Bed Bath & Beyond: a quick capital-structure primer for Apes

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It is with a heavy heart that I must announce that the Reddit traders are at it again.

Last weekend, a new conspiracy theory took hold on social media — that Bed Bath & Beyond’s plan to reorganise and exit bankruptcy would not, in fact, cancel out all of the value of the company’s shares. One overly lengthy post strongly hinted that some equity interests would maybe (?) be transferred into a new vehicle with an All-Star team of directors and other assets from the prior company:

The full post (which at print time has 36.5k views on X, plus an incalculable number from reposts) concludes, “Buckle up my Unwavering Butterflies, it’s ice cream time.” Pathos abounds.

It’s wearisome for a few reasons. The most important one is that, like most conspiracy theories, it’s a wild overextrapolation from a small truth. The author capitalises on one fact: there will be some value preserved in the restructuring of Bed Bath & Beyond.

But none of that value will be going to the retail investors who own its shares. It says so in the SEC filing! With our emphasis:

Cautionary Note to Holders of the Company’s Common Stock and Series A Convertible Preferred Stock

As a result of the Confirmed Plan becoming effective, all of the Company’s equity interests, consisting of outstanding shares of common stock and Series A Convertible Preferred Stock of the Company and related rights to receive or purchase shares of common stock, were cancelled on the Effective Date without consideration and have no value.

No shares of the Company’s common stock or Series A Convertible Preferred Stock will be reserved for future issuance in respect of claims and interests filed and allowed under the Confirmed Plan or pursuant to the exercise of any rights, options or other obligations of the Company to issue its common stock and/or Series A Convertible Preferred Stock.

The Company intends to file a Form 15 with the SEC deregistering the Company’s common stock pursuant to Rule 12g-4(a)(1) under the Securities Exchange Act of 1934 (“Exchange Act”). Upon filing the Form 15, the Company intends to immediately cease filing any further periodic or current reports under the Exchange Act.

It doesn’t get much clearer than “no value” and “without consideration”.

There is value somewhere in the company, of course. Shareholders should not be the least bit “optimistic” about this value, however, because the restructuring plan has explicitly zeroed them out.

Promise, there’s no secret plan to help out the Little Guy: just look at the version of the restructuring plan that the bankruptcy court confirmed last month, and went into effect on Sept. 29:

That Class 9 section above refers to you, Reddit degens. It brings us no pleasure to report this, but you’ll get nothing.

In a turn of events that was only slightly less run-of-the-mill, shareholders didn’t vote on the restructuring plan. They also weren’t needed; the restructuring plan says they were “deemed to reject” the plan, because again: They get nothing.

This is all the result of foundational stuff. The following won’t be news to our regular readers, whose time may be better spent trying to puzzle out the fulcrum security for Hawaiian Electric Industries — good luck! And also feel free to email me to talk your book, thanks! — but in case this post makes its way into the r/WallStreetBets universe, we figured we might as well take a stab at explaining basic corporate capital structure.

Debt — bank financing, secured loans, bonds, et cetera — include explicit promises to repay lenders. Equities do not. And in bankruptcy, there are usually a whole lot of claims/ownership interests and not a whole lot of cash or assets to compensate them, so choices have to be made about who gets paid in full and who doesn’t. There’s an order to whose claims get met first, though with plenty of negotiating and gamesmanship within and between the groups. One rule of thumb is that creditors come before equity holders. (Please do read Sujeet’s book about distressed investing! It’s very good!)

And really, it’s that way by design. Equity gets the returns and price appreciation if a company does great, and face the greatest risk if it fails.

For Bed Bath & Beyond, the lawyers, executives, lenders and bondholders will all get paid, at least in part.

Some of them will be offered equity in the new company instead of cash. But normal shareholders will not. By the time the corporate-value waterfall gets down to them, there’s nothing left.

There isn’t a secret endgame to help the Apes; they are the game. And it has become far too easy for vague expressions of “solidarity” from a Pied Piper activist investor to convince normal people to shove good cash after bad, and ride a stock all the way to zero.

Further reading:
— PFOF and its discontents