KKR steps into bank lending vacuum with Spanish deal


By Tommy Wilkes and Tracy Rucinski

LONDON/MADRID, April 29 (Reuters) - The U.S. private equity giant Kohlberg Kravis Roberts has agreed to lend the Spanish construction materials firm Uralita 320 million euros after banks refused to loan it any more cash.

As new regulations and rising loan losses force Europe's banks to cut back on the amount of money they lend to companies, investment houses such as KKR, Blackstone and Prudential's M&G are trying to fill the gap by lending directly to businesses facing a cash crunch.

KKR's asset management arm's (KAM) loan to Uralita is for seven years, allowing it to repay its bank creditors and bondholders and giving it more time and funds to develop plans.

Nat Zilkha, co-head of KAM's Special Situations unit, told Reuters it had agreed to do the deal - its largest European rescue lending transaction - once it became "very clear they were not going to get support from their current banks".

Zilkha said banks were "putting a gun" to their clients' heads in refusing to renew loans, while the policy of amending and extending loans, common two years ago, was coming to an end.

"These companies are so frustrated, frustrated by banks that won't support them, frustrated by hedge funds that are buying their debt in the secondary market and just looking for short-term gains," he said in a telephone interview.

KKR expects to earn significantly higher returns than those earned by banks from direct lending, but Zilkha declined to disclose the precise terms of this transaction, KKR's sixth such deal in Europe.

Last year, Uralita paid 26.9 million euros in interest and other financial costs, or about 8.4 percent of the 319.2 million euros of debt it held at year-end, according to a presentation of its 2012 results published in February.

With European banks still battling a slowdown domestic economies and struggling to offload assets, their pullback is likely to continue, Zilkha said, in some cases ending decades-old relationships between corporate treasurers and their banks.

Last week, Santander reported a 26 percent drop in first-quarter earnings, hit by rising bad loans, while Spain's second-biggest bank, BBVA, reported a drop in lending income in its home market, where net interest income was down 9 percent from a year earlier.

KKR has about $3 billion in assets in a "rescue lending" fund targeting what it believes are good companies with bad balance sheets, and is looking closely at more opportunities in Spain, Portugal, Britain, Holland and France.

Zilkha said the Madrid-based company, highly tied to the battered Spanish construction industry and with a chunk of soon-to-mature debt, is just the sort of business that banks now want to avoid.

"Certainly a lot of people in banks would look at this combination of factors and say 'No thanks' ... But we look for just these sorts of transactions," he said.

The Uralita deal involved a team of three from KKR's Special Situations group, two members of the firm's private equity unit who work closely with the industrial sector and its head of Spanish operations, Jesus Olmos.

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