Bed, Bath & BeBOND? (part 2)

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We all knew it was going to be bad, but it was worse. Bed, Bath & Beyond’s earnings were terrible, their cash got sucked up, and the CEO is out. The CEO’s credibility was already toast, but I want to pile on: their share buybacks might go down as some of the worst timed in history. Their investor day targets were laughable and I feel sorry for anyone who believed them. They also might be the fastest “great liquidity situation doing ill timed buybacks” to bankruptcy I have seen in awhile.

In my last Bed, Bath and BeyBOND post  I said,

I calculate LTM EBITDA of $190mm as the turnaround plan ran up against snarled supply-chains. Now we have changing consumer trends, which Target called out. So expectations are just $51MM in EBITDA for FY’22 (ended Feb ’23) and then going to $260MM in ’23.

This all sounds pretty bad compared to their investor day goals of $950MM. Management credibility is bad. And with everything else going on, I’m not sure many have appetite to invest in retail right now.

So we knew it would be bad, but it was Bed, Bath & BeREALLyBAD. EBITDA was negative $225MM. Woof. Expectations were negative $85MM.

As a result, their liquidity got zapped pretty quickly and they burned almost $500MM of cash. Good thing they were still buying back stock this quarter (what a clown show).

As a result, the bonds have cratered. In my last post, I mentioned I was interested in the 2034s at 50 cents. However, since that post the 2024s cratered from about 75 cents on the dollar at the beginning of June 2022 to 42 cents.

Ok – call me crazy, but I am taking a small flier on the 2024’s. The company is clearly in a distress scenario, but they also still have $900MM of liquidity. We could still see a fire sale of BuyBuyBaby (a big if), but there is value here to someone to loan-to-own, in my view.

BBBY still has $1.1bn of book value of real estate and $258MM of net working capital. I think they will start to sell down their $1.7BN of inventory over this year to generate cash and get over the 2024 maturity wall and they have room for mark downs of inventory to generate cash.

On the flip side, they still have $1.4BN of debt, but about $1.2BN of it is trading for less than 50 cents on the dollar!  So $1.3BN of real estate and NWC vs. $600MM of market value of debt (it is actually less) and $200MM of ABL. That leaves a gap of about $500MM to work with.

My pre-mortem expectation is they try to do a distressed exchange with the 2024s. They may generate enough liquidity to tender a portion of them (it is less than $150mm market value today – theoretically could use the ABL). My guess is liquidity worsens further next Q before they start to see some inflows from working capital.

One thing I know for sure – expect some coupons in the mail soon!

Special Situation Follow up: Bayer Glyphosate Liability $BAYN

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I did a previous Bayer post back in 2019, as the the market seemed to be implying a massive liability for glyphosate. I know how tough it is to clink a link, but highly encourage readers to look at what the market was / is pricing in for Bayer’s liabilities. It made / makes little sense in comparison to other liabilities in the past and relative to what glyphosate is – a chemical which the EPA basically goes to the mat on saying it is safe.

Specifically, the EPA states:

  • No risks of concern to human health from current uses of glyphosate.
  • No indication that children are more sensitive to glyphosate
  • No evidence that glyphosate causes cancer in humans. And they add: EPA considered a significantly more extensive and relevant dataset than the International Agency on the Research for Cancer (IARC).
  • No indication that glyphosate is an endocrine disruptor

I mean, think about it. Glyphosate is the most widely used chemical out there and one of the most studied. I don’t think the government is some evil entity that would hide whether it caused cancer or not. Nor do I think they’d allow it to continue if there was any doubt.

It is highly concerning that a jury can say that a chemical causes cancer, when in fact the evidence shows it does not. That is a slippery ethical slope.

Since then, Bayer has won 3 other cases determining that glyphosate did not cause cancer. I guess in the future one state can say it does and another says it won’t? Hm.

Maybe not. The Supreme Court may hear Bayer’s case. Or they may not. But given this situation I discuss above, it seems like they should!

If Bayer’s case is heard, they could help resolve about 31,000 cases against it AND a huge overhang on the stock.

If Bayer’s case is NOT heard, I think we’re basically in the same situation where Bayer will slowly but surely have to prove its case one by one. That seems more priced in (dangerous words of course).

