TPG’s Aleris in bankruptcy protection

Aleris International, a US-based aluminium processor that TPG bought at the height of the buy-out boom in 2006, filed for Chapter 11 bankruptcy protection for its North American operations on Thursday. TPG paid $3.3bn, including debt, for the company, which provides aluminium products to the construction and car industries. With the bankruptcy filing, TPG’s $830m in equity has been wiped out. The filing was particularly noteworthy because the debt for the Aleris deal was arranged without covenants and with a provision giving the company the right to suspend cash interest payments on part of its borrowings. Conventional wisdom had held that such easy terms made a bankruptcy protection less likely. The company will receive an additional $500m in debtor-in-possession (Dip) financing to allow it to function in bankruptcy. This new debt is being provided by holders of the company’s bank loans led by Oaktree Capital and Apollo Management. Many holders of this debt bought in at a discount on the expectation it would turn into equity if TPG decided against putting more money into the ailing company. In a potentially contentious move, TPG is expected to contribute to the Dip financing and maintain representation on the Aleris board, according to people familiar with TPG. By joining in the Dip financing, TPG would position itself ahead of other creditors. As recently as mid-October, TPG was carrying its investment in Aleris at 70 cents on the dollar. TPG originally planned to backstop Aleris by providing letters of credit but as the economic situation became more dire TPG did not take such action, according to people familiar with the matter. TPG has been working with lenders for the past few weeks to make sure the company can continue to function smoothly after the bankruptcy filing. Aleris is the latest in a series of setbacks for TPG. Another TPG-owned company, British Vita, signed a standstill agreement with creditors this week. TPG and other investors lost $7bn when Washington Mutual was taken over last year. However, TPG now has $18.8bn in the fund it raised just before the downturn, leaving it in a position of strength relative to its peers in spite of these missteps. SOURCE:www.ft.com