Wednesday, April 10, 2024

Ares Capital Drops 99 Cents Store into Bankruptcy

The Sun U.S.

Discount retailer 99 Cents Only filed for Chapter 11 bankruptcy in Delaware on Sunday after talks of closing. The company said it planned to close all of its 371 stores in the US and sell off its real estate and remaining inventory.

The move will result in the termination of over 10,000 employees.  The real estate will be sold off to satisfy creditors and store merchandise marked down under the handling of Hilco Global.

Private equity underwriter (PEU) Ares Capital purchased 99 Cent Stores in 2011 alongside a Canadian Pension fund.  Ares beat out an offer by Leonard Green Partners, another PEU.

As 99 Cent Stores is private no information is available on the amount of money Ares siphoned from their affiliate via, deal fees. annual management fees, special distributions or dividends.  Rest assured Ares recouped its initial equity investment long ago.

Hilco Global is part of Hilco Capital, which also has Canadian pension fund investment.  Hilco Global is itself a PEU affiliate:

Executive Vice-President and Head of Private Equity at CDPQ. “Hilco Global, whose role is to transition existing and often undervalued assets in challenged sectors into profitable use, directly benefits from the economic disruption taking place within companies around the world as a result of new technologies and changing consumer habits. Furthermore, this long term partnership is an excellent complement to CDPQ’s Distressed Debt strategy.”

The system has the greed and leverage boys on both sides of most deals.  They hold the equity and provide the credit.  Consider an IMF graphic put together and shared by Jack Farley via X. (I took the liberty of making slight adjustments).

The PEU boys are often on both sides of a buyout deal.  Even after getting multiples of their initial equity investment PEUs can buy discounted debt of affiliates they stressed as they travel the bumpy road to bankruptcy.  PEU sponsors often siphon valuable cash from the company during this process.

In our PEU oriented world conflicts remain secret.  There is no sheriff watching for unethical behavior.  The system is designed to their liking.  

Recall Ares beat out Leonard Green Partners for 99 Cent Stores in 2011.  Leonard Green bought JOANN in 2010 and bankrupted it last month.  LGP had taken JOANN public via an IPO in 2021.

Wolf Street wrote about JOANN's bankruptcy filing:
The company said today in an SEC filing that it had entered into a Transaction Support Agreement on March 15 with the holders of its senior secured term loan facility; and with the PE firms Green Equity Investors CF, L.P., Green Equity Investors Side CF, L.P., and LGP Associates CF, LLC; and with “certain current or former members of the Company’ board of directors”; and with “certain third-party financing parties that executed joinders thereto.”
And the means for LGP as a zeroed out equity holder to remain involved?  They likely bought discounted debt as JOANN circled the corporate drain.

I found it interesting that The Sun U.S. contacted 99 Cent Stores for comment but did not place a call to Ares Capital.  It's like interviewing the victim of the car wreck but not the perpetrator.  

One might expect elected officials to examine this unseemly financial landscape but that is not likely.  Politicians Red and Blue love PEU and increasingly, more are one.