Brick & Mortar Retail Meltdown, March Update

And private equity firms are at the helm.

March was a busy month for the brick-and-mortar retail meltdown which kicked off in 2015 and has since picked up speed. We’ve followed this progression from the early days. This year, there was a brutal January, an even more brutal February, and here’s March.

Southeastern Grocers, parent of Winn-Dixie, filed for bankruptcy on March 28. It’s buckling under its debts. Its creditors have agreed to restructure some of this debt in return for equity, which will reduce the debt by $500 million. The company has also secured new financing once it emerges from bankruptcy. In the Chapter 11 filing, it said it plans to continue operating over 580 stores in Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, and South Carolina. On March 14, when the company initially had announced bankruptcy plans, it also said that it would close 94 of its stores.

Michaels Companies, largest US crafts retailer with about 1,300 stores in the US and Canada, announced on March 22 that it would shutter all its 94 Aaron Brothers framing and art supplies stores. It will offer custom framing in its Michaels stores. The whole thing should be wrapped up by July 31.

Claire’s Stores filed for Chapter 11 bankruptcy on March 19, suffocating under $1.9 billion in debt. The youth-oriented jewelry and hair accessories retailer has 7,500 stores that also offer ear piercing, which was supposed to be its strategy to fight off online sales, but it wasn’t enough. Mall traffic had fallen 8% year-over-year, the debt was too high, and interest expenses ate up $183 million a year, chief financial officer Scott Huckins lamented in the court papers.

This is a “prepackaged” bankruptcy filing where the company has reached an agreement with its creditors – which include PE firms Elliott Management, Monarch Alternative Capital LP, and Apollo Global Management – to restructure its debt, meaning that ownership will be transferred to creditors in exchange for some of the debt. This group of first-lien lenders will also provide $575 million in new capital, including a $250 million first-lien loan.

The private equity angle: Apollo acquired the company in a leveraged buyout during the LBO boom in 2007. At the date of the bankruptcy filing, Apollo owned 98% of the shares and about 28% of three types of the company’s debt. In bankruptcy proceedings, creditors take control, and Apollo is well-placed.

Toys “R” Us filed for liquidation, it announced on March 15. The toy retailer, which had filed for Chapter 11 bankruptcy last September, will close all its 735 stores in the US and liquidate their inventory. The prospects of liquidation started becoming clear earlier in March. Shuttering the US operations will destroy about 33,000 jobs over the next few months. And it puts a lot of retail space on the market that may be worth “little or nothing,” and holders of Toys “R” Us commercial mortgage backed securities are bracing for losses [read…  What Are Zombie Retail Stores Really Worth: Answers Emerge].

Bon Ton stores faces liquidation if it cannot find a buyer, according to its bankruptcy court proceedings on March 12, in which the company set out the rules for an auction of its business as a going concern. The regional department store chain based in Pennsylvania had filed for bankruptcy in February, after discussions with its creditors about restructuring its debts had collapsed. Now the bondholders are clamoring for asset liquidation, hoping to get some of their money back. If there is no bid that satisfies the court and the creditors, Bon Ton will likely be forced into liquidation.

Guitar Center is buckling under its debts. The company calls itself “the largest musical instrument retailer in the world,” and opened as it says “its 262nd location” with its Times Square flagship store in Manhattan in 2014 while it was still in PE-firm driven expansion mode. In addition, it operates 120 stores specializing in band and orchestral instruments.

In early March, it announced that it is trying to push creditors into a debt exchange. On March 14, Moody’s said if this debt exchange succeeds, it will constitute a “distressed exchange” and will count as an “event of default.” And this debt exchange, as bad as it may be, is going to be the better outcome than any alternative.

If it succeeds, it will give the company some “financial flexibility,” but will add $50 million to its indebtedness, and this total indebtedness, Moody’s said, “remains a key credit concern, particularly given Moody’s opinion that there continues to be a relatively limited revenue visibility regarding the retail environment for musical instruments.”

