Bed Bath & Beyond (BBBY) shares plunged lower Tuesday after the struggling home retailer said it will raise around $1 billion from a preferred stock sale as it looks to avoid an imminent Chapter 11 bankruptcy filing.
Bed Bath & Beyond said the two-pronged sale would included $225 million convertible preferred shares and a further $800 million in warrants linked to the newly-issued stock. The Wall Street Journal reported Tuesday that investors are prepared to back the first phase of the sale, with support for the remaining capital raise emerging "over time".
The retailer, which defaulted on a loan to JPMorgan last week, may be hoping to take advantage of yesterday's surged in its share price, which sent Bed Bath & Beyond stock some 92% higher on the session to a year-to-date high of $5.86 each, pegging its market value at around $687 million.
Should the capital raising fail, Bed Bath & Beyond said, it will "likely file for bankruptcy protection", noting it had appointed turnaround expert Holly Etlin as interim CFO.
"We need the proceeds from the transactions to pay our outstanding obligations under our credit facilities and senior notes and to operate our business, and we expect that we will likely file for bankruptcy protection if the the transactions are not consummated," Bed Bath & Beyond said in a Securities and Exchange Commission filing late Monday.
Bed Bath & Beyond shares were marked 45.2% lower in early Tuesday trading to change hands at $3.22 each.
"We see a low probability that the company will be able to raise equity and view this as a 'last gasp' before filing for bankruptcy protection," said Wedbush analyst Seth Basham, who now pegs his share price target at zero.
"Moreover, the weak macro backdrop and high execution risk of the company's inventory, assortment, customer re-engagement and cost savings under an interim management team further reduces the probability of success," he added.
Bed Bath & Beyond posted a wider-than-expected third quarter loss of $393 million Tuesday, as sales fell 33% from last year to $1.26 billion, and said it's exploring "multiple paths" in its turn around strategy while accelerating plans for store closures and cost-cutting.
Still, shares in the group have rallied more than 260% over the past 30 days, with heavy trading in the options market, following the original warning from CEO Sue Gove that the group could file for Chapter 11 bankruptcy protection in the coming months.
Stock holders typically get nothing from Chapter 11 filing, as the courts consider them company owners rather than creditors, although turnaround experts will sometimes carve out a small portion of the recovery for equity investors as a gesture of good will - particularly if they want those same investors to buy stock in the entity that exits the Chapter 11 process.
Bondholders are taking an entirely different view on its prospects, even through they sit much further up on the list of creditors likely to recover assets in the event of a Chapter 11 filing, with traders pegging its $300 million paper maturing in August of 2024 -- which carries a coupon of 3.749% -- at just $7.52 per $100.
Standard & Poor's said last month that Bed Bath & Beyond, while not in "active default", remains highly vulnerable to the "virtual certainty" of a restructuring. The ratings company said that's based on its "deteriorating liquidity position, challenging operating conditions, and the looming maturities" of its debt pile.
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