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Source: Reuters - Tue 20th Oct 2009

Despite an equities rally and an uptick in high-yield debt, owners of struggling companies are putting in only a fraction of the cash needed for restructuring, leaving banks with the bill for billions worth of loans.

Private-equity owned companies, which borrowed hundreds of billions of euros through leveraged buyouts in the middle of the decade, will depend on the banks to roll over their debts on easy terms, analysts say.

Loan bankers have dubbed this strategy 'amend and pretend' as lenders accept many of the businesses they are refinancing will later need to be financed again on more commercially acceptable terms as the economy recovers.

"Stakeholders are hesitant to recognise losses if they think value will accrue later, so why maximise the pain now?" said Ed Eyerman, head of leveraged finance at Fitch Ratings.

On Wednesday British caravan parks company Park Resorts secured a 325 million pound restructuring deal with banks. The agreement sees lenders inject 25 million pounds into the company but the debt has been left unchanged.

Park Resorts' private equity owner GI Partners kept control of the company as lenders took a stake of just five percent.

But when a company is worth substantially less than its debt, many private equity firms are refusing to pour good money after bad.

On Tuesday soil-testing firm ALcontrol agreed a restructuring deal with lenders and new investor Blackstone after previous owner Candover wrote down the value of its investment to zero. 

But banks often have little choice but to roll over debts if owners and investors do not offer support, said Derek Sach, head of global restructuring at Royal Bank of Scotland.

"The reality for big or small lenders is they will need to find a solution and renew loans," Sach said.


Heavily indebted listed companies, such as Ladbrokes and Heidelberg Cement, have taken funds from equity investors to cut borrowing levels but this is not an option available to companies owned by private equity firms.

"Sponsor-owned businesses are not like a public company in that they can do a discounted rights issue" said Eyerman.

Specialist distressed funds, such as Oaktree Capital, TowerBrook Capital and Apollo Management, have billions ready to invest in distressed companies but are yet to put large amounts of money to work.

"The recent rise in secondary debt prices means there are very few good investment opportunities" said one distressed-debt investor, who asked not to be named.

The high-yield bond market provides a refinancing option for some privately held companies, such as Germany's Hella.

However, many struggling companies cannot afford to pay the interest rates demanded by the high-yield market. 

While leveraged bank loans typically pay three to four percent above base rates, high-yield bond investors often demand a total interest rate of 11-12 percent for low-rated companies.


Without support from investors, there are large numbers of companies forced to renegotiate terms with their creditors, said Mike Johnson of Augusta & Co, an advisory firm.

"There are dozens of situations out there that need covenant waivers or amendments" Johnson said.

"These negotiations will continue for several years as excess leverage works its way out of the system" said Johnson.

As part of these talks, banks will take stakes in companies in exchange for cutting debt levels. However, there is a limit to their appetite for such deals.

"No bank is particularly keen to swap its debt into equity because that's not our business, however it is something that banks need to do in this environment" said RBS' Sach.

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