The private equity angle – a familiar name in the recent flurries of LBOs that collapsed into bankruptcies, including iHeartMedia, Toys “R” Us, Gymboree: Bain Capital acquired Guitar Center in an LBO during the boom in 2007, whereby the acquired company took on a large amount of debt to fund its own acquisition, and then took on more debt to expand further. This expansion drive and debt pile-up then got hit by the brick-and-mortar meltdown.

Sears Holdings is reporting ever more horrid quarters. On March 14, it reported results for Q4, ended February 3, which covered the crucial holiday sales period. Revenues plunged 28% year-over-year to 4.4 billion. According to my projections and my beautiful chart, at the rate of declines over the past four years, revenues will drop below zero in 2020, even as CEO and hedge-fund owner Eddie Lampert is still touting “progress” in SEC filings. This thing is cooked and waiting to be carved up.

Signet Jewelers, whose brands include Kay Jewelers, Zales, and Jared, announced on March 14 that it would close 200 Stores over the next 12 months after same-store sales dropped 5.2% year-over-year. “Path to brilliance,” as the company calls its new plan to save $85 million in costs in 2018 and $100 million in 2019. It’s also trying to whittle down “non-customer” facing costs in sourcing, distribution, warehousing, and corporate and support functions. Meanwhile, its shift to online sales is proceeding too slowly, accounting for 11% of its total quarterly sales, up from 7% a year earlier.

Foot Locker, with over 3,300 stores globally, announced on March 2 that it plans to close about 110 stores this year, after having closed 147 stores and opened 94 stores in 2017. CEO Richard Johnson explained that Foot Locker was trying to reduce its exposure to “deteriorating” malls. “The disruption that has characterized the retail industry recently is not going away,” he said. But unlike others, Foot Locker will be able to hang in there for a while: It escaped a rumored LBO in 2006 by KKR and Apollo, so it hasn’t been strip-mined for cash, and its shares are still publicly traded, and it still has access to funding.

Bankruptcy is becoming an increasingly common “exit” for PE firms. And the pension obligations? Read…  PE Firm Cerberus Capital’s “Rollup” Collapses into Bankruptcy 
 

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

 

  63 comments for “Brick & Mortar Retail Meltdown, March Update

  1. mike
    Apr 2, 2018 at 1:15 pm

    So essentially the way this works is founders and employees create a valuable business. Wall street bandits buy it and screw the employees and load it up with debt purchased by the mutual funds regular people are forced into if they want their savings to maybe keep up with inflation, bandits pay themselves with debt, bankruptcy follows. Aint capitalism grand?

    • Kevin Beck
      Apr 2, 2018 at 1:32 pm

      One of the prerequisites for capitalism is that failure results in punishment. Which would mean that the bandits you refer to would suffer penalties for their equity ownership, since they are last in line. Instead, these deals usually are front-loaded on the payouts to the buyers and back-loaded on the payouts to the bondholders (or the looted, if you prefer).

      When the feedback loop is broken, then you don’t have capitalism.

      When the business failures are able to have their losses shifted onto others, then you don’t have capitalism.

      When failure is rewarded with a bailout, you don’t have capitalism.

      Sorry, Mike: Your version of capitalism is a straw man.

      • Mike G
        Apr 2, 2018 at 1:51 pm

        A “No True Scotsman” argument.
        Is your pure theoretical capitalism being practiced anywhere in the world?

        • marty
          Apr 2, 2018 at 2:17 pm

          No, it’s not a “no true Scotsman” argument. It has to do with the definition of Capitalism, which has been obscured by socialists over the years. Some how, magically, socialism which is responsible for over 100 million deaths and untold misery in the 20th century alone, is considered the solution to the fantastic prosperity that Capitalism has brought to mankind. It’s truly amazing how easy it is to fool people.

          There is no pure Capitalism practiced anywhere in the world because the people who own you won’t allow it. Capitalism = freedom, and they can’t have that.

        • Apr 2, 2018 at 3:34 pm

          Your post said this:
          “A ‘No True Scotsman’ argument.
          Is your pure theoretical capitalism being practiced anywhere in the world?”

          Yes. By wage earners. They are the last true capitalists.