Bayer currently trades for 7.4x ’23 EBITDA – this is for a pharma and consumer health giant (that also owns Monsanto and legacy Bayer crop protection which is just 40% of EBITDA). Merck and Bristol Myers Squibb trade for around 10x ’23. Is the market implying Bayer’s crop protection biz is worth, like 4x? That is crazy. Especially for me who is someone who thinks the glyphosate liabilities are overblown. They actually announced they are selling a piece of the business for 12x. Hm, maybe just keep doing that?

Last, we have also seen creative ways for dealing with liabilities, like the talc liability and asbestos. To be clear, I think glyphosate is nothing like those. Those actually caused issues! But I am sure Bayer is running through the options to mitigate risk…

I could see 25-30% upside on Bayer from some sort of resolution and even then I don’t think it’d look expensive.

Stay tuned!

Bed, Bath and BeBOND? $BBBY

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Full disclosure, I hate shopping at Bed, Bath and Beyond. It makes me angry. That has prevented me from actually acting on this investment. But I wanted to present it to others who may find it interesting and one I may act on:

At 54 cents on the dollar, BBBY bonds yield 12.3% to maturity. If they can do the bare minimum turning the biz around, or sell an asset like BuyBuyBaby, it is a much higher IRR. If they ever hit the goal from their 2020 investor day, it’s a home run (but low odds). But I also do think there’s a decent chance they don’t do any share repos near term and buy back discounted debt instead.

What’s the situation?

I highly encourage people to read Andrew Walker’s post on BBBY, which opened my eyes to (i) how much cash they have and (ii) the opportunity to improve earnings. He’s also opened my eyes to how much cash they’ve squandered…

Long story short (which is a story I probably should have shorted), BBBY had an investor day in 2020 and said they thought they could go from ~$450MM of EBITDA at the time to $950MM by 2023! Woa!

The way 2022 is going, there is no f*cking way there are getting there. Retail has been hard enough. With BBBY, you’ve got a turn around story, too.

And lo and behold – their guide was horrible for ’22.

I calculate LTM EBITDA of $190mm as the turnaround plan ran up against snarled supply-chains. Now we have changing consumer trends, which Target called out. So expectations are just $51MM in EBITDA for FY’22 (ended Feb ’23) and then going to $260MM in ’23.

This all sounds pretty bad compared to their investor day goals of $950MM. Management credibility is bad. And with everything else going on, I’m not sure many have appetite to invest in retail right now.

But I am always looking for a way to make money in nasty situations that no one wants to touch. Is there a place where maybe you can take a downside-protected position with solid return baked in and also some upside if things do go right?

I’d look at the bonds….


BBBY 2034 bonds are trading at 54 cents on the dollar! Woo wee. And that foots to a ~930bps spread to treasuries and 12.3% YTM. And yes, these are registered (not 144a), so normal everyday joes can buy them (not investment advice lol).

How does the cap structure look?

With cash of $440mm and total debt of $1.2bn, I see total and net leverage of 6.2x and 3.9x, respectively. Total liquidity sits at $1.4bn.

I use the LTM EBITDA basically to acknowledge there are 1x factors in ’22 that I don’t think will crimp profitability in the future. I already mentioned $260MM is FY’23 estimate, that probably goes lower honestly,  but I think $190MM actually isn’t a terrible mix between the next couple of years estimates. The market is forward looking after all

However, like I said, the BBBY bonds are at steep discounts to par. They have plenty of liquidity to take out the ’24s. Then its just the 2034s and 2044s – they have bought these back in the open market in the past!

Last but not least, they are currently marketing BuyBuyBaby, which actually grew comp sales in the latest Q (BBBY was -15%). I think equity holders are looking at a potential resumption of terribly timed buybacks like they’ve done historically, but I wonder if they buy back bonds. This would create equity value in itself, take BK risk off the table, and be at attractive IRRs.

You Don’t Have to Hold to Maturity

Let’s say they take-out the ’24s, which I think is a given. They turnaround the business somewhat and by Aug-2025, the market ascribes a 650bps spread (I think this is pretty conservative – single Bs right now have a spread of 480bps). That foots to an 18.5% IRR in the bonds!

If you are a real bull, you might look at those 2044s at 43 cents on the dollar instead!

My calls thus far on retail with BIG and BBWI have been terrible. So go at it with your own risk!

Opportunities in the Muni Meltdown

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First, some personal news. My wife and I have been blessed with our first child, so I’ve been a lot less active on here lately. That said, I’ve been watching the turmoil pretty closely in the market. In particular, the bond market is starting off with one its worst years ever… and it is only April…. And it is happening when the S&P trades off, which is atypical. 

