Tuesday, March 27, 2012

PEU Arcapita Declares Bankruptcy

Arcapita declared bankruptcy, a rare move for a private equity underwriter (PEU).  Private equity consistently states it poses no systemic risk.  Consider Arcapita's description:

Arcapita's private equity team operates out of its offices in Atlanta, London, Singapore and Bahrain. Arcapita acts as a principal and arranger in the acquisition of controlling and non-controlling interests in established companies throughout the world with an emphasis on the United States, Europe, the Middle East and India, targeting growth-oriented private equity acquisitions with a total transaction value between $50 and $500 million.

The firm is global in nature, so Arcapita's failure isn't due to unique features of the Bahrainian economy.   The firm's investment strategy sounds like many PEU's:

Arcapita focuses on five target sectors where it has built up industry knowledge and a successful track record:   healthcare, energy, business services, industrial and consumer sectors.
It seems Arcapita made the mistake of investing heavily in the buyout boom and is unable to refinance debt associated with those deals.

Of Arcapita's twelve holdings, eleven were done before the September 2008 financial crash.  That means frothy prices and unencumbered bond covenants.

Dealbook reported:

Arcapita began discussions about its $1.1 billion credit line three weeks ago, hoping to extend it by three years, but could not reach agreements with “certain nonbank creditors.”.
Despite many investors from tax havens like the Cayman Islands, Arcapita chose Southern New York for its bankruptcy filing, despite eight of the PEU's top ten investors being out of the U.S.

Now that it is in Chapter 11 protection, Arcapita is hoping to use American bankruptcy laws to complete the restructuring of its debt.
Arcapita's press release blamed a few nonbank creditors:

The actions of certain non-bank creditors have precluded Arcapita from reaching a consensual resolution before the March 28th maturity date.

Were any nonbank creditors fellow PEU's?  Did a PEU cramdown a PEU?  Like hyenas, they'll fight for Arcapita's carcass.  Look for systemic risk in Brunei, Bahrain and the Caymans.  London and Luxembourg.