          But for thisBIG difference, they are frequently PUNISHED FIRST when the LBO-thieves and the Debt-holders fail.

          The wage earners are in line to lose their (i) livelihood and (ii) their income and (iii) their health insurance and (iv) their pension or a significant part of their 401K if not yet vested.

          I have written about this — here — before.

          Critics of my sympathy for the down-trodden-wage earner have advised me “that this is their lot in life, and they had better accept it and suck it up”, so to speak.

          So wage earners PAY A PENALTY WHEN THEY HAVE NO FAULT, but the capitalists pay NO PENALTY WHEN IT IS THEIR FAULT.

          The primary difference being that Wage Laborers PUT UP THEIR OWN SELVES ( e.g., their ‘labor’) as the thing being risked, while so-called “capitalists” have nothing of their own at risk if they play with OPM ( other people’s money ) AND ALMOST NEVER EVER PAY FOR THEIR FAILURES, in any case.

          Privatized gains and socialized risks for so-called “capitalists”. Uh huh !

          Behind every great fortune lies a great crime?

          That may be just a value judgment, or philosophical assessment. And I share that sentiment.

          http://answers.google.com/answers/threadview?id=296588

        • Javert Chip
          Apr 2, 2018 at 6:11 pm

          There is no “true” -ism of any kind being practiced anywhere in the world.

          Never has been; never will be (not as log as humans are involved).

        • Bartleby
          Apr 5, 2018 at 12:01 pm

          This is pure capitalism, whatever these delusional ideologues want to believe.

        • Don
          Apr 5, 2018 at 5:14 pm

          I WAS always under the impression that for “pure capitalism” the government could not be involved in any way?

        • alex in san jose AKA digital Detroit
          Apr 5, 2018 at 10:16 pm

          Speaking as a Socialist, I agree. Capitalism means you are willing to take risks. To start a new business, to introduce a new product, etc. What we have now is an environment for the big boys that has no risks. The only way they fail is to “fail upward”.

          There’s a saying around: “Capitalism for the masses, socialism for the rich”. Since socialism means, among other things, safety, security, access to the best education and health care, cooperation rather than cut-throat competition, I have to say I believe there’s a lot of truth in that quip.

          It’s just that our oligarchs are keeping that sweet, sweet socialism to themselves rather than extending it to everyone.

      • Kent
        Apr 2, 2018 at 3:41 pm

        If this isn’t capitalism, what is it? Should the government regulate this away? Or are we just not going to have capitalism for the future?

        • Don
          Apr 5, 2018 at 8:24 am

          it’s called crony-capitalism. it started when the GOVERNMENT voted for the federal reserve. Where do the hedge funds borrow their money to buy business? Why did the govt. bail out car manufactures in 2008? Why does the govt. give money to private busineses?

          Can any of you socialist ever use your brain? And can you capitalist ever use your brains and admit to crony-capitalism?

          Most people 90+% don’t know how to use logic, because the socialist school systems don’t allow it to be taught, because they need stupid people in order to win. We are loosing this country.

          Always remember 90:10

      • Grizzlepaw
        Apr 3, 2018 at 4:21 pm

        Ability of one class of society to insulate themselves from the immediate effects of bad outcomes and pass it on to others is a core cause of long term societal collapse.

    • Javert Chip
      Apr 2, 2018 at 6:09 pm

      Mike

      Your description of “Wall Street Bandits” is indeed pretty dystopian. The following argument is not to unilaterally defend “Wall Street Bandits”, but to ask a legitimate economic question:

      If consumers have decided USA retail has too much physical retail space per capita (for every USA 100 sq-ft, Canada had 70, UK had 20, Germany had 10) and “physical” (ie: in-store) shopping is declining because consumer behavior is changing, how best to remove excess brick&mortar capacity?

      One way is to suck all available value out of a target property & liquidate the remainder. Sure enough, this looks like a nasty process, no matter how it’s done.

      However, no matter how you approach it, consumers have made the call and stores, jobs and companies are going away because customers have made the decision to go away.

      How else would you do it? You’re basically dealing with disposal of carion.

