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Bankruptcy Looks Like a Real Possibility for Bed Bath & Beyond. Here’s Why.

Is the writing on the wall for Bed Bath & Beyond?

After the home goods chain dismissed its chief executive and merchandising leader in the wake of a first-quarter flop, now the company has new troubles on the financial front after S&P Global Ratings on Monday lowered its credit rating to “CCC” from “B-“. The credit ratings firm gave the retailer a “negative” outlook, saying it could soon have serious problems with liquid assets.

“We believe macro conditions are worsening and prospects for home goods sales continue to deteriorate. Other retailers have indicated a significant, rapid decline in discretionary purchases across retail, and we believe Bed Bath & Beyond will remain susceptible to future declines,” S&P said. “The negative outlook reflects the risk the company could default on its debt or pursue a restructuring in the coming 12 months if its turn-around efforts do not gain significant traction.”

Bed Bath & Beyond burned through nearly $500 million in the first quarter, S&P pointed out, and with a 45 percent chance of a recession over the next year, there’s a growing risk that the chain “will face rapidly tightening liquidity” ahead.

Cash burn rate, an important bellwether of corporate well-being, can tell a company where it is headed, according to Drew McManigle, founder and CEO of Macco Restructuring Group. Businesses quickly burning through cash should scramble to slash costs. But S&P said Bed Bath & Beyond’s “prospects for doing so have deteriorated.”

Adding to the chain’s troubles, if BBB doesn’t get enough financing to please vendors, it might not have enough holiday inventory, “leading to a fast downward spiral and creating bankruptcy risk,” Wedbush Securities hardlines analyst Seth Basham said in a research note Monday. The retailer is promoting aggressive markdowns on “1,000’s of mostly owned-brand products,” he added.

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Bed Beth & Beyond should consider selling Buybuy Baby to fetch $630 million to $910 million in proceeds, the analyst suggested. But while that would buy the chain more time, Basham said it probably wouldn’t change the company’s “negative outlook” and problems serving customers.

The Wedbush note follows a Bloomberg report last week that said some suppliers have stopped shipping new product because Bed Bath & Beyond hasn’t paid its bills. On top of that, credit insurance firms aren’t covering shipments to the retailer.

Suppliers putting their foot down can be the proverbial nail in the coffin for retailers. That’s what happened to Kmart in 2002, when factors stopped greenlighting deliveries to the chain after Prudential Securities said the retailer might go bankrupt. Of course, once vendor product trickled to a halt, Kmart had no choice but to file for bankruptcy three weeks later.

Bed Bath & Beyond is believed to be working with Kirkland & Ellis, the law firm of choice when retailers believe bankruptcy might be on the table. The chain widened its first quarter net loss to $358 million from $51 million a year ago, as net sales plunged 25 percent to $1.46 billion from $1.95 billion.

The August S&P report for most vulnerable U.S. retail industries noted that home furnishing retail had a median market one-year probability of default rate at 5.4 percent, trailing only the internet and direct marketing retail group at 7.8 percent.

Altmeyer Home Stores filed for bankruptcy last month to liquidate its assets.

Last week Bed Bath & Beyond’s stock tumbled 52 percent after billionaire activist Ryan Cohen and his firm RC Ventures sold their stake in the chain. On Monday, shares were down another 16. 2 percent to close at $9.24 in Nasdaq trading.