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When a Sweet Loan-To-Own Deal Turns Sour

The strategy of loan-to-own is becoming increasingly popular as more buyout pros look to the bankruptcy courts for a source of deal flow at a discount. But few are prepared to deal with the intricacies of intercreditor situations that will unavoidably arise in the process.

Take the sticky situation at artificial sweetener maker Merisant Worldwide.

Wayzata Investment Partners, a private equity/hedge fund hybrid firm based in Minnesota, bought a big chunk of Merisant’s loans after it filed for Chapter 11 bankruptcy protection in January. The company’s PE backer, turnaround firm Pegasus Capital, washed its hands of the company, which had $560 million in debt upon filing.

Wayzata’s plan for the company involves converting most of the loans it purchased into a controlling stake in the company, as well as removing around $400 million in debt. In it, company agrees sell a 10% stake to NewPort Global Advisors for $10 million as part of its emergence from bankruptcy. Newport is a unit of buyout firm Providence Equity Partners which invests in distressed companies.

The catch is that Newport is playing on both sides of the table. In addition to the role of equity investor, the firm is also chairman of the unsecured creditors committee.

So the secured lenders aren’t too keen on Wayzata’s “loan-to-own,” or “vulture” plan, which involves letting Newport manage the company while it owns a passive controlling stake. The lenders are claiming Wayzata is trying to “leapfrog” the bankruptcy process with the investment from Newport.

In court documents cited by Dow Jones Bankruptcy Review, the lenders say the Wayzata plan closes other restructuring options for the company and relies on existing debt terms which, at Libor + 4%, is lower than today’s average lending rate. The lenders are seeking to block the Wayzata’s plan and Newport’s cash infusion and asked the bankruptcy court for the “strictest scrunity” of Newport’s double role as investor and head of unsecured creditors.