I personally believe Toys R Us just missed an opportunity to run a proper business.
Toys R Us has been struggling to pay off $6 billion in debt from the Bain Capital takeover in 2005. They didn't have the capital or the margins to invest in maintaining their stores, let alone competing with Amazon.
Buying a company with debt and then forcing that company to pay off that debt is fairly common, but for some reason it surprises me that it's actually legal. Why isn't Bain forced to pay off the debts when the company goes under?
To answer your question, the debt holders take precedence over the equity holders like Bain Capital, and generally being an equity holder and having your equity stake wiped to $0 is not a good outcome for a private equity firm. Bain does have to pay off debts - that is what the liquidation of assets is being done for - to pay off debts to the debt holders. Bain doesn't get to keep those assets.
This assumes they occur post bankruptcy. Looting a company involves dept then dividends from selling off assets to the point a company can't make debt payments. The money is already gone by the time the company can't pay, so they don't care what happens to the shell at that point.
Leveraged buyouts are basically ponzi schemes designed to use recurring revenue to pay back debtors, rather than the usual scheduled lump sum payout down the road.
They were tweaked to work on a different time scale.
The idea they can get some distance to avoid scrutiny.
In a lot of cases, the debtors are also the owners of the firm that initiated the leveraged buyout. They load the target up with debt, can't make the payments, and then they collect as debtors.
See Sears and their current CEO for exactly that model. It's been going on in retail for years. They're all getting boned hard though thanks to Amazon gutting brick-n-mortar retail. OOPS.
Of course the real people being screwed are the folks on main street.
Except, I think the rub here is that Bain will have paid itself enormous consulting fees from toys r us coffers.
My guess is that they come out ahead even after the bankruptcy. They would have put some of their own money in to purchase equity but my guess is, not more than fees would amount to after a decade.
Isn't that the nature of a business in America? It acts as a "corporate veil" and as long as you aren't using business funds inappropriately, the business is the "last stop".
The person you are replying to is making a point about leveraged buyouts and how they can be used by unscrupulous wall street types to milk and destroy an otherwise profitable industry.
Well the natural extension of what you ask, is a world like Japan where banks ask small and medium business owners for personal guarantees over business loans, bankrupting many SMB owners and entrepreneurs.
It's not mom and pop lenders that put up 6 billion. It's grownups that have a contract with a specific set of things/entities they can collect from. Don't waste tears over them.
Nobody cares about the banks. But the banks are going after Toys R Us (and other targets of the parasitic buyouts) because that's their only recourse, and they are costing plenty of innocent people their jobs. I feel things would be different if they could go directly after Bain et al.
Yeah no. If the stores were worth keeping open without the debt, then the bankruptcy court would keep them open. They lost money in each of the last 4 years, without as much of a debt load maybe they'd have broken even or a small profit, but not enough to justify the existence of the company.
Toys r US's numbers were significantly below where they'd need to be at to survive. It's unclear why you think we should infringe on banks ability to decide who to lend money to and what collateral to require.
Comments
Toys R Us has been struggling to pay off $6 billion in debt from the Bain Capital takeover in 2005. They didn't have the capital or the margins to invest in maintaining their stores, let alone competing with Amazon.
Buying a company with debt and then forcing that company to pay off that debt is fairly common, but for some reason it surprises me that it's actually legal. Why isn't Bain forced to pay off the debts when the company goes under?
https://www.forbes.com/sites/walterloeb/2018/03/19/bain-capi...
To answer your question, the debt holders take precedence over the equity holders like Bain Capital, and generally being an equity holder and having your equity stake wiped to $0 is not a good outcome for a private equity firm. Bain does have to pay off debts - that is what the liquidation of assets is being done for - to pay off debts to the debt holders. Bain doesn't get to keep those assets.
This assumes they occur post bankruptcy. Looting a company involves dept then dividends from selling off assets to the point a company can't make debt payments. The money is already gone by the time the company can't pay, so they don't care what happens to the shell at that point.
Leveraged buyouts are basically ponzi schemes designed to use recurring revenue to pay back debtors, rather than the usual scheduled lump sum payout down the road.
They were tweaked to work on a different time scale.
The idea they can get some distance to avoid scrutiny.
In a lot of cases, the debtors are also the owners of the firm that initiated the leveraged buyout. They load the target up with debt, can't make the payments, and then they collect as debtors.
See Sears and their current CEO for exactly that model. It's been going on in retail for years. They're all getting boned hard though thanks to Amazon gutting brick-n-mortar retail. OOPS.
Of course the real people being screwed are the folks on main street.
Except, I think the rub here is that Bain will have paid itself enormous consulting fees from toys r us coffers.
My guess is that they come out ahead even after the bankruptcy. They would have put some of their own money in to purchase equity but my guess is, not more than fees would amount to after a decade.
Isn't that the nature of a business in America? It acts as a "corporate veil" and as long as you aren't using business funds inappropriately, the business is the "last stop".
The person you are replying to is making a point about leveraged buyouts and how they can be used by unscrupulous wall street types to milk and destroy an otherwise profitable industry.
https://www.rollingstone.com/politics/news/greed-and-debt-th...
Well the natural extension of what you ask, is a world like Japan where banks ask small and medium business owners for personal guarantees over business loans, bankrupting many SMB owners and entrepreneurs.
It's not mom and pop lenders that put up 6 billion. It's grownups that have a contract with a specific set of things/entities they can collect from. Don't waste tears over them.
Nobody cares about the banks. But the banks are going after Toys R Us (and other targets of the parasitic buyouts) because that's their only recourse, and they are costing plenty of innocent people their jobs. I feel things would be different if they could go directly after Bain et al.
Yeah no. If the stores were worth keeping open without the debt, then the bankruptcy court would keep them open. They lost money in each of the last 4 years, without as much of a debt load maybe they'd have broken even or a small profit, but not enough to justify the existence of the company.
You're falling into the trap of assuming that the market is perfect, and that there's someone wanting to take over the stores.
Face it, the only reason they were in trouble, and the only reason this bankruptcy is happening, is because of the parasitic capital firms involved.
You can do the math, it's not that hard.
Toys r US's numbers were significantly below where they'd need to be at to survive. It's unclear why you think we should infringe on banks ability to decide who to lend money to and what collateral to require.