PEU Retail Implosions

Bloomberg reported:

Rue21 Inc., a teen clothing chain backed by private equity firm Apax Partners, is preparing to file for bankruptcy, according to people familiar with the matter.

A filing could come as soon as this month, said the people, who asked not to be identified because the process isn’t public. As it negotiates with lenders, the company has a forbearance agreement in place that lasts through late April.

The filing would continue a tumultuous year for U.S. retail, with numerous chains seeking bankruptcy protection and others closing huge swaths of stores. Payless Inc., the discount shoe seller, filed for Chapter 11 earlier this week.

Payless is owned by two private equity underwriters (PEU), Blum Capital Partners and Golden Gate Capital.  Reuters reported:

The stress facing the shoe seller is reflected in the trading price of its debt, which is far below face value. Its $520 million senior loan is being quoted at about 52 cents on the dollar, and its $145 million junior loan is being quoted at about 16 cents on the dollar, according to sources.

Some of that debt was used to pay a dividend to the company's equity owners, Blum Capital and Golden Gate. 

Other iconic chains, including apparel label J. Crew Group Inc and accessories chain Claire's Stores Inc, have started to look for ways to address their debt loads as their sales shrink.

PEHub reported J. Crew's similar situation:

U.S. apparel retailer J. Crew Group Inc is taking steps to negotiate with its creditors about cutting the value of its approximately $2 billion debt load, as its struggles with falling sales, people familiar with the matter said on Friday.

A debt restructuring would underscore the challenges the company has faced since it was acquired by private equity firms TPG Capital LP and Leonard Green and Partners LP in a $3 billion leveraged buyout in 2011. 

As for Claire's Stores Bloomberg offered:

Apollo Global Management is reaching back into its playbook. 

The private equity investor has been buying up bonds of Claire's Stores, the jewelry chain it acquired in 2007, Bloomberg News reported late Tuesday. It's a move that lets Apollo better control the company's fate, which has been bleak since the firm's buyout saddled it with more than $2.3 billion of debt. 

Buying affiliate debt on the cheap is a backdoor way to equity ownership post bankruptcy.  The Carlyle Group undertook this very strategy with Brinton's and Mrs. Fields.

Turn over a struggling retailer today and one finds a PEU.  Dividend milking by sponsors deteriorates the company's balance sheet.  This enables the PEU to buy back debt on the cheap and have hope of a future equity position for the company they managed into bankruptcy.    

Update 4-11-17:  Add Bain Capital's Gymboree to the list. 

Update 4-14-17:  Add  Neiman Marcus and PEU owners Ares Management and the Canada Pension Plan Investment Board to the list