Courtesy of Pam Martens
According to S&P Global Market Intelligence, there have been 35 retail bankruptcies this year, almost double the 18 retail bankruptcies of last year. The filing by Toys ‘R’ Us this week was the latest.
What many of these retailers have in common is that they were taken private in leveraged buyouts (LBOs) by private equity (PE) firms. Toys ‘R’ Us, Payless ShoeSource, The Limited, Wet Seal, Gymboree Corp., rue21, and True Religion Apparel were all LBOs. Gander Mountain can also be included in this list if you reach back to its 1984 LBO. Far too many LBOs are simply asset stripping operations by Wall Street vultures who load the company with enormous debt, then asset strip the cash from the company by paying themselves obscene special dividends and management fees.
On June 12 of this year, the official committee of unsecured creditors to Payless, consisting primarily of Payless stores’ landlords and vendors, alleged in a filing in U.S. bankruptcy court that the private equity firms involved in the Payless LBO in 2012, Golden Gate Capital and Blum Capital, had “siphoned over $400 million out of Payless. Lawyers for the unsecured creditors wrote the following in their objection:
“The Sponsor Group [Golden Gate Capital and Blum Capital] acquired the Debtors [Payless, et al] in October 2012 through a leveraged buyout (the ‘2012 LBO’) which increased the Debtors’ debt from approximately $125 million as of the fiscal year end immediately prior to the leveraged buyout to approximately $400 million. After the 2012 LBO, the Sponsor group siphoned over $400 million out of the Debtors…
“In connection therewith, the Committee engaged one of the nation’s foremost valuation experts – Dr. Israel Shaked and the Michel-Shaked Group as an expert witness. Dr. Shaked worked closely with the Committee professionals to analyze the Sponsor Claims and produced the 160-page Shaked Report which has been provided to counsel for the Debtors, Cremens, certain Term Loan Lenders, and the Sponsor Group, and to the Court under seal. In the Shaked Report, Dr. Shaked has concluded (among other things) that (i) as of February 27, 2013, immediately following the 2013 dividend recapitalization, the Debtors’ equity value was negative by a substantial margin, and therefore the Debtors were insolvent, (ii) as of March 10, 2014, immediately following the 2014 dividend recapitalization, the Debtors’ equity value was negative by an even more substantial margin, and therefore the Debtors were insolvent and (iii) the Debtors were insolvent at all times after the 2013 and 2014 dividend recapitalizations.
“In light of the findings in the Shaked Report, the Committee believes that the Debtors’ have claims against the Sponsor Parties and others for fraudulent conveyance, illegal dividends, breach of fiduciary duty and other state law causes of action related to the 2013 and 2014 dividend recapitalizations and related transactions that if pursued could provide robust recoveries to general unsecured creditors offered only a token recovery under the Plan in violation of the best interest of creditors confirmation requirement.”
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