Changing consumer habits and the rise of e-commerce are the two leading reasons retailers have given for landing in precarious—and sometimes dire—situations lately. But vendors and landlords have a different culprit in their sights, and they’re going after them in court.
Footfall might be down and Amazon may be threatening to eat everyone’s lunch but creditors say it’s the debt load these retailers are carrying after private equity buyouts that are the anchors pulling them under.
The Wall Street Journal recently chronicled the liquidity issues related to now-bankrupt Payless, Rue21, Gymboree and True Religion—as well as the resulting legal actions from creditors who have been left holding the bag.
[Read about how retailers might avoid bankruptcy in this tough market: Fung Global: 218% Spike in Store Closures a Necessary First Step]
Their claim is it’s the private-equity buyouts plus the dividend payouts to these investors—which often require retailers to take out loans—that put companies in untenable situations. Payless, for example, has taken on more than $700 million in debt since its 2012 buyout. About $350 million of that was to pay dividends to its investors Golden Gate Capital and Blum Capital. The balance went to support the buyout and make payments related to an advisory agreement. Ultimately the company filed for bankruptcy with $838 million in debt.
It’s a similar story for Gymboree, which filed for bankruptcy in June with $1.1 billion in debt. Creditors are now saying in court documents that they’re looking into possible claims against the retailer’s investor, Bain Capital, citing fees paid to Bain while they’re left on the hook to the tune of $220 million.
A lender for True Religion is also balking at the prospect of TowerBrook Capital, which bought the brand out for $835 million, receiving the same or higher returns when typically lenders are considered before equity owners.
But the list of retailer bankruptcies and store closures includes many companies for which private equity played no part, proving investors might say that it’s too simplistic to blame problems within the sector on them. Besides, not all of these deals have ended in bankruptcy court.