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

Late final summer season, Mattress Tub & Past had a brand new chief govt, a brand new technique and $375mn in new money from a canny funding agency, Sixth Road Companions. Collectively, they had been meant to propel the US dwelling items retailer by way of the 2022 vacation season and reverse an extended, 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 economic system.

Inside weeks of investing, Sixth Road 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, individuals conversant in the matter say. After a disastrous vacation season, with like-for-like gross sales falling a surprising 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 price hundreds of jobs and impose large 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 concerning the occasions of the previous eight months reveal the fragile dance between corporations determined for rescue capital and the Wall Road gamers who roll the cube on huge 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 tons of of billions of {dollars} in direction of betting on troubled companies.

Sixth Road, 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 Road designed its Mattress Tub & Past funding to guard itself if issues went incorrect.

The $375mn infusion, led by Sixth Road 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 totally different to lose cash since you knowingly lent cash to a sick firm and didn’t do a great job defending your self,” mentioned 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 Road grew involved when Mattress Tub & Past briefly pursued a bond change that it noticed as a distraction from reducing shops extra drastically, individuals conversant in the investor’s pondering say.

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

Mattress Tub & Past was going through chapter, however in February what Gove known as a “transformative transaction” appeared to supply an escape route. A hedge fund, Hudson Bay Capital, mentioned it will purchase about $1bn price of fairness, albeit over a number of months and topic to sure circumstances.

Sixth Road 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 frequent inventory, which it will 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 Road placing in one other $100mn to get JPMorgan on board. The money from the Hudson Bay share sale and the second Sixth Road mortgage, nevertheless, was used to repay JPMorgan’s revolving mortgage fairly than to spend money on 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 Road as a barrier in the best way of it elevating extra.

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

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

For its half, Sixth Road pointed to the tons of 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 Tub & Past’s stakeholders. The corporate, which can 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 under 5 cents on the greenback.

Sixth Road has now offered one other $40mn by way of a “debtor-in-possession” mortgage that may fund Mattress Tub & Past’s keep in court docket whereas yielding about 12 per cent curiosity yearly. To safe this mortgage, the corporate reluctantly allowed Sixth Road 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 undergo losses.

Bed Bath & Beyond capital stack post-bankruptcy

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

The decide overseeing the case famous that Sixth Road didn’t present the additional $40mn “altruistically”. A lawyer for the investor informed the court docket that the “roll-up was at all times 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 Road wouldn’t consent to “priming financing” from one other occasion that may push it down the reimbursement hierarchy.

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

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