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.”
But inexplicably, after making these serious allegations in June, the unsecured creditors agreed to a settlement the same month. According to multiple news reports, the unsecured creditors agreed to wave their claims against the LBO sponsors in exchange for $25 million in cash in the bankruptcy reorganization. The sponsors were allowed to settle “without admitting any wrongdoing of any kind.”
In April, Aisha Al-Muslim, a reporter for Newsday, the Long Island, New York newspaper, found the following after an in-depth review of court documents and data from top research firms like S&P Global Market Intelligence:
“…43 large retail or supermarket companies, which owned chains with 10 or more locations, have filed for bankruptcy in the United States since January 2015. The 43 companies controlled 52 brick-and-mortar chains. Twenty-one of the companies had stores on Long Island. Retailers selling only online and restaurants were excluded from the count.
“Of those 43 companies, 18 — more than 40 percent — were owned by private equity firms. The remainder were public or private companies or owned by a hedge fund.”
When 40 percent of insolvent large retail companies got this way at the hands of the so-called turnaround experts at private-equity firms while huge amounts of money moved from the coffers of the company to the pockets of the “experts,” it’s time for Federal regulators to get involved.
Big Wall Street banks are not likely to blow the whistle on asset-stripping scams in the private equity world. They are frequently involved in collecting fees for advising on the LBOs. Then they reap more huge windfalls in fees when they underwrite the bond offerings that load up the company with debt it can’t service on a long term basis.
So the overarching question in all of this is: where is the Securities and Exchange Commission, the so-called cop on the beat that is supposed to be policing the publicly traded corporate bonds involved in these deals?
Following are some of the largest retail names that have sought bankruptcy protection thus far this year:
- Toys “R” Us
- The Limited
- Wet Seal (Second bankruptcy filing)
- Eastern Outfitters
- BCBG Max Azria
- RadioShack (Second bankruptcy filing)
- Gander Mountain
- Payless ShoeSource
- Cornerstone Apparel
- True Religion Apparel
- Vitamin World
- Michigan Sporting Goods Distributors
- Marbles Holdings LLC