By Gareth Vaughan
Glass maker Metro GlassTech is the latest heavily indebted overseas private equity owned business to get into strife with its bankers, according to The Australian Financial Review.
Sumitomo Mitsui Banking Corporation and ANZ, two senior lenders in the Auckland-based company, bought by Catalyst Investment Managers for NZ$366.2 million from its founders in 2006, have broken ties to the company and sold NZ$25 million and NZ$42 million worth of senior loans respectively, the AFR reports.
Citibank and Hong Kong-based hedge fund SC Lowy were reportedly the buyers, paying about 60 cents in the dollar.
The AFR said the sales were likely to have been triggered by a negative report from McGrathNicol, in its capacity as investigative accountant. The report was apparently produced after a standstill agreement was signed by the company's lenders in April. Since then talks with the banks have focused on a capital restructure.
Cataylst bought Metro GlassTech, then Metropolitan Glass, from Aucklanders Andrew Smith, John Bedogni and Cameron Gregory who had founded the business in 1987, through a leveraged buyout largely funded through a NZ$322 million syndicated loan underwritten by BOS International. The loan included NZ$262 million of senior debt, NZ$60 million of mezzanine debt and a working capital facility.
Other senior lenders include ASB's parent the Commonwealth Bank of Australia, WestLB and Oversea-Chinese Banking Corporation, according to the AFR.
Metro GlassTech is chaired by former Waste Management managing director Kim Ellis who is overseas and couldn't be reached for comment. And Cataylst didn't immediately respond to a request for comment made to its Sydney headquarters.
Breached covenants in 2009
The company breached its banking covenants - on its interest cover and gearing ratios - in the year to March 2009, meaning its entire bank debt was classified as a current liability and was due for repayment within 12 months. However, after renegotiating the terms of its senior and junior loan facilities in October 2010, the repayment deadline for NZ$269.76 million of the debt was pushed out, meaning it was due for repayment in between two to three years time, Ellis told interest.co.nz last September.
In the meantime Ellis said Metro GlassTech needed to deliver on its financial forecasts.
“And that’s going to require a continuing improvement in the construction industry and the economy,” he said last September.
Asked how the business had traded since March, Ellis said then Metro GlassTech was a reflection of the construction industry generally.
“It’s definitely moving forward, it’s definitely on an incline upwards but it’s hell of a flat incline and it isn’t bouncing back as we thought it might have,” Ellis said then adding; “It may be a better recovery next year and certainly a strong 2012.”
After being outbid Fletcher Building boss warned of 'train smashes'
Catalyst snapped the business up from under the nose of Fletcher Building, outbidding the more natural buyer of the business with potential cost savings to extract, by about NZ$100 million. Then Fletcher CEO and now chairman Ralph Waters told me shortly afterwards that private equity's "irrational exuberance" and debt dominated acquisitions could lead to "train smashes" in the future.
The AFR now suggests that either Fletcher Building or its Australian rival CSR could buy Metro GlassTech, whose 2012 earnings before interest, tax, depreciation and amortisation are forecast to be about NZ$20 million.
Fletcher Building spokesman Philip King told interest.co.nz that although the company had looked seriously at Metro GlassTech some years ago, ultimately it "couldn't get our maths to equate to the value ultimately paid for the business."
"I'm not aware that the business is being formally offered for sale but there have been many rumours about how the business has struggled under too much debt," King added.
Annual loss of nearly NZ$50 million
Accounts filed to the Companies Office by its parent company show Metro GlassTech’s after tax loss widened to NZ$48 million in the year to March 2010 from NZ$31.1 million the previous year. Revenue fell 12% to NZ$137.3 million.
The company, which provides flat glass products to the residential and commercial building markets competing against the CSR owned Viridian, coughed up NZ$40.1 million of finance costs in the year, down from NZ$45.8 million the previous year.
Meanwhile, the AFR also says another Australian private equity firm, Crescent Capital Partners, bought about NZ$50 million worth of Metro GlassTech's subordinated debt at 80c in the dollar in 2008, which is now technically worthless. But in an attempt to salvage something from this, Crescent has put forward a recapitalisation plan that would see its debt converted into equity and reduce the value of the senior debt significantly.
Catalyst's purchase of Metro GlassTech was one of several raids by overseas private equity funds, high on cheap credit, on major New Zealand businesses between 2005 and 2007. Others snapped up in heavily leveraged deals during the period include Independent Liquor, Yellow Pages, TV3's parent MediaWorks, Hirepool, Hirequip, EnviroWaste and Healtheries. Several have been forced to restructure their weighty debt loads with Yellow Pages' writing off NZ$1.05 billion of bank debt earlier this year and MediaWorks' owners, led by Ironbridge, pumping in NZ$70 million of fresh equity in late 2009.