Private Equity looters and Donald Trump bankrupt 202-year-old Remington

Remington Arms was founded in 1816 (Wikipedia). It survived ups and downs in the U.S. economy until the private equity looters got their hands on it starting in 1993. After the extraction of roughly 200 years of built-up enterprise value, the debt-laden company was fragile and had a tough time weathering the Trump Firearms Slump (see “Cerberus’s Remington Debt Fizzles as Trump Cools Firearms Fervor”). Now it is time to cheat all of the bondholders via a Chapter 11 bankruptcy filing: “U.S. gunmaker Remington seeks financing to file for bankruptcy: sources” (Reuters).

When will investors learn not to buy bonds from these crippled-by-private-equity companies?

[How does private equity looting work? PrivateCo “buys” a company from the existing shareholders for $300 million. Then the company borrows $800 million, of which $750 million is paid to PrivateCo as advisory or management fees and/or dividends (PrivateCo is the only shareholder). A few years later it turns out that the company can’t pay principal and interest on the $800 million in debt so it is time to go Chapter 11 and wipe out the bondholders. That’s the classical approach, but it needs to be disguised a bit so that the bondholders can’t sue. Donald Trump actually tried to shut down this party by (a) making private equity guys pay taxes at the same rates as everyone else (closing the “carried interest” loophole), and (b) eliminating the deductibility of interest for corporations. Congress, however, wouldn’t go along. It is tough to see what value is created via leveraging up these ancient companies. If an investor wanted a leveraged investment in a stodgy company, he or she could simply buy the stodgy company on margin.]

11 Comments

  1. eb

    February 9, 2018 @ 7:17 pm

    1

    Why don’t lenders recognize this scam?

  2. eb

    February 9, 2018 @ 7:28 pm

    2

    The obvious answer is that the company name is old and revered. This is remarkably similar to scammers who look for inactive eBay accounts with positive reputations to crack, for the purpose of “selling” goods they will never deliver.

  3. Jack

    February 9, 2018 @ 11:23 pm

    3

    Really got this one figured out — the institutional investors, pension funds and endowments who buy the debt of leveraged companies have all been conned because none of them can read a financial statement and the senators who think financing is a real cost of running a business are all knuckleheads.

  4. SuperMike

    February 10, 2018 @ 1:24 am

    4

    It’s sad. Where will we get our guns?

  5. CHenry

    February 10, 2018 @ 8:41 am

    5

    Although Remington Outdoor is venerable, and with a decent brand portfolio, it’s hard to believe any small arms manufacturer in the developed world should be worth that much of a multiple of its purchase price. It makes you believe private equity-owned corporate bonds should be junk-rated, but are they?

  6. Poika

    February 10, 2018 @ 10:07 am

    6

    No offense, but if it is so simple and straightforward then why do you not become a millionaire/billionaire? Every bank(s)ter will grant the seed loan for such a 100% assured endeavor.

  7. philg

    February 10, 2018 @ 10:48 am

    7

    SuperMike: This is Chapter 11 reorganization (stealing from creditors), not Chapter 7 (liquidation). So the company will continue making guns. See https://en.wikipedia.org/wiki/Chapter_11,_Title_11,_United_States_Code

    CHenry: I think that a junk rating is common. Cerberus also owned Chrysler at one time, for example: http://www.leftlanenews.com/chrysler-rated-junk-bond-by-moodys-sp.html

    Poika: That’s a great question! I think that going to Harvard Business School or similar is a prerequisite for this scam as well as the McKinsey/Enron-style scam.

  8. VV2

    February 10, 2018 @ 12:45 pm

    8

    Phil, What is the McKinsey angle? Any posts you’ve written on this, or other material to read?

  9. philg

    February 10, 2018 @ 12:56 pm

    9

    Just do a quick Google search for “McKinsey Enron” and you will find plenty!

    http://www.independent.co.uk/news/business/analysis-and-features/mckinsey-how-does-it-always-get-away-with-it-9113484.html

    https://www.theguardian.com/business/2002/mar/24/enron.theobserver

    https://www.newyorker.com/magazine/2002/07/22/the-talent-myth (by the dreaded Malcolm Gladwell): “The one Enron partner that has escaped largely unscathed is McKinsey, which is odd, given that it essentially created the blueprint for the Enron culture.”

  10. Patrick M O'Keefe

    February 10, 2018 @ 3:34 pm

    10

    Hi eb,
    Good question!
    Here’s my speculation. The decision-makers at the buying institution are professionals who may actually understand this process very well. They make deals with the private-equity seller, which are structured to look good for the expected employment tenure of the of buyer professional. The buyer professional has moved on to another position before the deal melts down – perhaps even over to the sell side. The large institutions which are being represented have vast endowments, these deals are only a small part of their portfolio and at any given time, some of the will actually look good on their financial statements.
    Or something.

  11. G. Ranma

    February 10, 2018 @ 8:37 pm

    11

    Don’t forget that to a bank, loans are assets and deposits are liabilities.

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