BBBY - Equity Holders Likely To Be Wiped Out In Bed Bath & Beyond Bankruptcy

2023-04-23 20:56:00 ET

Summary

• Ailing home furnishing retailer finally files for Chapter 11 bankruptcy protection amid horrible sales trends and persistent liquidity issues.
• Company has commenced liquidation sales but will also pursue asset sales in a court-supervised auction in early June.
• With projected liquidation proceeds not sufficient to repay secured creditors in full, holders of the company's senior unsecured notes might be at risk of being wiped out.
• With even higher-ranking claims at risk of being extinguished, I do not expect any sort of recovery for common equity holders.
• Investors should sell existing positions and move on.

On Sunday, ailing home furnishing retailer Bed Bath & Beyond ( BBBY ) finally filed for Chapter 11 bankruptcy protection amid horrible sales trends and persistent liquidity issues.

(...) Bed Bath & Beyond Inc. today announced that it (...) filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey to implement an orderly wind down of its businesses while conducting a limited marketing process to solicit interest in one or more sales of some or all of its assets.

To facilitate this process, the Company has received a commitment of approximately $240 million in debtor-in-possession financing ("DIP") from Sixth Street Specialty Lending, Inc. Following court approval, the Company expects this financing to provide the necessary liquidity to support operations during the Chapter 11 process. (...)

While the Company has commenced a liquidation sale, Bed Bath & Beyond Inc. intends to use the Chapter 11 proceedings to conduct a limited sale and marketing process for some or all of its assets. The Company has filed motions with the Court seeking authority to market Bed Bath & Beyond and buybuy BABY as part of an auction pursuant to section 363 of the Bankruptcy Code. (...)

In layman's terms:

Bed Bath & Beyond has started to wind down its business while at the same time preparing to conduct a court-supervised auction of its assets as also stated in the company's chief restructuring officer's first day declaration .

While the commencement of a full chain wind-down is necessitated by economic realities, Bed Bath & Beyond has and will continue to market their businesses as a going-concern, including the buybuy Baby business.

To facilitate this process, Bed Bath & Beyond secured $40 million in new money debtor-in-possession financing. Moreover, Bed Bath & Beyond has filed a motion to establish procedures to govern an efficient, public, and flexible auction process to realize the full value of existing assets. Bed Bath & Beyond has likewise proposed procedures to govern a wind-down process for all of its assets, including of the liquidation of inventory in all retail stores and distribution centers. Bed Bath & Beyond believes the framework and roadmap of these combined procedures will best maximize value for all stakeholders.

Please note the difference between the $240 million in DIP-financing stated in the company's press release and the $40 million in " new money debtor-in-possession financing " noted in the first day declaration.

As it has turned out, the company failed to attract any third-party DIP-financing proposals despite approaching " numerous potential providers " which required existing creditor Sixth Street Specialty Lending ("Sixth Street") to take action (emphasis added by author):

Following round-the-clock, hard-fought negotiations , the Debtors and the DIP Lenders agreed upon the terms of a debtor-in-possession financing in the form of senior secured postpetition financing on a superpriority basis under (1) a new money single draw term loan facility consisting of up to $40 million, and (2) a roll-up of Prepetition FILO Secured Obligations in the amount of $200 million .

Effectively, Sixth Street managed to move $200 million in existing claims to a super-senior position in exchange for providing the funds required for an orderly wind-down of the business.

The company currently expects to generate aggregate net sales proceeds of $718 million from the liquidation of all remaining 475 brick-and-mortar stores which would leave even secured creditors with losses:

The issue is also very much reflected in the trading prices of Bed Bath & Beyond's unsecured bonds:

With unsecured creditors in real danger of being wiped out, there's apparently no hope for the company's common shareholders as the Absolute Priority Rule requires creditors to be paid in full before equity holders would be entitled to any sort of recovery.

Even assuming the unlikely case of the company's assets being auctioned off successfully, sales proceeds would likely be a tiny fraction of the $1.8 billion required to make creditors whole, particularly when considering the dismal state of the business.

According to the company's court filings , Bed Bath & Beyond has until May 22 to secure a potential stalking horse bidder with the auction set for June 2 and court approval for the winning bid expected by June 7.

The court documents also provide details regarding the company's recent efforts to solicit interest in a going-concern sale transaction under chapter 11:

Lazard initially reached out to a group of potential financial and strategic investors who are experienced in investing in the retail sector, operational turnarounds and/or distressed situations and held meetings with certain of those investors in late December 2022. This initial group was comprised of approximately twenty investors. Those parties included various financial sponsors, strategic buyers, and money center banks. Several of the parties contacted could have potentially been acquirers of some or all of the Debtors businesses, as well as providers of post-petition financing to fund a going-concern reorganization. (...)

However, no viable third-party postpetition financing sources nor any plan sponsors or stalking horse purchaser emerged given the uncertainty surrounding the Debtors’ go-forward viability.

No party was willing to provide financing to the Debtors on a junior, unsecured, or administrative priority basis.

With potential suitors having already rejected to make a move for the business, it's even more difficult to envision a successful sale in the proposed court-supervised auction.

Bed Bath & Beyond filed for bankruptcy with approximately 739.1 million common shares outstanding. At Friday's closing price, the company's market capitalization calculates to a whopping $215 million despite the stock's inherent value likely being zero.

Under normal circumstances, I would expect the company's market capitalization to decline into the single digit millions over time with Revlon ( OTCPK:REVRQ ) being the most recent example for this pretty common trading pattern for companies that are about to wipe out shareholders in bankruptcy.

Please note also that the Nasdaq Stock Market is likely to delist the company's shares in accordance with Nasdaq Listing Rules 5101, 5110(b), and IM-5101-1 within short notice.

While a short sale might yield decent results, I would advise investors to hold off until the Nasdaq delisting date has been set. With many retail investors using brokerage platforms that do not offer access to OTC trading, risk of falling victim to another short-squeeze would be reduced substantially this way.

Bottom Line

Bed Bath & Beyond finally succumbed to abysmal sales trends and resulting cash outflows.

While the company has already commenced liquidation sales, a court-supervised auction for some or all of its assets is expected to be conducted in early June but after the recent failure to attract strategic buyers, it is difficult to envision a successful outcome.

With projected liquidation sales proceeds not sufficient to repay secured creditors in full, holders of the company's senior unsecured notes might very well end up with nothing.

As even unsecured creditors appear to be in danger of being wiped out, I do not expect any sort of recovery for common equity holders at this point.

Given the issues discussed above, investors should sell existing positions and move on.

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