Issuer: Huntsman
Size: $350 million
Type: 11% senior secured notes
Managers: Deutsche Bank, UBS
The restructuring and refinancing of global chemicals company Vantico, completed on June 30, marked the end of a five-month joust between distressed debt investors MatlinPatterson and Apollo Management for control of the company.
| Frauman:”In takeovers like this, there really are no rules” |
The tussle could signal an upsurge in contested takeovers in Europe where rival bidders buy into different levels of the target’s debt. “In takeovers like this, there really are no rules,” says David Frauman, a partner at Allen & Overy and Vantico’s lead lawyer on its restructuring. “It is a question of how deep the buyers’ pockets are and if their strategy is the right one.”
Morgan Grenfell Private Equity (MGPE) created Vantico in June 2000 when it bought Ciba Speciality Chemicals’ performance polymers division. MGPE’s share interest was in a top company, Vantico Holding. Vantico Holding sold e150 million of Pay-in-Kind (PIK) notes to a group of 10 holders in a private placement.
Below Vantico Holding was Vantico Group, which issued e250 million of publicly held high-yield debt. Below Vantico Group, Vantico International had e400 million of bank debt. And below Vantico International were the operating companies.
“Vantico’s was a classic European capital structure,” says Frauman. “With security over various operating companies, Vantico International’s bank debt was senior debt in every sense of the word, with Vantico Group’s high yield structurally subordinated.”
But Vantico was overleveraged and could not service its debt. Last summer it hired Close Brothers’ Jason Clarke and Richard Granger to help it come up with new structuring and strategic options. Meanwhile, distressed debt investors started buying into its bonds. By autumn 2002, MatlinPatterson held over 60% of Vantico Group’s high yield.
MatlinPatterson wanted more than a fast buck out of Vantico’s bonds. It jointly owns US chemicals company Huntsman Advanced Materials. Linking Huntsman and Vantico would create a competitive, vertically integrated business. At the end of January, Vantico and MatlinPatterson struck a deal for the necessary debt-to-equity conversion, subject to approval from Vantico’s bank lenders. Agent bank CSFB indicated that the bank group would go along with the deal.
“The original proposal was that the company would voluntarily restructure, and everything bar the bank debt would be equitized,” says Richard Stables of Lazard, adviser to the bondholder committee. “The bank facility would be left in place, with new covenants that the company’s new business plan could live with.”
“We thought we had a deal on January 29,” says Bingham McCutchen partner James Roome, legal adviser to the bondholder committee. “But we had one meeting with the steering committee, then they sold a large part of their debt.”
Buying the bank debt was distressed debt investor Apollo Management. Like MatlinPatterson, it already owns a chemicals company, Resolution Products. Once it held 34% of the bank debt, Apollo could block the debt-to-equity swap, which was conditional on bank approval of continuing waivers by two-thirds of the bank exposure.
With Apollo positioned to exercise negative control over MatlinPatterson’s acquisition, Vantico took action. “Because Vantico was suspicious of Apollo’s motives, we sued them in New York alleging breaches of US anti-trust laws,” says Frauman. “We didn’t get an injunction, but the litigation froze Apollo for long enough to give MatlinPatterson time to make a new proposal.”
Competitive auction Apollo and MatlinPatterson were now in a competitive auction for Vantico. “Effectively, Apollo wanted to buy the business for less by paying out the banks in full but with the
bondholders and other stakeholders getting very little. They argued that the business was worth no more than the bank debt and offered the banks a better deal, taking them out at par,” says Stables. “The debate was all about the value of the business.”
MatlinPatterson and Huntsman now had to refinance the banks out at par themselves to rescue the debt-for-equity conversion. They approached UBS and Deutsche Bank to arrange a new high-yield issue and raised $350 million in high yield which, with $150 million in new equity, was enough to pay off the banks, fund the exchange offer, recapitalize Vantico, and have funds left over for MGPE and the PIK notes.
“The view that the company and the bondholders were promoting as to a higher valuation being appropriate was clearly endorsed by the ability to raise new debt finance on that structure,” says Stables. All the component parts of the restructuring and exchange completed on June 30.
Huntsman acquired 99.6% of Vantico Group’s senior notes via the exchange offer and subsequently exchanged them for equity in Vantico Group. So, after a solvent, out-of-court restructuring process, Vantico found itself recapitalized and part of a stronger, larger group. The bonds ultimately got what they wanted, albeit having paid slightly more. But they do get some compensation.
“The original deal would have been easier and quicker, and clearly it’s a little more expensive for MatlinPatterson to go down this route,” says Stables. “But there are advantages, such as not having recalcitrant banks with very tight covenant packages lending to the company. The US high-yield market has provided much more flexible financing going forward for this company.”
Apollo made a trading profit on its investment and did the other banks a favour by getting them refinanced out at par. Everybody’s happy.
Vantico has broader significance for distressed debt investors in Europe. “Now they have a proven means for using a combination of LBO financing techniques and restructuring to get control of a target company,” says Bingham McCutchen’s Roome.
The readiness of senior lenders in Europe to sell debt is starting to affect restructurings. “In Vantico, Apollo bought out every bank on the steering committee except CSFB,” says Frauman. “That never happens in England. But the clearing banks have started to sell bank debt positions in the past six months. The distressed debt investors will now be all over the capital structure of targets, and the structurally subordinated nature of European high yield will make it easier for those that buy bank debt to stymie rivals. Had Vantico gone into administration, the bonds could have been wiped out.”
