Bankrupt Payless ShoeSource has disclosed it is investigating whether venture capital backers that acquired the company in a leveraged buyout have contributed to its financial demise.
Since the buyout in 2012, private equity firms Golden Gate Capital and Blum Capital Partners, which together own 98.5% of Payless and control its board, have received more than $350 million in debt-funded dividends.
The practice of having companies they control borrow money to pay them dividends has enabled private equity firms to generate returns for their investors while increasing the financial strain on debtors. Since 2013, private equity owners have taken out more than $90 billion in debt-funded payouts.
Payless filed Chapter 11 on April 4 with $838 million of debt. In a bankruptcy court filing Wednesday, it said independent board member Charles Cremens had been investigating potential bankruptcy estate claims against Golden Gate and Blum and asked U.S. Bankruptcy Judge Kathy Surratt-States to reject a request by an official committee of creditors to hire an expert to review pre-bankruptcy transactions.
The filing noted that Payless and “the significant case parties in interest have sought an efficient and expeditious timeline” for the company to “be recapitalized and emerge from bankruptcy as a going concern.”
“The hiring of a trial expert by a committee seems antithetical to that goal,” Payless said.
The creditors’ committee on April 27 requested the appointment of Dr. Israel Shaked, a professor of finance and economics at Boston University, as an expert witness. The dividends paid to Golden Gate and Blum “were funded by the same secured debt that drove the debtor’s bankruptcy filing,” the committee said.
According to Payless, Cremens “has been conducting an investigation into potential claims [it] might have against the equity holders, Golden Gate Capital and Blum Capital. That evaluation is ongoing and covers the same transactions … for which the committee requests expert testimony in the Shaked application.”
In particular, Payless said, the investigation has focused on dividends paid on Feb. 28, 2013 and March 10, 2014 and the leveraged buyout itself.