One of these days they’ll start putting people in jail for what the private equity shops do to companies. From Wolf Richter at wolfstreet.com:
Bondholders of the PE-firm-owned brick-and-mortar retailer grapple with their fate.
PetSmart, the largest brick-and-mortar pet supply and services retailer in the US and Canada, with 55,000 employees, 1,600 big-box stores, 200 pet boarding facilities, and $8.7 billion in revenues in fiscal 2017, has a little problem: $8.1 billion in debt.
And you guessed it: Half of this debt is the result of its leveraged buyout by a private equity firm. When a company gets acquired via an LBO, it is the company itself that ends up carrying the debt used to acquire it. Hence the phrase “leveraged” buyout. In 2014, “activist” hedge funds took a stake in the publicly traded shares and started clamoring for a sale. PE firms took notice. A bidding war broke out – a bidding war for a brick-and-mortar retailer, as if they’d never even heard of e-commerce!
BC Partners in London, with zero experience in US retail, won the bidding war with its ludicrous $8.7 billion offer. It was the most expensive retail LBO ever. After the deal closed in 2015, BC Partners loaded PetSmart up with debt and extracted a special dividend of $800 million. With this dividend, BC Partners likely made its money, no matter what happens to PetSmart.
And then, in a move of desperation and in a sign that the credit market was boiling over with blind enthusiasm for anything junk-rated, PetSmart borrowed another huge load of money to buy its online competitor Chewy.com for $3.4 billion. It was the most expensive acquisition of an online retailer ever.
In its last SEC filing as a publicly traded company in February 2015, PetSmart reported $343 million in cash and a mere $560 million in debt. Now it has 15 times as much debt — $8.1 billion — and some of this debt is getting into painful trouble.
No one in bond-land will easily forget the epic collapse of Toys “R” Us bonds. They were still trading above par at 101 cents on the dollar in late August 2017. By September 18, they’d plunged 88% to 12 cents on the dollar, as bankruptcy rumors for the PE-Firm owned LBO queen became reality.
When Toys “R” Us filed for Chapter 11 bankruptcy, it assured everyone it would keep doing business as normal. The bonds jumped to 40 cents on the dollar by October 27, and those who’d had the balls to dive in at 12 cents made a bundle if they were able to unload them in late October (however, with little liquidity in this kind of bond, it can be hard to unload).
To continue reading: Is PetSmart Next?
