PetSmart Cancels Debt Deal After Investor Reluctance


Updates from PetSmart Inc

PetSmart has put aside a planned $ 4.7 billion fundraiser related to its separation from online store Chewy, generating a setback for the pet supply chain after years of difficult relationships between its lenders and the owner of the private equity.

Investors had objected to the terms of the proposed fundraiser, which included a mix of bonds and loans, amidst nervousness in corporate debt markets ahead of the US election. PetSmart, who holds an unwanted credit rating, had raised the interest rate on the bonds in an effort to earn them, according to people familiar with fundraising.

Investors had also objected to the loose documentation underlying the deal, the people said. This could have given BC Partners the ability to move assets out of reach of lenders, echoing an aggressive move the buyout company took two years ago when it transferred more than a third of equity from Chewy to entities where creditors had no claims.

This decision has become one of the outstanding examples of presumed dismemberment of assets – a claim that BC Partners denied. Asset stripping occurs when buyback groups take advantage of the flexible rules governing collateral-backed debt collateral arrangements to move valuable assets out of reach of lenders.

The latest iteration of the documents limited BC Partners’ ability to repeat history by tightening some restrictions, people say. However, that was not enough to secure the deal and the company withdrew the proposed fundraiser on Friday night.

“Despite their history of stripping assets from creditors, they demanded that it be even easier to strip assets in the future,” said Scott Josefsberg, analyst at research firm Covenant Review, although the final bond documents were improved “significantly” and the potential for future asset stripping had been “reduced”.

BC Partners declined to comment. PetSmart did not respond to a request for comment.

Petsmart is the third company to close a high yield bond deal this week, amid volatile markets. Spreads – the extra yield of high yield bonds over US Treasuries – widened the most this week since late September, as cases of Covid-19 increased globally and investors worried of a potentially contested US election.

British Columbia Partners acquired PetSmart, a physical chain, in 2015 as part of a $ 9 billion LBO. Two years later, PetSmart acquired the rapidly growing but unprofitable Chewy for $ 3 billion.

In 2018, as PetSmart struggled with the indebtedness it took on to finance the acquisition, BC Partners used the loose documentation behind the debt and transferred over a third of Chewy’s equity to companies. entities beyond the reach of creditors. The lenders sued PetSmart over the reorganization, although the lawsuit was ultimately resolved.

Similar fights between private equity firms and hedge fund creditors have taken place at companies such as J Crew and Neiman Marcus. PetSmart emerged as a rare example where a company successfully staged a turnaround that ultimately satisfied both the creditors and the owners of the business.

PetSmart’s debt rallied after reaching very high levels as investor sentiment towards the retailer improved. Mellow, meanwhile, registered his actions in 2019 and its market capitalization soared to $ 28 billion.

Along with the latest refinancing, PetSmart planned to distribute its remaining stake in Chewy to BC Partners so that the two companies would no longer be connected.

The drawn deal included a $ 1.5 billion senior secured note with a seven-year maturity, with interest payments raised to 6.5%, from around 5.5% earlier in the week. when the bankers started to market the deal. A second eight-year bond of $ 1.15 billion saw its interest rate rise to about 9 percent, from about 7.5 percent.

The bonds were to be accompanied by a term loan of $ 2 billion. BC Partners also planned to add $ 1.3 billion in equity, according to people familiar with the terms of the deal.

Overall, the transaction was well received by the rating agencies. Both S&P Global and Moody’s had improved PetSmart, citing what would have been the company’s debt burden after the refinancing and favorable winds due to a slight increase in the number of Americans seeking the company of cats and dogs. dogs.

“We believe the trends for next year will remain positive, as a wave of pet adoptions during the Covid-19 period and a shift from consumer discretionary spending towards home-related purchases provide good tailwind for the growth of the industry, “noted S&P Global.

Additional reporting by Eric Platt in New York

The standoff between PetSmart’s private equity owners and its debt investors

2015

BC Partners acquired PetSmart in $ 9 billion LBO

2017

PetSmart acquired fast growing but unprofitable Chewy for $ 3 billion

2018

BC Partners transfers over a third of Chewy’s equity to entities beyond the reach of creditors. Lenders file a complaint against the reorganization

2019

PetSmart and hedge funds settle dispute

Later in 2019

Chewy goes public. The online retailer’s market value has since climbed to $ 28 billion



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