Sometimes markets are weird. Case in point: recent trading in
Bed Bath & Beyond
securities. The prices of Bed Bath stock and bonds seem out of whack.
It’s been an interesting week for
Bed Bath & Beyond
(ticker: BBBY) and it’s only Wednesday. The stock jumped almost 100% Monday and then fell almost 50% on Tuesday. Shares, at $3.16, are up 5% coming into Wednesday trading. All the recent volatility has left Bed Bath stock up about 20% year to date and down about 82% over the past 12 months.
The wild two-day swing was driven, in part, by a plan from Bed Bath & Beyond management, announced Monday, to raise money to pay lenders. The company sold $225 million in convertible preferred stock and expects to sell another $800 in million in convertible preferred securities. The deal also involves warrants, option-like securities that can be converted to stock.
It’s all very complicated and will dilute Bed Bath & Beyond shareholders, meaning they’ll own less of the company than they started with. And for holders of common stock, there seems to be a lot of risk, with perhaps not a lot of reward.
Bed Bath’s bonds, however, could offer some better returns, especially because the capital raising benefits bondholders more than stockholders right now.
Take the Bed Bath & Beyond bond with a 4.915% coupon due in 2034. Right now, it fetches about 15 cents on the dollar, as of late Tuesday afternoon, even after it jumped 155% on Tuesday after the capital raising was announced. That means it offers a yield to maturity of almost 40%.
It will be hard for Bed Bath & Beyond stock or warrants to top that over a long period of time. What’s more, bondholders have a better chance to get some money out of their investment if the worst happens and the company is forced to restructure in bankruptcy because they are higher up in the capital structure than stock.
Most of the time, that isn’t the case. Because stocks are riskier than bonds, they tend to return more over the long run. Over the past 50 years, the
has returned roughly 10.5% a year on average, while corporate bonds have returned about 8.3% a year over the same span.
But once again, Bed Bath is more complicated. It’s a distressed situation, and Wall Street forecasts operating losses in 2023 and 2024. With the 4.915% bond trading where it is, Bed Bath stock would have to be about $150 a share in 2034 to beat it by a couple of percentage points a year.
It’s possible, but the math says the bonds are a better bet.
Write to Al Root at email@example.com