Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

There's a fascinating exchange buried in Payless ShoeSource's bankruptcy court documents, one that highlights the increasing ire over private equity firms' involvement in distressed retailers.

Payless, remember, is the discount shoe retailer that became insolvent earlier this year after being the subject of a leveraged buyout in 2012. Now, suppliers and property owners that are owed money are clearly mad about how private equity firms directed Payless to borrow millions of dollars to pay themselves hefty dividends without improving the company's viability.

These creditors want to hire an expert to evaluate how much those dividend payments ate into Payless's value and doomed its fate.

Here's where the case goes down the rabbit hole: Payless, which is still owned by private equity firms Golden Gate Capital and Blum Capital, responded this week by saying it's already investigating the dividend payments. The probe is being headed by Charles Cremens, who's affiliated with another private equity firm, Bunker Hill Capital. Payless argues that hiring a separate team would be redundant.

That's right, someone close to private equity is investigating private equity firms for doing a very private equity thing. This throws off a vibe that perhaps this investigation isn't the most independent one. The unsecured creditor group obviously shares that view in its desire to spend the time and money to bring on someone with a bit more of an outsider perspective.

At issue are the 2012 leveraged buyout and $350 million of dividend payments to Payless's private equity sponsors in 2013 and 2014, funded by borrowing in the incredibly forgiving and lenient debt markets, thanks to the Federal Reserve's abundant monetary stimulus. Borrowing costs were ultra low, and Payless took advantage of that to pile up more than $600 million in debt, which is what forced it to seek bankruptcy protection. 

Lower Costs
Many companies packed on debt at a time of low borrowing costs and ample bond buyers
Source: Bloomberg Barclays bond indexes

The dispute about Payless's dividend payments won't likely be the last. Other retailers are in somewhat similar situations. From the start of 2013, private equity owners have taken out more than $90 billion in debt-funded payouts, according to data compiled by LCD, part of S&P Global Market Intelligence, and cited in a Bloomberg News article.

Picking Up
Retailers went bankrupt at a record pace in the first three months of 2017
Source: S&P Capital IQ

The number of retailers filing for Chapter 11 bankruptcy is approaching its highest level since 2008 and 2009, and distress is especially high among shop operators owned by private equity. 

Private Distress
More private U.S. companies have filed for bankruptcy in recent years than public ones
Source: Bloomberg

It's understandable that Payless's board and owners don't want to waste the money to hire yet another expert. But it makes sense to try to honestly answer a burning question that increasingly looms over the retail industry: Have private equity firms accelerated the demise of weaker companies? 

A good start would be to not have private equity investigate its own complicity in excessive, debt-fueled dividend payments. It clearly didn't help Payless to have so much debt piled on top of it. It would be helpful to avoid a repeat. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at

To contact the editor responsible for this story:
Daniel Niemi at