Texas Pacific Group faces loss of equity control and cash in gate gourmet deal
Hedge funds are closing in on Gate Gourmet, with a view to relieving private equity investors in the embattled airline catering firm of some cash.
Investment norms were turned on their head in August as private equity group Texas Pacific Group (TPG) found itself on the wrong side of a deal involving the restructuring of Gate Gourmet UK.
A strike by some of Gate Gourmet's UK staff over pay and conditions brought many British Airways flights to a halt in August. Having bought the troubled food company, US private equity firm Texas Pacific Group (TPG) restructured and refinanced it with a senior leveraged loan package constituting a mezzanine and a senior loan, with a covenant package on the mezzanine loan.
The terms of the covenants package reflected that the deal was risky, involving a private equity company buying a company with borrowed money. The covenants stipulate that, if Gate Gourmet (UK) goes bankrupt - and despite an extension from BA to its major contract Gate Gourmet is not out of the woods - the mezzanine holders have the right to receive £159m in cash, 75% of the shares of Gate Gourmet UK and £50m in cash from the private equity sponsor. Those mezzanine holders are, increasingly, hedge funds.
Rab Capital hedge fund manager Louis Gargour said a number of hedge funds are involved on the other side of the trade to TPG, although he was unable to specify names other than his own.
The worst outcome for a private equity company is to have to put more cash into an investee firm, or losing equity control. TPG would do both: the private equity sponsor would lose control of the equity it bought in Gate Gourmet UK, and have to pay more cash.
"The private equity owner is held ransom by investors, not visa versa. That is a pretty rare situation," said Gargour. He expects the situation to have played out to its resolution within a month. And as developments at the company persistently testify to the seeming inevitability of bankruptcy, holders of the mezzanine notes' position strengthens, as they wait to be paid off, so they will go away. It allows the bondholders to negotiate an even tougher stance, to say the equity is worthless, so you need to pay us more cash."
"The lenders to the company, in this particular case, will likely recover more than par, or end up owning the majority of Gate Gourmet," said Gargour. "It is a very unusual structure, especially the provision of equity in the company in the event of bankruptcy."
The restructure of Gate Gourmet undertaken by Texas Pacific included an attractive re-financing package.
The terms of the mezzanine debt are so favourable that many hedge funds have come in on the other side of the deal.
Follows McVey's resignation
Schroders and Aviva Investors
LightTower Partners, Seneca Partners and Unicorn AM
Integration with Money Dashboard
View from the front row