American law criminalizes many productive transactions, and often legalizes theft. Case in point: private equity larceny, whereby a private equity firm buys a company, loads it with debt, has the company issue a special dividend so large it decimates the company (but makes the private equity firm whole), then at the first sign of trouble leaves the company for roadkill. From Wolf Richter at wolfstreet.com:
PE firms win again. Stiffed creditors not amused in bankruptcy court.
Nearly every retail chain caught up in the brick & mortar meltdown is an LBO queen – acquired in a leveraged buyout by a private equity firm either during the LBO boom before the Financial Crisis or in the years of ultra-cheap money following it. During a leveraged buyout, the PE firm uses little of its own capital. Much of the money needed to buy the retailer comes from debt the retailer itself has to issue to fund the buyout, which leaves the retailer highly leveraged.
The PE firm then makes the retailer issue even more junk bonds or leveraged loans to fund a special dividend back to the PE firm. Come hell or high water, the PE firm has extracted its money.
Then the PE firm charges the retailer hefty management fees on an ongoing basis.
This form of asset stripping removes cash from the retailer and leaves it struggling under a load of debt. It works wonderfully until it doesn’t – until booming online sales started eating their lunch, sending these overleveraged retailers, one after the other, into bankruptcy court, where creditors learn what it means to end up holding the bag. But they’re not amused, as we now see. But first the numbers…
Since 2010, retail chains owned by PE firms have issued $91 billion in junk bonds and leveraged loans just to raise the money for the special dividends paid to their PE owners, according to data by LCD of S&P Global Market Intelligence, cited by the Wall Street Journal. This does not include debt piled on retailers during the LBO itself. And it does not include drug stores and food retailers – such as PE-firm-owned Safeway-Albertsons, caught up in the middle of the meltdown.