Throwing Stella a lifeline

Somehow, within the restructuring and recapitalisation of Australia's largest tourism business, more than $600 million of debt has disappeared.

Stella Group, once part of the MFS empire, announced what it terms a "comprehensive corporate restructure and recapitalisation" today, splitting its business into three discrete, separately managed units – the hospitality group (which operates the Peppers, Mantra and Breakfree brands), the Australasian Stella Travel business and Stella Travel Services in the UK.

The restructuring was made possible when CVC Asia Pacific, which acquired a 65 per cent interest in Stella for $409 million (and the assumption of $905 million of debt) in February last year, bought the remaining 35 per cent from Octaviar, as MFS is now known, last month.

It paid only $3.2 million for a stake that was valued at about $700 million by the original deal, but dropped litigation claiming compensation for the fact that Stella had missed, grossly, the earnings forecasts provided when CVC bought in.

Last month's deal left CVC as the sole owner of the equity in Stella. Conveniently, Stella had only one bank. UBS was owed more than $900 million.

Today's statement from CVC doesn't explain the recapitalisation, but does say that Stella Hospitality had assumed $245 million of long-term debt and Stella Travel Australia/New Zealand $40 million. The UK business has been left debt-free.

That leaves about $620 million of the original debt unaccounted for. It would appear a reasonable assumption that CVC has put some more equity into the business. However, one of the positives of having just one banker in an over-leveraged business is that the bank has more to lose than the equity provider. It's also a lot easier to negotiate with one bank than a syndicate.

It appears UBS has converted a significant proportion of its exposure to Stella from debt to equity. There was no reference to UBS in today's statement but it did say that the Stella businesses would continue to be "majority owned and controlled" by funds advised by CVC Asia Pacific, which implies that its equity has been either sold down or, far more likely, diluted by new capital provided by UBS, swapping some of its debt for equity.

Had Stella not been recapitalised its distressed condition, or even failure, would have caused significant damage to the local tourism and hospitality sector.

The fact that the two main stake-holders have been able to so substantially re-make its balance sheet signals that they think that there is an attractive future for the group as the economy and the economics of the travel sector recovers.

Stella will now have the balance sheet and liquidity to enable it to survive until that occurs.