Analysis: Remington's Bankruptcy Draws Spotlight on Private Equity's Financial Engineering

When private-equity firm Cerberus Capital Management bought Remington in 2007, sales were strong and the future bright, according to a New York Times analysis. A decade later, Remington couldn’t escape its debts and had to file for chapter 11 protection. In order to buy Remington, Cerberus created a new entity, a holding company. Instead of Cerberus buying a gun company, it put money into the holding company, and the holding company bought Remington. The entities were related, but each could borrow money independently. In 2010, Cerberus had the holding company borrow $225 million from an undisclosed group of lenders, most likely hedge funds. Because this loan was risky — the lenders would be paid only if Remington made a lot of money or was sold — the holding company offered a generous interest rate of around 11 percent, much higher than a typical corporate loan. When the interest payments were due, the holding company paid them not in cash but with paid-in-kind (PIK) notes. The holding company spent most of the $225 million buying back its own stock, effectively transferring all the borrowed cash to Cerberus. In April 2012, Cerberus had Remington borrow hundreds of millions of dollars and use it to buy the holding company’s debt, effectively transferring responsibility for the principal and the interest payments onto Remington. Because the operating company borrowed the money with a normal loan — and not with PIK notes — interest payments were required in cash. Suddenly Remington was carrying hundreds of millions of dollars in debt that, if it could not be paid, would cause the business to go bankrupt. After the 2016 election, researchers at Cerberus saw an omen in their data. Applications through the National Instant Criminal Background Check System, which are known as “NIC checks,” were dropping by double-digit percentages. A plunge in NIC checks foreshadows a corresponding plunge in gun sales, which is what happened in the months that followed. Remington’s profit slid toward zero. Remington had been loaded with debt; now it couldn’t pay the interest. Banks controlling the debt made a proposal: They would exchange the money they were owed for an ownership stake in Remington via a “debt-for-equity swap” in chapter 11 bankruptcy. This arrangement would allow Remington to stay running, albeit under distant ownership, until a plan could be drawn up for its future, such as a sale or a liquidation of assets.

Puerto Rico Governor Requests Fiscal Board Be Removed as Representative in Restructurings

While Gov. Ricardo Rosselló praised the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) for providing tools to facilitate the island’s debt restructuring, he said that the panel should not meddle in the government’s affairs and should be removed as representative of the debtors in the commonwealth’s bankruptcy process, Caribbean Business reported today. Rosselló testified at a U.S. House Natural Resources Committee hearing today that was analyzing PROMESA and the operations of the oversight board it established. He said a “naïve and problematic” narrative exists that the island’s government is not doing its job, that the government refuses to carry out structural reforms, and that the oversight board is the solution to address said mismanagement. He listed structural reforms the government has implemented such as in education, energy, and an earned income tax credit.



Disputing this view, Puerto Rico Oversight Board Chairman José Carrion said in a New York Post commentary that years of local government fiscal mismanagement created a debt burden of more than $70 billion. That amount, plus $60 billion in unfunded pension liabilities, reflect a culture of government officials making promises they couldn’t afford and a decade of recession combining to engulf the island in a sea of red ink. The oversight board, appointed by Congress, is imposing budgetary discipline and making the case for deep economic reforms, according to Carrion. Thus far, the board has successfully renegotiated some of the island’s debt, and is working on agreements with the other creditors. There are several reforms Puerto Rico could take on, including welfare-to-work measures and making Puerto Rico an employee-at-will state. Unfortunately, the current government isn’t implementing all of these reforms, despite the fact that they could make Puerto Rico much easier to do business in and present a better case for attracting investments.



The House hearing comes a day after the Board filed more than 200 clawback actions targeting payments of more than $4 billion to creditors by the government, made while the commonwealth was in the zone of insolvency. Click here to read the prepared statements from today’s hearing.

Latest ABI Podcast Features New SIPC CEO Discussing Recovery Efforts in Madoff Case

ABI Editor-at-Large Bill Rochelle talks with Josephine Wang, who was named president and CEO of the Securities Investor Protection Corp. (SIPC) on April 1. Wang joined the legal staff of SIPC in 1983 and was promoted to General Counsel in 2004. She supervised the appeal by SIPC in the Second Circuit on the question of whether a trustee can recover fraudulent transfers from subsequent recipients abroad. Ruling that fraudulent transfer claims can reach recipients abroad, the appeals court reversed the district court. The reversal revived 88 lawsuits brought by the trustee in the Madoff case aiming to recover more than $3 billion. Listen to Wang discuss the Second Circuit’s “extraterritoriality” opinion, other key developments in the Madoff liquidation and SIPC's ongoing work to recover funds for victims of the Ponzi scheme.

As Retiree Health Care Bills Mount, Some States Have a Solution: Stop Paying

States across the U.S. are testing how far they can reduce health benefits for their retirees as a way of coping with mounting liabilities and balancing budgets, the Wall Street Journal reported. The cuts are a response to dramatic increases in medical costs, budget shortfalls and the introduction of new accounting rules forcing governments to be more public about how much they owe. Officials also face fewer legal hurdles to cutting retiree health benefits than they face with public pensions, which enjoy ironclad legal protections in many states. North Carolina, which will end future-retiree health care coverage for new workers hired in 2021, is not the only state to take more drastic measures. Kansas is now asking retirees to pay the full cost of their health care, pushing their monthly premiums to as much as $1,000. In Iowa, the state last year capped the contribution its flagship university makes to retirees’ health care, cutting the liability by $465 million. U.S. states as a group have promised hundreds of billions more in retiree health benefits than they have saved up. The gap for so-called post-employment benefits, which mainly consist of retiree health care, amounts to roughly $600 billion, according to government data compiled by Eaton Vance Corp. That is on top of the $1.4 trillion states need to pay for promised pension benefits, according to The Pew Charitable Trusts.

Developers See More Office Spaces in Malls as Retailers Close

As retailers close, developers are converting the space into offices to bring in stable rent and generate foot traffic for remaining stores, the New York Times reported. The biggest beneficiaries of the conversions are co-working enterprises, like WeWork, which provide shared work spaces primarily to entrepreneurs, freelancers and start-ups. The highest concentration of co-working spaces in retail nationally is in malls, according to an August study by global property company Jones Lang LaSalle. The same study predicted that co-working space in retail in general would grow at an annual rate of 25 percent through 2023.

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