Private equity struggling to keep debt and banks at bay

Private equity owners of New Zealand companies have been hurt by the credit crunch.

The private equity hangover has begun to hit some of New Zealand's largest companies, with several either breaching, or close to breaching, their banking covenants.

Independent Liquor, founded by the late Michael Erceg and now known as Flavoured Beverages, is the latest privately-owned company to reveal its own debt crunch.

The group, which mostly sells alcopops in New Zealand, Australia and Canada, was bought in January 2007 by Australian firm Pacific Equity Partners (PEP), together with Hong Kong-based CCMP Capital Asia (now known as Unitas Capital), for $1.2 billion.

The price raised eyebrows at the time and its latest accounts filed with the Companies Office show it has made a $33.8 million loss in its first full year under private equity ownership. However, that hasn't prevented PEP and Unitas from so far being paid $8.7 million for "investment services".

The accounts, for the year ending September 2008, reveal total assets of nearly $1.4 billion. However, more than $1 billion of this is intangibles such as brands and goodwill.

Its liabilities totalled $837 million, including more than $700 million of borrowings, and its interest costs have ballooned from $47 million in the previous nine-month period, to $80 million.

Its auditor, PricewaterhouseCoopers (PWC), has highlighted "the uncertainty around the ability of the group to comply with its debt covenants".

If a breach occurred that was not remedied, "the group would not be able to continue as a going concern," it notes.

According to PWC, Flavoured Beverages was able to meet its covenants during the year, but was only able to do so in the subsequent quarter because of a possibility it might get to keep $13.1 million put aside for an increase in Australian excise tax.

The Australian Government announced a steep increase in the excise tax on alcopops in April last year. Although retailers have already put up their prices, the move has not yet been ratified by Parliament.

If the tax hike is confirmed, then Flavoured Beverages "faces the risk that it would breach its banking covenants in the future", says PWC.

The accounts also reveal the company is receiving free glass bottles, because of a $6.2 million interest-free and unsecured loan it gave to its Dubai-based supplier, Altajir Glass.

To keep the banks at bay, it's possible PEP and Unitas may have to tip more money into the company. This has already happened to several companies owned by private equity.

Accounts filed in June by the Noel Leeming Group, which includes the Bond & Bond retail chain, reveal the appliance retailer breached its banking covenants over the past year. In April, its owner, Australian firm Gresham Private Equity, agreed to cough up an extra $15 million, and the Bank of Scotland International agreed to new terms with a final repayment date of June 2011.

However, there are anecdotal reports of some investors reneging on their commitments to large private equity funds.

Gresham was unable to save another of its investments earlier this year.

Queensland-based Riviera Boats was placed in receivership in June, owing its banks more than A$150 million ($186 million). Gresham jointly owned the company with fellow private equity firm Ironbridge.

Ironbridge also has problems in New Zealand with MediaWorks, which owns TV channels TV3 and C4, as well as one of the country's two main radio networks.

MediaWorks' holding company, HT Media, is $500 million in debt and last week it told staff that job cuts were likely, following a 15 per cent drop in revenue.

Australian company PBL Media, which among other things owns ACP Magazines in New Zealand, is also struggling with massive debt.

Private equity firm CVC Asia Pacific paid A$4.5 billion for half of the company in 2006. It now owns almost all of it and last year was forced to chip in an extra A$335 million to keep the banks happy.

In January, another private-equity-owned company collapsed across the Tasman. Discount retail chain ADR, which includes the Warehouse's former Australian stores, was bought out of receivership in March by Kiwi retailer Jan Cameron.

Just three years previously Cameron sold the Kathmandu chain to two private equity funds for $500 million, and there has been speculation its new owners are now keen to exit the investment through a public float.