Private Equity Fucks Toys R Us

[dismal]

Fees to the equity create a conflict with the debt. Generally debt wants to get paid first. I guess this was a pre-financial crisis deal so lenders were pretty aggressive. I read in one article the senior debt was debt was trading at 5 cents on the dollar, so the equity was nowhere near having any value.

The one thing I am confused on is who gets the money in the liquidation sell? Is it the 3 companies?

No, equity is last in the pecking order in a bankruptcy sale.

Generally it goes:
1) Unpaid taxes
2) Senior debt (up to it's par amount)
3) Junior debt (up to it's par amount)
4) Unsecured creditors (e.g., trade payables)
5) Equity

So, for example if the capital structure was $100 senior debt, $100 sub debt, $100 equity and the liquidation sale raised $150, it would go $100 to senior and $50 to sub debt.

 

[coloradoatheist]

Fees to the equity create a conflict with the debt. Generally debt wants to get paid first. I guess this was a pre-financial crisis deal so lenders were pretty aggressive. I read in one article the senior debt was debt was trading at 5 cents on the dollar, so the equity was nowhere near having any value.

The one thing I am confused on is who gets the money in the liquidation sell? Is it the 3 companies?

No, equity is last in the pecking order in a bankruptcy sale.

Generally it goes:
1) Unpaid taxes
2) Senior debt (up to it's par amount)
3) Junior debt (up to it's par amount)
4) Unsecured creditors (e.g., trade payables)
5) Equity

So, for example if the capital structure was $100 senior debt, $100 sub debt, $100 equity and the liquidation sale raised $150, it would go $100 to senior and $50 to sub debt.

Just trying to understand the loan given to Toys R Us for the LBO. It was a loan so I would think that's in the pecking order in the debt columns.

 

[dismal]

No, equity is last in the pecking order in a bankruptcy sale.

Generally it goes:
1) Unpaid taxes
2) Senior debt (up to it's par amount)
3) Junior debt (up to it's par amount)
4) Unsecured creditors (e.g., trade payables)
5) Equity

So, for example if the capital structure was $100 senior debt, $100 sub debt, $100 equity and the liquidation sale raised $150, it would go $100 to senior and $50 to sub debt.

Just trying to understand the loan given to Toys R Us for the LBO. It was a loan so I would think that's in the pecking order in the debt columns.

Yeah, debt/loan are the same thing. If it was secured by the assets of the company (the way your mortgage is secure by your house as collateral) it takes precedence. There are actually a bunch of things I left out that come before the debt, including the post-bankruptcy fees and such of all the people that descend on you when you file.

 

[RVonse]

Fees to the equity create a conflict with the debt. Generally debt wants to get paid first. I guess this was a pre-financial crisis deal so lenders were pretty aggressive. I read in one article the senior debt was debt was trading at 5 cents on the dollar, so the equity was nowhere near having any value.

Management always scams its way into being paid first. When Venture Stores went bankrupt, I read in the newspapers at that time the then CEO was paid millions in order to entice him to stay on for the liquidation!

I'm pretty sure anyone would have known how to liquidate a business and auction off assets. I mean how much talent would that entail????

Consider also the following. When an airline like TWA went bankrupt, the court ordered the employees to take a huge pension haircut. But the private equity guy running the show (Carl Icahn) made out with millions. Here is the typical private equity scam http://www.businessinsider.com/marc-andreessen-carl-icahn-killed-an-entire-airline-2014-3 :

It reportedly started when Icahn bought more than 20 percent of Trans World Airlines's stock in 1985, and then preceded to take TWA private, enriching himself with a $469 million payment. At the same time, TWA got laden with $540 million in debt. Icahn then sold the airline's London routes for $445 million in 1991. The sale was "a killer" for TWA, because the London routes were very valuable. The airline went bankrupt a year later.

In 1993, Icahn resigned as chairman, but signed a deal called the "Karabu ticket agreement," that allowed him to buy any ticket that connected through St. Louis for 55 cents on the dollar and resell them at a discount. The deal blocked him from selling tickets through travel agents, but he set up Lowestfare.com and made a killing.



Like I said before. In a better world, this shit shouldn't even be allowed to happen. Its a large part of what is wrong with capitalism in American IMO. Private equity firms.

 

[dismal]

Fees to the equity create a conflict with the debt. Generally debt wants to get paid first. I guess this was a pre-financial crisis deal so lenders were pretty aggressive. I read in one article the senior debt was debt was trading at 5 cents on the dollar, so the equity was nowhere near having any value.

Management always scams its way into being paid first.

Blatantly wrong. It's a matter of law. Equity is paid last.

Also - "equity" not equal "management".

"Management" are part of "employees" and employees can be paid retention payments if the courts approve. Debtors tend to approve of keeping the employees around, so they don't fight "market" retention plans once they are effectively in charge of the estate.

 

[RVonse]

You don't need to tell me about bad management. Maytag had a stock high of around $80 which eventually crashed due to crap management and the idiots that ran the show tried to sell out to a private equity firm, like in the Toys R Us case in order to get their money and run. Whirlpool ended up buying Maytag thankfully.

Maytag was founded and started by Fred Maytag who turned it into a great company. And then his grandson Fred Maytag II added even more value to the company when he led it. So for about 50 years the 2 Maytags created and grew a company that provided huge employment that was respected and admired by consumers. And then Fred Maytag II died of cancer and that is when other outside management began to destroy in about 30 years what the Maytags had built.

