When Spanish bride wear designer Pronovias needed a bailout to make up for the sudden drop in demand during the pandemic, its private equity owner, BC Partners, was willing to oblige.
In 2022, with the aftereffects of lockdowns still hurting the business, the sponsor stepped in with another equity boost. But by the end of last year, BC decided to call it quits and handed over the keys to creditors in a debt-for-equity swap.
It’s a story that’s becoming increasingly common as higher interest rates raise the bar on which companies that private equity firms are willing to keep supporting. While funds were prepared to keep injecting capital during the pandemic, believing that profits would stabilize again once normal operations resumed, now they look more selectively at the long-term viability of the companies they own.
“Sponsors have to pick which businesses to keep supporting,” said David Morris, a senior managing director and head of the UK restructuring practice at FTI Consulting. “Part of that will depend on how far away they think they are from value and the speed at which they could go back to value. They aren’t going to back them all from a capital or time perspective.”
In Europe this year, debt-for-equity swaps took place in 21 companies with publicly listed bonds or widely syndicated loans, according to data compiled by Bloomberg News. That helped make 2023 the second-worst year for distressed exchanges since 2009, with the worst year being 2020, according to S&P Global Ratings.
With default rates expected to rise to 3.8% for European junk debt by September next year, according to S&P Global, the number of companies being cut off by their sponsors is only likely to increase. BC Partners and Carlyle were the private equity firms that went through the highest number of debt-for-equity swaps in the region in 2023, alongside KKR’s special-situations arm, handing over the keys to companies including the security-systems firm Praesidiad and the Swedish mattress company Hilding Anders.
The number of such transactions is higher still if you include companies that have been taken over by private credit funds, for which adequate data is unavailable. French hair salon brand Dessange International, scuba diving and snorkeling equipment seller Aqualung International, the payments firm Unzer and the UK’s Dobbies Garden Center are just some of the companies that have been handed to private lenders this year in debt-for-equity swaps.
“In the last financial crisis, creditors were commercial banks less willing to take control,” said FTI’s Morris. “Now, on the other side of the table, they have creditors saying you either put new money in, or we’ll take control.”
The increase in debt-for-equity swaps can create new opportunities for creditors if they are able to buy debt at distressed levels and then convert it to equity. But lenders also face the risk that the company will never recover. Bondholders of call-center operator Atento face an uphill battle turning the company around after they acquired it in a swap last month. Shares in the Brazilian company have already been swapped once before, but the creditors who took over in that transaction, which took place in 2020, didn’t manage to make it profitable.
Several of the debt-for-equity swaps this year took place in family-owned businesses, which don’t always want to give up ownership. Lenders to Spanish steelmaker Celsa were only able to take control after a legal battle with the Rubiralta family that lasted more than three years.
Usually, though, the threat of enforcement remains in the background, and a deal is done where the private equity firm is offered some modest equity or other notional value instead of zero, said Jat Bains, a restructuring and insolvency partner at Macfarlanes LLP.
“From a sponsor’s perspective, you don’t want to have a business that has been enforced over either,” Bains said. “So if the writing is on the wall, they are usually willing to co-operate.”