Wall Street appears to have little faith that Bed Bath & Beyond ’s latest cash infusion will be enough to save the troubled retailer, but that’s not to say the situation lacks investment opportunities.
One option is investing in business-development company Sixth Street Specialty Lending (ticker: TSLX), which is helping finance Bed Bath & Beyond.
Shares of Bed Bath & Beyond (BBBY) plunged 21.3% Wednesday after the retailer said it planned to slash 20% of its workforce and close 150 of its stores. It also said it expects comparable second-quarter sales to drop by 26%. With the retailer clearly in decline, Bed Bath & Beyond’s $500 million of new financing—provided by J.P. Morgan and Sixth Street Partners—was deemed an insufficient lifeline.
For investors, that financing may represent an opportunity. Even with Bed Bath & Beyond’s plunge Wednesday, shares were up nearly 90% in August as the retailer has become the new favorite for the meme trading crowd. But few investors have the stomach—or impeccable timing—needed to profit from a meme trade.
That is where Sixth Street comes in. Investing in business-development companies such as Sixth Street is one way public investors can get exposure to private credit markets.
Specifically, while investors are understandably concerned about Bed Bath & Beyond’s stock, more than 90% of Sixth Street’s portfolio is first-lien debt, which provides investors with some measure of safety that they’ll get both a return on and of capital even in distressed situations.
Roughly 10% of its portfolio is in retail, as Sixth Street previously lent to other distressed retailers such as Barney’s, Sports Authority, and DSW. The firm credits thorough due diligence and its strength in valuing collateral, such as inventory, for enabling it to invest profitably in challenging situations. Since the portfolio’s inception, its gross loss rate on assets has hovered around 7 basis points. (One hundred basis points equal 1%.)
As such, while ratings agency Fitch has concerns about Bed Bath & Beyond’s ability to continue as a going concern, it has been more optimistic on Sixth Street, upgrading its rating to BBB, from BBB-, in April.
Sixth Street’s stock yields 8.9%—typically the sign of a value trap for most equities but a figure that is on par with other BDCs, which often yield between 7% and 10%. Sixth Street is also expected to be a beneficiary of rising interest rates because 99% of its loans have floating rates. Sixth Street also has a return on equity of 10.1%, topping peers such as New Mountain Finance (NMFC) and Goldman Sachs BDC (GSBD), which return 9.6% and 8.4%, respectively, according to FactSet data.
Analysts also like Sixth Street, and more than 80% of the analysts covering it are bullish on the shares.
The same can’t be said for Bed Bath & Beyond.
Write to Carleton English at firstname.lastname@example.org