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Private Equity Indigestion Comes With Bain Bloomin’ Onion Debts

 March 11 (Bloomberg) -- The restaurant operator that trademarked the Bloomin’ Onion, a deep-fried, 1,560-calorie appetizer, is giving its private-equity owners indigestion.

Bain Capital LLC, which has made more than $100 billion of investments since its founding in 1984, has hired restructuring specialists AlixPartners LLP and Miller Buckfire & Co. to help salvage its $3.2 billion 2007 takeover of Tampa, Florida-based OSI Restaurant Partners Inc. The company, which owns the Outback Steakhouse chain, is struggling with declining revenue and a 30- fold increase in losses during the worst economic crisis since the Great Depression.

Boston-based Bain isn’t the only leveraged buyout firm trying to bail out its investments. Apollo Management LP and Blackstone Group LP are employing an arsenal of tools, including debt exchanges and equity infusions, to rescue leveraged buyouts, such as Freescale Semiconductor Inc. and Realogy Corp. After spending a record $1.2 trillion on acquisitions during 2006 and 2007, LBO firms are now focused on deal-saving, not dealmaking.

“They are looking at existing deals and asking, ‘How can I buy myself time?’” said Bryan Marsal, co-founder of Alvarez & Marsal Inc., who has taken over the operations of bankrupt New York-based securities firm Lehman Brothers Holdings Inc. Marsal said his firm is also working for LBO managers who are “looking inwardly.”

Since November, at least seven companies owned by private- equity firms, including Blackstone’s Freescale and Apollo’s Harrah’s Entertainment Inc., have sought to pare more than $50 billion of borrowings by offering lenders the chance to exchange debt at a discount for cash or new securities.

Cheeseburger in Paradise

Almost $30 billion of debt was exchanged last year, more than three times the amount during the 23 years from 1984 to 2007, according to a report by Edward Altman, a professor of finance at New York University’s Stern School of Business.

“Firms appear to be scrambling to avoid bankruptcy like never before,” Altman wrote last month in his report.

OSI, whose 1,491 restaurants can be found in 49 U.S. states and 20 countries, offered to buy back some of its bonds for as little as 25.5 cents on the dollar. The company, which also operates the Cheeseburger in Paradise and Carrabba’s Italian Grill chains, said in a Feb. 23 filing that its net loss widened to $739.4 million last year from $22.6 million in 2007 because of “poor overall economic conditions.” The loss included a $650.5 million charge for non-cash costs, such as writing down goodwill from the purchase. Revenue fell 4.9 percent in the same period.

The restaurant operator was included on a list of 283 U.S. companies compiled this week by Moody’s Investors Service that are considered the likeliest to default.

Fading Attractions

When Bain and Catterton Partners announced their deal to buy OSI in 2006, restaurant chains were takeover targets because of their predictable cash flows and valuable real estate. OSI had net income that year of $100 million, and the buyout firms had to sweeten their offer by 2.9 percent to woo reluctant shareholders. That same year Bain, Carlyle Group and Thomas H. Lee Partners LP acquired Dunkin’ Brands Inc., the operator of more than 12,000 Dunkin’ Donuts, Baskin-Robbins and Togo’s shops worldwide.

The attraction faded soon after the OSI acquisition closed in June 2007, when two Bear Stearns Cos. hedge funds imploded, real estate prices collapsed, credit markets froze and consumer spending dropped. Now Bain’s struggle to keep OSI afloat as economic gloom deepens threatens to undermine the promise that private-equity firms could better manage the companies. It also may further depress the appetite of institutional investors for new buyout funds.

Debt Exchanges

As part of the rescue, OSI retained AlixPartners’ business- performance group to advise on ways to cut costs, focusing on how the company’s seven restaurant chains buy and distribute supplies. New York-based Miller Buckfire is advising on the debt buyback.

Executives at Bain and Catterton, based in Greenwich, Connecticut, declined to comment about OSI or the restructuring plans, as did officials at AlixPartners, Miller Buckfire and OSI.

