There’s been considerable gnashing of teeth over the downfall of the venerable American bed maker, Simmons. Having helped people sleep better for more than 135 years, the company answered to five different private equity masters before tumbling into insolvency under its most recent owner, Thomas H Lee Partners.
Cue an outbreak of PE-bashing: are these people not just barbarians by any other name? Here’s David Weidner, writing recently in the WSJ:
Simmons’ lenders stand to lose $575 million. The company cut 20% of its workforce last year. Although Simmons has added new factories in anticipation of better times, it is adding only 100 new jobs.
Companies such as Travelport and Simmons had it rough before the economy turned sour. Now that we’re in the Great Recession, they struggle to meet even the most basic obligations — after paying their respective private-equity owners.
Even if private-equity firms such as Blackstone, Kohlberg Kravis Roberts & Co. and Carlyle Group bring efficiencies and profits to the companies they buy, the unfortunate truth is that much of those profits aren’t returned or reinvested in those companies.
But is it fair to take such a broad swipe at the whole PE industry?
Kevin Cassidy, a senior credit watcher at Moody’s, has compared the experience of two mattress makers who’ve done the private equity go-round - Simmons and its arch rival Sealy Mattress, which was owned by KKR before being re-floated.
In summary, KKR was able to monetise its investment in Sealy through an IPO that simultaneously improved the capital structure of the mattress maker; Thomas H Lee, meanwhile, monetised its interest in Simmons by taking several dividends which left the company highly levered and more vulnerable to an economic downturn. Says Cassidy:
Sealy has largely weathered the economic crisis that accelerated last fall, with a two-notch downgrade of its credit rating. The more levered Simmons has seen its credit rating drop four notches, missed interest payments, and announced that it would file for bankruptcy and be acquired by another private equity firm.
In fact, Simmons really does look something of a disaster. Bond holders that funded about $375m paid to Thomas H Lee are likely to receive less than 5 per cent from the firm’s bankruptcy plan. The new owners, Ares management and Teachers Private Capital, already control National Bedding, best known for its Serta mattresses. But here’s the detail on the bondholder near-wipe out:
As part of the restructuring plan, Simmons will launch a process to solicit votes for a pre-packaged bankruptcy plan, which will reduce its total indebtedness to approximately $450m from $1bn. Under the plan, senior bank lenders ($540m) will be repaid in full, while senior subordinated note holders will receive $190m of the $200m principal due and the discount note holders will receive $15m of the $261m principal due, which can be paid either in cash or in equity of the new holding company. Holders of the $300m Super Holdco PIK Toggle loan will not receive any compensation under the restructuring plan.
So, all those holding the super holdco PIK-toggle loan thingies can take a hike, eh? Who’d have thought.
Related links:
Private equity deals hit the buffers - FT
Private equity’s love affair with leverage - FTfm
Private equity industry is still on the sidelines - FT
