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CAPITAL MARKETS

Corporate restructuring - Valuation challenges: is it worth it?

Junior lenders frustrated; IMO case sets precedent

The thorny issue of what a company in distress is actually worth has been uppermost in the minds of many in the European restructuring market over the summer. The decision by mezzanine lenders to IMO Car Wash (which has been in difficulty since June last year) to challenge the valuation put forward in its proposed restructuring has divided opinion across the market. It has also illustrated the inherent difficulty of valuing a company in such a constrained credit market, where buyers might struggle to finance a bid even if they can see value in the firm.

multiple Carlyle paid for IMO Car Wash

IMO Car Wash was bought by private equity group Carlyle in 2006 for £450 million – an eyewatering enterprise value multiple of 12 times. By June 2008 it was struggling to meet its debt payments and Carlyle injected a £25 million ($40.8 million) PIK loan to win covenant waivers. These were eventually breached, however, in the fourth quarter and lenders rejected a Carlyle-proposed restructuring. The senior lenders put forward a scheme of arrangement whereby new senior and junior debt would be provided but would leave 2% equity and the existing mezzanine would be flushed.

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