PetSmart tried a second time to amend its agreement with lenders as it seeks to quell investor concerns over a disputed asset transfer,

Updated 4/4/19

(Bloomberg)— PetSmart Inc. got enough lender support to pass a proposed loan amendment that will tighten restrictions on the company and limit lenders’ rights to pursue further litigation over the retailer’s Chewy.com business, according to people with knowledge of the matter.

The closely held pet superstore received consent from holders of more than 51% of the outstanding loan, enough to pass the amendment, said the people who asked not to be identified discussing a private situation. The amendment blocks lenders’ ability to pursue litigation over its transfer of Chewy.com equity out of creditors’ reach.

Phoenix-based PetSmart was entangled in a dispute between its lenders and private-equity owners—a group led by BC Partners—after it moved the stake in Chewy.com to a parent company and another 16.5% to an unrestricted subsidiary. Lenders are claiming that PetSmart was insolvent at the time of the transfer and consider it a fraudulent maneuver. The company has pegged the value of the Chewy unit at $4.45 billion, excluding cash on the balance sheet.

PetSmart tried a second time to amend its agreement with lenders as it seeks to quell investor concerns over a disputed asset transfer, according to people with knowledge of the matter.

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The pet superstore made a revised offer on Tuesday to reimburse senior lenders if it monetizes a 20% equity stake of its Chewy.com unit that it had moved. PetSmart also sweetened its initial offer by improving the consent margin and committing that 100% of future sales of any PetSmart asset would be used to repay consenting lenders. That’s up from the previous 50% pledge, said the people, who asked not to be identified discussing a private situation.

Representatives from PetSmart and its private equity sponsor declined to comment. Lenders have until Wednesday night to decide whether they approve of the change. The company could also accelerate that deadline if it passes a 51% holder consent threshold, the people said.

PetSmart’s $4.2 billion loan due 2022 climbed as much as 3 cents on the dollar to around 93, according to people familiar with the trading. Company unsecured notes due 2023 and 2025 were among the top performers in the U.S. high-yield market, rising nearly three cents on the dollar, according to Trace bond data.

The retailer’s original proposal to amend its loan documents launched last week failed to garner enough support to pass the minimum 51% consent threshold, Bloomberg reported. PetSmart’s offer to provide protection against future actions by the company if existing lenders drop the litigation was not enough to convince a group of investors who told the loan’s administrative agent they wouldn’t consent.

The company spoke with lenders last week to gather feedback on the original proposal. Based on that process, PetSmart launched the new offer to address the holders main points of concern, the people said.

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PetSmart announced in April it was buying Chewy, promising that the online platform would complement its chain of 1,500 stores and help reach a wider customer base. To pay for it, the company sold $1.35 billion in secured bonds and $650 million unsecured notes, in an underwriting led by Citigroup Inc. and Barclays Plc. The reception was warm enough that the interest rates were cut slightly from those initially discussed.

Within months of the acquisition, PetSmart lost some of its mojo with a key supplier, and then lost its chief executive. The notes sold by the pet superstore to finance the takeover of Chewy Inc. are among the year’s worst performers for newly issued junk debt, with some of its unsecured bonds having lost around a quarter of their value since being issued.

 

Because of the terms governing the new bonds, BC Partners would be within its rights to separate Chewy from PetSmart, keeping the promising online merchant’s revenue for itself.

PetSmart is No. 50 in the Internet Retailer 2018 Top 1000.

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