Like so many transactions struck at the height of the buyout boom, TPG Capital's $3.3 billion take-private purchase of aluminum products maker Aleris International Inc. in December 2006 was financed with a load of debt carrying easy terms. TPG bought it when the highly cyclical business was on track for a growth spurt. Even amid an ugly recession, Aleris CFO Sean Stack voiced his confidence in an earnings call last year that Aleris' capital structure -- with a term loan light on covenants and a revolver free of a single one -- should allow it to avoid any
covenant "issues."

As it turned out, the company was not spared. Aleris filed for Chapter 11 bankruptcy protection on Feb. 12 to become the second-largest private equity-backed business to fail this year after Chrysler LLC. Aleris had about $4.17 billion of assets and $3.98 billion in liabilities at the time.

Not even its flexible debt structure could withstand the steep drop in demand for its products and a sudden collapse in aluminum pricing. Its margins were simply devastated. In past downturns, aluminum pricing typically fell a couple of cents a month, says Carol Cowan, an analyst with Moody's Investors Service. But last year, it dropped an unprecedented 52% in just six months, from an average price of $1.39 in July to 67 cents in December.

The company, based in Beachwood, Ohio, sells rolled and extruded aluminum products to the automotive, housing and industrial sectors. It also recycles the lightweight metal from beer cans and scrap.

About 45% of its roughly $6.3 billion revenue came from the automotive markets, as well as building and construction, all heavily hit by the recession, Cowan says. Its dependency on volume, especially as major customers General Motors Corp. and Chrysler struggled, helped trigger the company's downfall, as did the roughly $2.5 billion debt that weighed on its books after its buyout.

Before its take-private, Aleris was growing rapidly through acquisitions. It doubled revenue in 2005, to $2.4 billion. Its history of strong profit-margin growth appealed to TPG, a source said in August 2006 at the time of the buyout. "Aleris has fairly stable processing costs," the person said, "so by driving more and more volume through its plants, it has been able to drive
up margins."

Not long after the deal closed, however, the outlook changed dramatically. Hoping to ride out the downturn, Aleris set out to attack costs, shutting plants. In January 2008, it reduced debt with the proceeds from the $295 million sale of its noncore zinc unit to Brazil's Votorantim Metais Ltda.

But the cost-cutting measures were not enough to stop its slide -- or save the $848.8 million of equity that TPG and management sank in the company about 2-1/2 years ago. Its equity obliterated, TPG passed on a chance to back Aleris as a debtor-in-possession lender.

Aleris may have been the biggest to fail, but it was hardly alone. Aluminum extruder Indalex Holdings Finance Inc., owned by Sun Capital Partners Inc., went bankrupt this year, as did Signature Aluminum Inc., sponsored by Miami's H.I.G. Capital LLC.

But the example Aleris set gives other PE-backed portfolio companies with covenant-lite structures little comfort.

Car chase
Second time around
Road to perdition
Crossover appeal
Fatal attraction
Go shop till you drop
Transactions from hell
Hard-won from start to finish
Bright light
The cheers, the groans