“The number of debt exchanges will increase as private equity firms focus on preserving their portfolio companies,” said Stephen Ledoux, a New York-based managing director at Rothschild, an investment bank that is advising movie-rental chain Blockbuster Inc. on restructuring options.

‘Proactively Deleveraging’

Private-equity investors are taking advantage of a provision in President Barack Obama’s stimulus package that allows companies to defer taxes related to buying back debt until 2014 and then spread the payments out over five years.

“The provision will make a meaningful difference to distressed companies considering debt restructurings,” Creditsights Inc. analyst Louise Purtle in New York wrote in a Feb. 17 note to clients.

“We’re proactively deleveraging,” KKR & Co. co-founder Henry Kravis said on a March 2 conference call with reporters. “We are certainly aware” of the tax provision, “and each of our companies is looking at the desirability of buying debt in,” he said.

As private-equity owners consider buying back debt, they’re also mulling whether to put new capital in companies to help them manage through the recession with their equity intact. LBO firms, which have few opportunities for new transactions, have about $400 billion in committed, uninvested capital and the ability to write checks.

Good Money After Bad

The willingness to add cash to a deal is a departure from previous private-equity strategies, said Steven Kaplan, a professor at the University of Chicago Booth School of Business.

“If you look at the defaults of the early 1990s, there wasn’t a lot of new money put in,” Kaplan said. “They either defaulted or they didn’t. Now they’re saying that if the equity is still going to have value, we’re going to put some more in.”

That may not be wise, said Jonathan Macey, a professor of corporate finance and securities law at Yale University in New Haven, Connecticut.

“It’s not always a bad idea for buyout firms to give their companies money to live another day,” Macey said. “But a lot of private-equity firms have fallen into the trap of throwing good money after bad.”

Apollo, the New York-based private-equity firm run by Leon Black and Joshua Harris that has announced two debt exchanges for its Las Vegas-based casino operator, Harrah’s Entertainment, agreed last month to pump as much as $150 million into Realogy, owner of the Century 21 and Coldwell Banker agencies, as it reels from the worsening housing slump.

Equity Cures

“There are likely to be more equity cures this year,” said Peter Fitzsimmons, who co-heads the restructuring practice at AlixPartners in New York. “Private-equity investors recognize the value of deleveraging their investments and may be willing to invest more equity to accomplish this.”

What the LBO firms are trying to avoid are bankruptcy protection filings. Of 86 U.S. companies rated by Standard & Poor’s that filed for bankruptcy last year, 22 were controlled by private-equity firms, according to the Private Equity Council, the Washington-based industry lobbying and research group. Among them were Apollo’s Linens ‘n Things Inc. and Mervyn’s LLC, a mid-market department-store chain owned by Sun Capital Partners Inc. in Boca Raton, Florida.

DIP Financing

“A year ago, the view from a buyout firm may have been that there were problems in the economy, but their companies were alright,” said Mohsin Meghji, a principal at New York- based restructuring firm Loughlin Meghji & Co., which is advising on the workout of KKR’s Masonite International, the Mississauga, Ontario-based door and fiberboard maker. “The reality of the situation has been made very clear.”

Access Industries Holdings LLC, the New York-based investment firm run by billionaire Len Blavatnik, offered in January to fund $750 million of debtor-in-possession, or DIP, financing for Lyondell Chemical Co., the Houston-based chemical maker it controlled that filed for bankruptcy. Access was excluded from the $8 billion bankruptcy loan approved last month, which included Lyondell’s prior lenders.

“The challenge will continue to be persuading senior lenders that private-equity participation as a lender is acceptable when the existing lender’s value may be impaired,” said Fitzsimmons of AlixPartners.

A growing number of groups are vying to reap the fees associated with restructuring advice, eager to assist private- equity firms whose own financial engineering didn’t work. Greenhill & Co., the investment bank founded by former Morgan Stanley banker Robert Greenhill, said on March 6 that it was creating a financing advisory and restructuring group in London and New York.

“It’s early days in this cycle,” said William Repko, co- head of the restructuring practice at Evercore Partners Inc., the New York-based investment bank advising General Motors Corp. “There is already a logjam of experienced restructuring professionals.” 
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