Sources: CVC’s $2.7 Billion Refinancing of Nine Entertainment Fails

The Hong Kong-based private equity firm CVC failed to reach a deal with creditors to refinance A$2.6 billion ($2.7 billion) of debt in Nine Entertainment, sources said on Thursday, putting the future ownership of the Sydney, Australia-based media network in doubt.

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Private equity firm CVC failed to reach a deal with creditors to refinance A$2.6 billion ($2.7 billion) of debt in Nine Entertainment, sources said on Thursday, putting the future ownership of the Australian media network in doubt. That leaves the London-based buyout firm facing a potential equity loss on paper of $2.2 billion and fending off hedge funds swooping to take control of Nine. The funds have bought up senior debt from creditors including French banks BNP Paribas and Credit Agricole Commercial and Investment Bank, sources said.

CVC’s Asia-Pacific arm had asked lenders last month to agree to a two-and-a-half year extension on the debt due in 2013, which represents some 70 percent of Nine’s total debt, hoping it would buy crucial time for Nine’s advertising revenue to improve. But over the past week a string of lenders – some who needed to repatriate cash to debt-stressed Europe – sold chunks of their debt to hedge funds.

Sources said that U.S. and Australian hedge funds, including Oaktree Capital, Anchorage Advisors, Och-Ziff and Apollo Global Management, now control as much as 50 percent of the debt and are looking to take control of Nine. The $2.7 billion in senior debt is a legacy of A$5.3 billion in cash and debt that CVC used to buy the network from media baron James Packer in 2006. CVC injected about A$1.8 billion of equity into the company as credit markets were booming in 2006. In late 2008, it invested a further A$335 million as part of a recapitalisation plan . CVC acquired 99 percent of Nine through three injections of capital, the Financial Times said. The Australian Financial Review (AFR) newspaper reported on Thursday that Nine made a loss of A$428 million in 2010-11. CVC could not be reached for comment.

Should CVC ultimately lose control of the company and is forced to write down its investment, the firm faces a total paper equity loss of $2.2 billion at current exchange rates, assuming the firm has not received any repayment. CVC is not the only casualty. A Goldman Sachs fund faces an up to 80 percent loss on A$975 million ($1 billion) in mezzanine debt of Nine, a source familiar with the matter said.

Although hedge funds hold half of Nine’s debt, and could still grab more, CVC does not have to give up control of the asset – yet. But bankers estimated that CVC is underwater on its equity investment because Nine is worth less than its debt. So unless Nine’s business prospects drastically improve, creditors are unlikely to extend or restructure the debt on maturity. That may leave CVC with little option but to swap the debt for equity. Bankers were told at a lender meeting in November that the next 12 months earnings before interest, tax, depreciation and amortisation (EBITDA) for Nine would be around A$400 million. Assuming Nine would be valued at seven or eight times EBITDA, it would fetch as much as A$3.2 billion — lower than the company’s total debt of A$3.7 billion, bankers said. CVC, which pulled a plan to float Nine earlier this year due to adverse market conditions and weak advertising markets, could inject more equity, but that would be a tough sell to the limited partners who invest in its funds, sources said.

CVC has agreed with Goldman Sachs to convert the mezzanine debt into equity, a source familiar with the matter said. Realising the refinancing plan was doomed, CVC has asked lenders to consider splitting the senior debt into two classes, the AFR reported. The first tranche of debt will be for $1.8 billion, which CVC is proposing to allocate to the few remaining original bank lenders, the newspaper said. The second tranche, of $900 million, will be high-yield warrants paying a 14 percent coupon. Both tranches would mature in 2017. Senior lenders told Reuters on Thursday they had not been told of the plans reported by AFR. Commercial banks, including BNP Paribas, Commonwealth Bank of Australia and Credit Agricole Commercial and Investment Bank sold around A$250 million of senior debt last week, sources said.. Credit Agricole declined to comment. Hedge fund Canyon Partners sold around A$200 million of debt this week to another hedge fund, a source familiar with the matter told Reuters. The sources declined to be identified because they were not authorised to speak to the media. Debt traders say that Asian banks continue to hold debt in Nine in chunks of more than A$50 million.

By Stephen Aldred and Sharon Klyne