Buyouts, Bankruptcy, and Bonuses

by Dollars and Sense

Today's New York Times has two terrific articles about the profits that were made, and the damage done, via debt-financed buyouts. One article focuses on the Simmons Bedding Company (think mattresses), which was bought out by one private equity company after another, with the result that the company is now buried in billions of debt and is filing for bankruptcy. PE managers made off with millions, while bondholders and employees are screwed. The second article (by David Carr) is about a similar scenario at the Tribune Company, which has $8 billion in debt, has laid off thousands of employees, and is in bankruptcy—but its top managers look like they're going to collect $66 million in bonuses. Here they are:

Profits for Buyout Firms as Company Debt Soared

By JULIE CRESWELL
Published: October 4, 2009

For most of the 133 years since its founding in a small city in Wisconsin, the Simmons Bedding Company enjoyed an illustrious history.

Presidents have slumbered on its mattresses aboard Air Force One. Dignitaries have slept on them in the Lincoln Bedroom. Its advertisements have featured Henry Ford and H. G. Wells. Eleanor Roosevelt extolled the virtues of the Simmons Beautyrest mattress, and the brand was immortalized on Broadway in Cole Porter's song "Anything Goes."

Its recent history has been notable, too, but for a different reason.

Simmons says it will soon file for bankruptcy protection, as part of an agreement by its current owners to sell the company—the seventh time it has been sold in a little more than two decades—all after being owned for short periods by a parade of different investment groups, known as private equity firms, which try to buy undervalued companies, mostly with borrowed money.

For many of the company's investors, the sale will be a disaster. Its bondholders alone stand to lose more than $575 million. The company's downfall has also devastated employees like Noble Rogers, who worked for 22 years at Simmons, most of that time at a factory outside Atlanta. He is one of 1,000 employees—more than one-quarter of the work force—laid off last year.

But Thomas H. Lee Partners of Boston has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company's fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise.

Wall Street investment banks also cashed in. They collected millions for helping to arrange the takeovers and for selling the bonds that made those deals possible. All told, the various private equity owners have made around $750 million in profits from Simmons over the years.

How so many people could make so much money on a company that has been driven into bankruptcy is a tale of these financial times and an example of a growing phenomenon in corporate America.

Every step along the way, the buyers put Simmons deeper into debt. The financiers borrowed more and more money to pay ever higher prices for the company, enabling each previous owner to cash out profitably.

But the load weighed down an otherwise healthy company. Today, Simmons owes $1.3 billion, compared with just $164 million in 1991, when it began to become a Wall Street version of "Flip This House."

In many ways, what private equity firms did at Simmons, and scores of other companies like it, mimicked the subprime mortgage boom. Fueled by easy money, not only from banks but also endowments and pension funds, buyout kings like THL upended the old order on Wall Street. It was, they said, the Golden Age of private equity—nothing less than a new era of capitalism.

Read the rest of the article.

Of Layoffs, Bankruptcy and Bonuses
By DAVID CARR | October 4, 2009

Let's say that a group of corporate executives uses scads of debt to take over a struggling company, sells off some profitable assets, lays off thousands of employees while achieving miserable results. And then, less than a year after saddling the company with $8 billion in debt, they opt for bankruptcy.

You'd expect them to walk the plank, or at the very least, spend a good stretch of time in the naughty corner. But you wouldn't expect the top 700 managers to collect $66 million in bonuses.

But that's just what might happen at the Tribune Company. A week ago Friday, lawyers for the company, which publishes The Los Angeles Times, The Chicago Tribune, The Baltimore Sun, and owns other newspapers and television stations, were in Federal Bankruptcy Court in Delaware suggesting that the proposed 2009 bonuses were critical for the health and survival of the company.

Under questioning, Chandler Bigelow III, the chief financial officer, said the bonuses would help "incentivize our key managers to battle all of the intense challenges that unfortunately our local media businesses are facing," according to The Associated Press.

The unsecured creditors of the Tribune Company filed a letter in support of the incentives, and its senior lenders support the plan as well. But both the company's union and the trustee appointed to oversee the bankruptcy raised objections, arguing that the bonuses would be the highest ever paid — even as the company has its lowest cash flow in 10 years.

"It is sort of along the same lines as the Bank of America and A.I.G. bonuses, except it is not taxpayer money," said Cet Parks, executive director of the Baltimore-Washington Newspaper Guild, in an interview. "At the same time they are asking employees to make sacrifices, they want to reap the rewards of all these cuts they have been making."

Read the rest of the article.

Labels: bankruptcy, David Carr, layoffs, leverage, private equity, Simmons Bedding Company, Tribune Company

 

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10/05/2009 01:05:00 PM 0 comments

 

How Far Will Deleveraging Go?

by Dollars and Sense

From Wall Street Journal (November the 8th); via Yves Smith

Wall Street Journal Opinion November 8, 2008

How Far Will Deleveraging Go?

Credit will still have to shrink to keep leverage at precrisis levels.
By DAVID ROCHE

The global economy is in recession. Will this lead to depression? And if not, how long and deep will the recession be? The answers to both questions depend on the extent of deleveraging by financial institutions.

The amount of risk-free or "tier-one" capital a bank is holding is a good reverse indicator of how leveraged it is. Globally, financial institutions had about $5 trillion of tier-one capital on the eve of the credit crisis. Those in the United States and European Union had about $3.3 trillion of tier-one capital supporting a loan book of some $43 trillion.

Then came the crisis.

How much did they lose? There are three answers. If mark-to-market rules are applied, global financial sector losses are estimated to amount to 85% of tier-one capital. But mark-to-market rules are extreme and assume the banks are insolvent and that all their assets will have to be fire-sold for whatever they can fetch in today's dysfunctional markets.

If economic value, a concept based on the present value of future cash flows of the assets, is used instead, current losses are about half the amount calculated using mark-to-market rules.

Finally, if we use only the losses that have been recognized by the institutions themselves so far, we are a touch short of $700 billion.

Despite these losses, the loan books of banks have grown, not shrunk during the credit crisis. Only the balance sheets and leverage of the nondeposit-taking institutions, such as hedge funds, investment banks and prime brokers have shrunk, probably by 40%-60%.


Read the rest of the article

Labels: banking system, financial crisis, financial crisis bailout, leverage

 

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11/10/2008 03:44:00 PM 0 comments

 

Good Basic Article on Leverage and the Crisis

by Dollars and Sense

From James Saft of Reuters:

October 24th, 2008


Distortion is the new normal for markets


Posted by: James Saft
Tags: Uncategorized, Credit crisis


(James Saft is a Reuters columnist. The opinions expressed are his own.)


LONDON (Reuters) - The evaporation of borrowed money has fundamentally changed the way markets function, and what look like crazy anomalies may end up being closer to the new reality.


Across financial markets, especially in fixed income, strange things are happening. Take two examples:


The U.S. government takes Fannie Mae and Freddie Mac into conservatorship, essentially guaranteeing their debts. Investors first narrow the premium they demand to lend to the two mortgage giants, then stage a strike and send these premiums to all-time highs.


Treasury inflation-protected securities (TIPs) hugely underperform standard Treasuries, and are factoring in precious little inflation in comparison to market expectations.


And while fundamental explanations and official policy errors may explain some such moves, they probably don't account for all of them.


The common denominator is the rapid disappearance from the market of leverage, money borrowed by investors to magnify what they can buy.

Read the rest of the article

Labels: financial crisis, financial crisis bailout, leverage

 

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10/26/2008 06:31:00 PM 0 comments