BC Partners has a history of getting its way in credit markets.
Even though its 2018 maneuver to move pieces of Chewy Inc. away from lenders of parent PetSmart Inc. sparked controversy in creditor circles, investors eventually agreed to the transfer.
So when the private equity firm last month came knocking for another $4.65 billion to finish what it started and fully carve out the valuable online retailer, there was little reason for anyone involved to expect the transaction not to go smoothly. After all, PetSmart’s brick-and-mortar business had performed relatively well during the pandemic, and the recapitalization the BC Partners-led group was proposing as part of the deal would leave the company with better credit metrics.
Debt investors, however, had other ideas.
After a week-long struggle, the firm was forced to pull the plug on the bond and loan offering Friday after lenders balked at proposed covenant protections and demanded yields that were well above those initially discussed, according to people with knowledge of the matter.
At the heart of the issue, concessions BC Partners had been willing to make proved insufficient to paper over the resentment and underlying suspicion that had built up among certain creditors ever since 2018, the people said. A weaker tone across markets ahead of the U.S. election and a resurgence in coronavirus cases, as well as other pulled deals, gave debt buyers even more leverage in the discussions.
The outcome, in part, underscores how creditors have become less willing to cede ground to private equity firms after years of weakening safeguards allowed them to siphon collateral out of lenders’ reach. Some debt buyers were deeply skeptical of loose documentation that could have potentially allowed BC Partners to shift assets beyond their grasp once again if the company were to ever run into trouble.
Representatives for BC Partners, PetSmart and Chewy didn’t respond to requests for comment. A spokeswoman for JPMorgan Chase & Co., which led the loan offering, declined to comment, as did a spokesman for Barclays Plc, which led the bond portion of the sale.
BC Partners — which just three years earlier had saddled PetSmart with billions of dollars of debt to acquire Chewy — approached investors with a simple pitch: PetSmart’s position in the retail market had strengthened, and its focus on services such as grooming and training made the business resilient to online competitors.
In exchange for letting Chewy go, creditors of the new PetSmart would benefit from a slightly more conservative debt profile, resulting in lower leverage and better credit ratings compared to the existing structure. BC Partners was to contribute $1.3 billion of equity into the reorganized PetSmart.
But weak creditor protections — analyst Scott Josefsberg of research firm Covenant Review described those initially proposed as “atrocious” in an interview — helped rekindle memories of the bitter dispute between the firm and creditors just a couple years earlier.
Investors worried that loopholes in the debt documents would allow cash to leak out of the company and ultimately set the stage for a replay of 2018, some of the people familiar with the matter said.
Faced with lukewarm demand for the new debt offering, BC Partners agreed to sweeten many of the terms. It bumped yields on the secured portion of the financing to at least 6.5%, and upped the rate offered on the riskier portion of the transaction, an eight-year unsecured note, to around 9%.
It also agreed to tighten a variety of covenants. The concessions helped bring in more demand for the financing, including an upsized $1 billion order for the loan from Apollo Global Management Inc., said the people, who asked not to be identified discussing a private transaction. A representative for Apollo declined to comment.
It wasn’t enough. By the end of the week, BC Partners realized it couldn’t get a deal done unless it was willing to push yields on the debt even higher. It instead decided to pull the offering.
The big question now is whether BC Partners will attempt the separation without the refinancing. Ironically, provisions that lenders agreed to as part of the resolution to the 2018 dispute could allow PetSmart’s remaining stake in Chewy to be fully distributed to its private equity owners as long as PetSmart’s leverage remains below five times — a threshold the company currently meets, based on its own calculations and adjustments.