Tag: Distressed Debt Investing

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!

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….

via GIPHY

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!

Why is Everyone Freaking Out about Hertz Issuing Equity in Bankruptcy? I Break It Down $HTZ #COVID19

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Well, it happened. Hertz is cleared to issue equity in bankruptcy on Friday, June 12. This is a monumental day (which I live tweeted the hearing process on my twitter for those interested). Companies issue equity all the time – why does anyone care that Hertz is issuing equity in bankruptcy.

To put it simply: because the equity is likely still worthless.

Now, I can back up. Hertz was already highly leveraged coming into the COVID19 crisis, but the economy was good. Perhaps Hertz could manage its way through its debt problem.

When people stopped traveling due to COVID19, that crushed demand for transportation, especially rental cars which are typically picked up at airports. In addition, the pressure on the economy meant that the “residual value” it receives for cars coming off lease was also diminished (i.e. used car sale prices went down).

Here is how Hertz described it in their bankruptcy filing:

Typically, when a company goes bankrupt, its stock will still be listed for a little bit of time, but it will not be worth anything. It will trade, but its  typically much smaller amounts. It is just waiting to be delisted.

There are a few exceptions to this such as W.R. Grace. Grace filed for bankruptcy because of growing asbestos liabilities, but did not have solvency issues. The equity continued to trade and had value. It had value because the value of the business after all liabilities were paid was still greater than zero. There aren’t many other cases I know of like this except maybe General Growth Properties, which Bill Ackman was involved in.

Another example is American Airlines when it last filed for bankruptcy. The equity was initially deemed to be zero, because unsecured creditors were not going to be made whole, but valuations moved up and that created equity value in bankruptcy.

So why is Hertz issuing equity in bankruptcy different?

First, it still seems pretty clear that the market is saying the bonds are not going to be made whole. Let’s look at the trading prices and also discuss the “waterfall.”

Here is a Hertz unsecured bond. You can see that pre-covid, investors essentially deemed it likely that Hertz would pay the money back and they would be made whole. These bonds traded from par to a low of 12 cents on the dollar, but some others traded as low as 9 (before bankruptcy, bonds that mature earlier than others are said to have temporal seniority – i.e. the company will try to take those bonds out first, so you at least have some chance or option value to make out better than later-maturing classes).

Trading at 9-12 cents on the dollar means the bonds are saying that’s likely what their recovery in bankruptcy would be. Pretty simple – bond investors wouldn’t just sell a bond at 10 cents on the dollar for no reason. The coupon on these bonds was 6.25% too so the market with such a low price was implying in March and April already that they wouldn’t pay another coupon.

Here’s an example “waterfall” chart. It’s simplistic, but the point is to say, if there is no value after the secureds are paid off, senior unsecured creditors get nothing.

Here’s another way credit debt investors draw it out. I’m showing 3 scenarios that hopefully are self-explanatory enough:

This math is why it is so crazy to people that Hertz is issuing equity in bankruptcy.

Even with all the positive news (for creditors) that Hertz is issuing up to $1 BILLION in bankruptcy, the bonds are still at less than 50 cents on the dollar. That implies the bonds are still in the hole by 50%. So Hertz may raise a $1 billion of equity that may immediately be worthless.

The  thought that maybe issuing equity increases option value of the equity might be a little crazy too. At this point, it is still hard to argue that the unsecureds are going to be made whole here. Even if they rise to 65, 70 cents on the dollar that is still the case. The market started to improve for GGP from 2009 to 2010, but its bonds also snapped up to 100 cents on the dollar.

It also hard to say right now that the operating environment will improve in such a strong way that Hertz will increase in value. Valuations are conducted on a 5 year view anyway (i.e. no one is valuing Hertz solely on trough 2020 earnings – they essentially do a DCF) so it seems unlikely to me they aren’t already including some strong rebound next year.