November 30, 2010 11:06 pm

First Reserve suffers losses on KCA deal

First Reserve, the energy-focused US private equity group, has suffered its biggest single loss after handing over its majority stake in KCA Deutag, the Aberdeen-based oil services group, to its Russian-backed minority partner Pamplona.

The unusual move leaves First Reserve nursing several hundred million pounds of losses on the deal. It left Pamplona in position to make a sweetened debt restructuring proposal to KCA’s lenders, offering to inject $400m of fresh equity.

KCA Deutag, formerly known as Abbot Group, was taken private in a £906m buy-out by the private equity groups just as the debt bubble was bursting in December 2007.

Burdened with more than $2bn in debt, the company has struggled to respect its loan covenants, especially since the fall out from the BP oil spill in the gulf of Mexico caused delays to new oil rigs and hit the company’s earnings.

First Reserve initially took a majority stake in the deal, while Pamplona owned only about 20 per cent. But KCA said on Tuesday that First Reserve had transferred all its interests in the company to Pamplona, which now owned all of its equity.

Pamplona, advised by Rothschild, hopes to have an advantage in the debt restructuring talks as it is linked to TNK BP, the Russian oil group that is one of KCA’s biggest customers, through Russia’s Alfa Group, its biggest investor.

The London-based private equity and hedge funds group was founded in 2005 by Alex Knaster, former chief executive of Alfa-Bank, which was a cornerstone investor in its debut buy-out fund. Alfa is also a large investor in TNK BP. Pamplona executives sit on the boards of both TNK BP and KCA.

First Reserve cemented its place as the world’s biggest private equity group specialising in energy deals by raising a new $9bn fund last year. But the losses on KCA are the first it has suffered on a deal.

The US group’s inexperience in the complexities and uncertainties of debt restructurings was a factor in its decision to wave the white flag and hand its stake over for free to Pamplona, according to people familiar with the situation.

The restructuring follows a previous attempt by the shareholders to refinance the company using a high yield bond. However falling earnings and the fall out from the BP oil spill in the gulf of Mexico scuppered the plan. All parties declined to comment.

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