Lenders to U.K. contractor Jarvis have taken a massive hit over the past two weeks with the debt plummeting to 20 from the mid 40s following a proposed debt-for-equity swap and an interim financing package underwritten by Deutsche Bank and a group of hedge funds.
Now Deutsche Bank and that group of hedge funds--including Strategic Value Partners and Canyon Capital--are banking on equity stakes and an upturn in the troubled company centered on its rail business. A Deutsche Bank spokeswoman and an SVP official declined comment. Canyon officials did not return calls.
The debt was unloaded by original lenders, including Barclays and RBS, over the past year with a number of dealers active in the paper. The selling was done between the 90s and 30s, but in April the debt was trading in the 70s and then fell precipitously to the mid 40s after the company announced it needed more cash to survive.
A Jarvis spokeswoman explained that Deutsche Bank is now providing a £22.7 million revolver and a £8.7 million standby term loan facility. The £297 million of bank facilities will be converted into approximately 95% of the equity. If successful--contingent on shareholder approval--there will be an underwritten placing of £50 million of new shares open to the equity investors that will take out the interim financing. If the shareholders don't approve the transaction, they will be wiped out.
Deutsche Bank, which according to several distressed sources is not heavily invested in the name but was active trading the paper, will earn fees for arranging the financing and receive warrants that will be held up to 15% value of the equity. The bank will also be given an eighteen month right of first refusal to arrange any future debt or equity raising for Jarvis.
"It's trading at option value right now," said one distressed dealer in London, adding that the exchange creates permanent dilution and that even 20 could be a high price. Another source added that he was surprised the hedge funds were willing to buy the paper at such rich levels in the past and attributed this to a lack of understanding of the enormity of the problems affecting Jarvis. The company has been struggling since May 2002 when a train was derailed in Southern England. The company also overpaid for rights to run Private Finance Initiative (PFI) contracts with the U.K governments. Since then, the company has exited the PFI contracts and has sold its stake in the London Underground for £147 million and is now focusing on its road-building and rail businesses.
One investor in the debt noted it has been bad for the hedge funds, but he said going forward "There's something to be done. It's not a disaster." Peter Collini, a managing director with Gazelle Corporate Finance, which advised Jarvis on consolidating its debt and the restructuring, added "The problems were large, but you've now got a very good rail business that has great potential domestically and the management team have done a fantastic job rebuilding the credibility with Network Rail." He also added that the hedge fund involvement was positive for the company, since their economics are different from the original lenders. "They quickly assessed the Deutsche Bank proposal as the best alternative and are looking for a loan-to-own."