      • Alex D
        Apr 2, 2018 at 7:47 pm

        Would it be reasonable to assume that LBO targets are really “dead man walking”?

        In the case of the retailers in this article, surely the Bain Capitals of the world could see the writing on the wall.

        My reading about LBO ideal targets all call for steady cash flows able to support the increased debt load even during a downturn.

        Im genuinely curious here because your argument is very thought provoking.

        Appreciate it

        • Javert Chip
          Apr 3, 2018 at 12:07 pm

          Full disclosure: I’m an old retired CFO and a pretty red-blooded capitalist.

          LBOs were never intended as warm & fuzzy processes for resuscitating struggling companies, and are really not targeted at reasonably healthy firms, who generally qualify for more advantageous financing. Frankly, LBOs require desperation, and only offer tough love. REAL TOUGH love.

          If the definition of success is a 10-year survival rate, LBOs (PEs, whatever) do indeed “save” some companies (probably more than 50%); however, they are also really good at recycling value and disposing of failed firms. Depending upon the economy, I’d guess 30-50% of companies entering an LBO will soon go bankrupt. It will always be uncomfortable to watch hopes, dreams and hard work end up in failure, but the alternative is even worse: tax-payer support of European & (especially) Japanese banks that “extend & pretend” with years, decades of bad loans to zombie companies, and no capital to lend to new, vibrant companies.

          My issue with LBOs is the treatment of unfunded pension obligations. These get very little respect in Bankruptcy. However, they actually represent long-standing management failures to meet commitments to then-existing employees.

          The fix won’t be found in bankruptcy (the financial horse has already left the barn). I’d prefer companies be required to fund pensions at some level (80-90%?) on an on-going basis. This imposes discipline on both corporations (to fund) and employees (to be reasonable).

          Bottom line is companies fail for one and only one reason: customers walk away. This can be caused by stupid management, stupid unions, bad products, foolish pricing, customer emotions, national events or any number of other reasons., but sooner or later, customers just walk away…and companies die.

        • c smith
          Apr 3, 2018 at 3:04 pm

          “…surely the Bain Capitals of the world could see the writing on the wall.” Of course they do! Their role (as vultures) is to do the “stripping” as clinically and efficiently (for them) as possible. If they can get paid entirely up front, with unsecured debtholders willing to fund every penny, more power to them! The REAL problem is the central bank’s willingness to backstop this idiocy every 7 or 8 years with unlimited free money. If someday the Fed showed enough backbone to let rich people fail, we might have “real” capitalism again.

        • David Krenshaw
          Apr 5, 2018 at 1:16 pm

          Imagine if when the paramedics arrive at an accident scene, the first thing they do is empty the guy’s pockets, take his credit cards and run them to the limits, figure out how to divvy it all up among themselves — then start to worry about the guy lying on the pavement.

          Yeah, I’ll bet only about half those injured folks make it, too.

    • Caliban Upon Setebos
      Apr 2, 2018 at 8:06 pm

      PE == Public Enemy
      LBO == Legalized Bust Out
      MAUL == Make Americans Unemployed Losers

  2. polecat
    Apr 2, 2018 at 1:19 pm

    Private Equity = C•A•N•C•E•R

  3. Bart
    Apr 2, 2018 at 1:20 pm

    SIG has good cash flow but sales will continue to deteriorate and the feeling is the “path to brilliance” is going no where. If Golden Gate Capital had not given Zales a loan and then managed to convince SIG to buy them, the Zales name would have been long gone. Can PE take over, load up the balance sheet, BK it to get rid of underperforming mall locations without paying rent?

    H2 will get interesting for the economy. The auto industry, specifically sub-prime segment has seen sales stall and the lower part of prime is slowing. As the year progresses, more off lease vehicles will come back driving down the price of used and further reducing residuals on leased vehicles making new leases more expensive.

    Wolf, what about retail mall loans coming due and new loans to the sector, are most covenant light?

    • Suzie Alcatrez
      Apr 2, 2018 at 7:54 pm

      Zales first went bankrupt in 1992.

