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

Late final summer season, Mattress Tub & 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 had been meant to propel the US house items retailer by the 2022 vacation season and reverse a protracted, harmful slide in gross sales.

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

Inside weeks of investing, Sixth Avenue was quietly questioning the turnround plan of the CEO, retail veteran Sue Gove, whereas firm insiders had been complaining about what they noticed because the investor’s tightfistedness, folks conversant in 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 Tub & Past’s Chapter 11 chapter submitting. The enterprise now dangers a liquidation that would value 1000’s of jobs and impose large losses on shareholders and plenty of collectors.

Years of monetary and operational mis-steps contributed most to the corporate’s collapse. However courtroom filings and interviews with key gamers concerning 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 large returns from such high-wire conditions.

The variety of bonds categorised 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 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 Tub & Past funding to guard itself if issues went improper.

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 present revolving credit score facility with JPMorgan, which was backed by stock and different property, ranked above the Filo in compensation 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 an excellent job defending your self,” stated Kristin Mugford, a former investor at Bain Capital now at Harvard Enterprise Faculty. “No lender needs to be that idiot.”

By late 2022, nevertheless, Sixth Avenue grew involved when Mattress Tub & Past briefly pursued a bond alternate that it noticed as a distraction from reducing shops extra drastically, folks conversant in the investor’s considering say.

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

Mattress Tub & Past was dealing with chapter, however in February what Gove known as a “transformative transaction” appeared to supply an escape route. A hedge fund, Hudson Bay Capital, stated it could purchase about $1bn price 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 Tub & Past © Jeenah Moon/Bloomberg

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

As a part of the deal, Mattress Tub & 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 somewhat than to put money into the enterprise.

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

Uneasy with the corporate’s technique and losses, Sixth Avenue was “unwilling to approve the debtors’ projected finances,” Mattress Tub & Past said in courtroom papers. That situation, along with a falling share value, saved the corporate from tapping a whole lot of thousands and thousands extra from Hudson Bay that would have saved it afloat longer.

Had its Wall Avenue backers been extra accommodating, firm insiders lamented, it might need pulled off a turnround. “It was loss of life by a thousand cuts . . . it was unattainable to function the enterprise,” stated one.

For its half, Sixth Avenue pointed to the a whole lot of thousands and thousands of {dollars} it had infused as proof of its good religion. Its legal professionals famous in courtroom 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 Tub & Past’s stakeholders. The corporate, which can be looking for 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 a “debtor-in-possession” mortgage that can fund Mattress Tub & Past’s keep in courtroom 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 present mortgage into the DIP mortgage, which shall 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 undergo losses.

Bed Bath & Beyond capital stack post-bankruptcy

DIP loans had grow to be much less widespread for the reason that monetary disaster of 2008-9, stated Jared Ellias, a Harvard Regulation Faculty professor, so “this may increasingly point out a change available in the market for distressed financing or, extra probably, absolutely the desperation of Mattress Tub & Past’s place.”

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

Mattress Tub & 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 will push it down the compensation 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 courtroom, “essentially the most beneficial executable transaction accessible”.

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