'Big Short' investor Michael Burry issues 'death spiral' warning to meme-stock fans after Bed Bath & Beyond's last-ditch financing deal
The investor of"The Big Short" fame was likely referring to Bed Bath & Beyond's $1 billion agreement with Hudson Bay Capital and other institutional investors, which may have spared the homewares retailer from filing for bankruptcy.
Bed Bath & Beyond has committed to sell convertible preferred stock, which holders can convert into the company's common stock at a discount to the market price. It will also issue warrants to buy common stock and convertible preferred stock at fixed, discounted prices. Deals that allow stock conversion at a variable price instead of a fixed one are called"death spiral convertibles." That's because holders can convert their preferred shares into common stock at a discount to the market price, then sell them for a profit, pushing the market price lower. They can then convert more shares at a lower price and sell those, driving the market price even lower, and so on.
"Bed Bath's convertible is not too death-spirally, though," Bloomberg columnist Matt Levine wrote in hisabout the agreement this week. He noted the preferred stock can't be converted for less than $0.72 a share, meaning sellers will lose money if they convert their shares and sell them when the market price is below that level.
Levine described the deal as"meme-stock financial engineering," as it essentially allows institutional investors to conduct their own meme-stock offerings. They can buy stock at a discount from Bed Bath & Beyond, then sell it at the market price to eager retail investors.
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