Distressed companies can stay solvent as long as retail stock investors remain irrational. And Wall Street’s financial engineers have noticed. Earlier this week, struggling retailer Bed Bath & Beyond announced plans to raise as much as $1bn in equity.
B,B&B bonds trade at less than 10 cents on the dollar. Its market capitalisation of roughly $500mn seemed too high, given the company had missed an interest payment and was in default on a bank loan. Raising any capital outside of bankruptcy, let alone equity, seemed impossible.
The complex offering is made up largely of preferred stock convertible into common shares and preferred stock warrants. The rub for the issuer is that the conversion prices will be at discounts to Bed, Bath and Beyond’s current share price, making it expensive.
The offering has an anchor institutional buyer. Very likely this investor would simply convert the preferred shares into common stock and recognise the essentially risk-free profits.
As a result, B,B&B gets its rescue capital and skirts bankruptcy, for now. Savvy Wall Street firms can cash in easy profits simply for writing a big cheque. Meanwhile retail shareholders subsidise the whole exercise, presumably for the vibes.
This is nothing new. Cinema chain AMC has survived the pandemic by leaning into the meme stock phenomenon, selling hundreds of millions of dollars of equity. Last year, when it ran out of authorised shares to issue, it created a preferred stock unit to artificially replicate common stock, known as an APE. It sold these to retail investors, raising more equity.
The Spac that is attempting to merge with Donald Trump’s Truth Social app also has a deal with institutions to raise equity capital at a discount. Even private equity firms grasp that retail investors will buy up their complex instruments which do not trade on markets.
Democratisation of capital markets has largely been a force for good. That does not stop the cleverest financial institutions from flexing their advantages in the capital markets.