"In all business, there is a factor which cannot be compensated for in dollars and cents or computed by any measure. It has no relation or connection with the mercenary and is represented only by the spirit of love which the true craftsman holds for his job and the things he is trying to accomplish."
...Fred Maytag I. https://en.wikipedia.org/wiki/Frederick_Louis_Maytag_I

No truer words ever spoken. Dismal are you listening?

 

[RVonse]

Fees to the equity create a conflict with the debt. Generally debt wants to get paid first. I guess this was a pre-financial crisis deal so lenders were pretty aggressive. I read in one article the senior debt was debt was trading at 5 cents on the dollar, so the equity was nowhere near having any value.

Management always scams its way into being paid first.

Blatantly wrong. It's a matter of law. Equity is paid last.

Also - "equity" not equal "management".

"Management" are part of "employees" and employees can be paid retention payments if the courts approve. Debtors tend to approve of keeping the employees around, so they don't fight "market" retention plans once they are effectively in charge of the estate.

See the above example how Carl Ichan did it. But he was not the first nor will he be the last to pull off this scam.

 

[dismal]

Blatantly wrong. It's a matter of law. Equity is paid last.

Also - "equity" not equal "management".

"Management" are part of "employees" and employees can be paid retention payments if the courts approve. Debtors tend to approve of keeping the employees around, so they don't fight "market" retention plans once they are effectively in charge of the estate.

See the above example how Carl Ichan did it. But he was not the first nor will he be the last to pull off this scam.

I work in this field. I can tell you that's not the way it generally works. Lenders generally do not lend you money so you can distribute to yourself out of the company they lent money to.

A given set of assets is capable of bearing a certain amount of debt. A senior lender might lend 3X EBITDA. A sub lender might lend another 2X EBITDA. If you buy the asset for, say 8X EBITDA you're going to have to come up with equity for the rest.

So, let's say EBITDA is $100MM. That means the asset at 8X will cost $800MM, and assuming the above ratios the cap structure would be $300 senior debt, $200 sub debt and $300 equity.

Now, you decide, hey, I'm going to pencil in a $400 million distribution to myself! You now have cash need of $1,200 million. $800 to the asset owner to buy the asset, $400 to pay a distribution to yourself. You check back with the lenders about what they'd be willing to lend to this scheme and shockingly it's still 3X senior ($300MM) and 2X sub debt ($200MM). So now you need to write a $700 equity check so you can write yourself a $400 distribution. Huzzah, right?

 

[Axulus]

So it appears the whole "private equity is evil" was much ado about nothing. As it turns out, if there is any value to a debt free Toys R Us, they'll continue to operate as a going concern.

Toy company MGA Entertainment said on Friday it put in an $890 million bid for Toys 'R' Us stores in the U.S. and Canada.

Billionaire Isaac Larian, who heads MGA Entertainment, put in a bid of $675 million for stores in the United States and $215 million for stores in Canada, MGA said in a statement.

The funds to purchase the stores will come from Larian's own coffers, additional investors and bank financing, the privately held toy and entertainment company said.

https://finance.yahoo.com/news/toys-r-us-gets-890-140326824.html

 

[Jimmy Higgins]

So it appears the whole "private equity is evil" was much ado about nothing.

You mean that they are operating as normal, didn't require bankruptcy, and not trying to stiff their lenders?

 

[Underseer]

$460 million in operating profit while having how much in assets on its balance sheet? That number tells us nothing without knowing how big the balance sheet is.

If they have, say, 10 billion in assets (or more), and their operating profit is falling (as seems to be the case for 2017), then that is not very good at all.

There is a thing called opportunity cost: the assets may be redeployed and earn a higher return with some other use. That has nothing to do with private equity or debt but rather the company's poor return on assets.

Rightists can always be counted on to defend the elites no matter how many just-so stories they have to concoct.

I'm with you. Capitalism is broken anyway and is doomed to destroy itself, so why not let these venture capitalists make it happen a little bit faster? As long as the elites make money off of it, who cares what happens to the plebeians?

 

[Axulus]

$460 million in operating profit while having how much in assets on its balance sheet? That number tells us nothing without knowing how big the balance sheet is.

If they have, say, 10 billion in assets (or more), and their operating profit is falling (as seems to be the case for 2017), then that is not very good at all.

There is a thing called opportunity cost: the assets may be redeployed and earn a higher return with some other use. That has nothing to do with private equity or debt but rather the company's poor return on assets.

Rightists can always be counted on to defend the elites no matter how many just-so stories they have to concoct.

I'm with you. Capitalism is broken anyway and is doomed to destroy itself, so why not let these venture capitalists make it happen a little bit faster? As long as the elites make money off of it, who cares what happens to the plebeians?

Yes, because deploying assets to a poor use is the key to radical leftist utopia. And leftists scratch their heads when the public trusts Republicans more with the economy. Hmm, I wonder why?

New Poll Finds Voters Trust GOP Over Dems on Economy

https://townhall.com/tipsheet/guybenson/2018/02/09/politico-poll-trump-gop-gain-n2446346

 

[Jimmy Higgins]

Yes, because deploying assets to a poor use is the key to radical leftist utopia. And leftists scratch their heads when the public trusts Republicans more with the economy. Hmm, I wonder why?

You wouldn't be the only one. The Republicans have repeatedly fucked the economy with debt.