How PetSmart swallowed Chewy

October 4, 2019

We read, with interest, this article from the Wall Street Journal about Chewy.com and PetSmart’s e-commerce strategy. Accepted wisdom says that it is impossible to compete with Amazon, and Chewy’s founder, Ryan Cohen, (raised in Montreal) was rejected countless times for that exact reason. But Cohen persevered, recognizing both the attractive economics of recurring pet food orders and the opportunity to wow customers with service.

The less obvious point of interest relates to PetSmart’s bonds:

That June, PetSmart announced an aggressive move to restructure Chewy ownership, putting a large chunk of its shares out of the reach of bondholders. It mirrored a tactic employed by other private-equity-backed retailers such as J.Crew Group Inc. and Neiman Marcus Group Ltd. to preserve value for their shareholders. Lenders saw it as a desperate attempt to keep the most valuable piece of the company away from them in the event of a bankruptcy, and geared up for a legal fight.

“Structural Value” is one play in our fixed income Playbook. Before buying a bond, we read the contract carefully. We keenly seek to identify both unanticipated risks (to be avoided, as in the case of PetSmart) and opportunities. With Structural Value investments we are looking for situations where the contract itself provides value to the lender, above and beyond the underlying credit quality of the company.

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