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Saturday, 20 April 2019

Chewy worries don't dent PetSmart bond rally

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Bonds of struggling retailer PetSmart rallied on Monday as an improvement in earnings overshadowed concerns that bondholders will have a smaller claim on its fast-growing online unit Chewy.

PetSmart, owned by a private equity consortium led by BC Partners, said its adjusted Ebitda grew 5.1% to US$271.7m in its first quarter, two sources with access to the company’s financials told IFR.

While the results were helped by around US$100m of add backs - or adjustments made by management to earnings for one-off items - investors expressed some relief after a series of disappointments in recent quarters.

“This was the first piece of good news we have seen in a while,” one of the sources told IFR. “The amount of information and the quality of information (coming out of the company) has been very limited.”

PetSmart’s unsecured bonds had fallen to less than half of face value last month, but jumped by almost six points on Monday. Its 7.125% 2023s and 8.875% 2025s rose to 53.75 and 53.25 cents respectively, according to MarketAxess.

The company’s secured 5.875% 2025s posted more modest gains, ending the day 1.3 points higher at 70.75 cents.

 

MOVING PIECES

PetSmart also announced it had put over a third of the equity in Chewy - the unprofitable online retailer it acquired last year in a bid to help turn its business around - out of creditors’ reach, the sources said.

It moved 20% of Chewy to its private equity owners as a dividend, and another 16.5% to a so-called unrestricted subsidiary. As a result, PetSmart’s creditors now only have a claim on roughly 63.5% of Chewy.

Some analysts and investors, however, had been expecting an even more punitive outcome as the company looks to tackle declining sales and intense competition from online rivals like Amazon - helping explain the rise in its junk bonds.

PetSmart’s move could also be a prelude to a distressed exchange on the company’s unsecured bonds, some analysts said.

In its communications with investors, PetSmart did not say what its next move would be. The company was scheduled to host a conference call with investors and analysts later on Monday, the sources said.

PetSmart and BC Partners declined to comment.

 

POSSIBLE SWAP

PetSmart could offer unsecured bondholders the option to swap into new bonds issued by the unrestricted subsidiary that owns the 16.5% stake in Chewy.

Such a move might help reduce the company’s debt load, while offering bondholders a chance to marginally improve their position in the company’s capital structure, according to Scott Josefsberg, an analyst at research firm Covenant Review.

“Some unsecured creditors might like to be exchanged because they would then have senior claim on Chewy equity,” Josefsberg said. “This is all allowed by the covenants.”

PetSmart last month hired J.K. Symancyk to be its new chief executive, filling a role that had been vacant for nine months following the resignation of Michael Massey, who had been in charge since BC Partners took the company private in 2015.

PetSmart reportedly paid over US$3bn when it acquired Chewy in 2017.

 

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