February 19, 2009 / 5:06 PM / 11 years ago

RLPC-ANALYSIS-Low loan recovery rates threaten junior lenders

    * Junior lenders facing heavy losses on leveraged loans 
    * Recovery rates could be as low as 0-10 percent 
    * Smaller mezzanine funds threatened by losses 
    By Tessa Walsh 
    LONDON, February 19 (Reuters) - Signs emerging from troubled 
European leveraged loan restructurings show junior lenders risk 
losing nearly all of their investments, senior bankers and 
investors say. 
    Recent restructuring proposals and loan credit default swap 
(LCDS) auctions indicate historically low recovery rates for 
some of the leveraged loans which financed private equity firms' 
buying sprees at the height of the boom. 
    "The signs emerging in terms of how low the price points are 
in cents on the dollar are not good," a leveraged banker said. 
    Heavy losses are anticipated for junior lenders, which hold 
subordinated second-lien loans with second claims over 
companies' assets after senior debt, and mezzanine loans which 
rank just ahead of equity. 
    "I think mezzanine is going to get wiped out," a senior loan 
investor said. 
    A recent Fitch report said expected recovery rates for 
junior second-lien and mezzanine lenders remain very low in the 
0 to 10 percent range. 
    This is consistent with secondary trading levels on troubled 
cash loans, according to Thomson Reuters LPC data, which show 
almost no value in the junior loans. 
    Mezzanine loans of auto sector companies such as Visiocorp 
[VSOCP.UL] and Autodistribution [ATDST.UL] for example are 
trading at 1 and 2 percent of face value. 
    Depending on the severity of the situation, secured senior 
lenders which have historically been immune to credit losses 
also face impairment and credit losses and may have to accept 
"haircuts" to help ailing companies survive the downturn. 
    The Fitch report revised historically high recovery rates 
for senior loans of 71 to 90 percent downwards to 51 to 70 
percent as banks and private equity firms battle for control of 
ailing leveraged companies. 
    Private equity firms that are willing to support companies 
are often seeking to inject fresh equity into struggling 
companies with new "supersenior" tranches ranking ahead of 
senior debt in repayment. 
    Some banks are however resisting on principle as they do not 
feel any debt should rank above senior debt and would prefer to 
accept losses rather than hand the keys of businesses over to 
private equity firms who were responsible for companies' demise. 
    LCDS auctions for Finland's Sanitec [SNTCI.UL] and polymers 
firm British Vita [BRITV.UL] last week offered a view on 
recovery rates that could be seen on the restructurings of both 
companies' cash loans, banking sources said. 
    "These are just synthetic prices but are supposed to give a 
guideline," another senior leverage banker said. 
    Sanitec's first-lien LCDS contract settled at 33.5 percent 
of face value and its second-lien LCDS settled at a mere 4 
percent, bringing heavy losses of 66.5 percent and 96 percent 
respectively for sellers of protection. 
    British Vita's protection sellers faced even steeper losses 
when the company's first-lien LCDS settled at 15.5 percent of 
face value and its second-lien LCDS was pegged at 2.875 percent. 
This brought losses of 84.5 percent and 97.125 percent for 
sellers of protection. 
    Poor prospects for junior lenders were underscored by 
housebuilder Crest Nicholson's [CRTNC.UL] debt for equity swap. 
Senior lenders took 86 percent of the company, second-lien 
holders got 4 percent and management got 10 percent, sources 
    Senior investors say some private equity firms are actively 
trying to cut junior lenders out of restructuring agreements as 
they seek writeoffs to reduce the debt of portfolio companies. 
    Weak fourth-quarter results mean some specialist mezzanine 
funds are already facing impairment on as much as 50 percent of 
their leveraged loan portfolios, banking sources said, and the 
number of debt restructurings is increasing. 
    This could threaten the survival of smaller mezzanine funds, 
although larger players such as Intermediate Capital Group 
 and Mezzvest are expected to survive. 
    "Assuming that these leveraged loans were one to two turns 
overlevered, that effectively wipes out the mezzanine on every 
deal and Crest Nicholson burned all the way through the second 
lien," a head of leveraged syndicate said. 
 (Editing by David Holmes) 
 ((tessa.walsh@reuters.com; +44 20 7542 4048;  Reuters 
Messaging: tessa.walsh.reuters.com@reuters.net)) 
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