    • 728huey
      Apr 3, 2018 at 8:29 pm

      Not to sold like a hedge fund apologist here, but they need to close some of these jewelry stores. I didn’t know Jared, Kay, and Zales were all under the same corporate umbrella, but since that is the case they need to close some stores. In the mall I work nearby, there is a Zales Jewelers with a Rogers and Holland store literally across the corridor from it, and there’s a Kay Jewelers just downstairs and over in front of the food court. Having all of these stores in the mall is redundant, and jewelry isn’t one of those must have items you buy daily or even weekly.

      Having said that, the mall is in a serious predicament, as Sears continues to be that dead anchor store walking, but now there’s the possibility of another anchor store going under, as my local Bergners department store is part of Bon Ton stores which filed for bankruptcy and is facing possible liquidation. The other anchor stores in the mall are JC Penney and Macy’s, which have had their woes well documented.

  4. Kevin Beck
    Apr 2, 2018 at 1:25 pm

    I don’t know what Eddie Lampert would define “failure” as, since he seems to think Sears Holdings is actually making progress.

    I would define failure for Lampert as looking in the mirror.

    I guess for him to talk about progress means that their credit rating is so low, he’s able to buy back Sears’ debt at distress prices, rather than redeem it legitimately.

    • RepubAnon
      Apr 2, 2018 at 2:26 pm

      I think “progress “ means escaping bankruptcy clawback provisions in the Sears context…

    • Drater
      Apr 2, 2018 at 2:56 pm

      Lampert would not have a reflection in a mirror…

  5. cdr
    Apr 2, 2018 at 1:33 pm

    So sad about retail.

    Grocery stores appear to be devolving into shelves with cans marked ‘Food – human’ with check boxes for beans or soup or juice/orange or whatever. Actually, that’s factitious. I love Aldi and other stores are better priced now. The ones that used to be ‘the other stores’ are suffering.

    On the other hand, I’m eating better for less. Perhaps it’s just competition and Adam Smith’s invisible hand in operation. I have more things available than I could have imagined a few years ago and they cost less and less. Especially if you add in the internet.

    • Brian M
      Apr 2, 2018 at 9:03 pm

      Gawd. Do you really consider eating at Aldi’s a positive? I still remember shopping at Aldi’s Emporium of Flavorless Mush when I was a penniless college student.

  6. Apr 2, 2018 at 1:41 pm
  7. Scott
    Apr 2, 2018 at 2:23 pm

    I don’t think this was posted here earlier, but True Value sold a majority stake to PE firm earlier this month.

    http://www.chicagobusiness.com/article/20180315/NEWS07/180319925/true-value-sells-majority-stake-to-private-equity-firm

    I really don’t see how this benefits the stores, but Private Equity will likely do less damage as each store is owned and operated independently.

  8. Stan
    Apr 2, 2018 at 2:27 pm

    You can thank Mitt Romney and his Bain Capital for many of these Leveraged Buy-Outs and the attachment of massive debt (which is their payday). LBOs should be illegal.

    • Arnold Ziffel
      Apr 2, 2018 at 2:47 pm

      Also the Federal Reserve that lowered interest rates to all time historic lows which allowed malinvestments to grow like weeds.

  9. toid
    Apr 2, 2018 at 2:31 pm

    The businesses were great,times change many didn’t adapt.
    No one is screwing anyone.

    • Apr 2, 2018 at 5:04 pm

      No, you are not paying attention.

      Many fine businesses — were hobbled by ETERNAL FORCES — to with, the gaggle of LBO-thieves placing a huge debt monkey on their back.

      You cannot adroitly adapt when hobbled by a massive weight on your back, while you are honestly participating in the retail race.

      Hobbled, because attention is necessarily diverted from growing the business to servicing the externally supplied debt.

      IT IS NOT AS IF THE LBO DEBT WAS ADDED while “growing” the business. It was not. It was put in place by malevolent actors — like the inestimable “Mitt” Romney — still angling to become president of our once-great nation.

      https://www.chron.com/news/nation-world/article/Romney-defends-5-sons-lack-of-military-service-1572191.php

      What a man, what an ego ! ! !

