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Bed Bath & Beyond debt exchange just a first step

Image of Bed Bath & Beyond storefront

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Bed Bath & Beyond initiated a distressed debt exchange to all holders of its unsecured senior notes, the company announced Tuesday.

Why it matters: It's the first step in an effort one source says the company hopes will lead to serious negotiations with bondholders — if a majority organizes into a single negotiating group.

  • That's a big if because the company needs to have 51% of bondholders at the table.
  • Then those talks would have to yield an agreement, the likelihood of which is unknown, the source adds.

What they're saying: Not much outside the release. Bed Bath & Beyond did not respond to Axios' request for comment.

  • "We believe this transaction will put us in a stronger financial position going forward by significantly reducing our debt and interest expense upon a successful completion," interim CEO Sue Gove said in the release.
  • The exchange would push out the maturity date on its senior notes due 2024, which will soon need to be refinanced, Gove said.
  • The move is to provide the home goods and furnishing retailer with "greater stability and flexibility in our business," Gove says.
  • S&P downgraded the company's issuer rating to CC from CCC, noting that it views the exchanges as "distressed and tantamount to default because the noteholders will receive less than they were originally promised."

Details: The holders of the 3.749% senior unsecured notes due 2024 could opt for 3.693% senior second-lien secured non-convertible notes due 2027 at par value, redeemable in one year by BBBY at 40% of principal; or 8.821% senior second-lien secured convertible notes due 2027 at $410 per $1,000 of principal.

  • The holders of the 4.915% senior unsecured notes due 2034 could opt for 12% senior third-lien secured convertible notes due 2029 at $217.50 per $1,000 of principal.
  • And the holders of the 5.165% senior notes due 2044 could also opt for third-lien convertible notes.

Of note: There are three types of bondholders Bed Bath & Beyond must engage with, the source says. These include...

  • Those that have held the notes from the beginning at 100 cents on the dollar.
  • Institutional investors that recently invested in the debt out of their distressed funds.
  • And retail holders, which are the most difficult to assess, the source says.

Yes, and: In all cases, the bondholders would receive collateral in exchange for pushing out the maturity date, the source emphasizes.

  • That should be attractive if Bed Bath & Beyond were to file for bankruptcy, giving them at least some possibility of a recovery, the source explains.
  • The stabilizing effect of the exchange could also potentially help the retailer raise additional capital, which to date has been difficult to do given the volatility of its stock and meme stock status, the source claims.
  • "A company with this kind of cash burn cannot exist indefinitely without raising more capital," the source says.

Between the lines: It's a relatively straightforward distressed debt exchange, says David Silverman, a senior director at Fitch Ratings, noting that Bed Bath & Beyond's offer involves a material reduction in terms.

  • While the exchange reduces pressure by extending the due dates on the debt, it does little to slow Bed Bath & Beyond's cash burn, Silverman cautions.

👀 What we're watching: Silverman says that the retailer, it could be argued, is initiating the exchange to avoid bankruptcy, based on the language it is using.

  • If they are not able to effect change with sufficient participation, the company would have to look at alternatives that include filing for bankruptcy, he says.

The big picture: Bed Bath & Beyond is burning through cash, having spent about $800 million in the first half of the year, Silverman says — which alone could fell the company.

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