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2026-10-08 · Equity Buy (Low conviction); 8.25% secured notes overweight vs UA 2030; TLB market weight vs EYE TLA.

Ad-hoc, one-off report at Truman's request. Single-name research only: this report does not consider the portfolio. Prices are 2026-10-08 intraday (Yahoo Finance chart API). Treasury and SOFR rates are FRED, latest available (10-06 / 10-07). Financials come from SEC filings retrieved this session; sources are at the end. (est.) marks my own estimates. No model was built (build_model.py not run). The decisions are Truman's.

1. Bottom line

Two corrections to the framing of the request:

1. EYE has no TLB. National Vision's only term debt is a $231mm bank Term Loan A (S+150–225 grid, 5% amortization, maintenance covenants, due 2028-06-13), plus an undrawn $300mm revolver. I compare Petco's TLB with that loan. It is not a like-for-like trade, since the TLA is pro-rata bank paper with no secondary market.
2. Under Armour's 7.25% notes due 2030 are senior unsecured. Only UA's $1.1bn revolver is secured. That makes the comparison sharper: Petco's secured paper yields more than UA's unsecured paper.

2. The business

What Petco is. Petco is a US pet specialty retailer: ~1,377 pet care centers in the US and Puerto Rico at Q2, ~300 full-service vet hospitals, and ~1,600 weekly Vetco clinics (10-K). It also owns 50% of a Mexico/Chile JV, which is equity-accounted. CVC and CPP Investments bought it in the 2016 LBO, IPO'd it in 2021, and still control ~65% of voting power, so it is a Nasdaq "controlled company". Every store is leased, generally on ~10-year terms. The top 10 vendors are ~40% of sales.

Revenue mix (FY2025, ended 2026-01-31; net sales $5.96bn):

Financial history:

*Includes a $1.22bn goodwill impairment.

Reading the trajectory:

• The turnaround so far is margin work, not growth. Sales have fallen three years running. Gross margin rose ~110bp from FY23 to FY25 (less promotion, better unit costs), and SG&A fell from 37.9% to 36.6% of sales (payroll, consulting).
• Adj. EBITDA has recovered from the $337mm FY24 trough to $424mm LTM. FY25 FCF of $187mm was helped by an inventory release, and LTM FCF of $238mm by payables timing.
• Structural FCF is about $90–110mm/yr (est.). That is guide EBITDA $422mm less JV EBITDA (non-cash to Petco) ~$52mm, interest ~$122mm, capex ~$140mm, and taxes and other ~$15–20mm.

Q2 FY26 (reported 2026-09-02):

• Sales were flat at $1.489bn, with comps +0.6%. Management blames "stronger-than-expected points redemption" after relaunching the membership program.
• Adj. EBITDA was $122.2mm, including a $6.8mm one-time net IEEPA tariff refund ($115.4mm without it).
• Q2 net income of $38.7mm includes a $15.7mm tax benefit from a $13.4mm unrecognized-tax-benefit release. It is not a run-rate figure.
• FY guide reaffirmed (sales flat to +1.5%, adj. EBITDA $415–430mm). Q3 guide: sales +0.4–1.0%, adj. EBITDA $100–103mm.
• The stock is down from ~$2.70 before the print to $2.23. It is at the bottom of its 52-week range ($2.14–3.88).

Competitive position, in one paragraph. Petco's US rivals are PetSmart (private, larger), Chewy in online consumables, and Walmart, Costco, Tractor Supply and Amazon in mass. Its edge is the services-plus-store bundle: vet care and grooming pull visits that online can't serve. Its handicaps are a sub-scale online consumables business against Chewy and a store base that is still shrinking. EYE is the useful analogue: both are destination retailers built around licensed professionals (vets vs optometrists) and labor-constrained services. The difference is that EYE is growing stores (+3.3%) while Petco is closing them.

3. Capital structure

Debt stack (2026-08-01, pro forma for the September $75mm TLB prepayment):

The refinancing (2026-02-02). Petco replaced the $1.5bn 2028 term loan with:

• a $900mm TLB, issued at 99.0 (OID $9.0mm), with a 1% soft call for 6 months (expired 2026-08-02) and 1% amortization;
• $600mm of notes.

Since then the company has prepaid $75mm of the TLB (September). Management cites $170mm of total prepayments over nine months. The $75mm was applied to scheduled amortization in order, so the TLB has no scheduled amortization for about eight years, which means none before maturity. The 2028 maturity wall is gone. The first maturity is now the ABL, in March 2029.

Credit metrics (LTM adj. EBITDA $424mm unless noted):

Ratings:

• Moody's upgraded the CFR to B2 from B3, stable outlook, on 2026-09-28. It also raised the TLB and note ratings, but the press coverage I retrieved does not state the instrument-level rating: n/a (unverified).
• S&P: last seen at B, but I could not verify the date of that action: n/a (unverified).

