TheChek News Flow

Private equity firms hand over distressed companies to rivals

Transfers involving groups such as KKR and Bain show rising power of lending arms

Private equity’s biggest names including KKR and Bain Capital are handing over distressed companies to the lending arms of rivals, as they struggle with tough economic conditions.

The rash of handovers to creditors underscores the problems many private equity firms face as their portfolio companies contend with higher interest rates, stubborn inflation and supply chain issues.

It also shows the growing influence of credit provided by the lending arms of the same large private equity firms. In recent years, private credit has been a faster-growing business than buyouts for many of the industry’s biggest names, including Apollo, Carlyle and KKR.

Bain Capital’s European business has recently ceded ownership of German manufacturer Wittur to KKR’s credit arm, according to people familiar with the deal.

Goldman-backed ink supplier Flint is also in talks with creditors about handing over control, according to several other people familiar with the details, while Carlyle is expected to hand over the keys at security company Praesidiad to a group of lenders including Bain Capital’s credit business.

Meanwhile, KKR’s private equity arm has lost control of German payments company Unzer to a group of creditors including Goldman Sachs, Swiss private equity firm Partners Group and European credit manager Alcentra.

In the US, KKR’s investment in healthcare company Envision was wiped out in a deal for a group of senior lenders including Blackstone to take over the company, the Financial Times reported in May.

“We had many years of easy money and low interest rates where companies owned by private equity took advantage,” said Jeanine Arnold, an executive at rating agency Moody’s. 

“[Private equity] continued to push the boundary on the debt those companies were taking on. That’s OK when you have earnings growth but then we’ve had Covid, Ukraine and interest rate increases.”

Private equity-owned businesses are struggling partly because some of the debt used to finance buyouts was not hedged against interest rate rises.

As rates have gone up, loan repayments have increased and companies have had to spend more money servicing their debt.

“There was relatively little interest rate hedging by private equity firms for their floating rate debt and now that rates have gone up, debt servicing costs have more than doubled over the past year and a half,” said Paul Goldschmid, partner at investment manager King Street. 

A problem for lenders is that many of the loans that were used to finance the deals do not have strong covenants, contractual protections for creditors, which can help them identify issues with a company’s balance sheet before it runs into serious problems.

“The key difference we see between now and the last cycle is that the trigger event now tends to be liquidity, given the lack of covenants during the last few years,” said Manuel Martinez-Fidalgo, a co-head of restructuring at Houlihan Lokey. “In 2008 or 2010, you would sit down and have an early seat at the table. That isn’t the case now.”

Adam Plainer, co-chair of Dechert’s financial restructuring group, said: “The warning signs aren’t being picked up early enough.”

The loose lending terms give private equity owners more flexibility to come up with solutions to keep their companies afloat, including taking on more debt.

“The nature of the loans created over the past few years allows the issuers to kick the can down the road as there are very few protections for existing lenders,” said Dushyant Mehra, co-chief investment officer at hedge fund Hildene Capital Management.

If there are a series of company defaults it could leave creditors with losses, as well as the logistical headache of having to own assets they did not intend to.

“For now, there is an alignment in incentives between private equity and private credit,” said Allan Schweitzer, portfolio manager at credit hedge fund Beach Point, which manages $15bn in assets. “Private equity firms want their portfolio companies to keep going, and private credit firms don’t have the infrastructure to take the keys of multiple companies simultaneously.” 

Californian newspapers report that Ali Rezaei, who wanted to buy a $109,000 gold Patek Philippe watch (Ref. 5980/1R-001) from Shreve & Co., had been told he would secure the timepiece as long as he built up a purchasing history of other, more attainable, watches and jewellery.

The lawsuit, registered with the San Francisco County Superior Court, alleges that Mr Rezaei was told by Shreve & Co. that he could secure the promised watch if he could build a relationship and purchasing profile with the retailer.

What he was not told, he alleges, is that Shreve & Co. kept dangling the carrot of the gold Nautilus if he continued spending, even though the jeweller had been informed by Patek Philippe that it was going to lose its agency as part of a programme to cut 30% of its worldwide doors.

Mr Rezaei’s filing says he followed the advice, buying a different gold Patek Philippe watch from Shreve, for $71,000.

He then reportedly bought a women’s Patek Philippe, encrusted with diamonds, for $50,000 and a second men’s piece for $47,000.

