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Europe Debt Woes Force DinoSol Loan Writedown, Irish Bank Sale

Strategic Value Partners Founder Victor Khosla
Victor Khosla, founder of Strategic Value Partners. Source: Strategic Value Partners via Bloomberg

Europe’s sovereign debt crisis pushed DinoSol Supermercados into the hands of its creditors and prompted Bank of Ireland Plc to start selling 3 billion euros ($4.3 billion) of project finance loans to boost reserves.

Permira Advisers LLP will hand over its ownership in DinoSol to the Madrid-based supermarket chain’s creditors in a debt restructuring, three people familiar with the matter said April 6. Bank of Ireland, Ireland’s largest bank, said April 4 it hired Deutsche Bank AG to sell most of its project finance business of U.K. infrastructure loans.

The distressed debt market in Europe is set to outstrip the U.S. for the first time as deficit-ridden governments force banks to sell $2 trillion of underperforming assets, Strategic Value Partners LLC predicts, and budget cuts and austerity measures begin to bite.

“European commercial banks are now having to sell the distressed assets on their balance sheets in the size and scale we’ve never seen in the history of modern finance,” Victor Khosla, founder of the Greenwich Connecticut-based distressed-debt hedge fund manager, said in a telephone interview. “The sovereign debt crisis in Europe is helping to increase the supply of distressed assets in Europe.”

Standard & Poor’s said it expects a “second wave of defaults” next year, after writeoffs on senior leveraged loan peaked at 6.5 billion euros in 2009. KPMG Europe LLP hired two restructuring partners to cope with an anticipated increase in workload, it said April 4.


Distressed debt typically yields at least 10 percentage points more than government bonds. Hedge funds dedicated to buying the debt earned an average 4.1 percent return this year after reaping 23 percent last year, according to Singapore-based data provider Eurekahedge Pte. By comparison, junk bonds returned 14.7 percent in 2010, according to Bank of America Merrill Lynch’s Global High-Yield Index.

Investors profit when a company’s debt is restructured and they recover more than the amount implied by loan prices by taking the company’s assets or shares.

DinoSol’s loans fell to as low as 15 percent this year, according to Jefferies Group Inc. prices. The debt is now quoted at 17 to 19 percent of face value after three people familiar with the borrower said on April 6 that investors led by fund managers Indicus Advisors, Alcentra Group Ltd. and M&G Investment Management Ltd. and lenders Caja Madrid Societe Generale and Lloyds Banking Group Plc may agree to write down debt in exchange for ownership of the company.

Eircom Breach

The Spanish chain’s sales have been falling since 2009 as consumers cut spending, forcing it to ask lenders to reset covenants in 2010 to grant it “liquidity headroom,” according to Permira’s website.

Permira, which bought DinoSol from Royal Ahold NV in 2004, will relinquish control, the people said. A Permira spokesman who didn’t want to be identified declined to comment.

Ireland’s largest phone company Eircom Group Ltd. risks breaching conditions on 3.75 billion euros of debt, Chief Financial Officer Mark Wilson said March 1. Harbourmaster Capital Management Ltd., Eircom’s biggest lender, has teamed up with Blackstone Group LP, Alcentra, Avoca Capital Holdings and Deutsche Bank AG to represent holders of Eircom’s first-lien loans, four people with knowledge of the talks said March 1.

Irish Bank Disposals

Ireland’s banks are curbing loans and bolstering capital after logging record losses from the bursting of a decade-long real-estate bubble. The nation’s central bank ordered Bank of Ireland, already 36 percent-owned by the state, to dispose of about 30 billion euros of non-core loans after publishing stress tests for Irish lenders last month.

Lenders are beginning to crystallize losses after forgiving debt last year and keeping default rates artificially low, said Christian Savvides, a managing director at Rothschild in London. The global default rate ended the first quarter at 2.6 percent and may fall to 1.5 percent by the end of the year, according to an April 8 report by Moody’s Investors Service.

“Most banks in Europe now seem to be taking a pragmatic attitude towards debt restructuring, recognizing that sometimes a writedown is necessary to restore a company’s health and allow lenders to get their recovery through the equity,” Savvides said. “In the next wave of restructuring in Europe, I would expect to see fewer of the ‘sticking-plaster’ type transactions that leave companies struggling to cope with too much debt.”

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