krblokhin
Bankrupt Bed Bath & Beyond (OTCPK:BBBYQ) liquidation in Ch.11 is looking more like a Ch.7 liquidation and that is not good for BBBY investors. An important hearing was held on June 14 that disclosed some interesting new updates. It is surprising that investors are valuing the BBBY equity at almost $134 million based on the latest price of $0.18 considering that I believe it is very unlikely shareholders will get any recovery. I continue to rate BBBYQ a strong sell.
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June 14 Hearing
I "attended" a hearing via zoom that was mostly about the DIP order (docket 718) on June 14 that contained some interesting new information. In addition, a number of critical dockets were just filed. DIP lender, Sixth Street Specialty Lending, disclosed at the hearing that they are going to make a "credit bid" on some of the BBBY assets that collateralize their secured debt holdings. It was not disclosed what specific assets they will bid on. (A credit bid is using the full face amount of a debt instrument as if it were cash even if the market value of that instrument is worth less than the face amount.)
The number of multiple litigations by BBBY are expected to be rather significant it was disclosed at the hearing. Of course, often the results are less than these expectations. These litigations include alleged shipping and price gouging claims against shipping companies. There are also preference claims and litigation for various claims against other parties. These multiple litigations usually take a long time to resolve as the judge noted during the hearing. The term "liquidating trust" was mentioned a few times during the hearing. I am, therefore, assuming the bankruptcy plan will include some liquidating trust that will pay cash proceeds from the litigation against various parties after the plan's effective date. I would expect that unsecured noteholders would be listed beneficiaries of this liquidating trust, but near the bottom for payments. I have doubts that BBBY shareholders would be even listed as beneficiaries because there are just too many claims that have higher priority. It might be something similar to the Sears Holdings liquidating trust.
What is interesting, in my opinion, is what was not said at the hearing. Often judges want updates, but Judge Vincent Papalia never asked. Yes, there was a lot of talking, but not about how store liquidations are doing or the status of the bidding process.
$21.5 Million Stalking Horse Bid
The selection of a stalking horse bid by Overstock.com (OSTK) to pay $21.5 million for some of the intellectual property filed on June 13 (docket 708) disappointed many investors who were expecting a stalking horse bid for buybuy BABY. The intellectual property includes valuable data on their customers and some computer software, but it does not include trades names such as Bed Bath & Beyond. It will be interesting to see if other bidders will now come forward with bids by the June 16 deadline that are higher than $21.5 million. An auction, if needed, is set for June 21.
Nothing New on buybuy BABY - (Yet)
There have been a number of media reports that there are parties interested in buying buybuy BABY. Some investors were originally expecting some stalking horse bid on this significant asset. The reality is that BABY will most likely get bids that are bargain prices with buyers using "30-70% off coupons" to purchase assets of the bankrupt retailer. BBBY bought BABY in 2007 for $67 million cash and repayment of $19 million debt. That transaction included the purchase of eight BABY stores. While there are now about 120 BABY stores the entire retail industry is completely different than in 2007.
Late last year many investors kept asserting that BBBY could avoid bankruptcy if they just sold BABY to raise needed cash. Two things. First, BBBY raised $360 million from various stock sale transactions earlier this year and it still filed for bankruptcy. So, it is very unlikely that selling BABY would have kept them out of Ch.11. Second, is the section 548 issue that too often investors do not even know about.
Often potential buyers are very reluctant to buy assets from severely distressed companies because of section 548. A severely distressed seller can't just sell some assets at even a modest discount from fair value to raise needed cash. A potential buyer and the buyer's bankers often worry about a potential claw back of the sale. The best way is to look at this issue is to read section 548:
Section 548 (a)(1) The trustee may avoid any transfer... of an interest of the debtor in property, or any obligation... incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily...(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and (ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;"
Two points are the focus of this section. It is up to the bankruptcy judge to determine if the seller was "insolvent". There are no exact metrics used to determine insolvency. The judge also would decide on the "reasonably equivalent value". This is why a specific judge is so important for each bankruptcy case. Their approaches are often very different.
Under section 365 BBBY can now sell BABY "free and clear" and the buyer will not have to worry about some potential claw back. In addition, they most likely will buy it a much lower price. It is very frustrating to constantly read comments by investors in distressed companies asserting that a company can "just sell" a major asset to raise cash to stay out of bankruptcy. Many retail investors seem completely unaware of section 548.
Store Lease Sales
A major source of cash for paying any potential recoveries, if any, for lower priority claim holders, such as the unsecured noteholders, was expected to come from the sale of valuable store leases. This is where this case looks more like a Ch.7 case instead of Ch.11 case. So far there has not been any purchases of a large number of leases in one major transaction that is often associated with a Ch.11 case. Burlington Stores (BURL) is buying seven store leases (docket 644) for $1.475 million. (There is also a $245k lease cure amount associated with this deal.) BBBY is getting $3.5 million from their landlord for two lease termination agreements (docket 659). The two stores are in Woodbridge, N.J. and Las Vegas.
BBBY had 475 stores when they filed for bankruptcy after closing many stores earlier in the year prior to the filing. A couple of store leases have already been rejected and nine subleases have been assumed/assigned for what seems to be just the cure amounts (docket 705). It will be interesting to see if there are many bids for the remaining store leases by the June 16 deadline besides these already negotiated deals.
Latest Budget
The final DIP order filed June 14 included a budget. Cash from store liquidations is forecasted to total $636 million.
DIP Budget
restructuring.ra.kroll.com/bbby/Home-DocketInfo
Updated DIP Milestones
June 16-Deadline to submit bids for assets
June 21-Auction
June 28 - Order entered approving asset sales
June 30-Filing bankruptcy plan
July 22-Completing going-out-of-business sales
August 31-Plan confirmed and gone into effect
Unsecure Noteholders
Holders of the unsecured notes are holding "lottery tickets" hoping for some type of recovery, even if just some token "gift" from a higher priority class under a Ch.11 plan or they might be able to get a token amount from a liquidating trust. At least there is an ad hoc group of unsecured noteholders that are asserting their interests during the bankruptcy process, which actually did happen during the June 14 hearing. BBBYQ shareholders currently do not have any group asserting their interests. Below are the members of this group (docket 703):
Unsecured Noteholder Group
restructuring.ra.kroll.com/bbby/Home-DocketInfo
Conclusion
While the complete liquidation of Bed Bath Beyond continues to move forward in Ch.11 it seems less and less likely there will be any recovery for those at the bottom- BBBYQ shareholders. It is irrational to value BBBYQ at $134 million. There are no major bidders for the assets that would allow payment to shareholders. Unsecured noteholders could still see a recovery, but they may have to wait a very long time from some potential liquidating trust that seems might be part of their bankruptcy plan. I continue to rate BBBYQ a strong sell.
It is shocking that this retailer had more cash than debt in November 2020, but because of irrational massive stock repurchases and imploding operations, they had to file for Ch.11. Even after raising millions from new stock sales they could not keep their stores stocked with inventory. This disaster will be covered in B-schools for years. $Bed Bath & Beyond(BBBY)$ $Bed Bath & Beyond(BBBYQ)$ $Overstock.com(OSTK)$ $Burlington(BURL)$
SOURCE: SEEKING ALPHA
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