Documentation: what matters to a creditor (read from the indenture and credit agreement exhibits to the 2026-02-02 8-K):

• Covenant-lite TLB. There is no financial maintenance covenant in the term loan (§7.10 "[Reserved]"). The notes have incurrence covenants only.

• "Closing Date EBITDA" is defined as $543mm in both documents, against reported FY25 adj. EBITDA of $408mm. The covenant definition allows uncapped "run-rate" cost savings (actions taken or expected within 24 months, in good faith). Every ratio basket therefore runs on an EBITDA ~30% above what investors see. On that basis, first-lien net leverage is roughly 2.2x (est.), not 2.9x.

• Room for new pari-secured debt is large (est. ~$1.0bn):

  • a free-and-clear basket of the greater of $543mm and 100% of TTM covenant EBITDA, plus a builder for voluntary prepayments not funded with debt;
  • ratio debt up to 3.00x first-lien net leverage (the Closing Date ratio), roughly another $400mm on covenant EBITDA (est.);
  • a separate $715mm or borrowing-base basket for ABL-type debt.

  Existing TLB and noteholders can be diluted, though not primed: new debt comes in alongside them, not ahead.

• ECF sweep is likely zero. It is 50% at ≥2.75x first-lien net leverage, 25% at 2.50–2.75x and 0% below 2.50x, all on covenant EBITDA. At ~2.2x (est.), no sweep. Deleveraging is voluntary.

• LME protections:

  • J.Crew blocker: no transfer of material IP to unrestricted subsidiaries, and no designating an IP-owning subsidiary as unrestricted.
  • Subordinating the notes in right of payment needs each holder's consent.
  • Releasing all or substantially all collateral, or changing lien priority, needs 66⅔% of the notes. That is a supermajority, not a sacred right: partial protection against a Serta-style uptier.
  • The TLB has pro-rata sharing language. Non-pro-rata repayment is allowed only for non-consenting lenders in extension and refinancing amendments.
  • I did not review the open-market-purchase or guarantor-release ("Chewy") language.

• MFN: 75bp on incremental pari term loans.

• Notes call schedule:

  • make-whole until 2028-02-01, then 104.125 (2028), 102.063 (2029), par from 2030;
  • an equity claw of 40% at 108.25;
  • up to 10% per year at 103 before 2028.

4. TLB vs EYE (National Vision Term Loan A)

How to read it:

• EYE is the better credit on every axis. It runs a third of Petco's leverage with 5x the interest coverage, higher margins, positive growth and real covenants, and it is not sponsor-owned. The ~250bp margin gap is not a mispricing. A bank TLA to a ~1x-levered public company prices like near-investment-grade risk; a cov-lite B2 sponsor TLB prices like single-B.
• The S+425 is fair, not rich. The reasons to want it:
  • deleveraging is visible ($170mm prepaid; there is an explicit 2.0x target);
  • the term debt is the main thing the sponsor-controlled board says it is paying down;
  • the coupon floats, which helps if the curve is right: 2-year UST at 4.79% against SOFR at 3.88% prices in hikes.
• What caps it is negative convexity. The soft call ended 2026-08-02 and the loan marked 99.50 on 8/1. With a fresh Moody's upgrade, Petco has every incentive to reprice (I'd guess a 50–75bp cut, est.) or to keep prepaying at par. Upside stops at about par plus carry. Downside is single-B retail with no maintenance covenants and room for ~$1bn of new pari debt (§3).
• What would make the TLB look like EYE's loan: reaching the 2.0x net leverage target ($850mm net debt at today's EBITDA, ~$360mm more paydown), comps that hold positive, and a sponsor sell-down that ends the controlled-company status. Those would justify the B1/BB- path, which is exactly when a repricing would bite.
• Verdict: Market weight. Hold it for floating-rate carry. Don't expect price upside. If a repricing comes, judge it on the new margin rather than defending the old one.

5. Secured notes vs Under Armour 7.25% 2030 (unsecured)

Recovery sketch (est.; illustrative, not a model):

• Petco. Default EBITDA ~$300mm at 4.0–5.0x gives an EV of $1.2–1.5bn. Less 5% admin and the ABL drawn ~$350mm at default (est.), the 1L pari pool of $1.42bn recovers **~56–76%**. If Petco uses ~$500mm of the pari basket before defaulting, recovery falls to ~41–56%. Rejecting leases in Chapter 11 helps going-concern value. The lease claims themselves are unsecured and don't dilute the 1L.
• UA. Default EBITDA ~$120mm at 6–8x (credit for the brand) gives an EV of ~$0.7–1.0bn. If the revolver is fully drawn ahead of a filing (the typical pattern), the notes recover ≈0%. On a ~$600mm draw, the residual $80–310mm is shared with ~$1.3–1.4bn of other unsecured claims (trade payables are $669mm alone, plus lease rejection and litigation), so the notes recover **~6–22%**.

