Nybron flooring International, a Swiss wood-flooring company with about €400 million ($528 million) a year in sales, was bought for an undisclosed sum last year by private equity firm Vestar Capital Partners, which has its European base in Paris. Vestar financed the deal largely with a debt package of €455 million — around nine times EBITDA — via Credit Suisse, which parceled the debt out to eager, mostly non-bank, lending institutions.
The loan package was split into three senior pieces of €95 million each, a mezzanine loan of €75m, a second-lien loan of €25 million, a revolving credit facility of €40 million, and acquisition finance (a bridge loan) of €30 million. The complexity of the deal, which was completed about a year ago, is fairly typical for private equity buyouts these days. All the elements of the package have various terms and covenants for the different lending syndicates.
In the past year, Nybron hasn’t done as well as it had expected, largely because of the price of raw materials and other external factors. Also, according to Chris Haffenden, an analyst at Debtwire, a market tracker, the flooring company was “bumping up against its debt covenants, though not in breach of any,” and was last month in negotiations in Paris with its banks to revise terms. (Nybron and Vestar officials weren’t available for comment.)
Because Nybron had “consent request” clauses in its debt deals, the holders of senior debt were able to agree without much trouble — and for a fee, rumored to be 0.175 percent — to new terms, but the company was having difficulty getting all the mezzanine lenders on board, according to a source familiar with the negotiations. However, Nybron had the foresight last year to negotiate a “yank the bank” clause into the deal so that it could replace a recalcitrant syndicate lender under certain circumstances when it needs to resolve a debt restructuring.
Pushing the Boundaries
“It’s an extremely aggressive move for a borrower and would be used only in extremely stressed situations,” says the source. But it gives the lending institutions an incentive not to hold up a negotiation.
Such clauses would have been unthinkable for medium-sized European companies a few years ago. Nybron’s situation is an example of both the prevailing extremely borrower-friendly environment, as well as how this environment has pushed back the risk boundaries in the capital markets, both for borrowers and lenders.
Borrowing costs have reached new historical lows; companies’ leverage levels are at historical highs; and the composition of that debt is more complex than ever (see charts).
But few expect the situation to continue indefinitely. “The huge increase in high yield, mezzanine and second-lien issuance means that the number of distressed situations is likely to increase, even in a benign environment,” says Stephen Phillips, a partner in the financial restructuring and insolvency practice of law firm White & Case. “Once you’ve decided to do a deal with seven, eight, nine times leverage, you’re in an inherently risky situation if there is decline in the credit cycle and/or you go off your business plan. What we’re seeing in some of the negotiations is the [private equity] sponsors pushing the lenders for clauses that, while they won’t take that risk away entirely, will mitigate it.”