Following the sort of advice that is widely circulating on social media, he even bought a $53,000 gold and diamond necklace in March last year, the sort of purchase that deliver the highest profit margins to a jeweller.

Mr Rezaei accuses Shreve of falsely promising that this sort of purchasing would open the door to him buying the Patek Philippe Nautilus of his dreams.

His lawsuit says he spent over $220,000 building up his profile with the understanding, encouraged by Shreve & Co., that he would secure the golden Nautilus.

The case is complicated by the fact that Shreve & Co. is among the authorized dealers that have lost the agency of the watchmaker this year, so was ultimately unable to sell the watch to Mr Rezaei, even if it had wanted to.

According to documents filed with the San Francisco court, Shreve did not tell its sales associates or Mr Rezaei that it would be unable to sell Patek Phillipe.

Instead, Mr Rezaei alleges, Shreve strung him along to continue to reap additional sales revenue and deprived him of the watch he was promised.

His lawsuit accuses Shreve of fraud, false promise, breach of contract, and intentional and negligent misrepresentation.

He is seeking $500,000 in damages.

Patek Philippe has declined to comment on the case and Shreve & Co. has not responded to WatchPro questions.

Californian newspapers report that Ali Rezaei, who wanted to buy a $109,000 gold Patek Philippe watch (Ref. 5980/1R-001) from Shreve & Co., had been told he would secure the timepiece as long as he built up a purchasing history of other, more attainable, watches and jewellery.

The lawsuit, registered with the San Francisco County Superior Court, alleges that Mr Rezaei was told by Shreve & Co. that he could secure the promised watch if he could build a relationship and purchasing profile with the retailer.

What he was not told, he alleges, is that Shreve & Co. kept dangling the carrot of the gold Nautilus if he continued spending, even though the jeweller had been informed by Patek Philippe that it was going to lose its agency as part of a programme to cut 30% of its worldwide doors.

Mr Rezaei’s filing says he followed the advice, buying a different gold Patek Philippe watch from Shreve, for $71,000.

He then reportedly bought a women’s Patek Philippe, encrusted with diamonds, for $50,000 and a second men’s piece for $47,000.

Following the sort of advice that is widely circulating on social media, he even bought a $53,000 gold and diamond necklace in March last year, the sort of purchase that deliver the highest profit margins to a jeweller.

Mr Rezaei accuses Shreve of falsely promising that this sort of purchasing would open the door to him buying the Patek Philippe Nautilus of his dreams.

His lawsuit says he spent over $220,000 building up his profile with the understanding, encouraged by Shreve & Co., that he would secure the golden Nautilus.

The case is complicated by the fact that Shreve & Co. is among the authorized dealers that have lost the agency of the watchmaker this year, so was ultimately unable to sell the watch to Mr Rezaei, even if it had wanted to.

According to documents filed with the San Francisco court, Shreve did not tell its sales associates or Mr Rezaei that it would be unable to sell Patek Phillipe.

Instead, Mr Rezaei alleges, Shreve strung him along to continue to reap additional sales revenue and deprived him of the watch he was promised.

His lawsuit accuses Shreve of fraud, false promise, breach of contract, and intentional and negligent misrepresentation.

He is seeking $500,000 in damages.

Patek Philippe has declined to comment on the case and Shreve & Co. has not responded to WatchPro questions.

Sergei Surovikin dismissed as head of military’s aerospace forces

Russia’s army has dismissed Sergei Surovikin, a prominent general, as head of its aerospace forces amid a crackdown on potential Wagner sympathisers following the paramilitary group’s failed mutiny in June.

State newswire RIA Novosti cited an “informed source” on Wednesday saying Surovikin had been “relieved of his post” and replaced by Viktor Afzalov, the aerospace forces’ chief of staff.

Known as “General Armageddon” for brutal bombardments under his command in Syria, Surovikin took over Russia’s invasion force last October after a series of embarrassing battlefield setbacks in Ukraine.

He was the most prominent figure among a number of senior military leaders who had good relations with Wagner’s leader Yevgeny Prigozhin, but he has not been seen in public since he was detained in late June.

Though Russia’s military has not explained Surovikin’s absence or said whether he remains deputy commander of its invasion forces in Ukraine, the general’s detention came in the midst of President Vladimir Putin’s post-mutiny crackdown at the top of the security services.

