At Home Restructured Bonds Offer Asymmetric Opportunity Via High Yields, Potential Capital Appreciation

Following the Footsteps of Successful Investors

In the world of investing, timing and insight are everything. Warren Buffett famously capitalized on market disruptions caused by Hurricane Katrina in 2005, purchasing undervalued insurance stocks when others were selling. Similarly, private equity firms like Hellman & Friedman (H&F) have built a reputation for identifying undervalued companies, restructuring them, and unlocking their potential. One such opportunity lies in the recently restructured bonds of At Home Group Inc., offering investors a chance to follow in the footsteps of seasoned professionals.

About Hellman & Friedman

Founded in 1984, Hellman & Friedman is a leading private investment firm with over $80 billion in assets under management. Known for its long-term approach and focus on growth-oriented businesses, H&F has delivered impressive returns across various sectors. Some notable successes include:

• Hub International: Acquired in 2013 for $4.4 billion, the company’s valuation grew to $23 billion by 2022.
• DoubleClick: Purchased in 2005 and sold to Google in 2007 for $3.1 billion.
• Nielsen Company: Invested in 2006, followed by a successful IPO in 2011.

Pretty good examples that highlight H&F's ability to transform struggling companies into market leaders, making it an ideal partner for At Home Group Inc.

Introducing At Home Group Inc.

At Home Group Inc. is a U.S.-based retailer specializing in home decor and furnishings. With 219 stores nationwide as of January 2021, the company offers a wide range of products, from furniture and textiles to seasonal decorations. However, like many brick-and-mortar retailers, At Home faced significant challenges due to increasing competition, shifting consumer preferences toward e-commerce, and global supply chain disruptions.

To address these issues, Hellman & Friedman acquired At Home Group in July 2021, transitioning it from a publicly traded entity HOME to a privately held company. This move allowed H&F to implement strategic changes without the scrutiny of public markets, focusing on operational improvements and expansion.

The Restructuring Opportunity

As part of its restructuring efforts on , At Home Group issued new bonds designed to provide financial flexibility while protecting investor interests. A key feature of this issuance is the exchange offer, which replaced older bonds (ISIN USU04798AB73) with newly structured securities (ISIN US04650YAC49). Here are the highlights of the new bond offering:

• Coupon Options:
  • Cash Coupon: 7.125% paid semi-annually.
  • PIK (Pay-in-Kind) Coupon: 8.625%, allowing the company to issue additional bonds instead of cash payments until November 2027.

• Maturity Date: May 12, 2028.
• Call Option: The company can redeem the bonds at par value starting in May 2023.
• Security Rank: First Lien debt, meaning bondholders hold priority claims over other creditors in case of default or liquidation.

The bonds currently trade at approximately 40-45% of their nominal value on the OTC market, translating to an attractive yield-to-maturity of nearly 40% annually if held until maturity, excluding reinvested coupons.

Why First Lien Debt Matters

First Lien bonds represent senior secured debt, giving holders preferential access to the company's assets in the event of bankruptcy. This security reduces risk compared to unsecured or subordinated debt, making it an appealing option for conservative investors seeking higher returns than traditional corporate bonds.

Key Risks and Considerations

While the potential rewards are significant, investors should be aware of the associated risks:

1. Limited Transparency: As a private company, At Home Group provides minimal public disclosure, requiring trust in H&F's expertise to navigate uncertainties.
2. Market Competition: The home goods sector remains highly competitive, with major players like IKEA, HomeGoods, and Bed Bath & Beyond dominating the space.
3. Economic Sensitivity: Retail businesses are sensitive to macroeconomic conditions, including inflation, interest rates, and consumer spending patterns.
4. PIK Risk: Although limited to November 2027, the PIK option introduces some uncertainty regarding cash flow generation during that period.

Despite these challenges, the involvement of H&F serves as a strong endorsement of At Home Group's turnaround potential. The firm's track record suggests it will prioritize improving operational efficiency, enhancing digital capabilities, and expanding product offerings to drive growth.

Investment Thesis

For those willing to take calculated risks, At Home Group's restructured bonds present an opportunity to capitalize on H&F's proven strategy. By acquiring these bonds at deeply discounted levels, investors stand to benefit from both capital appreciation and high yields. Additionally, the First Lien structure ensures robust downside protection, aligning interests between creditors and management.

Conclusion

Following the lead of experienced investors like Hellman & Friedman can be a rewarding approach for retail investors looking to diversify their portfolios. While At Home Group faces familiar retail industry headwinds, its partnership with H&F positions it for recovery and potential growth. For those comfortable with the inherent risks, participating in this restructuring could yield substantial returns, echoing the success stories of H&F's past investments.