PetSmart revives shelved refi, with Chewy equity as collateral

PetSmart is attracting investors to its resuscitated refinancing deal, after another quarter of strong earnings, according to seven sources following the deal. On top of the stronger market backdrop, the deal’s revamped collateral package and investor-friendly covenants are driving demand, the sources added.

The financing package comprises a USD 2.3bn term loan due 2028, led by JPMorgan, alongside USD 1.2bn of senior secured bonds due 2028 and USD 1.15bn senior unsecured bonds due 2029, both led by Barclays. Sponsor BC Partners will also contribute roughly USD 1.3bn in equity.

The loan is talked at Libor+ 450bps with a 75bps floor and 99 OID. Whispers for the secured bonds are in the mid-5% area, while the unsecured bonds are whispered in the mid-8% area. The roadshow is expected to last until Monday (1 February), with commitments for both due on 2 February.

Talk on the previous loan stretched to Libor+ 575bps (1% floor) with a 98 OID, along with a downsize to USD 2bn from USD 2.3bn. Meanwhile, talk on the secured notes had drifted to 6.5%, while the unsecured notes were talked at 9%.

PetSmart last attempted a refi in October but pulled it because investors balked at losing equity ownership in Chewy, concerned that the company’s standalone earnings power would not be sustainable, as reported.

The issuer has been trying to bring back the deal since early January, but held off due to market uncertainty and volatility linked to political events, three of the sources said. Ultimately, the primary market shrugged off even the US Capitol riots earlier this month, with already strong demand soon set to be supercharged by chunky redemptions.

Even after extracting more favorable pricing, the separation of Chewy played a big role in PetSmart’s last USD 4.65bn refinancing proposal ultimately being shelved.

In the new deal, however, PetSmart is stumping up roughly USD 4bn of Chewy equity as collateral for the secured debt, the sources said. Although the refinancing will still transform Chewy from a subsidiary into a separate sister company, investors are pleased to now have some cushion from the company’s growth engine, the sources added.

Another new feature in the revamped deal: the term loan’s covenants are expected to provide better protection against transactions that could adversely affect lenders. Among the changes, debt incurrence and restricted payment baskets are set to be tighter than the previous attempt, according to three of the sources.

In marketing materials for the new deal, PetSmart provided flash numbers for the company’s 4Q20, which ends in the coming weeks. As of 3 January, revenue was roughly USD 1.5bn, up 13% year-over-year quarter-to-date, three of the sources said, and same store sales were up 14%. Adjusted EBITDA totaled USD 265m-275m for the period, according to deal documents.

Giving credit for the sponsor injection, pro forma leverage comes to 3.9x through USD 4.9bn of total debt and USD 1.268bn of pro forma LTM adjusted EBITDA. For the LTM period ended 1 November 2020, leverage was at 5.4x. Pro forma liquidity totals more than USD 1bn, including USD 318.8m of cash and USD 688m of ABL availability.

PetSmart’s USD 650m 8.875% senior unsecured notes due 2025 traded today at 104.125 to yield 2.989%, compared to recent trades as low as 98.721 to yield 9.227% in late November, according to MarketAxess.

Its USD 1.9bn 7.125% senior unsecured notes due 2023 traded today at 100.5 to yield 2.94%, compared to trades at 96 to yield 9.035% in early November after the deal was shelved.

Chewy’s shares traded at USD 103.69 today, for a USD 42.8bn market cap. The consenting TL is quoted at 99.922/100.344, compared to quotes at 98.458/99.181 in early November, while the non-consenting TLB is at 99.75/100.063, up from 98.125/99 in early November, according to Markit.

Barclays declined to comment. PetSmart, JPMorgan and BC Partners did not return requests for comment.

2021 Debtwire

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