'Big Short' investor Michael Burry issues 'death spiral' warning to meme-stock fans after Bed Bath & Beyond's last-ditch financing deal

• Michael Burry tacitly flagged the risks of Bed Bath & Beyond's last-minute financing deal this week.
• The "Big Short" investor advised meme-stock fans to learn what a "death spiral convertible" is.
• The retailer's new backers might keep buying discounted shares then selling them, hitting the stock.

Michael Burry has issued a veiled warning to meme-stock fans about Bed Bath & Beyond's last-ditch financing deal this week.

"It's time memesters look up what a death spiral convertible is," he said in a now-deleted tweet on Thursday.

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 his "Money Stuff" newsletter about 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.

Burry, who inadvertently helped spark the meme-stock boom by investing in GameStop in 2019, has repeatedly sounded the alarm on the craze. In 2021, he compared the frenzy around them and other speculative assets to the dot-com and housing bubbles. He also warned meme-stock buyers were signing up for the "mother of all crashes."

The Scion Asset Management chief has been right so far. Bed Bath & Beyond stock soared from about $4 in April 2020 to over $35 by January 2021 — an almost 700% rise — but has since crashed by more than 90% to below $3 a share today.

Burry shot to fame after his massive bet against the mid-2000s housing bubble was chronicled in the book and movie "The Big Short." He's also known for making prescient market predictions, and betting against Elon Musk's Tesla and Cathie Wood's Ark Innovation fund in 2021.