Firm Controlled by KKR Nearing Bankruptcy : Securities: A planned debt swap by Hillsborough Holdings is in doubt. Bondholders are worried about the firm’s junk bonds and a lawsuit.

Marking a new travail for top buyout firm Kohlberg Kravis Roberts & Co., Hillsborough Holdings said Wednesday that it may be forced into bankruptcy court if can’t soon renegotiate its $624 million in junk bond debt.

Hillsborough--a building materials company called Jim Walter Corp. until it was bought by KKR two years ago for $2.4 billion--said bondholders have been balking at a planned debt swap because of their nervousness over the junk market and a $3-billion asbestos-related suit pending against the company.

The suit, filed in July, contends that the KKR buyout was a conspiracy to avoid settlements with plaintiffs who sued a Hillsborough subsidiary for selling allegedly harmful asbestos. The suit worries the bondholders because they fear that it may prevent Hillsborough from selling assets to pay debts.

“Now it’s nail-biting time,” said Kevin McCabe, a senior analyst with R. D. Smith & Co., a New York investment firm specializing in distressed securities. “The two sides are just trying to stare each other down.”

A filing for bankruptcy court reorganization would be a blow to the prestige of KKR, which, with investors, owns 92% of Tampa, Fla.-based Hillsborough. The buyout firm has recently suffered a spate of bad publicity during its struggles to restructure the debt of another KKR-controlled firm, Seaman Furniture, and the continuing financial difficulties of SCI Television, a partnership in which KKR owns a 46% stake.

News of Hillsborough’s difficulties contributed to a slide in junk bond prices, which lost one-quarter to one-half point in Wednesday’s trading, analysts said.

Hillsborough, which reported $1.4 billion in revenue for the fiscal year that ended in May, faces a Dec. 27 deadline for the debt renegotiation. Eighty percent of bondholders must agree for the deal to be consummated.

Hillsborough’s business operations are generally sound, analysts said, but the company took on a very heavy debt load in the buyout, arranged by KKR and the investment firm Drexel Burnham Lambert. Among its businesses, Hillsborough manufactures iron pipes and aluminum and other building materials; it also mines coal and builds and finances homes.

Several bondholders cited special reasons for skittishness. They said the Hillsborough bonds lack certain protective covenants that are often used to limit the ways that management can distribute cash to shareholders.

And they said the assets of a home-financing subsidiary, Mid-State, can’t be used to service Hillsborough’s debt. Because of that limitation, Hillsborough’s balance sheet “doesn’t look nearly so good,” said one bondholder.

A spokesman for KKR, Tom Daly, insisted that the buyout firm’s problems have been overblown in publicity about the difficulties of SCI Television and Seaman. “The truth is, KKR is doing just fine,” he said.

At the same time, he acknowledged that Hillsborough is much more important to KKR than are either Seaman or SCI Television.

KKR took over Seaman, a New York furniture retailer, in a $360-million leveraged buyout two years ago. This year, with the Long Island economy slowing abruptly, Seaman was unable to raise enough money to pay creditors, and it faced possible bankruptcy.

That was avoided last month when Seaman’s creditors agreed to a renegotiation that gave the company’s banks 47.5% of its stock and 8% for some bondholders, leaving 44.5% for KKR.

SCI Television is the result of a highly leveraged, $1.2-billion buyout of six former Storer Communications stations in 1987. The chain, 54% owned by entrepreneur George Gillett, has suffered as the TV advertising market has cooled. Recently, the company has sought to restructure its debts as some bondholders have tried to force it into bankruptcy court.

A steering committee of bondholders has agreed in principle to a debt restructuring that would cut Gillett’s stock holdings to 41%, and reduce KKR’s to 15%, while giving 39% to bondholders and 5% to banks. Under the proposal, KKR would also forgive a $160-million note that it holds from SCI Television, and Gillett and KKR would give up leases on SCI property worth $42.2 million.

It remains to be seen whether a sufficient number of bondholders will agree to the plan.

Some investors have predicted that these problems with KKR deals will make it harder for the firm to complete new buyouts and to line up investors who are willing to accept relatively higher risks for the promise of higher returns.

In 1987, KKR put together a $5.6-billion buyout fund that investors were told would produce annual returns in the mid-20% to the low-30% range over a six- to seven-year period. Daly, noting that KKR has yet to invest several billion dollars of this fund, said it was too early to predict whether the returns will fulfill expectations.