      • BirdBrain
        Apr 2, 2018 at 5:21 pm

        That article is over 10 years old. Get a grip!

      • Caliban Upon Setebos
        Apr 2, 2018 at 8:09 pm

        Mittens “The Kitten” Romney is the poster child for the Public Enemy (PE) Legalized Bust Out (LBO) Mafiosos.

  10. Mike
    Apr 2, 2018 at 3:12 pm

    This brick and mortar collapse is not mystical at all, especially given all the P/E buyouts. No individual store, like a ma and pa, can operate with so much debt. so what makes anyone think massive chains can do so ? LBO’s introduce way too much debt to allow any of it to ever be re-paid, especially since so many categories in retail operate on low margins in the first place. There is this on-going fallacy that volume can make up for low margins. We are also not far at all, from Amazon completely collapsing as well. (Trump knows this inherently too, so he is just poking their eventual demise along a wee bit faster. Gotta Love it! btw)

    It’s all had an extra 18 year ride, with the super cheap money spewed out by central banks; mostly ours. Would not surprise me at all to see each month going forward, an ever greater increase in the number of bankruptcy filings, continuing in retail, and then into many other industries. Corporations have taken on way too much cheap debt, many to fund their share buy backs. By later this fall, we could very well see, a brand new announcement on more QE4, after the signaling by the Fed of halting of rate increases after June. This is the proverbial bus going off the cliff type stuff, where everything was all speeding forward at once, but now is going to be brought down to earth it what seems to be a rather sudden crash. Central banks worldwide have intervened hundreds of times in just the past 2 years to keep stocks elevated, many of which were not barely even noticed by the public. Now the intervention has become so costly, and so much of it needed much more frequently, that the time scale between interventions is approaching zero.

    Good video on all of this over at https://www.greedometer.com/compare-pre-crash-2007-now-greedometers-free-look/

  11. Realist
    Apr 2, 2018 at 3:26 pm

    Are there statistics availble over the number of people whose retirement have been affected when PE companies have put their cash cows into bankruptcy ?

  12. TJ Martin
    Apr 2, 2018 at 3:38 pm

    Before everyone dives into the blame game or panic mode .. lets put a bit of perspective on a couple of those ‘ brick and mortars ‘ coming apart at the seams

    Guitar Center – I can tell you first hand that Guitar Center has never been a viable nor profitable business model since its inception nationwide despite what their marketing mavens may of said . Add to that the steep … and baby I do mean STEEP * decline in guitar sales and popularity from acoustic to ear shredding electric … about the only genuine surprise is that its taken reality so long to finally catch up with Guitar Center

    ( Even American guitar manufacturing icon Gibson is on the verge of bankruptcy )

    Sears – Give me a break . Sears has been ” Dead Man Walking ” too stupid to fall down for over three decades with the majority of their problems having been self induced

    Bon Ton – Been in the same dire straights for many of the same reasons as Sears for almost as long

    Foot Locker – Foot Locker ? Hell .. you mean there still is a retailer operating under the Foot Locker moniker ?

    Seriously … Foot Lockers presence in the market place has been all but invisible in most markets .. going on a decade or more

    Suffice it to say once one digs beneath the headline surface .. much of what is going on has been ‘ in progress ‘ for years .. 99% of the time self created and self induced then exacerbated by the joys of short term buy em and dump em at a profit PE

    • ML
      Apr 3, 2018 at 2:45 am

      “Suffice it to say once one digs beneath the headline surface .. much of what is going on has been ‘ in progress ‘ for years .. 99% of the time self created and self induced”

      It’s the same here in the UK. I’ve lost count of the number of New Look’s reincarnations. On wikipaedia a Maplin CEO announced M would go broke in 2015. Debenhams, House of Fraser, ilk are sympromatic of outmoded businesses desperately trying to keep up.

      Sad for the employees but good for other retailers to have less competition.

