PetSmart Bonds Sink As Most Expensive LBO In Retail History Hurtles Toward Bankruptcy

Thursday, April 26, 2018
By Paul Martin

by Tyler Durden
Thu, 04/26/2018

With Sears’ hedge-fund owner stepping in the backstop the flailing retail giant as it shambles toward bankruptcy, and what’s left of Toys R’ Us is struggling through the indignity of liquidation after the company failed to find a buyer in bankruptcy, 2018 is shaping up to be just as bad – if not worse – of a year for American retailers as 2017 was. Already, retail defaults reached an all-time high during the first quarter, Moody’s Investors Service revealed. And the fallout is far from over.

And in what’s shaping up to be the next big private-equity backed retailer to crumble under a stupefying pile of debt, Bloomberg reported today that investors in pet supply retailer PetSmart are panicking as the $8.1 billion in bond and loan maturities that are soon coming due might force it too into bankruptcy, even as the market for pet supplies in the US is in the midst of an unprecedented boom.

Americans spent $70 billion on pet supplies in 2017, compared with $41 billion in 2007, according to data provided to Bloomberg by the American Pet Products Association.

The company’s troubles have caused the value of its bonds trading on the secondary market to plummet, with some of these bonds are now trading at half of face value and a yield of 21.2%, according to Bloomberg. What’s worse, the adjustable-rate bonds carry a coupon of 300 basis points above Libor, with a floor of 1%. This is hugely problematic, given 3M USD Libor recently touched its highest level in 13 years.

In retrospect, BC Partner’s offer seems almost ridiculously high.

But BC Partners’ purchase price amounted to retail’s most expensive takeover to date. It valued PetSmart shares 11 percent higher than analysts’ consensus, and at a 40 percent premium to their price before the sale process began.

Of course, this is hardly news to anybody who has been following the troubled world of American retail. In what sounds to us like a recipe for instant business success, private equity firm BC Partners led a leveraged buyout of the company in 2015, topping its own highest bid to lock in the winning offer at $8.7 billion, or $83 a share, despite having no retail experience. That makes the PetSmart buyout the most expensive takeover in retail history.

The Rest…HERE

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