by Wolf Richter, Wolf Street
PE firms win again. Stiffed creditors not amused in bankruptcy court.
Nearly every retail chain caught up in the brick & mortar meltdown is an LBO queen – acquired in a leveraged buyout by a private equity firm either during the LBO boom before the Financial Crisis or in the years of ultra-cheap money following it. During a leveraged buyout, the PE firm uses little of its own capital. Much of the money needed to buy the retailer comes from debt the retailer itself has to issue to fund the buyout, which leaves the retailer highly leveraged.
The PE firm then makes the retailer issue even more junk bonds or leveraged loans to fund a special dividend back to the PE firm. Come hell or high water, the PE firm has extracted its money.
Then the PE firm charges the retailer hefty management fees on an ongoing basis.
This form of asset stripping removes cash from the retailer and leaves it struggling under a load of debt. It works wonderfully until it doesn’t – until booming online sales started eating their lunch, sending these overleveraged retailers, one after the other, into bankruptcy court, where creditors learn what it means to end up holding the bag. But they’re not amused, as we now see. But first the numbers…
Since 2010, retail chains owned by PE firms have issued $91 billion in junk bonds and leveraged loans just to raise the money for the special dividends paid to their PE owners, according to data by LCD of S&P Global Market Intelligence, cited by the Wall Street Journal. This does not include debt piled on retailers during the LBO itself. And it does not include drug stores and food retailers – such as PE-firm-owned Safeway-Albertsons, caught up in the middle of the meltdown.
The chart shows how the asset stripping business boomed until 2015, when the brick-and-mortar meltdown set in (2017 issuance through June):
The PE firms get the cash. The retailer gets the debt. By the time the retailer goes bankrupt, the PE firms already got their money out. Creditors – usually institutional investors plowing in other people’s money – are left fighting over scraps…
Payless Inc., the shoe retailer with 22,000 employees and 4,000 stores in 30 countries, filed for Chapter 11 bankruptcy on April 4. In the filing, it said it plans to cut its debt in half, stiffing creditors for the rest. In 2012, Payless was acquired in a leveraged buyout by PE firms Golden Gate Capital and Blum Capital Partners. Less than five years from LBO to bankruptcy.