Big Short investor Michael Berry warns meme fans of a ‘death spiral’ following Bed Bath & Beyond’s latest financial deal.

  • This week, Michael Berry tacitly noted the risks involved in a last-minute Bed Bath & Beyond financial deal.
  • Investor “Big Short” advised meme stock lovers to learn what “death spiral convertible” means.
  • The retailer’s new backers may continue to buy stock at a discount and then sell it, hitting the stock.

Michael Berry issued a veiled warning to meme fans about Bed Bath & Beyond’s latest financial deal this week.

“It’s time for the memesters to see what a death spiral convertible is,” he said in now deleted tweet on Thursday.

The investor known as “The Big Short” was likely referring to Bed Bath & Beyond’s $1 billion deal with Hudson Bay Capital and other institutional investors, which may have saved the home goods retailer from filing for bankruptcy.

Bed Bath & Beyond has committed to sell convertible preferred shares, which holders can convert into the company’s common stock at a discount to the market price. It will also issue warrants to purchase common shares and convertible preferred shares at fixed, discounted prices.

Trades that allow shares to be converted at a variable price instead of a fixed price are called “death spiral convertibles”. This is because holders can convert their preferred shares into common shares at a discount to the market price and then sell them at a profit, resulting in a lower market price. They can then convert more shares at a lower price and sell them for even lower market prices, and so on.

“That said, the Bed Bath convertible isn’t too deadly,” Bloomberg columnist Matt Levin wrote in his Money Stuff newsletter about the agreement this week. He noted that preferred shares cannot be converted for less than $0.72 per share, meaning that sellers will lose money if they convert their shares and sell them when the market price drops below that level.

Levin called the deal “the financial engineering of meme stock” as it essentially allows institutional investors to run their own meme stock offerings. They can buy shares in Bed Bath & Beyond at a discount and then sell them at market price to active retail investors.

Berry, who inadvertently helped spark a meme stock boom by investing in GameStop in 2019, has repeatedly sounded the alarm about the craze. In 2021, he likened the frenzy around them and other speculative assets to dot-com and housing bubbles. He also warned that buyers of meme stock are subscribing to “the mother of all crashes.”

The head of Scion Asset Management has been right so far. Shares of Bed Bath & Beyond rose from about $4 in April 2020 to over $35 by January 2021, nearly 700%, but have since crashed more than 90% to below $3 a share today.

Barry rose to fame after his big bet against the mid-2000s housing bubble was featured in the book and movie The Big Short. He is also known for making far-sighted market predictions and betting against Elon Musk’s Tesla and Cathy Wood’s Ark innovation fund in 2021.

Twitter/@michaeljuburry

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