💥KKR Effectively Tells Bernie Sanders to Pound Sand💥

Toys R Us (Short Severance Payments)

Toys R Us (Short Severance Payments). Ok, this is getting out of hand. Shortly after Dan Primack wrote that KKR ought to pay for 30,000 employees’ severance OUT OF THE GOODNESS OF KKR’S HEART, Pitchbook jumped in parroting the same nonsense.

Look. Don’t get us wrong. Long time readers know that we’ve been hyper-critical of the PE bros since our inception. But this is just ludicrous already. In “💩Will KKR Pay Toys' Severance?💩” and again in “🔥Amazon is a Beast🔥” we noted that “[t]here’s ZERO CHANCE IN HELL KKR funds severance payments.” We stand by that. Without any legal compunction to do so, these guys aren’t going to just open up their coffers to dole out alms to the affected. That’s not maximizing shareholder value. Those affected aren’t exactly future LPs.

But wait. This keeps getting better.

On Friday, The Wall Street Journal reported that on July 5:

Nineteen members of Congress sent a letter to the private-equity backers of Toys “R” Us Inc. questioning their role in the toy retailer’s bankruptcy and criticizing the leveraged-buyout model as an engine of business failure and job loss.

The letter’s content? Per the WSJ:

It asks whether the investment firms deliberately pushed Toys “R” Us into bankruptcy and encourages them to compensate the roughly 33,000 workers who lost their jobs.

Take a look at this letter. It demonstrates an utter lack of understanding of how private equity works.

Meanwhile, Congress cannot get the President of the United States to turn over his tax returns with the entire country waiting for that to happen and yet we’re supposed to believe that a letter will compel KKR to make severance payments. Utterly laughable. KKR owns those fools and they know it. Okay: maybe not Bernie Sanders.

Imagine the response:

“Um, yes, Representative Poindexter. We did. We deliberately flushed hundreds of millions of dollars of equity checks down the toilet. We hear that makes a compelling marketing message to potential LPs of our next big fund.”

Thankfully, you don’t have to imagine the response because KKR already responded. Per the WSJ:

KKR issued a response dated July 6 stating that Toys “R” Us’s troubles were caused by market forces—specifically the growth of e-commerce retailers—and that the decision to liquidate was made by the company’s creditors, not KKR, and was against the firm’s wishes.

Furthermore:

KKR stated in its response that it reinvested $3.5 billion in Toys “R” Us over the course of its ownership and didn’t take any investment profits. It added that it wrote down its entire equity investment of $418 million and challenged reports that it had earned a profit on the investment.

“Even accounting for fees received from Toys ‘R’ Us, we have lost many millions of dollars. To find anyone who profited, one would need to look at the institutions that pushed for Toys to liquidate its U.S. business,” the firm wrote.

In other words: “Pound sand, Sanders.”

Divided Recaps Under Attack in Payless Holdings Case

Niiiiiiiiiice. We're impressed that Reuters and Bloomberg both picked up on something that happens - or at least appears to happen - often in bankruptcy cases: a conflict. 

Here's the drill: the official committee of unsecured creditors (UCC) in the Payless Holdings LLC case filed an application seeking to employ The Michel-Shaked Group as expert consultants. The mandate included providing "expert consulting services and expert testimony regarding the Debtors' estates' claims relating to the pre-petition dividend recapitalizations and leveraged buyout, including solvency and capital surplus analysis." As a quick refresher, Payless' private equity overlords Golden Gate Capital and Blum Capital dividended themselves hundreds of millions of dollars of value via debt incurred - albeit under relatively low interest rates - on the company's balance sheet. The company's debt load - in addition to various other factors characteristic of retail players today - was a major factor in the company's eventual bankruptcy filing.

Payless Holdings LLC - through Munger Tolles & Olson LLP ("MTO") as counsel to "the independent director of the Debtors" - subsequently objected to the UCC's application. The independent director (the "ID") claimed that the application is, at a maximum, duplicative of the services to be rendered by another UCC professional and at a minimum, premature. Why premature? Well, because the ID is conducting, through MTO, his own investigation into the dividend recapitalization claims the company might have against the private equity firms. That investigation is ongoing. Having a simultaneous analysis runs the danger of not only being duplicative and premature but also hindering the Debtors' aggressive proposed timeline for emergence from bankruptcy. 

As loyal readers of PETITION know, we're big fans of the (shadiness of the) dividend recap and, as such, we really enjoyed Bloomberg's snark: "That's right, someone close to private equity is investigating private equity firms for doing a very private equity thing." To be clear, separate counsel at the direction of an independent director is investigating the private equity firms. But, close enough. 

Let's pull the thread. Payless' main counsel, Kirkland & Ellis LLP, does a ton of private equity work - including, upon information and belief, work for the private equity sponsors implicated here. According to its own retention application, K&E has been representing Payless since 2012 as general corporate counsel. The private equity transaction dates back to 2012. Curious. K&E began representing the Debtors in connection with restructuring matters in November 2016; its engagement letter is dated January 4, 2017. 

The ID presumably got his mandate because he has "served as an independent or disinterested director for various companies in financial distress and restructurings." Among his qualifications are four other current director engagements including iHeartMedia Inc. and Energy Future Intermediate Holding Company LLC. Recognizing that the recap might be at issue, the ID hired separate counsel shortly after joining the board in January 2017 - right around the same time that K&E got hot-and-heavy on the restructuring side (if the engagement letter date is any indication). 

So, to summarize, K&E and management have been working with the private equity owners for five years. During that time, the dividend recaps occurred. The ID came on board right around the same time that K&E's restructuring team got enmeshed with the company. The same ID has a board portfolio of 5 directorships, 60% of which are for companies that are using K&E as restructuring counsel as we speak. Meanwhile, we have to assume that the ID gets paid tens of thousand of dollars for each board mandate with, perhaps, some equity consideration thrown in for good measure. Defensively, the objection drops a nice little footnote to assure us all that the ID is truly independent:

From the Debtors' Objection to the Shaked Application.

Perhaps the benefit of the doubt ought to be given to the ID and approval of the Shaked application delayed until after the ID completes his investigation. After all, if he comes down against the private equity shops, the application is moot. On the flip side, well, he won't. Notably, the objection already lays the case that the company relied in its business judgment on the opinions of Duff & Phelps, which issued a solvency opinion and presentation at the time of the transaction(s). Naturally, the UCC won't believe it and will push, again, for this engagement. Presumably, the company will jam them with the "train has left the station" defense. The upshot: if we were litigating this on behalf of the UCC we would certainly call into question the actual "independence" of the investigation sooner rather than later and see if the Judge bites. If done tastefully and in a way that doesn't impugn the character of the ID (which we are in no way advocating), it will at least somewhat offset the impression the Debtors are leaving with the Duff & Phelps bit and plant the seed in the Judge's mind for consideration upon the results of the investigation.

The hearing on the matter was scheduled for May 31 but was subsequently pushed indefinitely.