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Indelicato Discusses Private Equity Realizing Higher Yields Through Bankruptcies with Law.com
June 16, 2023
Mark Indelicato, Thompson Coburn New York managing partner, spoke with Law.com on the growing trend of private equity sponsors seeking higher yields through bankruptcy. The article, “Sponsors Are Getting More Aggressive' as Private Equity Turns to Bankruptcy to Increase Yields,” was published June 16, 2023.
Law.com reports that, as a debtor, Retailer Instant Brands is emblematic of the financial distress permeating the sector. The company filed for Chapter 11 earlier in the week after initially benefiting from the rise of consumer spending during the pandemic, but ultimately succumbing to what their filing characterizes as supply-chain issues, inflation, high interest rates and shortened payment terms from suppliers and vendors.
In what some describe as a bold maneuver, Law.com says, Instant Brand’s private equity sponsor Cornell Capital had included provision of $257 million in debtor-in-possession financing contingent on the repayment of a $55 million promissory note Cornell issued Instant Brands in January.
In the article, Indelicato said that, typically, such a repayment would occur at the end of a bankruptcy, so asking for it from the outset prevents any of the $55 million from going to unsecured creditors.
“You usually see that subject to entry of a final order, but baking it into the interim order—that’s a little bit more aggressive,” Indelicato told Law.com, adding that private equity firms are increasingly using bankruptcies amid high interest rates to cleanse their balance sheets.
“You blame the bankruptcy on high interest rates and supply-chain issues. It doesn’t tarnish the brand reputation at all,” he said. “Private equity players and hedge funds are using bankruptcy affirmatively to ultimately increase their yields down the line.”
With some exceptions, Indelicato observed, the restructuring industry is nowhere near its Great Recession peaks.
“I think we’re going to see more bankruptcies impacted by liquidity of consumers like real estate, retail, and the leisure industry, but as a whole I don’t think you’re going to see the wholesale unemployment increases associated with 2008,” Indelicato said.