I’ve written before about how bonds probably have a place in your portfolio, despite what you may think of as a low yield. They offer a hedge. Last time I wrote this of course was the last Fed tightening cycle. You would’ve done quite well buying bonds at that time, actually. 

I write this today, treasuries are up, stocks down, with people forgetting about inflation for the moment and fearing whatever other flavor of the month they can dream up of (hard landing in China, War in Europe, Japan devaluation, global recession). 

Despite the barrage of headlines on inflation, I think the risk that still few are talking about is the bust on the other end as the Fed does begin to tighten as demand cools. I wrote about it in my bull-whip post,  and I think a lot of what we are seeing right now can be traced to supply chain issues.

Oil and commodities are a bit different, as they are rising due to the capital cycle playing out as well as another supply chain issue called “war.” Oil price increases, to some extent, is a bit different than just general inflation. 

That all said, as the Fed does slow things down, how many containers of goods are heading here right as demand softens considerably? Hm.

I won’t dwell on this because I doubt I will convince many people one way or another. From my vantage point, I’ll end by saying I am seeing a lot of normalization (or at least things not getting worse) right into a hiking cycle. 

Carnage in Munis

The PIMCO intermediate muni bond ETF is down ~7.5% YTD and the iShares muni ETF is down almost 8%.

That’s tough when starting yields were low. Heck, a 30-yr treasury issued in May-2020 is down 43 points from issuance. Tough when the coupon is 1.25% and the yield is still below 3%.  

However, the carnage leads nicely into what I am looking at buying.

I am in the highest tax bracket and live in Massachusetts. If I can find a 4% yielding MA Muni bond, that’s like finding a near-7% corporate bond. Out of state, a 4.0% muni is still like looking at a 6.2% corporate, as the table below shows.

It isn’t simple to make that comparison, though. High-yield (read: junk bonds) are currently yielding about 6.5%. So finding a corporate bond with equivalent yield to a Massachusetts General Obligation bond isn’t quite apples-to-apples (MA GO bonds are rated AA). 

Can we find any bonds that meet these criteria? 

Part of the “problem” of getting these yields in muni land is you have to accept long term maturity risk, i.e. duration. However on the flipside, locking in a 7% corporate tax equivalent for a long period of time also seems attractive to me.

Further, many Americans own real estate like myself, with 30 year mortgages locked in below 3%. So again, finding a 4% completely tax free bond seems like an attractive use of capital when I am technically short a 3% mortgage at the same time. Let me break down three interesting examples that I found in my search:

Dulles Toll Road (CUSIP: 592643DG2)

The second bond example is the DC Dulles toll road bond. This bond is backed by the revenues generated from the toll road to the Dulles airport of which there are few low congestion alternatives. At 81.625, this bond yields 4.1% to maturity. 

Revenues in 2021 were already coming back to 2019 levels, which supports that this road (and airport) are relatively resilient. Omicron did throw results under the bus compared to budget, but the trend back is obvious. 

For context, 2020 operating revenue declined by 38.2% vs. 2019. Bad, but not “completely shut down” bad.  

You could buy the first lien bonds, but I like the sub notes (third liens) for several reasons. First, the 1Ls are 0% coupon and I’m not going that far (yet). Plus, lien has a segregated reserve fund. The first three liens are funded at the lesser of the standard three prong test: 10% par; 125% average annual debt service (AADS) or 100% maximum annual debt service (MADS).

There are a few attractive covenants (iii and iv matter for these bonds). Rates charged for the toll road must provide net revenue in a fiscal year of at least (I) 200% maximum annual debt service (MADS) of all first senior lien bonds, (ii) 135% debt service of all first senior and second senior lien bonds, (iii) 120% debt service of all first senior, second senior and subordinate lien bonds and (iv) 100% debt service of all outstanding bonds. 

According to the financial disclosures they also have over 2,000 days of debt service costs on hand in cash and there are limited capital improvement projects on the horizon. We could have another pandemic for 6 years and they could still pay interest.

In essence, there is decent coverage here.  

However, due to the pandemic and a development project, this bond is rated A- (but wrapped by Assured Guaranty). I think travel will resume and has already resumed post pandemic and this seems like a strategic asset.  

I am BTFD. 

Mass 2% GO Bond (CUSIP: 57582RN93)

The Massachusetts 2% GO Bond due 2050 (I know, I know, that’s far out but hear me out), was recently trading at 95-100 cents on the dollar. Currently, they are trading at 65 cents on the dollar for a 4% yield to maturity.

