PetSmart Offers Loan Amendment to Quash Asset Dispute

(Bloomberg) -- PetSmart Inc. offered to amend its debt documents, providing further protection for senior lenders as it seeks to quell concerns over an asset transfer that put some parts of the pet-supply retailer beyond creditors’ reach.

The closely held pet superstore offered on Monday to tighten its credit agreement if existing lenders drop ongoing litigation, according to people with knowledge of the matter. PetSmart is offering to limit its ability to layer on additional senior debt, and is providing additional incentives including consent fees, said the people. To pass the amendment, the retailer needs approval from lenders holding more than 50 percent of the outstanding loan amount.

Phoenix-based PetSmart is entangled in a dispute between its lenders and private-equity owners -- a group led by BC Partners -- after it moved a portion of shares in the Chewy.com unit to parent company Argos Holdings and another Chewy stake to an unrestricted subsidiary. Lenders argue that PetSmart was insolvent at the time of the transfer and consider it a fraudulent maneuver. The company pegged the value of Chewy unit at $4.45 billion, excluding cash on the balance sheet.

The proposed loan amendment would also block the company’s ability to use the 16.5 percent of Chewy equity it moved to the unrestricted subsidiary for the benefit of junior debt holders, said the people, who asked not to be identified discussing a private situation. Without the change, PetSmart could have used that equity in a debt exchange with its bondholders. The amendment would also limit the ability for the non-guarantor entity to incur more debt, they added.

PetSmart’s term loan jumped about 3 cents on the dollar to around 90 after the news, according to traders with knowledge of the prices. The company’s unsecured bonds due 2023 were among the top performers in the U.S. high-yield market, rising around 2 cents on the dollar to 71.75, according to Trace bond trading data.

The amendment would also create a new available basket of junior-lien debt that could be used to manage liabilities with the unsecured creditors, the people said. Representatives from PetSmart and BC Partners declined to comment on the offer.

Lender Approvals

To sweeten the pot, PetSmart is offering consenting lenders a 50 basis point consent fee, a 50 basis point increase in margin, as well as a commitment to repay about $250 million of senior debt at par within the next 12 months, according to the people.

PetSmart is also considering a number of alternative transactions in case the existing lenders don’t consent before the deadline, they said. Those alternatives would include repurchasing the unsecured debt, exchanging it for new first lien debt, or a combination of the two.

The proposed amendment launched Monday morning expires Friday evening or earlier in the week if the approval threshold is met, according to the people.

Management pushed Chewy as a turnaround vehicle when PetSmart acquired the web retailer in 2017, financed in part with about $2 billion in debt. But results at the company have lagged as Chewy has been growing. Chewy’s revenue rose about 62 percent in its fiscal third quarter from a year earlier, pushing PetSmart’s overall sales up about 15 percent to $2.64 billion even as sales from its physical stores declined 0.5 percent, people familiar with the results said in December.

After PetSmart announced a transfer of Chewy shares in June in the form of a dividend, the loan agent resigned after a group of lenders instructed it not to release liens on the assets and PetSmart sued it to force the issue. A new agent later countersued, saying the move constituted a fraudulent transfer. Spinning off parts of Chewy to the private-equity owners could deprive creditors of a fair recovery if PetSmart runs into financial trouble.

The group of secured lenders challenging the company includes Bardin Hill Investments, Eaton Vance, Franklin Advisors, HPS Investment Partners, Onex Credit Partners, and Voya Investment Management, according to the court filings.

The case is Argos Holdings Inc. et al v. Wilmington Trust, National Association, 18-cv-05773, U.S. District Court, Southern District of New York (Manhattan)

--With assistance from Eliza Ronalds-Hannon, Jeannine Amodeo and Lisa Lee.

To contact the reporter on this story: Katherine Doherty in New York at kdoherty23@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net, ;Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Kevin Miller, Dan Wilchins

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