Banks funding leveraged buyouts were rightly criticized in the early stages of the downturn for being wrong-footed by private equity sponsors, signing up to generous covenant waivers largely as a result of being unable to do anything else.
In recent months they have adopted a more robust approach, and more and more wiped-out equity holders are being forced to hand over the keys in debt-for-equity swaps.
West Bromwich Building Society, Styles and Wood, and Independent News and Media have agreed to such deals, along with the private equity owners of Gala Coral (Candover, Cinven and Permira), which are ceding control of the company to debtholders. UK household goods retailer Robert Dyas, previously owned by Change Capital, has passed control to lenders Allied Irish and Lloyds. Even Hollywood studio MGM is reportedly considering a debt-for-equity swap to tackle its $3.7 billion debt burden.
But while many banks and debt funds may now be congratulating themselves for taking a tougher stance with their errant borrowers, they need to look carefully at what they have taken on. Many have been frantically staffing up their workout departments in anticipation of the volume of work coming their way but professionals with tried and tested expertise in this field are few and far between.