By Sandrine Bradley and Maytaal Angel
LONDON (Reuters) - Steel trading firm Stemcor, one of the UK's largest private companies, could be taken over by U.S. distressed investment fund Apollo (N:APO), as part of a $2 billion (1.34 billion pounds) debt restructuring, according to banking and industry sources.
Apollo is in the process of negotiating a debt for equity swap with Stemcor and its creditors. At the same time, the debt-laden company is trying to sell its core trading and distribution business, which has attracted interest from two individuals, the sources said.
Apollo has built up an undisclosed stake in Stemcor by buying up the company's debt in the secondary loan market, and is now Stemcor's largest lender, a banker said.
A deal with Apollo would be a classic debt for equity swap, in which Apollo would write off this debt in return for ownership of Stemcor, which was hard hit by the financial crisis and debt accumulated in buying an iron ore asset in India.
"There are around three bidders in the process all with different approaches and all at varying stages of negotiation," said one of the bankers.
The offers for the core business from the two individuals are likely to come in at less than the value of Stemcor's debt, which means that the sale will have to form part of a wider debt restructuring of the group's debt, two of the bankers and two industry sources said.
"Unless it manages a refinancing, which is not on the table, it needs to do something else with its lenders. The sales process is a way of delivering a financial restructuring," a second banker said.
Stemcor and Apollo declined to comment. Stemcor has previously confirmed it is in talks to sell its core business.
The company, controlled by the Oppenheimer family including Labour Party lawmaker Margaret Hodge, faces a December maturity on a $1.15 billion syndicated trade finance loan that it signed in March 2014, put in place as part of a restructuring.
Under the terms of that restructuring, $1.3 billion of Stemcor's debt was converted into term loans and the $1.15 billion loan was put in place by existing lenders including ABN AMRO Bank, HSBC (L:HSBA), ING (AS:ING), Natixis (PA:CNAT), Societe Generale (PA:SOGN).
The company's existing debt comprises around $770 million of senior debt and $150 million of junior debt - which forms the rump of the restructured $1.3 billion term loans – as well as a further $60 million senior piece and the $1.15 billion trade finance loan, two of the bankers said.
BLACK HOLE
Much of the $1.3 billion debt was accumulated in buying an ore mine and processing facility in India's Odisha state.
"The Indian business has been a bit of a black hole for Stemcor, there is not much synergy with its core trading business," said the first banker.
Stemcor has been trying to sell the business since 2013, when it was valued at around $700-750 million.
But the sale has been hampered by changes in Indian legislation, including a Supreme Court order last year to close nearly half of Odisha's mines, including Stemcor's, because they were operating without a renewal of leases.
"The last restructuring was only completed last year. In reality it just turned into an amend and extend situation and a deeper restructuring will have to be done now," a lawyer close to the situation said.
Stemcor's senior lenders have formed a coordinating committee, advised by PwC. Apollo, advised by Lazard, would have to come to a consensual agreement with the co-ordinating committee over any debt for equity plan it wants to implement.
Lazard and PwC declined to comment.