Distressed debt funds including Apollo and Avenue are circling Biffa, the struggling UK waste management group, which looks set to become the latest indebted company to be snatched away from its private equity owners.
In the most recent example of this, Strategic Value Partners, a US hedge fund, is set to take control of Klöckner Pentaplast from private equity group Blackstone, according to people familiar with the situation, after an ill-tempered battle for the German plastic film producer.
Biffa was acquired for £1.2bn by Montagu Private Equity and Global Infrastructure Partners in 2008, but has since struggled to grow amid the weak UK economy, causing the price of its debts to fall – attracting the attention of so-called distressed debt funds, which specialise in troubled companies.
The company received a further blow when the government recently closed a landfill tax loophole, and a meeting with creditors last Friday failed to reassure lenders, many of whom are now trying to sell the loans to distressed debt funds.
“It’s a shambles,” a senior distressed debt bank trader said. “A number of funds are circling it.” Two people familiar with the matter said Apollo, a large US private equity group, and Avenue Capital, a distressed debt-focused hedge fund, were among the debtholders. Avenue declined to comment while Apollo could not be reached.
Ahead of the financial crisis buyout groups used large amounts of debt to finance acquisitions around the world, but the subsequent economic downturn has left many of these companies struggling to meet their debt repayments.
Many of the companies have subsequently been taken over by distressed debt investors. These are typically hedge funds and private equity groups that buy the loans and bonds of companies in trouble at a discount and swap their debt for ownership. This strategy is known as “loan-to-own”.
Biffa is the latest company to attract the attention of distressed debt investors. Montagu and GIP have written down the value of their ownership to zero, and the battle for control is likely to be between senior lenders and lower ranking creditors, so-called mezzanine lenders.
The former are being advised by PwC, the consultancy, while the latter have hired Houlihan Lokey, the restructuring-focused investment banking advisory boutique. Montagu, GIP and Biffa declined to comment.
The distressed debt trader said the price of the £920m senior loans had fallen from about 80p in the pound early this year, to about 60p after last week’s creditor meeting.
The £260m mezzanine debt is currently trading at about 5p to 15p, indicating that those lenders could be wiped out as well.
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