Debt Innovations in Europe from KKR

They say nesessity is the mother of innovation. Then it’s times likes these that act as a maternity ward. In a restructuring deal that could be replicated across Europe, a private-equity consortium led by U.S. buyout shop Kohlberg Kravis Roberts has slashed the debt of Dutch semiconductor company NXP by nearly 10% after having $465 million of loans written off at no cost to the buyout firms’ equity.

Bought for €6.4 billion ($8.5 billion) in 2006, NXP sought to reduce its debt ($3.8 billion of US-denominated debt and €1.5 billion of euro-denominated debt prior to the restructuring) after revenue fell 25% last year to $979 million. 

The twist: In a restructuring, a buyout firm is typically expected to inject additional equity to reduce the level of debt in a company. Instead, the NXP restructure involved lenders writing off some of the nominal value of their junior debt in exchange for a higher place in the capital structure. This appeases lenders because, although they cut the nominal value of the debt they own, they acquire debt that is less likely to default. The higher priority debt can be higher in value on a mark to market basis than the distressed junior debt they previously owned. The restructuring reduces NXP’s interest payments by €30 million ($40 million). Pretty crafty!

This transaction is one of the first significant debt reductions involving no additional cash injections by a sponsor in Europe. It’s certain to not be the last.

Meanwhile, the Deal Professor takes a longer look at a situation back Stateside that got a bit contentious.

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