Taking Stock of Bankrupt Portfolio Companies

Today both Dealscape Blog and Buyouts took stock of the 20-plus LBO-backed bankruptcies of 2008.

The stories are particularly timely, since another one bit the dust today. As predicted by the NY Post, Goody’s filed for Chapter 11 in the U.S. Bankruptcy Court in Delaware. Backed by Prentice Capital Management, the clothing store operator is the seventh LBO-backed retail business to go under this year.

Thus far we have: Apollo Management’s Linen’s ‘n Things, Highland Capital Management’s Home Interiors & Gifts, NRDC Equity Partners’s Fortunoff, and Sun Capital Partners’s Lillian Vernon, Wickes Holdings, and Sharper Image.

Of the six, most will liquidate (Sharper Image, Lillian Vernon, Wickes, and Fortunoff will sell or have sold their assets.) Sharper Image is selling its assets because the terms of its DIP loan were too restrictive to continue as a going concern. DIP loans are typically secured by assets; nowadays most of an LBO-backed company’s assets are tied up with second lien lenders. That doesn’t leave much left for a DIP lender to secure. It’s making DIP loans harder to score, and when a bankrupt company finds one, they’re full of strict covenants.
Thanks to obvious headwinds like a softening economy, rising commodities costs, and the housing crisis, LBO-backed businesses related to the retail, transport and construction industries have been hit the hardest.

Dealwatch outlines each PE-backed Chapter 11 situation with a handy timeline; Buyouts’ feature outlines the differences between workouts in this cycle and the last, accompanied by a detailed chart highlighting 23 LBO-backed bankruptcies, including the sector and reasons cited for each filing.

Articles:
Buyouts: Firms Grapple with New Chapter 11 Playbook (sub. required)
Dealscape: Dealwatch: PE-backed bankruptcies (sub. required)
NY Post: Goody’s in Utter Tatters