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Why do these companies somehow deserve to exist? Why can't the creditors make their own decisions on who to lend to and pay the price if they are wrong?



If you look closely, much of the "debt" is actually between subsidiaries of the same controlling PE owner - it's possible for the left hand to loan money to the right hand, claim back huge interest payments (Maplin were paying 15%! https://leftfootforward.org/2018/03/revealed-how-private-equ... ), thereby taking profit out of the subsidiary without it appearing as profit to the taxman. The internal creditor at the high rate will have got their principal back very quickly. It's the external creditors (suppliers etc) who get stiffed.

Remember that every supplier and every employee of a business is also a creditor.


The author doesn't know how bankruptcy works. You can say the debt is "secured" all day long, but if it is held by the owners then the bankruptcy judge will immediately kick it to the back of the line by equitable subordination.


Interesting. What about the obvious follow-up question: Why do the external creditors that lend to a pizza company via accounts receivable deserve their money back? Didn't they see the scammy nature of the operation?

It’s not like suppliers of a chain this large aren’t big savvy corporations too.


<shrug> They're Pizza Express. There's one on every high street. Who would expect them to fail to pay invoices? There's a cost to credit-checking your counterparties, too. And at the end of the day, none of them are invulnerable. If you're a food wholesaler or a POS systems company, do you refuse to do business with Pizza Express? Do you have time to go through their accounts? Is £1bn even unusual? Have they been like running successfully like this for a while?

I think this particular case there might be late payment but the business is going to remain in operation and they'll eventually get paid. Thomas Cook on the other hand incurred a lot of externalised costs.

I'm really not a fan of post-hoc "ah, people deserve to lose their money because they should have known (nonobvious XYZ)". There's even a surprising sentence in the BBC article:

> its auditors were happy to conclude the chain is a viable going concern when it signed off its accounts in April this year despite the company's debts being worth more than its assets

If the auditors (chartered regulated specialists!) think it's fine, who would say it wasn't?


Also

> despite the company's debts being worth more than its assets

Doesn't mean much if you're just comparing Book Value...


In this case they wouldn't care because the external bank debt is senior to the debt in question. The author doesn't really know anything about corporate finance as I would expect from a publication called "Left Foot Forward".


Why do the lenders that lend $1B to a pizza company deserve their money back? Didn't they see the scammy nature of the operation?


Do the lenders lend that $1B to the pizza company, or did they lend it to the hedge fund, which then transferred the debt to the pizza company? If the latter, I think the hedge fund should be considered the lender to the pizza company so they're on the hook when the pizza company goes bust.


This is what really killed Toys R Us.

PE firms essentially made TRU borrow shit tons of money from them at ridiculous rates to buy itself from public shareholders, then eventually they couldn't keep up with the interest payments.

At the time of the buyout, Toys R Us was in a sales slump, but they were still making a profit and continued making a profit until the very day they closed their doors.


Company management decided to borrow money at a bad time. You phrased that in really weird way to make it sound like some sinister external force is making them do things against their will.


If feels sinister because the company didn't need to borrow money.

A business that was adequately servicing investors, employees, and customers, has been destroyed because a small group tried to extract more wealth from the company than it could sustain.

But I would probably agree with you that just because something feels sinister, doesn't mean that it actually is. And "Toys R Us" would have been destroyed by Amazon within the decade no matter what. Gary Vanderchuck talked about how terribly poor the management was, and their failure to do any significant innovation or participate meaningfully in any of the trends around children's entertainment.


It was sinister.

Bain, KKR, and Vornado borrowed money to "buy" the company then saddled the debt with the purchased company. So in a way, they did force them.

The shareholders and board members prior to the buyout made out like bandits, which is all they wanted.

Toys R Us couldn't keep up with the interest payments on loans from Bain and KKR. Not to mention "advisory fees" and whatever bullshit they charged Toys R Us with. That's what put them under. Not lagging sales. Not bad business. Being "bought" by sinister people.


If feels sinister because the company didn't need to borrow money.

A business that was adequately servicing investors, employees, and customers, has been destroyed because a small group tried to extract more wealth from the company than it could sustain.


It looks almost like fraud, an exploit using an edge condition.

* Buy a working company.

* Borrow a ton of money, siphon it out.

* Bankrupt the company which is liquidated for much less than the amount borrowed.

* The lenders are left holding the bag.


Hedge funds and Private Equity are entirely different beasts


You can't just transfer debt like that. Otherwise I could go take out a mortgage and transfer it to a homeless guy for beer money.




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