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Lenders' clash to shape European restructuring

Source: Reuters - Fri 7th Aug 2009

The future of many European financial restructurings may be shaped in a London courtroom on Monday when a tussle between senior and mezzanine lenders over a car cleaning company comes to judgement.

Senior lenders to IMO Car Wash, owed about 300 million pounds, are seeking court approval to impose a restructuring solution on lower-ranked mezzanine lenders, owed about 90 million pounds.

Mezzanine lenders across Europe, who lent a total of more than 70 billion euros (60 billion pounds) during the credit boom, fear an adverse ruling could significantly weaken their hand in other negotiations, forcing them to accept much higher write-offs on their investments.

"The IMO case is likely to set the tone for many restructurings to come, as it helps clear the way for senior lenders to capture companies at the bottom of the market" said Karl Clowry, a restructuring expert at law firm Paul Hastings.

The senior lenders, led by Lloyds unit HBOS and a number of distressed debt investors are seeking control of the firm in exchange for a writedown in the debt.

Their low valuation of the company has led them to offer junior lenders a token 2 percent equity stake in the restructured company and no say in the restructuring, according to a document seen by Reuters.

IMO and Lloyds both declined to comment on the case.

A wave of financial restructurings is breaking across Europe, with lenders pushing to take control of heavily indebted companies through debt-for-equity swaps. 

So-called mezzanine debt yields more than senior bank loans and took off in the boom years as a high-yielding alternative to junk bonds.

Many of the loans were snapped up by hedge funds and specialist lenders such as BlueBay Asset Management Plc , Och Ziff Capital Management Group and Intermediate Capital Group Plc .

London court rulings have significance beyond Britain's borders because legal mechanisms can bring English law into play even if the company affected operates elsewhere in Europe.


At the heart of the case is a dispute over how to value the company. All agree its value has fallen since a 450 million pound buy-out backed by private equity firm Carlyle in 2006, but there is no agreement on how far it has dropped.

The question is whether the remaining value "breaks" before senior lenders have been paid off in full or whether there will be anything left for mezzanine investors, said Albert Stein, managing director, MPC Partners.

Junior lenders think the company is worth about 350 million pounds, senior lenders about 200 to 250 million pounds while a sale process brought an even lower offer for the company, according to the document seen by Reuters.

"The problem with the (car washing) industry is that the valuation changes depending on whether or not it rained last week" said Stein.

A sale in a few months' time might lead to much higher values, and not just because of weather conditions. 

"Valuations today are very related to timing" said Michael Berry, a debt adviser at Versatus, who used to run Nomura's leveraged finance business.

"A more ordered sale process with proper advice and marketing might yield a different valuation in just a few months time" said Berry.


The junior lenders have asked for a larger equity stake in the company as well as other payments if its value rises, the document says.

"If the mezzanine lenders prevail in this fight we'll see a lot more emboldened non-senior lenders" said MPC's Stein.

Mezzanine lending in Europe boomed around the middle of the decade, with $18.8 billion (11.4 billion pounds) issued in 2006 alone, Thomson Reuters LPC data show.

Because of its impact on junior lenders, the IMO case is one of the most significant restructurings to come before the courts since the MyTravel case in 2004, Paul Hastings' Clowry said.

In that case, the Court of Appeal effectively approved a scheme of arrangement that included the senior creditors but excluded lower-ranked bondholders.

Clowry said the significance of the IMO case makes it likely that if the juniors lose they will seek to appeal the judgement, which may delay the final outcome. If the seniors lose, they may seek to buy the company out of administration, he said.

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