  13. sierra7
    Apr 2, 2018 at 3:40 pm

    Tens of thousands individual pension monies cast into the abyss; Fleeing corp leaders can cry baby shoes and escape; Society forced to pick up those obligations unless the politicians (corporations handmaidens) sniff “no funds”; Privatization of stolen capital and the socialization of the costs. Nothing new but bears repeating. Experienced a large LBO decades ago; it was horrible.
    This is not “capitalism”; it’s a criminal enterprise system. Worse than the Mafia.

    • Rates
      Apr 2, 2018 at 3:49 pm

      I suggested giving this system free to China and there were objections from some of Wolf’s readers. They were saying that PE is necessary for the creative destruction component of capitalism.

      Last time we Muricans exported our brand of free wheeling “capitalism” to a major Asian economy i.e. Japan, we managed to cause the whole economy to come to a standstill in less than 10 years.

      If we give away our PE people for FREE to China, I guarantee there will NEVER be any more discussion of the Chinese overtaking the US economy. Sun Tzu’s Art of War will be forced to include that strategy in the next edition.

    • Kent
      Apr 2, 2018 at 3:55 pm

      Put pensions at the front of the line for bankruptcy proceeds and this would never happen. Creditors wouldn’t lend money to the PE firms if they couldn’t be at the front of the line themselves.

      • Javert Chip
        Apr 2, 2018 at 6:27 pm

        I support this idea.

        Pension findings a legacy liability that get inherited with the purchase of a business.

        Classifying pensions as senior debt won’t stop bankruptcies if a company can’t change with the market, but that’s no reason for johnny-come-lately PE firms to ignore unfunded pension liabilities so they can take the cash & run.

        The devil in the details: how do you prevent normal business activity (eg: buying Christmas inventory) from taking the value of a weak company below the value of unfunded pension obligations?

        • Tom T
          Apr 2, 2018 at 9:02 pm

          Mr. Chip,

          I wonder if you have had the opportunity to read “Killing the Host” by economist Michael Hudson? If not, might I strongly urge you to do so, respectfully.

  14. Gandalf
    Apr 2, 2018 at 3:48 pm

    Actually, as much as I’d like to nail Romney and Bain, it was Mike Milken who started this business of doing LBOs with junk bonds way back in the late 1970s. It was the same thing back then, pillaging long established companies by loading them up with debt, stripping the assets, and then watching the company fail.

    In another thread, I explained in detail how these PE companies are just the blood sucking parasites of the capitalist ecosystem. They are not, in fact, the apex predators who are truly responsible for sending these companies into a death spiral in the first place. Truly healthy companies at the top of their game are usually not threatened easily by these PE blood sucking parasites.

    And so, no matter how distasteful you might regard blood sucking parasites, they generally serve the function of accelerating the process of capitalist “Creative Destruction” (re: Joseph Schumpeter) – culling the herd of the old, infirm, and weak

  15. Gandalf
    Apr 2, 2018 at 3:53 pm

    Meanwhile, the Trump war on trade and Amazon continues, fear grips the stock market, and stocks plunge, today.

    What next? A downward death spiral into a major depression a la the Smoot Hawley Act? Schizoid re-assuring tweets from POTUS, saying “April Fools! Just Kidding!” ???

    • Rates
      Apr 2, 2018 at 5:21 pm

      “Truly healthy companies at the top of their game are usually not threatened easily” by Trump either.

      Heck you can easily extend your argument to everything.

      “Truly healthy stock markets”
      “Truly healthy crypto”

      Heck “Truly healthy economies” can’t be threatened by some Smooth sounding acts.

      I think you need to drink your own Kool Aid to see just how well it’s tasting.

  16. GSH
    Apr 2, 2018 at 4:03 pm

    In the Austrian school of economics the consumer has the ultimate word. He/she decides what to buy and from whom. So, in theory, the consumer could punish PE companies by never buying from the companies they are running into the ground. In practice, the consumer does not seem to be self-aware and exercises none of her/his power. Sheep come to mind.

    The real enablers of PE companies are Wall Street and the pension funds who buy the junk debt that allows leveraged buy-outs. Why aren’t pension funds prohibited from buying that junk given their fiduciary duty.

    • Javert Chip
      Apr 2, 2018 at 9:05 pm

      GSH

      The American consumer (as a group) makes a couple billion buying choices a day. And they are taking considerable volumes of their business to places other than brick&mortar retail.

