Thursday, June 21, 2018

Fallout from Retail Bankruptcies -- Landlords and Junior Creditors v. Private Equity

By Bill Siegel

The June 8, 2018 article in Bloomberg, “Private Equity Comes Under Fire” written by Eliza Ronalds-Hannon and Steven Church1, highlights the tensions that exist between landlords and junior creditors on one side and private equity on the other in retail-related bankruptcies.  The article discusses the bankruptcies of Claire’s, Nine West and Top Markets (Winn Dixie) as well as J. Crew’s efforts to transfer valuable assets out of reach of junior creditors.  Viewing themselves as victims of over-reach on the part of private equity, landlords and junior creditors alike are becoming increasingly more litigious.
 
Retail Bankruptcy and Expensive Debt
 
Many of the problems experienced by large retailers can be traced to being over leveraged with expensive debt and in some instances having conveyed assets to insiders for less than fair market value. 
 
  • In the Claire’s Stores bankruptcy case, in addition to being over leveraged, creditors are complaining that private equity has exercised too much control over the restructuring process to the detriment of creditors.  Creditors are complaining in particular about the plan proposed by private equity in which private equity will loan Claire’s $574 million to finance its reorganization and in exchange, Claire’s will pay private equity $1.5 billion.
  • In the Nine West bankruptcy, creditors argue that in addition to private equity financing the takeover with expensive debt, they also acquired three of Nine West’s subsidiaries at below market rates and then sold two of them to third parties while the third was sold back to Nine West -- earning private equity hundreds of millions of dollars.
  • In an attempt to keep junior creditors from attaching certain assets, J. Crew transferred its brand to a subsidiary of J. Crew.  Presumably, this conveyance occurred with the approval of the secured lender while also benefitting private equity.  Concern is growing among creditors of both PetSmart and Revlon that the same may occur to them.
  • Creditors in the Tops Friendly Markets grocery chain bankruptcy are seeking to investigate the leveraged buyout that funded private equity’s acquisition as well as the fees and dividends they received.
 
It goes without saying that landlords and junior creditors will continue to investigate the actions of private equity.  The investigation will start with the acquisition/buyout to determine whether it was financed with expensive debt and exorbitant fees.  Given the current disruption in the retail industry, it’s easy to see how and why retailers are looking at bankruptcy as a solution.  But, if the plan is to short change junior creditors, junior creditors will insist on investigating private equity and if necessary -- filing suit. 
 
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