For Bain Capital Private Equity, distress has come to five of the leveraged buyout deals it made in the early 2000s, but the private equity firm's finances are likely to weather any fallout just fine.
The year started out with the bankruptcy filing of Gymboree Corp. and is wrapping up with the Chapter 11 of Toys "R" Us Inc. -- Bain investments from 2010 and 2005, respectively. Three other Bain companies, Guitar Center Inc., TOMS Shoes Inc. and iHeartMedia Inc., are each experiencing distressed financials, according to ratings agencies.
Privately-held Bain declined to comment on whether these investments have had or could have any effect on its bottom line, nor does the company file publicly financial documents that could show how something like the collapse of any of these deals could change the firm's financial picture.
Experts said that distress among five portfolio companies isn't likely to create any serious problem for Bain.
"I doubt if this is going to have a major impact on its business," said Stephen Moyer, adjunct professor at the University of Southern California and author of Distressed Debt Analyst, explaining that "investors tend to always focus on the performance of the more recent funds."
In addition, most people are writing off the performance of private equity investments made between 2005 and 2007, Moyer said. Generally, funds from that period "have had subpar performance. Investors view it as a bad vintage."
Of these five, two fall into those years, Toys "R" Us and Guitar Center, and the iHeart deal closed just after, in July 2008.
Further, the very nature of Bain's investment in these companies protects it from major losses -- the deals were leveraged buyouts.
Georgetown professor Adam Levin explained recently in a Huffington Post op-ed regarding leveraged buyouts: "To be sure, private equity firms will lose most or all of their investment in the bankruptcy, but don't feel too bad for them. The private equity firm isn't on the hook for the debt incurred in the LBO. Moreover, the private equity firm's losses are offset by the management fees it has been charging for all the years prior to the bankruptcy as well as by the gains on successful LBOs."
Even in the rapidly changing retail environment, Bain has seen success with recent investments such as Canada Goose Inc., a winter coat maker, and home retailer Bob's Discount Furniture. Further, Burlington Coat Factory and Michael's, both LBOs from 2006, have been positive stories for Bain from the pre-recessionary period. When Burlington went public in 2013, Bain more than quadrupled its investment, according to The PE Hub Network. And Fortune reported that Bain's and partner The Blackstone Group's $1 billion investment in Michael's reached a value of $3.25 billion when the craft supply seller went public in 2014.
Additionally, Bain has made moves to protect some of these investments.
The company bought some of Gymboree's bonds when they began trading at distressed levels, according to Bloomberg, debt that allowed it to recover something in the bankruptcy. It also transferred assets under the iHeartMedia umbrella, causing lenders to sue saying $1.241 billion had been removed from their collateral package.
"Distressed is not about fairness," Moyer said. "It is usually a zero-sum game where both sides are pursuing their self-interest."
Here's a look at the situation with each company.
Recently, Guitar Center -- the music instrument mega store -- was downgraded by Moody's Investors Services a notch further into junk -- to B3 -- as 2019 maturities linger on the balance sheet. The ratings firm said that further ratings actions will focus on whether the company is able to refinance those debt obligations, which include a $375 million credit facility and $615 million in 6.5% senior bonds, both of which mature in April 2019.
The downgrade by Moody's (the second it's taken on Guitar Center this year) follows a report by Reuters in July that is looking for ways to restructure its $1.3 billion debt load. The rating firm said that Guitar Center isn't likely to generate cash flow over the next year as music instrument sales are challenged in a tough retail environment. The company didn't respond to request for comment.
Bain acquired Guitar Center in 2007 with no partners in a $1.6 billion leveraged buyout. However, the firm exited the majority of its stake in 2014. Ares Capital Management that year agreed to swap $535 million in debt for a 60% stake in Guitar Center.
TOMS, a socially-conscious, hip shoe company, is the most recent of these Bain investments. The firm took a 50% stake in the company in 2014 for $300 million, all of which was debt.
In August, S&P Global Ratings said that after a weak quarter it believed TOMS' recovery would be difficult given its own current trends and the broader weakness in the retail market, calling the capital structure "unsustainable" and downgrading it to CCC+ with a negative outlook. A Sept. 20 report by Fitch Ratings Inc. said that TOMS was one of several retailers it believed could default before the end of 2017. According to Moody's, which holds a stable outlook on TOMS, the company has $306.5 million in senior term debt due in 2020. A representative for TOMS couldn't be reached for comment.
IHeartMedia, the former Clear Channel, is the standout among Bain's investments for its sheer size. Bain, alongside partner Thomas H. Lee, took the company private in 2008 in a $24 billion transaction in 2008.
The deal has left the company with more than $20.4 billion in debt, more than $8 billion of which matures in 2019.
For most of 2017, the company has been extending the acceptance date on a poorly subscribed tender offer -- without explanation as to the ultimate goal. The offer follows litigation with creditors of its Clear Channel Outdoor subsidiary, the publicly traded billboard advertising arm of its business, that alleged the company illegally transferred away collateral backing their loan.
IHeart declined to comment for this story.
IHeart files public financials, which showed that it is subject to a management and financial advisory agreement with Bain and Thomas H. Lee until 2018. The agreement requires that iHeart pay no more than $15 million a year for those services and in the first half of 2017 it paid $7.6 million in management fees and reimbursable expenses.
Gymboree was the first Bain investment to enter bankruptcy in 2017, filing June 11.
The company entered with a plan to be in and out of bankruptcy quickly, already having negotiated with lenders, and executed that plan -- concluding its bankruptcy case on Sept. 29.
Following that, Gymboree is no longer a Bain portfolio company. The new owners are a group of term loan lenders that swapped their debt for ownership of the company. That group includes Carriage House Capital, Brigade Capital Management, OppenheimerFunds Inc., Searchlight Capital Partners and others.
The company declined to comment further for this story.
Bain acquired Gymboree without any partners in 2010 in a $1.8 billion leveraged buyout.
According to that company's financials, during the second half of 2016, Gymboree paid $1.5 million in management fees and reimbursements to Bain, and owed another $1.4 million, with the majority of that the result of the sale of Gymboree Play & Music.
Toys "R" Us entered bankruptcy on Sept. 18, under the weight of $7 billion in liabilities. The debt stemmed from Bain's acquisition, alongside KKR & Co. and Vornado Realty Trust, of the company in 2005 in a $6.6 billion leveraged buyout. Bain didn't take dividends but, along with its partners, received up to $6 million a year in management fees.
The company was forced to file for bankruptcy on a shortened timeline, after news that the company was considering bankruptcy leaked out in media reports. Vendors reacted by demanding cash upfront for deliveries, causing a liquidity crunch that Toys couldn't sustain. Toys declined to comment on this story.
It hasn't proposed a plan in bankruptcy yet, but has secured a $3.13 billion bankruptcy financing package that will allow the company to stock shelves through its all-important fourth quarter. During the holiday shopping season, the company is expected to bring in nearly $5 billion in sales, or 43% of its revenue for the year.
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Editors' pick: Originally published Oct. 15.