      The customer is in complete control. The consumer has made the strategic decision the brick&mortar retail has way too much capacity. PE companies are simply re-cycling the dead & wounded.

      Consumers are already not buying from weak companies way before PE scavengers get involved.

  17. raxadian
    Apr 2, 2018 at 4:12 pm

    L B OS

    L B OS

    FREE MONEY WITH L B OS!

    THE COMPANY SINKS, WE WALK AWAY

    EVERYONE PARTY WITH L B OS!

    The day LBOs are declared illegal might never come but it really should.

    And I never thought I would write this but regulations seem worse than they were during the eighties.

  18. Gandalf
    Apr 2, 2018 at 4:14 pm

    GSH,

    You missed my point. The consumers have already chosen, by turning away from these companies – that is what makes them weak, infirm, aging.

    The PE companies, like true blood sucking parasites, pick only on the weak, infirm, and aging. They feed off their hosts, reproduce quickly, and get their DNA propagated and out of the host long before their host expires. So they are very difficult to punish or to destroy.

    So the Austrian school is perfectly correct – it just does not include blood sucking parasites into its analysis of the capitalist ecosystem.

  19. Beans Baby
    Apr 2, 2018 at 5:09 pm

    I’m coming to the belief that a LBO is actually the financialization of labor itself.

  20. NoRush
    Apr 2, 2018 at 5:11 pm

    I heard that Herrington Catalog went Chapter 7 a little over a week ago.

  21. Bead
    Apr 2, 2018 at 5:26 pm

    Trump needs to win his rounds with Amazon and its race to the bottom.

  22. NoFreeLunch
    Apr 2, 2018 at 6:46 pm

    I am always amazed that people claim a company is making a killing on something at someone else’s expense, yet that company is publically traded, its accounting is public, and one can buy their stock and participate in making a killing. But the claim doesn’t hold out in reality with the stock price increases. For example, many people claim gas is too expensive, and oil companies are making a killing. So buy their stock if you think so, and use the stock gains to buy gas. The same holds true of PE companies. There are about a dozen that are publically traded. Their making a killing off what they buy will go to the stock holders, since they are public. Somehow, the imagined huge profits never quite materialize, and rocket the stocks of those companies.

    • Caliban Upon Setebos
      Apr 2, 2018 at 8:14 pm

      Publicly traded Public Enemy (PE) outfits channel their profits from Legalized Bust Outs (LBOs) to a few insiders while leaving a few scraps for the public shareholders. After all, if it’s such a great deal why would they ever let you in on the deal?

      • NoFreeLunch
        Apr 3, 2018 at 6:58 am

        Maybe you can point out the “channeling” you refer to on Apollo’s 10-K. I don’t see it.

    • Gandalf
      Apr 2, 2018 at 7:10 pm

      Sporkfed,
      I like blood sucking parasite. Has a more evil sound to it.
      Some parasites can be relatively benign, allowing the host to live for a long time while shedding the progeny of the parasite.

      • polecat
        Apr 2, 2018 at 7:25 pm

        They’re privatizing TICKS, and not only do they not let go …. but also spread the most virulent form of psychopathic Socializelossiosis as they feed …

  23. TCG
    Apr 2, 2018 at 7:51 pm

    It looks like some other media are finally picking up on this, finally. I saw https://newrepublic.com/article/147669/real-retail-killer, yet we’ve been hearing about it here for years.

  24. ML
    Apr 3, 2018 at 2:51 am

    Nothing wrong with debt when the business is well-managed. But there’s the rub.

  25. Bruce Kowal
    Apr 3, 2018 at 8:39 am

    A few sentences in the Internal Revenue Code would stop this kind of activity. Just limit the deductibility of interest expense when the indebtedness exceeds a certain percent of net worth before the debt. The broader question behind this change to the Code is whether it is good public policy to allow a deduction – – and ALL deductions are well established in law to be a matter of “legislative grace” – – for interest expense when the result is the crippling of a going concern and the enrichment of a few.

Comments are closed.