Bonds of Bed Bath & Beyond Collapse on Bankruptcy Fears as Suppliers with Unpaid Bills Halt Shipments
by Wolf Richter • Aug 22, 2022
Meme-stock crowd got crushed, shares collapsed 69% in four days. Their billionaire hedge-fund hero, who might have known about the unpaid bills, got out in time.
By Wolf Richter for WOLF STREET.
The $675 million of senior unsecured 30-year bonds that meme-stock darling Bed Bath & Beyond issued in 2014, and that are due in 2044, with a coupon interest of 5.165%, collapsed to a new closing low of 15.8 cents on the dollar today, with some trades being below 15 cents, after having plunged all last week from the meme-stock inspired dead-cat bounce.
That would be a yield to maturity of 33%, assuming that the company pays the interest for the life of the bond and doesn’t default, and at maturity pays off the bond. But with this yield, the bond market is signaling that a default and a bankruptcy filing are imminent, with a massive haircut for unsecured bondholders (chart by FINRA/Morningstar):
On Friday, Bloomberg reported that a survey of vendors, undertaken by credit-rating and consulting firm Pulse Ratings, had found that Bed Bath & Beyond had fallen behind as much as 90 days on its bills.
All respondents had past-due accounts receivable with Bed Bath & Beyond, and some said that over half of their accounts receivable with Bed Bath & Beyond were past due. The suppliers also complained that “management is short on guidance about its plans to catch up with its past-due bills,” according to Bloomberg, citing the survey it had seen.
Also according to Bloomberg, based on its sources, several firms that provide trade credit insurance to vendors have revoked coverage of Bed Bath & Beyond.
Not being able to pay suppliers is getting very close to the endgame. And the bond market knows that a lot better than the meme-stock crowd.
The $225 million of senior unsecured 20-year notes that Bed Bath & Beyond issued in 2014, due in 2034, with a coupon interest of 4.915%, collapsed to a new low of 16 cents on the dollar today.
That would be a yield of 34%, assuming that the company even pays the interest for the life of the bond which the bond market assumes is very unlikely (chart by FINRA/Morningstar)
The $300 million in of senior unsecured 10-year notes that Bed Bath & Beyond issued in 2014, due in 2024, with a coupon interest of 3.749%, collapsed to a new low of 32.7 cents on the dollar today.
That’s a yield to maturity of 75%, assuming that those bonds will pay interest for two years and then get redeemed at face value in August 2024. But the bond market is nearly certain the company will default before August 2024, and that a bankruptcy court will give them high and tight haircuts (chart by FINRA/Morningstar)
The likely buyers of these bonds are hedge funds and PE firms that want a seat at the table during the bankruptcy proceedings to get their share of the pie while shareholders get ripped apart.
This plunge in bond prices unwinds the boost that the bonds received from the meme-stock crowd when they inflated the shares to such an extent that it created the hope that the company could raise cash by issuing new shares at those inflated prices. But that didn’t happen.
But from the prices today, we can see that holders of these unsecured bonds are now figuring into their calculus a very high probability that they will have to fight this out in bankruptcy court.
Numerous other brick and mortar retailers were liquidated in bankruptcy court in recent years, including Toys ‘R’ Us. Sears was chopped to little pieces in bankruptcy court. Money-losing over-indebted brick-and-mortar retailers are notoriously difficult the restructure in bankruptcy court, and most end up getting liquidated.
Holders of unsecured bonds issued by retailers tend to get little or nothing in bankruptcy court. But stockholders are the bottom of the capital structure, lower even than unsecured bond holders and other unsecured creditors, and tend to get wiped out.
And yet, bankruptcy filings have fired up the meme-stock crowd into bidding up shares of companies after they filed for bankruptcy, hoping for I dunno, that at a minimum they can sell that stuff to the greater meme-stock fool at 10 times the price?
But selling that stuff is precisely what the meme-stock crowd doesn’t do, and so they get wiped out when the hedge fund billionaires amid them – who know that you don’t have a profit until you dump this stuff – dump this stuff, and eager falling-knife grabbers in the meme-stock crowd make that a very profitable trade for the hedge fund billionaires.
Which is what happened in the case of Bed Bath & Beyond when activist investor Ryan Cohen, five months after hyping the shares and disclosing that his firm RC Ventures had taken a 9.8% stake in the company, and then imposing some changes on the company, dumped his entire stake, causing the shares to re-collapse.
SEC filings show that RC Ventures dumped the shares on August 16 and 17 at prices ranging from $18.68 to $29.21, cashing out a profit of $69 million, while the meme-stock traders that hung on to their shares or bought the falling knives got carried out on stretchers.
The Bloomberg report came out on Friday, and the information that Bed Bath & Beyond was behind on its bills had likely started circulating before then. The bonds started to re-collapse on August 17. There is a good chance that Cohen knew that the company was behind on its bills – that he knew that this was getting close to the endgame and that he needed to get out while the getting was good.
Only the meme stock traders didn’t know it. These folks need to learn from Cohen that you don’t make money with this crap unless you sell this crap when it’s high.
From the intraday high on August 17 of $30 a share until the close today – in four and a half trading days – the share price kathoomphed 69% (data via YCharts):
In the end, this is the classic story of a brick-and-mortar retailer with lots of big stores that got run over by ecommerce.
Bed Bath & Beyond has an ecommerce operation, like Sears and Toys ‘R’ Us had ecommerce operations, and customers are using it. But the stores are expensive to operate, and they require a lot of inventory (cash) and staff, and this has been years in the making.
Annual revenues collapsed by 36% from the peak in 2017 through 2021, and 2021 was the best year ever for retailers as consumers blew their pandemic gazillions on no matter what — but they stayed away from Bed Bath & Beyond:
What’s different is that the meme-stock traders and hedge funds have gotten involved in the brick-and-mortar meltdown – also see GameStop – during the greatest stock bubble ever, and they played this game amongst each other, shuffling those stocks back and forth, hyping the shares in the social media and then dumping them, while others believed their hype and bought the stuff and got cleaned out. Oldest game in town. And throughout, the SEC has been reliably asleep.
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