This is backed by the full faith and credit of the state of Massachusetts, which I am willing to bet on.

One problem with munis like this is that buying them significantly below par opens up excess discount taxes. These rules are somewhat absurd, but if you buy a muni bond too far below par you may have to pay ordinary income taxes on the discount to par value. That said, in a world where these bonds have some chance of going back to par within the next 10 years. I’d gladly pay that tax.

By my estimates, I could see the potential for a 10% IRR using the assumption that they could go back to 2021 prices at some point in the next 10 years. 

Charlotte Water & Sewer (CUSIP: 161045QQ5)

The last bond is another Charlotte Water & Sewer revenue bond (CUSIP: 161045QQ5). This yield is lower, at 3.70% YTW, but this is a AAA bond (what is the US Federal Gov’t again?). That’s like buying a 5.75% AAA corp bond or a 4.90% treasury. 

Charlotte is a large, growing populace. The raw water sources are ample and the water treatment plants have an average 29 year life remaining. Net revenues are growing, debt is falling, and this also has about 500 days of cash on hand. Did I mention it was AAA? 

$KAR Gets (Less) Physical with $CVNA Asset Sale: I’ll Sell KAR Stock Too

Reading Time: 3 minutesI wrote up KAR stock back in 2021 when investors were confusing secular issues (auctions are becoming more competitive with online presence) with cyclical ones (there just were no cars to sell!).

Now, KAR is selling it’s physical auction business to Carvana in a $2.2BN transaction ($1.6BN after–taxes). This is great compared to pre-sale market cap of $1.6BN (+$1.9BN of corp debt).

Interestingly, KAR says it will only lose about $100MM of EBITDA (KAR did $481MM in 2021). So they sold the physical auction business for about 22x.

 So Ryan, I believe, from a revenue standpoint, the revenue impact is approximately, I believe, $800 million in the current year. And Eric may correct me if I’m wrong. And the adjusted EBITDA impact in the current year are approximately $100 million. As I mentioned, that $100 million is a combination of 3 numbers, the EBITDA of the business, which is the significant majority of that number, I would say, by far. And then revenue from the commercial service agreement, which is a modest sum in the current year. And stranded costs, which is an even more modest sum in the current year, but obviously, some benefit, we think, over time there as well.

They’ll get about 50% of their EV by selling 25% of their EBITDA. Not bad!

The company has been trying to shift more online, acquiring several online auctions and attending podcasts and hosting an investor day highlighting their focus shift.

Here’s the thing: The core to my thesis was that I thought physical auctions were necessary AND a competitive advantage.

Reminder: I used to buy and sell used cars. I bought a couple lemons online and personally, I swore it off. There are simply too many moving parts on a car to capture it in a picture, especially  those that are coming from a lease.

When a vehicle comes off-lease, if the leaseholder and dealer do not purchase the vehicle, the captive finance company then owns it and sells it. Because finance companies do not have dealerships, they use the wholesale market to sells the cars back to the dealer network. Typically a vehicle will enter an OPENLANE closed online auction (only open to that OEM’s franchise dealer network), if it doesn’t sell there it will move to an OPENLANE open online auction (open to all of KAR’s registered dealer buyers), and if it doesn’t sell there it will be moved to/ sold at physical auction.

So why am I selling?

This sounds like KAR is keeping the great parts? Doesn’t the KAR stock look cheap now with all that cash?

Maybe, but I don’t want to own this anymore. It is against what I firmly believe the industry requires to move volume efficiently. So, so, so many cars actually end up going into physical auction. And I think having this integration is actually valuable. I don’t have the numbers on me, but the last two years are irrelevant anyway.

Online is less capital intensive (theoretically…), but it isn’t clear to me who the “winner” will be long-term. I worry about that. Clearly KAR has acquired several online platforms that weren’t around just a few years ago.

If OPENLANE wasn’t the obvious winner (i.e. they had to acquire other players to augment it), why would it be in the future?

I somewhat doubt that because of this, KAR stock should trade at a structurally higher multiple. Could be totally wrong.

Oh, and last thing, KAR has a pref that converts at 17.75, so share count is going up 29% (my math it goes from 124 to 159-160, could be wrong though). I knew this going in, but given all the moving parts, I am closing out here.

I have the pro forma KAR stock trading at ~9x PF EBITDA ($3bn market cap, $100MM net debt vs. $345MM of EBITDA). That screens somewhat cheap, but I’m not staying along.