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| Crest Nicholson | |
| Size | £509 million refinancing and debt-for-equity swap |
| Date | September 2011 |
| Financial adviser | Lazard |
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The troubles faced by Europe’s banking sector in 2011 will inevitably translate into increased corporate distress in 2012 and there is a pressing need for banks to deal with many assets sitting on their balance sheets. Minneapolis-based distressed debt fund Värde’s takeover of UK house builder Crest Nicholson last year could be a sign of things to come. Crest Nicholson, which was taken private in 2007 when it was bought by HBOS and West Coast Capital, had already completed a debt restructuring in 2009 but still had £509 million ($799 million) of debt on the balance sheet. It had a debt to ebitda ratio of 10.2 times and net debt to ebitda of 8.2 times. The firm was symptomatic of what is likely to be a growing trend over the next couple of years – sticking-plaster restructurings that prove insufficient as the global downturn persists.
The UK firm’s debt was held by a bank-dominated syndicate when the US fund, advised by Lazard, decided to build a blocking minority position. The key to its strategy was its approach to Lloyds to buy its stake in the debt – which the UK bank had assumed as part of its ill-starred HBOS takeover. Lloyds held 25% of outstanding debt and equity and was fronting a number of the guarantees. It therefore took two to three months to negotiate the sale. “The key to unlocking this transaction was for Lloyds Bank to sell its stake,” says Sam Whittaker, a director at Lazard. “Having been a member of the coordinating committee, Lloyds only wanted to sell to a buyer that was already in the credit.”
Having completed the purchase of Lloyds’ stake by October 2010, Värde presented a restructuring proposal, which was rejected by the syndicate in favour of another refinancing. Lazard therefore advised Värde to focus on building its position in the secondary market. “The difficult dynamic that the banks could not overcome was that with Värde having bought 25% of the debt from Lloyds and with an upcoming maturity, the banks would not be able to do another scheme to extend with too much debt,”says Michael Grayer, head of debt advisory at Lazard in London. “Everyone had done the maths and knew that it wouldn’t work.”
But it was clear that the company’s capital structure was in urgent need of attention as its debt pile was due to mature this year. “Värde identified an opportunity where it could put capital to work and be able to influence the outcome of any restructuring through the debt,” Grayer says. “They came into this situation over a year ago. The company had been through one restructuring but it was clear that this had not right sized the balance sheet.”
The fund therefore faced the tough job of convincing lenders to sell out. “This syndicate was made up of many conventional banks that may not have provisioned adequately against these loans and therefore did not necessarily want this deal to happen,” says Whittaker. “Funds that had already adequately marked their positions were more likely to get on board but the syndicate was largely composed of banks.”
These included, along with Lloyds: HSBC, Mizuho, Newcastle Building Society, AIB and Bank of Ireland. Deutsche Bank’s distressed-debt trading desk had bought into the credit and was working in tandem with Värde, and other hedge fund players such as Castle Hill were involved.
Resistance to the deal was spearheaded by HSBC and Mizuho, which had roughly 20% of the debt between them. Indeed, at an initial meeting with the syndicate on December 20 2010 the syndicate was almost unanimously against what Värde was proposing. This was to roll over £150 million of the £359 million senior debt and to equitize the remaining £209 million senior debt and £150 million PIK.
The board and management were, not surprisingly, in favour of the debt-for-equity swap, and Värde was confident that the commanding position it had established via the Lloyds purchase along with the looming 2012 maturity that the firm faced meant that the syndicate would eventually come round.
“The toughest part of the negotiations was getting the syndicate to realize that there was a sensible reconstruction plan on the table and that Värde was not prepared to change its stance,” says Grayer. The debt conversion, which was 100% consensual, means that Crest Nicholson now has net assets of £173 million compared with net liabilities of £99 million in 2009 and senior debt of £150 million, which matures in 2015. The firm recorded a 95% increase in profit to £47 million in 2010 from £24 million in 2009 and now has a debt to ebitda ratio of three times and a net debt to ebitda ratio of one.
The need for over-levered corporates in Europe to address their problems is acute, and while banks might not have adequately provisioned for much of their exposure, European Banking Authority capital requirements mean that there is an increasingly urgent need for them to do so. “More of this needs to be done,” says Grayer. “Many extend and pretends done between 2008 and 2010 will have to be revisited.”
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Global markets Cargill Inc/The Mosaic Company |
| Glencore |
| Kinder Morgan |
| European Union |
| Rabobank |
| Crest Nicholson |
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