(Bloomberg) -- Buyout firms are writing increasingly fat equity checks for their companies as a way to help pull off difficult debt refinancings and soothe the nerves of credit investors. 

Brookfield Asset Management Ltd, Silver Lake Management LLC and EQT AB are among those that have injected extra cash into the firms they own as part of an agreement to roll over debt maturities. It’s a trend that looks set gain momentum, especially as more companies struggle to cope with soaring borrowing costs and a slowing economy. 

Junk-rated firms in Europe have €220 billion-equivalent ($234 billion) in bonds and loans coming due between 2025 and 2026, according to data compiled by Bloomberg. At the same time, refinancing costs have climbed dramatically over the past few years, with the average yield on an index of high-yield companies in the region at 7.8%, up from around 3% at the end of 2021.  

“The first sacrifice has to come from the shareholders,” said Alberto Gesualdi, a partner at Milan-based Ver Capital. “Once the equity injection, which cannot be ridiculously low or totally inadequate, is guaranteed, the creditor is for sure better disposed and, in certain cases, can even accept economic sacrifices.”

For example, Brookfield and the Qatar Investment Authority recently committed £300 million of fresh equity and a £100 million revolving credit facility to bolster Canary Wharf Group before it refinances bonds due in 2025. Credit investors cheered the move, sending the notes up 6 pence to 78 pence following the Oct. 25 announcement. 

In another example of the trend, Platinum Equity is finalizing discussions with lenders of Spanish fishing company Iberconsa to inject around €75 million to refinance loans due in 2024, according to people familiar with the matter who weren’t authorized to speak publicly. A representative for Platinum Equity didn’t immediately respond to a request for comment by Bloomberg News. 

One of the reasons that private equity firms are willing to pay up is that they want to avoid difficult talks with creditors over a company’s precarious finances, and to signal that they’re backing the business. 

In the case of Schoeller, Brookfield’s show of commitment allowed for an amicable solution with distressed debt investor Strategic Value Partners, which had accumulated a position in the bonds at a discount. In fact, SVP also stepped up to provide the company with a new €125 million loan replacing the bonds. 

Other Options

To be sure, there are other ways for owners to support companies without turning to cash. In the case of auto parts maker Adler Pelzer, shareholders instead awarded the company a €120 million subordinated loan, meaning that they may be repaid, but would be behind all other creditors in getting reimbursed.

But for some sponsors — even those that supported their businesses through the pandemic — the time has come to question whether it makes sense to keep backing a company with bleak growth prospects, according to David Beadle, a senior analyst at Moody’s Investors Service, speaking at a media roundtable earlier this month. 

That’s what’s happening with Pro-Gest Spa, an Italian packaging producer owned by the Zago family. With about €450 million of debt coming due from next year, a hefty equity injection is not on the table, according to people familiar with the matter, who asked not to be identified because the details of the talks are private. The company has been looking at alternatives to cut their debt load ahead of payment deadlines, either by selling assets or seeking loans from credit funds. A spokesperson for Pro-Gest declined to comment. 

In other cases, lenders have rebuffed owners offering extra cash because they deemed it insufficient. Creditors to furniture maker Keter Group BV rejected the proposals from BC Partners and PSP Investments, who were trying to extend the company’s loans. Eventually, they agreed the private equity firms would sell Keter in exchange for pushing back the debt maturities. 

In an era of high-cost capital, however, it is firms’ ability to deleverage that may prove vital for their survival.

“Now, more than ever, for many companies — considering the macroeconomic backdrop and the rise in interest costs — it’s essential to reduce your debt, or reschedule it,” said Ver Capital’s Gesualdi. 

--With assistance from Libby Cherry, Clara Hernanz Lizarraga and Irene García Pérez.

(Updates with requests for comment to representatives at Platinum Equity and Pro-Gest.)

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