EDITORIAL: Pension shortfalls taint Sun Capital

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Florida-based Sun Capital Partners has received plenty of brickbats for how it ran Marsh Supermarkets, a storied local grocer that disappeared from the retail landscape this summer after selling off 26 stores and shuttering 18 others.

Marsh had been losing market share for years, in part because Sun underinvested in store upgrades after buying the company in 2006 for $88 million in cash and the assumption of $237 million in debt. Marsh, which operated 117 groceries at the time of the purchase, had closed nearly half by the time it sought bankruptcy protection this May.

But even more galling than what happened to Marsh’s retail presence is what happened to its pensions. In court filings, the company—which was nonunion in recent years but had pension liabilities going back decades—acknowledged it had underfunded its pension obligations by $76 million.

Filings by Marsh last month show the company now is moving forward with offloading that pension shortfall to the Pension Benefit Guaranty Corp., an independent U.S. government agency that comes to the rescue of underfunded or failed pension plans.

The PBGC doesn’t use tax dollars to bail out pensions. Instead, it relies on insurance premiums paid by nearly 24,000 insured defined-benefit pension plans—though its director said this year that, without major reforms, it’s on track to run out of money within a decade.

Marsh joins a long line of failed companies, including some in central Indiana, that obtained PBGC relief. In 2010, for instance, the agency picked up the $20 million shortfall at Columbus-based Irwin Financial Corp. following the failure of its bank subsidiary, Irwin Union Bank. And last year, it assumed $36 million in pension liabilities for Indianapolis-based Vertellus Specialties Inc., a chemical maker that restructured in bankruptcy court.

Though Sun hired investment bankers in September 2016 to try to line up a buyer, the failure of that effort was entirely predictable. Why would rival grocers seek to buy Marsh lock, stock and barrel—which would include assuming its pension liabilities—when instead they could let the company fail and pick off the best locations at a bankruptcy auction?

While the demise of Marsh dings Sun’s reputation, it’s not necessarily a financial hit. Private equity firms pocket cash along the way—through dividends and asset sales. It’s possible, even likely, that Sun’s investors made a bundle on Marsh—given the tens of millions it generated by selling real estate holdings in the early years of Sun’s ownership.

We aren’t privy to the numbers, but Sun’s decade-long ownership of the mall retailer The Limited might be instructive. The chain closed all its stores in January, writing their value to zero. Even so, Sun made 1.8 times its $50 million investment, Reuters reported, citing a letter the private equity firm sent to its investors.

Many private equity firms are white knights, providing capital that helps promising firms reach their potential. But some are vultures, monetizing whatever value they find, then leaving the business itself in a trash heap in bankruptcy. Sun appears to have been the latter.•


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