PetSmart has shelved a planned $4.7bn fundraising linked to its split from online store Chewy, delivering a setback for the pet supply chain after years of testy relations between its lenders and private equity owner.

Investors had pushed back against the terms of the proposed fundraising, which included a mix of bonds and loans, amid jitters in the corporate debt markets ahead of the US election. PetSmart, which holds a junk credit rating, had increased the interest rate on the bonds in an attempt to win them over, according to people familiar with the fundraising.

Investors had also balked at the loose documentation underpinning the deal, these people said. It could have given BC Partners the flexibility to move assets out of reach of lenders, echoing an aggressive manoeuvre taken by the buyout firm two years ago when it transferred more than a third of Chewy’s equity to entities where creditors had no claim. 

That move became one of the marquee examples of alleged asset stripping — a claim BC Partners has denied. Asset stripping is when buyout groups take advantage of loose rules governing the collateral backing debt agreements to move valuable assets out of the reach of lenders. 

The latest iteration of the documents curbed BC Partners’ ability to repeat history by tightening certain restrictions, according to the people. However, it was not enough to get the deal over the line and the company pulled the proposed fundraising late on Friday.

“Despite their history of stripping assets from creditors they were asking for it to be even easier to strip assets going forward,” said Scott Josefsberg, an analyst at the research company Covenant Review, although the final bond documents were improved “significantly” and the potential for future asset-stripping had been “curtailed”.

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

Petsmart is the third company to pull a high-yield bond deal this week, amid market volatility. Spreads — the additional yield on high-yield bonds compared with US Treasuries — have widened by the most this week since the end of September, as Covid-19 cases have risen around the world and investors have worried about a potentially contested US election.

BC Partners acquired PetSmart, a brick-and-mortar chain, in 2015 in a $9bn leveraged buyout. Two years later PetSmart acquired the quickly growing but unprofitable Chewy for $3bn.

In 2018, as PetSmart was struggling under debt it took on to fund the acquisition, BC Partners utilised the loose documentation underpinning the debt and transferred more than a third of Chewy’s equity to entities out of reach of creditors. Lenders sued PetSmart over the reorganisation, although the suit was ultimately resolved.

Similar fights between private equity firms and hedge fund creditors have played out at companies such as J Crew and Neiman Marcus. PetSmart emerged as a rare example where a company was able to engineer a turnround that ultimately satisfied both creditors and owners of the business. 

PetSmart’s debt has recovered from severely distressed levels as investor sentiment surrounding the retailer has improved. Chewy, meanwhile, listed its shares in 2019 and its market capitalisation has soared to $28bn.

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

The pulled deal included a $1.5bn senior secured note with a seven-year maturity, with interest payments raised to 6.5 per cent, up from about 5.5 per cent earlier in the week when bankers first started marketing the deal. A second $1.15bn eight-year bond had its interest rate increased to about 9 per cent, up from about 7.5 per cent. 

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The bonds were due to come alongside a $2bn term loan. BC Partners also planned to add $1.3bn of equity, according to people familiar with the terms of the deal.

Overall, the deal had been viewed favourably by rating agencies. Both S&P Global and Moody’s had upgraded PetSmart, citing what would have been the company’s lower debt burden following the refinancing and tailwinds due to an uptick in Americans seeking the companionship of cats and dogs. 

“We believe trends for the next year will remain positive as a flurry of pet adoptions through the Covid-19 period and a shift in consumer discretionary spend toward home-related purchases provide a good tailwind for industry growth,” noted S&P Global. 

Additional reporting by Eric Platt in New York

The tug of war between PetSmart’s private equity owners and its debt investors

2015

BC Partners acquired PetSmart in a $9bn leveraged buyout

2017

PetSmart acquired the quickly growing but unprofitable Chewy for $3bn

2018

BC Partners transfers more than a third of Chewy’s equity to entities out of reach of creditors. Lenders sue over the reorganisation

2019

PetSmart and hedge funds settle the litigation

Later in 2019

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

Via Financial Times