Cerberus Capital Management’s Stephen Feinberg needs a rescue mission to save his two military contractor investments.
IAP Worldwide Services, bought by Cerberus in 2004 when Pentagon budgets were robust and growing, is in talks with creditors after defaulting on its loans.
A casualty of the austere budgetary times, IAP, which manages airfield and airspace operations at locations throughout the Middle East and Asia, may be repossessed by creditors like Monarch Alternative Capital, an investor in distressed debt, before the end of the year, according to a source with direct knowledge of the situation.
At Falls Church, Va.-based DynCorp, the second military contractor owned by Cerberus, losses through the first nine months of the year were $34 million — compared to a $54 million surplus in the year-earlier period.
Once thought to be the third-largest contractor in Afghanistan, DynCorp, which builds and maintains military bases, has been hurt by the US pullout and by the government sequester.
On a conference call to announce the results, DynCorp CEO Steven Gaffney said Tuesday, “While the Department of Defense budget is coming down, it is still the largest in the world.”
A debt investor, sounding a bit more cautious, said, “Anyone who tells you how DynCorp will fare in the next year is guessing.”
The company received $7.4 billion in contracts for missions including providing much of Afghan President Hamid Karzai’s security.
DynCorp this week tapped Christopher Bernhardt, an executive with a mergers and acquisitions background, as its new president, prompting speculation a merger can’t be far behind.
Both companies were acquired by Cerberus in leveraged buyouts and are struggling under debt loads that were more manageable when their top lines, fattened by larger Pentagon budgets, were healthier.
Those loans now present an unnecessary burden during what already would be challenging times.
While the financial situation at DynCorp is shaken, it is in far better shape than IAP, whose business has been sliding for years.
When IAP tripped its loan covenants in recent years it was able to work out a deal with creditors. But in today’s tougher business climate a similar outcome may be harder to come by this time.
IAP has a waiver on its debt until the end of the year.
Former Vice President Dan Quayle, Cerberus’ chairman and an IAP board member for roughly six years, resigned from the ailing contractor a few weeks ago.
While IAP and DynCorp are hurting, Cerberus has made back multiples of its IAP investment through dividends, a source close to the situation said. The firm currently has $550 million invested in DynCorp.
Cerberus and Monarch declined to comment.