Mistake by Terra Firma Gives H/2 Hedge Fund Possible Windfall

(Bloomberg) -- It pays to dot the i’s and cross the t’s. That’s the issue that has befallen British private equity chief Guy Hands who faces another setback at his fund’s struggling U.K. care home provider.

When his Terra Firma Capital Partners Ltd. altered a loan agreement with Barclays Plc, it unwittingly allowed creditors including a U.S. hedge fund access to a "valuable windfall," lawyers for Hands told a court Friday.

"That is a problem of its own making," Mark Howard, a lawyer representing Barclays, said in court documents. The lender is involved in the lawsuit because it acted as the security agent for the loan that is at the center of the dispute.

Terra Firma used a shareholder loan to help buy Four Seasons Health Care, the U.K.’s second-largest care home provider, in an 825 million pound ($1.12 billion) acquisition in 2012. A later amendment to the terms, that was intended to provide security over the loan, "fundamentally altered the capital structure," said David Wolfson, a lawyer for Four Seasons.

The move allowed hedge fund H/2 Capital Partners LLC, the major creditor of Four Seasons, to potentially get control of two further sets of care homes that were acquired by Terra Firma in a separate deal, Wolfson said in his submission. He said the changes would have been considered "commercially absurd," asking the court to correct the mistake.

"H/2 never bargained for, and never expected, to receive this windfall," Wolfson said.

Four Seasons and Terra Firma rushed the changes to the loan contract through, Barclays said in its court filing, stating that the new terms should remain in place. It was "a risk that the company was prepared to take by choosing to give security in the manner it did." The bank said the private equity firm risked default before the changes were made.

Hands and H/2 have been negotiating a debt for equity swap that would see the hedge fund take control of the distressed care home provider. Four Seasons and H/2 are attempting to reach agreement by a revised deadline of May 18 to restructure the company, Four Seasons said in a statement Friday.

The legal standstill won’t necessarily delay the restructuring of the care homes. H/2 has proposed that the parties simply "agree to disagree" and execute the agreement without delay. In a November press release, it said it was “taking the unusual step of voluntarily proposing the deferral of its own interest.”

Representatives for Terra Firma and Four Seasons referred to the statements on the restructuring and didn’t comment further.

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