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PetSmart debt falls after CEO hire as restructuring concerns grow

PetSmart Inc. bonds hit fresh lows at distressed levels again on May 21 after the embattled pet specialty retailer announced the hire of J.K. Symancyk as its new CEO amid mounting concerns that the company will look to restructure.

Symancyk was most recently head of Academy Sports + Outdoors, another pressured big box retailer, which this past year has taken advantage of the discounted trading levels of its loan to make a number of subpar repurchases.

The PetSmart $4.3 billion B term loan due March 2022 (L+300, 1% LIBOR floor) covenant-lite TLB due March 2022 was quoted at 77.5/78.375 on May 21, down from 78.875/78.75 on May 18.

The company's debt has come under renewed pressure in recent weeks after Amazon.com Inc. launched its own pet products brand supplying dry dog food to Amazon Prime members. PetSmart, by some Street estimates, sees as much as 12% of its sales from Blue Buffalo Pet Products' pet food.

The move was a further blow to PetSmart, which in 2017 bought online pet retailer Chewy.com in a $3.4 billion deal aimed at diversifying its brick-and-mortar business amid declining foot traffic at its stores and rising competition from e-commerce sites.

A year later, bonds backing that acquisition are trading at half of what investors originally paid: the PetSmart 8.875% senior notes due 2025 hitting a new low of just 50.25 cents on May 21, from pricing at par in May 2017. The downward spiral in the valuation of the bonds is also due, in part, to ongoing market speculation that PetSmart could split from Chewy.com in a spin-off to its sponsors, a group led by BC Partners, as well as general sector tailwinds.

"If I'm a bondholder, I'm getting worried," said one restructuring banker. "The issue here — a common theme for all these retailers — is that investors thought they had value in the real estate, and they don't."

The $1.35 billion of 5.875% first-lien notes due 2025 are at new lows of 65.75, according to MarketAxess.

Both S&P Global Ratings and Moody's have flagged concerns that the company may choose to reduce debt at a discount. Moody's in May cut its corporate family rating on PetSmart by two notches, to Caa1, citing "continued weak operating performance" in PetSmart's brick-and-mortar businesses, alongside risks of a potential distressed debt exchange. S&P Global, meanwhile, maintains a CCC+ corporate rating on PetSmart, with a negative outlook, and ratings on the issuer's secured and unsecured debt of CCC+ and CCC–, respectively.

While its leverage at more than 8x is unsustainably high, PetSmart has no meaningful maturity until its term loan comes due in July 2022.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.