Another Buyout Bust

Kohlberg, Kravis, Roberts appears close to winning the dubious honor of filing the biggest private equity-backed bankruptcy since the credit crisis started.

Masonite International, the Canadian door maker bought by KKR in 2005 for $1.9 billion, missed a $42 million debt payment last week, prompting both S&P and Moody's to lower their ratings on its debt. Erin Griffith at PEHub points out that a Masonite bankruptcy--if it occurs--would be bigger than the bankruptcies of Linens N Things (Apollo-backed) and Mervyns (originally bought by Cerberus and Sun Capital) earlier this year.

Last week, Bloomberg noted what a pickle KKR finds itself in with respect to its ownership of Masonite. Like other private equity investors seeing value in the distressed corporate loans of the deals they backed during the buyout boom, KKR bought some of Masonite's debt, according to Bloomberg's sources. This puts KKR in the unique position of being a creditor of a company that KKR loaded up with debt that the company now can't pay. And, as its owner, KKR must decide whether or not to file bankruptcy.

If Masonite does go forward with bankruptcy, it would be the first sizable private equity deal where the owner is also a creditor, but it most certainly won't be the last. Other buyout shops like Apollo have also been active investors in the buyout debt market in the past year.

A lot of investors will be watching how such a transaction will play out. Right now, Masonite has thirty days to pay the interest it owes or else renegotiate the terms of the $770 million debt.

Bloomberg reports that Masonite's other creditors are keeping KKR's debt unit at an arm's length in the discussions over the company's fate. Its KKR Financial subsidiary owns about 5 percent of Masonite's debt.

by Megan Barnett