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PetSmart High Yield Debt Tumbles after 3Q Earnings Miss

Debt backing PetSmart was falling more deeply into distressed territory on Tuesday after the privately held pet retailer unveiled lackluster third-quarter earnings, with sources highlighting adjusted EBITDA for the period of roughly $189 million, shy of expectations and down about 34% year-over-year.

“We think this is going to go lower into distressed with retail pressures,” sources noted, highlighting negative fourth-quarter outlook chatter on the issuer’s earnings call yesterday. “People are really going to be focusing on this going forward. There’s definitely a lot of pressure.”

PetSmart 5.875% first-lien notes due 2025 and 8.875% senior notes due 2025—both of which priced at par in May, as part of a $2 billion offering backing the purchase of Chewy.com—were falling in blocks Tuesday by 4.125 points and five points, respectively, according to MarketAxess, to 81.25 and 70.

Meanwhile, the issuer’s B term loan due March 2022 (L+300, 1% LIBOR floor) was off by more than two points on the day, falling to quotes of 82.25/83.25, from bid quotes of 84.5 Monday, sources noted.

The Phoenix-based retailer has most recently been pressured by mounting market speculation over whether PetSmart could split from Chewy.com in a spin-off to sponsors, which could be impeded by restricted-payment covenants tied to the issuer’s senior debt.

Following the PetSmart’s second-quarter earnings roll-out in September, the company’s senior and unsecured debt was also downgraded on Sept. 18 by S&P Global Ratings to B and CCC+, respectively, from B+ and B–, keeping respective recovery ratings of 3 and 6 unchanged. S&P Global also lowered the issuer’s corporate credit rating to B from B+, with a negative outlook remaining in place.

“Factors contributing to our downward revisions include greater competition in the pet retailing space with mass retailers and other online retailers competing aggressively for pet food market share. We also think management turnover will complicate operational and acquisition execution,” S&P Global noted in a Sept. 18 report.

Moody’s maintains a B1 corporate credit rating on PetSmart, with a negative outlook, with Ba3 and B3 ratings on the issuer’s secured and unsecured debt, respectively. — James Passeri/Rachelle Kakouris

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