Last summer, PAI, a French private equity firm, competed with lenders to keep control of Monier, the roofing business it had taken over two years before. Initially, PAI offered €125m of fresh funds to the company in the form of senior debt, while asking other lenders to write off their debts in exchange for a 25 per cent equity stake.
Lenders balked, and despite improved offers by PAI, they rallied together with a consortium of distressed debt funds - Apollo Management, TowerBrook Capital and York Capital - to raise the money themselves and push forward a restructuring that saw them take control of the business and ultimately wipe out PAI's stake.
"The emergence of lender-led restructurings in 2009, perhaps best exemplified by Monier, has resulted in a levelling of the playing field between senior lenders and private equity firms," says Joseph Swanson, co-head of European restructuring at Houlihan Lokey, which advised Monier lenders.
"Whereas 2008 was characterised by private equity firms offering to trade equity injections for material writedowns of senior debt, that strategy seems to have been dropped from the playbooks in 2010. Instead, we are seeing a growing trend for private equity and senior banks to work together to impose impairment on junior lenders."
This was the case with Schoeller Arca Systems, a Dutch plastic packaging company. In September, a Dutch judge approved a restructuring under which, One Equity Partners, the private equity company that owns Schoeller, kept control of the company through a pre-packaged sale of the business to a new entity with the backing of senior lenders. Their claims remained whole, but those of junior creditors were wiped out.
Daniel Morland, managing director at Close Brothers Corporate Finance, says key features many distressed situations this cycle has been private equity firms' willingness to reinvest in their companies and whether the terms are acceptable to lenders.
"That sets the agenda for whether the banks are prepared to share some pain with the private equity groups or whether they would prefer to take ownership of the company," he says.
More recently, one trend that has once again drawn battle lines between private equity firms and lenders has been the use of debt buy-backs to keep companies within financial covenants.
Mauser and Endemol, two private equity backed companies, came under attack in recent months from lenders who believed the companies were wrong to use the gains from such buy-backs in covenant calculations. In the case of Endemol, it has sought a compromise with lenders.
Simon Davies, managing director at Blackstone, adviser to Mauser and Klöckner Pentaplast, which both carried out debt buy-backs that were viewed as aggressive by lenders, says it is important to maintain an open and constructive dialogue.
He says: "Even if a given strategic approach is aggressive towards a particular stakeholder, a business should be forthcoming with information and effectively 'lead' with information . . . to maintain an environment of mutual trust and respect."
Matthew Prest, managing director at Moelis & Co, says private equity owners taking an aggressive stance with lenders in a restructuring will result in a "bad deal dynamic and most likely result in failure".
"They need to take a decision as to whether they are in a position to support a business financially or not. If the latter, they need to recognise that their position is weak, work with the lenders to support the business and facilitate a hand-over when necessary."
Heather Swanston, partner at PwC says that there is now an increasing trend for private equity houses to raise potential issues with the lenders earlier than used to be the case.
"Both sides have been trying to understand the rules of the market and that meant that progress was incredibly slow," says Nigel McConnell, managing partner at Cognetas.
"There was no magic formula, you couldn't look across Europe and say this was the kind of deal that would get done, because of the variety of jurisdictions and varying protection for creditors."