BBBY - Bed Bath & Beyond: Hudson Bay Financing Recent Equity Offering Won't Be Enough

2023-03-10 04:49:28 ET

Summary

• Bed Bath & Beyond stock is burning a lot of cash quickly, the $360 million that the company raised recently likely won't be sufficient to cover the company's liabilities.
• This company continues to further dilute shareholders with the recent equity offering and the agreement with Hudson Bay, these deals also likely won't provide any significant long-term benefits.
• Bed Bath & Beyond continues to close stores, the company has no viable plan to stabilize or turn around its failing business.

Tough times often bring out the best and worst in people and companies. When the pandemic hit in 2020 and inflation reach historically high levels over the next couple years management teams were tested in unique ways. Some companies thrived in this difficult operating environment, while others struggled.

One company that failed in every possible way during the pandemic and the subsequent rise in prices was Bed Bath & Beyond ( BBBY ). This company now faces what likely will eventually be a chapter 7 bankruptcy and forced liquidation.

Bed Bath & Beyond's problems started during the pandemic. While many retail companies such as Target (TGT) adopted quickly to the new operating environment with same day pick-ups and online sales, Bed Bath & Beyond failed to make any meaningful or timely adjustments even as their store traffic dropped significantly. This company had a significant amount of stores is in states such as New York and California, where the shutdowns were stricter and longer, but management's poor planning is also now leading the company to shutdown stores in states such as Florida and Alabama as well. Bed Bath & Beyond recently announced the closure of 87 stores in early February, and the company also missed interest payments on bonds last month as well.

Bed Bath & Beyond is barely solvent, and the company's recent equity offering and financial agreement with the hedge fund Hudson Bay Capital is simply a desperate attempt by management for avoid what looks like an inevitable forced liquidation.

The financial agreement between Hudson Bay Capital and Bed Bath & Beyond is not likely anything more than an effort by this hedge fund to take advantage of the current situation. While the deal purports to be an agreement by Hudson Bay to lend Bed Bath & Beyond $1 billion, with $225 million in cash up front, the agreement explicitly states that certain terms and conditions have to met before the additional $800 million is lent. Management's recent issuance of $135 million in equity in early February will also likely be insufficient. Bed Bath & Beyond currently has $3.41 billion in long-term debt, and $1.49 billion in nonconvertible debt. The company has also nearly $1.2 billion in unsecured debt.

Bed Bath & Beyond's recent deal with Hudson Bay further dilutes equity holders since the agreement is for the hedge fund to be able to convert the preferred stock they got as part of the deal to common stock at a 20% discount to what the stock is trading at, as long as the stock trades above $.716 cents a share. Hudson Bay likely shorted the stock or used to put options to lock in a profit as well. The hedge fund also knows that since this a popular stock to trade, there will likely be short squeezes that create opportunities for the company to profitably use their warrants. This financial arrangement between Hudson Bay and Bed Bath & Beyond is essentially the company leveraging what little value is left in the equity to receive some short-term financing, and shareholders have lost most of their equity value as a result of this and other deals management has made.

Bed Bath & Beyond would only turn to a hedge fund for financing if traditional lenders turned them down, since the terms of the company's agreement with Hudson Capital are clearly unfavorable. Bed Bath & Beyond also already received a default notice from JP Morgan in January, the company almost certainly tried to renegotiate the terms of the loan with the bank ahead of that warning. Recent statements by Bed Bath & Beyond, also makes clear this financing is going to be used exclusively for short-term debt payments, not for restructuring the business longer-term.

Hudson Bay knows that this stock is a popularly traded equity, and that this company has a significant short-interest, the hedge fund should be able to convert their preferred stock to common and sell the stock to short sellers who need to cover. This hedge fund does not likely have any interest in helping the company longer-term, this is simply financing that will likely keep Bed Bath & Beyond from declaring bankruptcy for another couple months. Bed Bath & Beyond has three major bond holdings due in 2024, 2034, and 2044. The 2034 and 2044 bonds are currently trading at nearly 15 cents on the dollars. The 2024 bonds are trading at 34.5 cents on the dollar. The 2024 bonds have rallied from a low of $.04 on the dollar in early February after the company announced the company completed their efforts to raise capital.

Bed Bath & Beyond's equity has also been nearly completely wiped out, the stock is currently trading at $1.26 a share, so the company won't likely be able to leverage the common stock for any more capital. Management also spent $890 million in nine months ending in November of last year, so the $360 million raised does not look sufficient even in the short-term. The only reason Hudson Bay or any other institution would consider lending to Bed Bath & Beyond at this point would be to cover counter-party risk in the bond market, and even then lending to a failing company with no plan or significant assets of value wouldn't likely make sense. Part of the reason JP Morgan issued a default notice to Bed Bath & Beyond, was because the value of the company's inventory has fallen in value, another sign that the company lacks any real assets to further borrow against. The fact that no retail company has tried to acquire Bed Bath & Beyond at these very low levels is also a further sign that the company's brand and inventory has minimal value.

Bed Bath & Beyond has no plan to turn the company's struggling business around, and the short-term capital that management has received from the recent equity offering and the financial agreement with Hudson Bay will not likely prevent this company from being forced to liquidate. Bed Bath & Beyond has not been able to get traditional loans from banks or find any company willing to acquire or merge with them. Interest rates going up will also make finding financing at appealing rates more difficult. Even though the short-term financing the company has received will provide help with their 2024 bonds, management still has to deal with $3.41 billion in long-term debts, and 1.2 billion in unsecured debt. Bed Bath & Beyond's brand is broken, and management doesn't likely have the capital or plan to turnaround the failing core business model.

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