Food for thought

When the capital markets are roaring, investment banking tales of derring-do are about initial public offerings (IPOs) or hard-fought takeovers. In times like these, they are more likely to be about restructuring. As sole restructuring advisor on the recent capital transformation of Premier Foods, Goldman Sachs showed that this type of deal also represents victory over considerable odds.

For the past decade, Premier has been building an extraordinary portfolio of food brands. Its business model is to sell "great British brands" only to supermarkets in the UK. These brands include Hovis, Bisto, Mr Kipling, Angel Delight, Bird's, Branston, Oxo and a host of others. The trouble was that Premier acquired the first three by buying RHM in 2007, and the debt it raised to do so has been a millstone around its neck.

Serious concerns

The company had net debt of about £1.8bn ($2.67bn) at December year end and banking facilities of some £2bn with what were originally 34 commercial banks. By last November, the share price had fallen 85% in 12 months and management was seriously concerned about breaching its loan covenants. It scrapped the interim dividend and postponed a December net debt to EBITDA [earnings before interest, tax, depreciation and amortisation] covenant test date. It also called in Goldman Sachs, alongside NM Rothschild, as joint financial advisor.

Together with its fears over covenants, the company was worried about liquidity in a worsening trading environment, with suppliers tightening terms. An attempt to raise capital from shareholders foundered even before it was formalised, as feedback indicated it would not succeed.

"The company needed three things," says Andrew Wilkinson, Goldman Sachs's co-head of European restructuring. "It needed a long-term deal with its banks, completely remodelling its debt structure. It needed a medium-term deal with its pension fund so that, whatever happened to the pension fund's investments, the company did not have to make more than a certain level of contribution. And while it had to go to existing shareholders for capital, it also had to look outside for a cornerstone investor to underpin the capital raising."

Premier needed a balance sheet robust enough to see the company through to 2013 and to eliminate any risk of breaching its banking covenants. It also turned out to need funding just to get through the restructuring. But Goldman also felt that the underlying investment case was sound enough to sell a stake to an outside investor.

Clearly, Premier had to change the payment terms on its debt, to push back the maturity and rejig the amortisation. For that, it needed 100% consensus from its banks. It had to ask for serious concessions, but banks, by their very nature, tend to offer the very minimum. So the company had to strengthen its negotiating position by demonstrating that new capital was available from an outside shareholder. But the fact that Premier had significant debt repayments looming in 2010 and 2011 could have put investors off.

"So we said to the company that we would have to run all these things in parallel," says Mr Wilkinson. Indeed, when the time came, Goldman Sachs had the bankers sitting in one of its meeting rooms and the new investor in the next room, to communicate to the bankers exactly what was needed.

Before it even got that far, there were some fires that had to be fought along the way. One involved credit insurers. In the wake of the Woolworths collapse, trade credit insurers had started to cut limits on Premier's cover. Given Premier's overleveraged state, this threatened to turn a serious situation into a crisis. The Goldman Sachs swaps team worked with the bankers, with the active support of the Bank of England, to persuade the insurers to give Premier some breathing space.

Liquidity problem

The next fire involved liquidity. While the company originally thought its funding would be sufficient to the end of March and the completion of the restructuring, it was clear by December that this would not be the case, particularly with suppliers tightening the screw. While they took some persuading not to boost the price, a number of the core syndicate banks provided an additional £125m loan with no repricing, and Premier was able to swap a £100 acquisition facility into a working capital facility.

From the start of January, the restructuring efforts assumed more urgency, and the search for an outside investor intensified. Plans were also laid for a share placement with existing shareholders. "We considered going down the rights issue route," says Rob Pulford, a Goldman Sachs managing director in leverage finance. "But a placing provided the company with the option to get an outside investor in."

After talks with various private equity houses, Warburg Pincus agreed to take £60m of the shares - 10% of the enlarged equity - as a firm placing, underwriting a further £60m if needed. It also limited its stake to 15%, including any open market purchases, with a 12-month lock-up and an 18-month standstill agreement. In return, it was promised a seat on the Premier board.

With a cornerstone investor lined up, and plans for the share placing in hand, it was time to tell the banks that Premier had access to new capital - and that it had to renegotiate its debt substantially, and fast.

Tough negotiations

"It was a very tough series of negotiations," says Mr Wilkinson. "We needed a deal placed and closed by the end of March to get the accounts signed off. The good news was that we could get £400m in new capital. But we needed a new term sheet, new credit facility approvals and new covenants. And we had to have them in two-and-a-half weeks."

That is not the kind of timetable that banks are used to dealing with and certainly not one that they relish. But they were persuaded that, once the deal was in place, they could remove Premier from their list of things to worry about. "We staked our restructuring reputation that we would be able to get the banks' unanimous consent to the deal on a tight timetable," says Mr Wilkinson. "We felt we could get it done with the carrot of new capital, and we were right."

The maturity on the debt was extended by 21 months to 2013, priced at 300 basis points (bps) over Libor, about 100bps over the original pricing. The amortisation schedule was amended and the covenants reset to provide "significant" headroom. Using the proceeds of the share placing, the debt itself was reduced to £1.4bn.

The placing was announced on March 5 and ran for two weeks. The shares on offer were priced at 26p, a 9% discount to the previous close. A satisfying 66% of shareholders subscribed to the offer, so there was no need for Warburg Pincus to take up its provisional tranche. The issue raised £404m, falling to £379m after expenses. In the meantime, the pension fund trustees had agreed that the company would not have to increase its deficit contributions until 2014, and that no proceeds from the equity issue would be directly applied to the deficit. Given that Premier has one of the few remaining open defined benefit schemes, the trustees have a certain amount of goodwill towards the company.

This exercise points the way to further private equity involvement in restructurings, at least in the UK. "There is only a finite amount of cash in the public market's coffers and, if the economy continues to perform as we expect, we will see more deals like this with a private equity spin," says Mr Pulford.

"The Premier deal suggests that pension-scheme trustees will be increasingly important stakeholders in UK restructurings."