Hardliners who have been known to sympathise with Wagner and criticise the army’s leadership — in particular, defence minister Sergei Shoigu and Valery Gerasimov, chief of the general staff — have been sacked or detained after giving dire assessments of the situation at the front.

Prigozhin’s rivals, meanwhile, have appeared more frequently in public at high-level events, suggesting they continue to enjoy Putin’s patronage. Last week, Putin visited the army headquarters in Rostov for the first time since Wagner briefly seized it during the mutiny, and was given a guided tour by Gerasimov.

Under Surovikin’s command, Russia switched to defensive tactics aimed at consolidating its territorial conquests while launching devastating air strikes on Ukraine’s civilian infrastructure.

He lost his position to Gerasimov following an internal power struggle in January, but remained popular among hardliners who chafed at Shoigu and Gerasimov’s poor management while continuing to serve as Wagner’s effective handler.

In his last public appearance, a video released in the middle of the night as Prigozhin’s 24-hour mutiny began, a visibly distressed Surovikin cradled a machine gun as he urged Wagner to stand down.

Andrei Kartapolov, an MP and former deputy defence minister, said in July that Surovikin was “resting” and “not available right now”, without elaborating.

But after the Kremlin struck an 11th-hour deal to stop Wagner’s march on Moscow, Prigozhin appeared to have at least partially reintegrated himself into the Russian security establishment — even as generals who shared many of his gripes with the army’s leadership fell out of favour.

The Wagner leader attended a roundtable with Putin at the Kremlin in July before the group departed for exile in Belarus, whose leader, President Alexander Lukashenko, brokered the deal to end the mutiny.

Prigozhin then appeared in a dimly lit video appearing to tell Wagner’s fighters that they had relocated to Belarus “for some time” before eventual redeployment in Africa, where the group has been hired as mercenaries in several countries.

On Monday, a Wagner-linked channel on social media app Telegram posted a video in which Prigozhin claimed he was in Africa on a mission to “make Russia even greater on all continents”.

Tesla keeps creating new paying accounts on Elon Musk’s X (formerly Twitter) to the point that it is now likely paying around $20,000 per year to be on the social media platform.

It’s not clear what it is getting in return.

Public companies, like Tesla, have to disclose any “related transaction” that may have conflict of interest between its executives or board members and any other companies that they have interests in.

For example, Tesla often disclosed dealings with SpaceX over the shared use of Elon Musk’s plane or the latter’s purchase of Tesla parts.

Now Tesla is going to have more to disclose and possibly justify to its shareholders as it is starting to spend more money on X (formerly Twitter), which is under the ownership of its CEO, Elon Musk.

X has been having issues behind being profitable with advertising, and it has turned to subscription services.

Twitter Blue, now X Premium, is a $8 per month subscription service for X users. It “verifies” the user, gives them a blue badge, and gets them more visibility.

But X is also pushing a subscription for businesses called “Verified Organizations” with similar features:

It is quite expensive. X charges $1,000 a month for the main account and then $50 per month for every other “affiliated account.”

Tesla is paying for this service and Electrek has found 13 accounts affiliated to Tesla’s verified org account.

It means that Tesla is paying $1,650 per month – or roughly $20,000 per year – to be on X.

Where things are starting to look excessive is that Tesla appears to be launching several new accounts requiring an additional $50 per month payment for every aspect of its business since Musk took over Twitter and launched this new subscription service.

For example, Tesla launched a new “Tesla North America” account last month, a new “Tesla Europe” account in January, a new “Tesla AI” account in May, a new “Tesla Megapack” account in January, and new “Tesla Optimus” account also in January.

This strategy is unique to X as Tesla operates only a single official account on other social media platforms, like Instagram and Youtube.

The Tesla Optimus account has posted a single tweet since it was created in January:

Tesla has been paying $50 per month for this account which has been sitting useless for most of the time.

The automaker has also been paying “affiliate accounts” for executives like Franz von Holzhausen, Drew Baglino, and Tom Zhu, who all rarely use their accounts for anything other than repost Tesla’s own official posts.

Electrek’s Take

Update: Tesla fans seem to be missing the point here. They are focusing on the amount, which everyone agrees is meaningless for Tesla. It’s not the amount the problem, it is the decision-making being a slippery slope. Ironically, I explained it on X: