Left to right: Simon Parry-Wingfield and Ben Babcock

HeidelbergCement has successfully restructured the debt accumulated from its Hanson acquisition with the help of Morgan Stanley, who were tasked with Europe's largest-ever stressed refinancing exercise. Writer Edward Russell-Walling

Debt restructuring is the order of the day for many companies, so HeidelbergCement's recent refinancing did not stand out on that score alone. What set it apart was its size and the sheer number of banks that had to be coaxed on board. With so many lenders involved, the exercise demonstrated the advantages of having a truly independent adviser - in this case, Morgan Stanley.

In spite of the gloom pervading the construction trade, Heidelberg insists that its business is fundamentally sound. It is among the top three or four global operators in aggregates, cement and concrete, along with the likes of Lafarge and Cemex. It has got itself heavily into debt, however, largely to fund the £8bn ($13bn) purchase of its UK competitor, Hanson, at the top of the market in 2007.

German billionaire Adolf Merckle owned 86% of Heidelberg, largely via two indebted family holding companies, VEM and Spohn, both of them leveraged against the Heidelberg shares. That complicated matters further, particularly as many of their lending banks also had exposure to Heidelberg.

Shifting strategy

The intent was to refinance the Hanson acquisition through the disposal of non-core businesses, bond issues and perhaps a rights issue. But it was initially funded through short-term banking facilities - most importantly via a three-part syndicated loan package. This consisted of a €600m term loan A, repayable in May 2009; some €5bn of term loan B, maturing in May 2010; and a €1bn revolving facility. In addition, Heidelberg had a significant number of bilateral credit lines, reflecting the broad international spread of its operations. By the end of 2008, the company had net debt of €11.6bn.

The pressure had already built up earlier that year. It was obvious that, in a deteriorating world economy, the underlying business was coming off the boil. Non-core disposals were proving difficult for similar reasons. Mr Merckle himself had suffered huge losses, shorting Volkswagen stock not long before it went through the roof. Increasing concern over Heidelberg's situation had sent its own shares plummeting - by early this year they had fallen 70%. The company had lost the investment grade rating it held before the acquisition and the debt capital markets were effectively closed to it.

As earnings prospects dimmed, the company feared it would breach its loan covenants in 2008/09. On top of that, it had significant maturities looming - €1.6bn in 2009, including the €600m facility tranche, and €6.6bn in 2010. Intensive discussions with lenders (already rattled by strains across the wider Merckle empire) produced a temporary covenant waiver, but as 2009 began, it still looked as if much of Mr Merckle's Heidelberg stake would end up in the hands of the banks. Then, in the first week of January, the German financier committed suicide.

Independent adviser

Heidelberg had called in Morgan Stanley in late 2008 to help find a solution to its problems. This was not because the investment bank had a long-established relationship with the company, but rather the reverse. "We were not lenders to the company," explains Simon Parry-Wingfield, one of Morgan Stanley's two co-heads of Europe, the Middle East and Africa (EMEA) restructuring, previously head of leveraged finance. "And they had decided that independence was critical."

At this stage, the company believed - and had been told by its lenders - that the first thing it must do was to raise a large amount of new equity, and Morgan Stanley's mandate was on that basis. "When we looked at the situation, it became clear that equity needed to be a component of the solution, but the sequencing was unclear," says Mr Parry-Wingfield. "We felt that concerns over the debt might not create the right platform for a rights issue or private placement."

The public equity markets were simply not open to distressed credits in the early part of this year. "In January and February, there was no talk of green shoots, or any shoots," says EMEA restructuring co-head Ben Babcock, who joined the bank in September, and was previously head of European restructuring at Merrill Lynch. "At that time, equity was not a viable corporate finance alternative on reasonable terms before the capital structure had been stabilised," he says.

This appeared true of private as well as public equity. The team sounded out private equity investors but it became clear that their terms would be demanding. The cost of doing the equity first would be punitive for the lenders. "But if we could provide a stable platform, and if lenders agreed to it, there was a better prospect of raising capital and completing asset sales from a position of strength," says Mr Parry-Wingfield.

Mr Merckle's death had been particularly unsettling for lenders to the holding companies, creating uncertainties over what would happen to his estate. It did, however, impress upon Heidelberg's management that they needed to take the situation into their own hands and manage the crisis proactively.

Manifold interests

The main challenge facing the company was the complicated diversity of bank interests it had to address. The bank had more than 50 different lenders, some with added exposure to its main shareholders. It had a variety of syndicated, bilateral and other facilities, with varying terms. The primary plan was to extend the loan maturities and reset the covenants, but any postponement of maturities required unanimous consent, and many lender consents were conditional upon consent of all other lenders.

The Morgan Stanley team sat down to draw up a plan. In fact, it drew up three plans. "It was critical to have a number of fallbacks, to ensure the success of the primary plan," explains Mr Parry-Wingfield.

Plan A, which reflected the company's original intention, was to raise equity and hybrid debt to strengthen the balance sheet. While there was definitely interest from private equity and sovereign wealth fund investors, they proposed tough terms on the existing debt and would dilute equity for holding company lenders.

That was presented as all the more reason for lenders to agree to primary plan B, which involved terming out the debt and resetting the covenants through new consolidated facilities. If both plans proved unacceptable, finally there was plan C. This would mean repaying the €600m bridge facility when it became due in May 2009, seeking a covenant waiver to prevent breach, and pressing on with efforts to renegotiate with lenders before the maturity of the €5bn tranche the following year.

One-to-one approach

And then came discussions with the banks, laboriously, one by one. Four of the core lending banks were chosen to act as arrangers, to serve as sounding boards and, as Morgan Stanley puts it, to "drive one-to-one interaction with lenders". They were Commerzbank, Deutsche Bank, Nordea and Royal Bank of Scotland, and having them "inside the tent", rather than outside, was regarded as important to the success of the enterprise. "They had a critical role in the refinancing process, much like the syndication of a new facility," says Mr Parry-Wingfield.

Official launch

Proceedings were formally launched towards the end of March at a large meeting where management presented the restructuring plan and provided an update on the business with, importantly, an independent accounting firm's view of the outlook. The lenders agreed to a short maturity deferral - to mid-June - to get the restructuring done.

Morgan Stanley established early on that all would be treated equally and that there would be no special favours. "The goal was to make everyone a little unhappy, in order to produce the best deal for all," says Mr Parry-Wingfield.

Lenders who were also exposed to VEM and Spohn were easier to convince than others. Those with smaller exposures and no long-term relationship with Heidelberg were more difficult, and some held out until the last moment. Finally, the last agreement to plan B was secured, and an extraordinary €8.7bn of syndicated and bilateral debt, letters of credit, cash management and other facilities was rolled into a single facility paying 425 basis points over Euribor. Maturing in December 2011, it gives the company more control over the syndicate, with no further need for one-to-one negotiation.

"This has been the largest stressed refinancing in Europe by far and, significantly, was done in the context of 100% consensus," says Mr Babcock. "Lenders understood the quality of the underlying asset and the efficacy of the plan put forward."

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter