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As the year 2009 comes to a close, I wanted to take some time to reminisce on some of the more troubling times in the world of buyouts, leveraged finance, and restructuring.
The summer of 2009 was probably one of the slowest in the past decade for leveraged lending and buyout activity. What we did see was about $12 trillion in government aid since 2008, and a number of quasi-public attempts at purchasing illiquid securities and clearing the market. The United States saw a wave of bankruptcies, as the corporate bond default rate pushed past 10%, and investors balked, throwing more money at the junk bond (high yield) market in search of returns. And slowly, but surely, the high yield market began to show signs of life, but not enough to bring back the mega-buyout. It may be years until we see that type of glorious transaction again.
One interesting deal I encountered sitting on my desk at work at 7:30 in the morning, ice cold Snapple in hand, was the bankruptcy of ‘Everything But Water, LLC,’ the largest U.S. retailer of women’s swimwear. The company was seeking Ch.11 protection, after being acquired by Bear Growth Capital Partners (the fundless subsidiary of Bear Stearns Merchant Banking, shout out to LA, LLC’s partner from Bear). Bear Growth Capital Partners acquired a majority stake in EBW in April of 2006, at the height of the private equity bubble. This was two years after the retailer received its first investment from investment bank Broadsword Partners. Bear’s acquisition led to the roll up of Water Water Everywhere and Just Add Water, two businesses in the same industry that helped EBW double the size of its operations. *BSMB is now a part of JPMorgan.
Since September of 2008, Everything But Water had seen a 23% decline in gross sales and had been operating at a loss. The company had assets of about $58 million and debt of $35 million. In its prime, EBW operated 70 stores and had over 360 employees selling swimsuits in the $50-200 price segment from Anne Cole and Michael Kors. Despite layoffs, spending cuts, and tighter inventory controls, the company was not able to improve its free cash flows enough to appease lenders. EBW tried closing individual stores based on year over year performance and also hired Hilco Real Estate, LLC to help it negotiate rent reductions and lease modifications with its landlords, all to no avail.
Lender D.B. Zwirn insisted that it would accelerate into covenant default if EBW did not enter a comprehensive restructuring that addressed structural issues.
Other higher end consumer retailers backed by LBO shops that filed for bankruptcy included Fortunoff, which was backed by NRDC Equity Partners and Blue Tulip Corp., a Highland Capital Partners backed retailer of gifts. Bankruptcy after bankruptcy made it very difficult for LBO firms like BSMB to raise and deploy capital.
For more information, please purchase the March 2009 copy of Buyouts Magazine….