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Private Equity. Instant Pot had great cashflow but slowing sales, so the PE owners issued $450M in new debt and then immediately paid out $250M in dividends to

Private Equity. Instant Pot had great cashflow but slowing sales, so the PE owners issued $450M in new debt and then immediately paid out $250M in dividends to themselves resulting in the company carrying 8x leverage compared to the 4x it had prior to the financial engineering. Further slowing sales and all the cash being stripped from the company ends up with bankruptcy every time.

youainti 3y ago
Really disappointed that this happened.
falcolas 3y ago
I'm apparently stupid. I can't understand how that can be even remotely legal.
- soganess 3y ago
  I know basically nothing about this, but hear money peeps talking about it all the time like it is common practice. Some version of it happened to the B&M store Clarie's.
- taylodl 3y ago
  The company's officers are in on the take. Legally they can take these actions on behalf of the company, as long it's clear and in the open.
  - pavon 3y ago
    It is the bankruptcy part that I don't understand the legality of. Parent company pulls a ton of money out of subsidiary, claims bankruptcy, then magically parent company isn't liable for subsidiary's debt?
    - Zigurd 3y ago
      PE isn't a parent company. LBO debt is debt carried by the acquired company. So there is no sleight of hand in bankruptcy. The poison is already in the acquired company's bloodstream.
      - mikeyouse 3y ago
        Yep, all correct. The sleight of hand comes just before bankruptcy when the assets are stripped and sold to a different entity so the debtholders are screwed with worthless assets and are stuck filing longshot lawsuits to recover assets while the ghouls who raided the company invest their ill-gotten proceeds while tying the mess up in court for years. https://archive.is/LsqUp https://archive.is/LsqUp
No1 3y ago
Who in their right minds lends to a PE-owned company? You know they’re going to raid the piggy bank and leave the lender holding the bag. There can’t be that many rubes with $450 million laying around. Are the investors government pension funds or something?
- civilitty 3y ago
  Just another in a long list of the awful long term consequences of zero interest rate environments interacting with the principle-agent problem. The people approving these loans get to report better quarterly numbers and by the time the chickens come home to roost, they’ve already moved on.
- Zigurd 3y ago
  LBO lenders charge high rates. This means a loan that eventually settles for less than face value can still be more profitable than a low-interest loan that gets paid off on schedule.
- deleted 3y ago
  [deleted]
- hef19898 3y ago
  I guess those loans are rather quickly sold on to third parties, either as bundles or stand alone. Kind of like what happened to MBS, mortgage backed securities.
  - ajsnigrutin 3y ago
    Also, a lot of the time, the government will bail them out, and they can continue doing that.
rossjudson 3y ago
You've got a few numbers there, and I'm really really curious about the whole story. Besides killing the company/jobs, the debt-holders are left holding the bag?
- Nifty3929 3y ago
  No reason to think the company or jobs are in jeopardy. Maybe they are, maybe not. The really bag-holders are the lenders who will take a haircut. Most companies emerge from bankruptcy stronger than before, having never ceased operations. From the article: "Broadly speaking, the CCAA is the Canadian equivalent of Chapter 11 of the U.S. bankruptcy code. Companies enter both processes when they are seeking the court's help to protect them from their creditors while they try to come up with a way to restructure the business and continue to operate."
- mikeyouse 3y ago
  Yep, pretty much. PE Owners get rich(er), debtholders get wrecked, employees lose their jobs, any assets (pension contributions etc) are given to the debtholders. The company will likely continue to exist and Instant Pots will still be made/sold, but with a much smaller footprint in the future. The linked article talks to management about how unsustainable the $500 million in debt is without noting that it was half of that amount until these jokers took out loans worth $450M to gave themselves $250M.

youainti 3y ago

Really disappointed that this happened.

falcolas 3y ago

I'm apparently stupid. I can't understand how that can be even remotely legal.

soganess 3y ago
I know basically nothing about this, but hear money peeps talking about it all the time like it is common practice. Some version of it happened to the B&M store Clarie's.
taylodl 3y ago
The company's officers are in on the take. Legally they can take these actions on behalf of the company, as long it's clear and in the open.
- pavon 3y ago
  It is the bankruptcy part that I don't understand the legality of. Parent company pulls a ton of money out of subsidiary, claims bankruptcy, then magically parent company isn't liable for subsidiary's debt?
  - Zigurd 3y ago
    PE isn't a parent company. LBO debt is debt carried by the acquired company. So there is no sleight of hand in bankruptcy. The poison is already in the acquired company's bloodstream.
    - mikeyouse 3y ago
      Yep, all correct. The sleight of hand comes just before bankruptcy when the assets are stripped and sold to a different entity so the debtholders are screwed with worthless assets and are stuck filing longshot lawsuits to recover assets while the ghouls who raided the company invest their ill-gotten proceeds while tying the mess up in court for years. https://archive.is/LsqUp https://archive.is/LsqUp

No1 3y ago

Who in their right minds lends to a PE-owned company? You know they’re going to raid the piggy bank and leave the lender holding the bag. There can’t be that many rubes with $450 million laying around. Are the investors government pension funds or something?

civilitty 3y ago
Just another in a long list of the awful long term consequences of zero interest rate environments interacting with the principle-agent problem. The people approving these loans get to report better quarterly numbers and by the time the chickens come home to roost, they’ve already moved on.
Zigurd 3y ago
LBO lenders charge high rates. This means a loan that eventually settles for less than face value can still be more profitable than a low-interest loan that gets paid off on schedule.
deleted 3y ago
[deleted]
hef19898 3y ago
I guess those loans are rather quickly sold on to third parties, either as bundles or stand alone. Kind of like what happened to MBS, mortgage backed securities.
- ajsnigrutin 3y ago
  Also, a lot of the time, the government will bail them out, and they can continue doing that.

rossjudson 3y ago

You've got a few numbers there, and I'm really really curious about the whole story. Besides killing the company/jobs, the debt-holders are left holding the bag?

Nifty3929 3y ago
No reason to think the company or jobs are in jeopardy. Maybe they are, maybe not. The really bag-holders are the lenders who will take a haircut. Most companies emerge from bankruptcy stronger than before, having never ceased operations. From the article: "Broadly speaking, the CCAA is the Canadian equivalent of Chapter 11 of the U.S. bankruptcy code. Companies enter both processes when they are seeking the court's help to protect them from their creditors while they try to come up with a way to restructure the business and continue to operate."
mikeyouse 3y ago
Yep, pretty much. PE Owners get rich(er), debtholders get wrecked, employees lose their jobs, any assets (pension contributions etc) are given to the debtholders. The company will likely continue to exist and Instant Pots will still be made/sold, but with a much smaller footprint in the future. The linked article talks to management about how unsustainable the $500 million in debt is without noting that it was half of that amount until these jokers took out loans worth $450M to gave themselves $250M.