As briefly alluded to yesterday morning, Simmons expects to file Chapter 11 “soon”
Simmons says it will soon file for bankruptcy protection, as part of an agreement by its current owners to sell the company — the seventh time it has been sold in a little more than two decades — all after being owned for short periods by a parade of different investment groups, known as private equity firms, which try to buy undervalued companies, mostly with borrowed money.
For many of the company’s investors, the sale will be a disaster. Its bondholders alone stand to lose more than $575 million.
This just makes no sense. My guest bedroom has a Simmons mattress in it that has to be one of the nicest things I have ever laid on, and that’s including some old girlfriends. And the joker wasn’t cheap, either. What wrecked this purveyor of fine sleepware?
But Thomas H. Lee Partners of Boston has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company’s fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise.
So, basically, Gordon Gekko. Over and over again, as the company was sold, loaded up with debt, re-sold, loaded up with more debt, et cetera, until it carried over a billion dollars in debt which it now plans to shed in its planned bankruptcy filing. Through clever (if unethical) dealmaking, the firms who did the buying and the loading are all making off with tidy profits while the bondholders who ultimately purchased the company’s debt will see that money vanish. Or, in other words:
These private investors were able to buy companies like Simmons with borrowed money and put down relatively little of their own cash. Then, not long after, they often borrowed even more money, using the company’s assets as collateral — just like home buyers who took out home equity loans on top of their first mortgages. For the financiers, the rewards were enormous.
Maybe more like house flippers, except not on Flip This House where everything works out well in the end but more like on The Property Ladder where nothing ever works out as planned and that tall lady looks on and shakes her head because seriously, are people really this stupid? The difference is that THL and others were able to charge the company hefty fees for the privilege of buying and running the company, so they made out like bandits while the company found itself leveraged more and more to pay these fees. So far as I know, house flippers have yet to come up with a way to charge fees from the house they are flipping.
It makes exactly as much sense as me charging Citi a million dollars every time I make fun of them, which I really need to start doing.
Martin // Oct 7, 2009 at 6:15 am
Your comment reminds me of the classical toast: “To our wifes and girlfriends, and may they never meet!”
Phil // Oct 8, 2009 at 11:10 am
Actually, this scam seems more similar to the one run by the mortgage writers than the mortgage buyers. That worked something like this:
1. Use capital to write a bunch of mortgages.
2. Pool said mortgages into ABS bonds. Continue to collect fees for administering mortgages.
3. Split the revenue from the ABS bonds into different categories: principal, interest, straight pass-through; collect fees for this structuring.
4. Create ABS CDO structure on whatever ABS structured securities couldn’t be sold; collect fees for doing this. Sell AAA tranches to investors, keep equity tranche.
5. Roll unsold mezzanine tranches into CDO CDO. Collect fees for doing this. Loop back step 4 a few times
6. By now you have recovered almost all of your capital used in step 1. Return to step 1 and repeat.
In theory the retention of the “first loss” equity tranches was supposed to keep you honest, but in reality the “first profit” position represented by the various fees was larger – you couldn’t lose. Also – once the equity tranche is wiped out, you no longer have skin in the game. And your guaranteed upside is multiplied by enormous leverage.
mr_clueless // Oct 9, 2009 at 12:20 pm
They too deserve to go out of business considering they build products with all kinds of hazardous chemicals in them.
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It makes exactly as much sense as me charging Citi a million dollars every time I make fun of them, which I really need to start doing.
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Indeed Bandit used to be on here every other day and now I haven’t seen him in while which is a bit of a bummer.