Analysis: Bed Bath's novel deal is no universal dodge-bankruptcy card

Applied Energetics

17/02/2023 11:00

By Shankar Ramakrishnan
       Feb 17 (Reuters) - Debt-stricken companies seeking to
buy themselves time for a turnaround will find it hard to
emulate Bed Bath & Beyond Inc's  BBBY.O  unusual stock sale that
staved off bankruptcy, legal and corporate finance experts say. 
    The U.S. home goods retailer stunned Wall Street by
clinching a deal last week to sell preferred convertible stock
and warrants to hedge fund Hudson's Bay Capital Management and
other investors that delivered it a $225 million cash infusion
and future payments, tied to financial performance milestones,
that could add up to slightly over $1 billion. 
    The investment spared Bed Bath from what it had said was
"likely" bankruptcy, after it received a notice of default last
month from JPMorgan Chase & Co  JPM.N  pertaining to credit
lines totaling $1.5 billion, amid a drop in the value of the
company's inventory. 
    It's unclear whether Bed Bath can capitalize on the
breathing room to turn around its business, which has been
battered by competition from other online and brick-and-mortar
retailers. 
    But the deal with Hudson's Bay has raised the question of
whether other companies in financial distress, such as
telecommunications equipment provider Avaya Holdings Corp
 AVYA.N  and discount retailer Tuesday Morning Corp  TUEMQ.PK 
that filed for bankruptcy this week, could deploy similar
financial engineering to stay afloat. 
    Six legal and corporate finance experts interviewed by
Reuters said it will be challenging for other companies to
structure similar life-extending deals, because it was Bed
Bath's popularity with so-called meme stock investors that
limited the potential risks for Hudson's Bay.
    Meme stocks are shares that individual investors often trade
based on social media posts rather than an analysis of a
company's finances.
    "Not all companies are meme stocks, so this strategy might
not work for other distressed companies," said Marcel Kahan, law
professor at NYU School of Law.
    A spokesperson for Hudson's Bay declined to comment, while
Bed Bath & Beyond did not respond to requests for comment.
    To secure the Hudson's Bay investment, Bed Bath offered a
deal that guarantees the hedge fund a lucrative return in most
circumstances. Hudson's Bay can convert the preferred stock and
warrants it got from Bed Bath to common stock at a roughly 20%
discount, based on a pre-agreed formula that looks at the last
ten trading days for Bed Bath's stock. 
    Hudson's Bay will get this discount as long as the stock
trades above 71.6 cents, according to the terms of the
agreement. Bed Bath shares are currently hovering around $1.80,
and its popularity with meme-stock investors makes it less
likely that they will drop below the 71.6-cent floor, the
experts said. 
    To pull off such a deal, other troubled companies would have
to convince investors that they enjoy a similar meme-stock
status, the experts added.
    DILUTIVE DEAL
    Hudson's Bay investment comes with risks that other hedge
funds may not be willing to take. Hudson's Bay has committed Bed
Bath contractually to buying back the preferred shares at a 15%
premium in the event of a bankruptcy, yet this protection may
prove worthless if Bed Bath runs out of money again, the experts
said. 
    Credit ratings agency Fitch senior director David Silverman
said few investors would go for such deals. "It was a surprise
that someone was even willing to write a $200 million-odd check
to invest in Bed Bath's equity," he said.
    It is not clear how much of the stock Hudson's Bay has
converted and sold since it inked the deal with Bed Bath on Feb.
6.
    The deal is very dilutive for other Bed Bath investors, who
will end up owning 80% less if the company survives. Most
bankruptcies end with the equity of investors in a company wiped
out, so Bed Bath was able to justify the deal to investors as a
last-ditch effort to spare them from total loss. 
    Seth Basham, a Wedbush Securities analyst who had a $0
target on Bed Bath's stock before raising it to $0.25 on the
Hudson's Bay deal news, said that all the retailer has
accomplished is buying itself some time to turn its business
around against the odds. The company has been rolling out store
closures in a last-ditch bid to return to profitability.
    "They are on a wing and a prayer that there will be much
value created for the common shares as they would need to far
exceed their turnaround plan," said Basham.
 (Reporting by Shankar Ramakrishnan in New York; Editing by Greg
Roumeliotis and Christopher Cushing)
 ((Shankar.Ramakrishnan@thomsonreuters.com;))