Banks funding leveraged buyouts were rightly criticized in the early stages of the downturn for being wrong-footed by private equity sponsors, signing up to generous covenant waivers largely as a result of being unable to do anything else.
In recent months they have adopted a more robust approach, and more and more wiped-out equity holders are being forced to hand over the keys in debt-for-equity swaps.
West Bromwich Building Society, Styles and Wood, and Independent News and Media have agreed to such deals, along with the private equity owners of Gala Coral (Candover, Cinven and Permira), which are ceding control of the company to debtholders. UK household goods retailer Robert Dyas, previously owned by Change Capital, has passed control to lenders Allied Irish and Lloyds. Even Hollywood studio MGM is reportedly considering a debt-for-equity swap to tackle its $3.7 billion debt burden.
But while many banks and debt funds may now be congratulating themselves for taking a tougher stance with their errant borrowers, they need to look carefully at what they have taken on. Many have been frantically staffing up their workout departments in anticipation of the volume of work coming their way but professionals with tried and tested expertise in this field are few and far between. The banks will find themselves taking control of highly distressed corporates that face significant long-term challenges in a sector (consumer) that is likely to suffer for some time to come. So the reality is that they could be loading themselves up with a large number of situations that they simply do not know how to deal with.
This must be the hope of the independent turnaround specialists who have been eyeing developments with interest. If banks and debt funds take control of a large number of companies that they know little about other than that the equity is worth zero, this presents a real opportunity for the many boutiques that have sprung up in the wake of the bursting of the LBO bubble.
At some stage if banks become swamped with these situations they will almost inevitably have to look at offloading some to what will be very willing buyers. So ex-leveraged finance bankers (reincarnated as turnaround specialists) who have played their cards right could now see themselves taking control of corporates (from bank owners) that are struggling under debt burdens that they themselves arranged for them in their previous roles. For some, investment banking is a gift that just keeps on giving.
