How a rescue turned to regret in Bed Bath & Beyond’s bankruptcy

How a rescue turned to regret in Bed Bath & Beyond’s bankruptcy

Late final summer time, Mattress Bathtub & Past had a brand new chief government, a brand new technique and $375mn in new money from a canny funding agency, Sixth Avenue Companions. Collectively, they have been meant to propel the US house items retailer by means of the 2022 vacation season and reverse a protracted, harmful slide in gross sales.

The optimism rapidly evaporated, exposing tensions between the corporate and its supposed rescuer that present the knife-edge nature of distressed-debt investing in a slowing US economic system.

Inside weeks of investing, Sixth Avenue was quietly questioning the turnround plan of the CEO, retail veteran Sue Gove, whereas firm insiders have been complaining about what they noticed because the investor’s tightfistedness, individuals acquainted with the matter say. After a disastrous vacation season, with like-for-like gross sales falling a stunning 40-50 per cent within the fourth quarter, any hope of a 2023 comeback was snuffed out when collectors selected to play hardball.

Final week, these tensions culminated in Mattress Bathtub & Past’s Chapter 11 chapter submitting. The enterprise now dangers a liquidation that would price 1000’s of jobs and impose big losses on shareholders and lots of collectors.

Years of monetary and operational mis-steps contributed most to the corporate’s collapse. However court docket filings and interviews with key gamers in regards to the occasions of the previous eight months reveal the fragile dance between firms determined for rescue capital and the Wall Avenue gamers who roll the cube on massive returns from such high-wire conditions.

The variety of bonds labeled as distressed in Morningstar’s high-yield bond index grew greater than fourfold between 2021 and 2022, and asset managers have devoted a whole lot of billions of {dollars} in the direction of betting on troubled companies.

Sixth Avenue, which now manages $65bn, was no stranger to teetering retailers. The agency had loaned cash to the likes of Toys R Us and JC Penney, reporting that such retail loans produced an annualised return exceeding 20 per cent. And Sixth Avenue designed its Mattress Bathtub & Past funding to guard itself if issues went mistaken.

The $375mn infusion, led by Sixth Avenue alongside smaller companions, on August thirty first was within the type of a “first-in, last-out”, or Filo, mortgage. Solely the corporate’s current revolving credit score facility with JPMorgan, which was backed by stock and different property, ranked above the Filo in reimbursement precedence.

“It’s one factor to lend cash to a wholesome firm that later will get sick. It’s completely completely different to lose cash since you knowingly lent cash to a sick firm and didn’t do job defending your self,” stated Kristin Mugford, a former investor at Bain Capital now at Harvard Enterprise Faculty. “No lender desires to be that idiot.”

By late 2022, nevertheless, Sixth Avenue grew involved when Mattress Bathtub & Past briefly pursued a bond trade that it noticed as a distraction from chopping shops extra drastically, individuals acquainted with the investor’s considering say.

By early 2023, with distributors reluctant to produce stock after the dire vacation season, JPMorgan and Sixth Avenue informed the retailer that breaches within the phrases of its loans constituted a default.

Mattress Bathtub & Past was going through chapter, however in February what Gove referred to as a “transformative transaction” appeared to supply an escape route. A hedge fund, Hudson Bay Capital, stated it might purchase about $1bn value of fairness, albeit over a number of months and topic to sure situations.

Sixth Avenue places of work in Midtown Manhattan: the funding agency invested closely in Mattress Bathtub & Past © Jeenah Moon/Bloomberg

The bizarre transaction concerned the fund shopping for convertible most well-liked inventory at a reduction and changing it into frequent inventory, which it might rapidly promote at a revenue right into a market boosted by a burst of meme inventory mania.

As a part of the deal, Mattress Bathtub & Past’s lenders waived the threatened default, with Sixth Avenue placing in one other $100mn to get JPMorgan on board. The money from the Hudson Bay share sale and the second Sixth Avenue mortgage, nevertheless, was used to repay JPMorgan’s revolving mortgage slightly than to put money into the enterprise.

Between the primary a part of the Hudson Bay deal and different inventory gross sales this 12 months, Mattress Bathtub & Past raised greater than $400mn. However the firm noticed Sixth Avenue as a barrier in the best way of it elevating extra.

Uneasy with the corporate’s technique and losses, Sixth Avenue was “unwilling to approve the debtors’ projected price range,” Mattress Bathtub & Past acknowledged in court docket papers. That situation, along with a falling share worth, saved the corporate from tapping a whole lot of tens of millions extra from Hudson Bay that would have saved it afloat longer.

Had its Wall Avenue backers been extra accommodating, firm insiders lamented, it may need pulled off a turnround. “It was loss of life by a thousand cuts . . . it was not possible to function the enterprise,” stated one.

For its half, Sixth Avenue pointed to the a whole lot of tens of millions of {dollars} it had infused as proof of its good religion. Its legal professionals famous in court docket final week that it had agreed on 5 separate events to not implement defaults.

The chapter course of will now decide simply how deep the losses are for Mattress Bathtub & Past’s stakeholders. The corporate, which can also be in search of a purchaser, has estimated that its liquidation worth can be simply over $700mn. Shareholders are anticipated to recoup nothing whereas its junior bonds, with a face worth of $1bn, are buying and selling beneath 5 cents on the greenback.

Sixth Avenue has now supplied one other $40mn by means of a “debtor-in-possession” mortgage that can fund Mattress Bathtub & Past’s keep in court docket whereas yielding about 12 per cent curiosity yearly. To safe this mortgage, the corporate reluctantly allowed Sixth Avenue to switch or “roll up” $200mn of its current mortgage into the DIP mortgage, which will probably be repaid first from any sale or liquidation proceeds. Its remaining declare of $347mn, together with accrued curiosity, ranks decrease within the hierarchy and will nonetheless endure losses.

Bed Bath & Beyond capital stack post-bankruptcy

DIP loans had develop into much less frequent because the monetary disaster of 2008-9, stated Jared Ellias, a Harvard Regulation Faculty professor, so “this will point out a change available in the market for distressed financing or, extra seemingly, absolutely the desperation of Mattress Bathtub & Past’s place.”

The decide overseeing the case famous that Sixth Avenue didn’t present the additional $40mn “altruistically”. A lawyer for the investor informed the court docket that the “roll-up was all the time the financial consideration for offering one other spherical of capital”.

Mattress Bathtub & Past added that it couldn’t discover any supply of junior financing and that Sixth Avenue wouldn’t consent to “priming financing” from one other social gathering that may push it down the reimbursement hierarchy.

Even so, the retailer admitted that it had little alternative however to take what Sixth Avenue was providing. It was, its funding banker wrote to the court docket, “probably the most beneficial executable transaction obtainable”.

Back To Top