How to read it:

• The market pays ~100bp more for Petco's secured paper. At these recoveries, that implies the market sees Petco default as ~3.5x more likely than UA. In risk-neutral terms, spread ÷ LGD is ~11%/yr for Petco against ~3%/yr for UA (est.).
• I think that ratio is too high.
  • Petco generates cash, is paying debt down, and has its first maturity in 2029.
  • UA is burning cash, has cut revenue guidance, has needed covenant relief on its revolver, and its notes sit behind a secured revolver that the indenture lets grow to $1.5bn+. UA's revolver also has a springing maturity 91 days before June 2030 if the notes aren't refinanced, which forces a 2029–30 refinancing event.
• UA's best counterargument is its equity cushion. A $2.06bn market cap stands under $600mm of debt; Kevin Plank controls the votes; and $396mm of cash covers the drawn revolver. Petco's $639mm equity is a thin buffer under $1.43bn of debt, and in retail, EV can vanish fast. That is why the call is Overweight with moderate conviction, not a high-conviction switch.
• Verdict:
  • Overweight the Petco SSN, and prefer it to UA 7.25% 2030 on a spread-per-unit-of-loss basis. The notes also carry better covenants and more call protection (make-whole to 2028) than the TLB.
  • The trade-off is rate duration: the fixed coupon over ~4.3 years is ~3.6 years of duration (est.). The 5-year UST has risen from 4.19% (6/30) to 5.03% (10/06). Both bonds' marks above are stale against that move, and in today's rates both likely trade below par (est. in the table).
  • For spread exposure without rate exposure, the TLB is the substitute.

6. Equity view: Buy, Low conviction

Valuation:

• Price and size: $2.23 × 286.4mm economic shares (Class A 248.6mm + B-1 37.8mm; B-2 votes only) = $639mm market cap; EV $1.85bn.
• Multiples: 4.4x LTM adj. EBITDA, 4.7x after stock comp. For reference, EYE trades at 7.1x and UA at ~10x FY26 adj. EBITDA (est.). They are different businesses, cited only for scale.
• FCF yield: ~14–17% on structural FCF of $90–110mm (est.); 37% on the flattered LTM $238mm.

Bull case:

1. Deleveraging moves value to equity. Each $100mm of paydown is ~$0.35/share, or +16% at today's price. At a constant 4.4x multiple, reaching 2.0x net leverage is worth ~+57%.
2. Comps have turned. There have been two positive quarters, and services grew +5.2% in H1, giving a growing, Amazon-resistant 17% of sales.
3. Credit momentum. The Moody's upgrade, the 2028 maturity wall pushed to 2031, and SGL-1 liquidity take bankruptcy risk out of the equity narrative.
4. The sponsor exit has to happen at some point. At 4.4x EBITDA, a take-private or strategic bid for a ~$6bn-revenue platform is plausible. This is speculative, and nothing has been announced.

Bear case:

1. Sales are flat to down for the fourth year. Q3 is guided to only +0.4–1.0%. The margin levers (promotions, payroll, consulting) are largely pulled already.
2. Low-quality EBITDA bridge. Adj. EBITDA includes ~$52mm of Mexico JV EBITDA, $32mm of stock comp is added back, and FY26 includes a $6.8mm one-time tariff refund.
3. Dilution. Stock comp is ~5% of market cap a year. The basic share count rose 2.3% y/y.
4. Leases. 8x-rent leverage is 5.65x. Retail equities with that profile can go to zero on a modest EBITDA miss.
5. Sponsor control. ~65% of the vote, and an RP and debt-basket package that allows recaps. I did not analyze RP capacity.

Scenarios to fiscal year-end Jan 2028 (est.):

Weighted 30/50/20, the expected value is ~$2.95, or +33%.

Why Low conviction. The base case needs no re-rating, only flat EBITDA and continued paydown. But the bear case loses most of the equity, and the evidence for stable EBITDA is just two quarters of +0.6% comps with a one-off in them.

What raises conviction:

• Q3 (early December) delivering adj. EBITDA at or above $100mm with comps of at least +0.5% after the membership-redemption drag fades;
• FY27 guidance implying EBITDA growth without one-offs;
• net debt below $1.1bn by year-end.

What breaks the call:

• FY27 EBITDA guidance below $400mm;
• a debt-funded dividend or recap;
• ABL draws outside the seasonal pattern.

7. Watch list

• TLB repricing or amend-and-extend: likely after the upgrade. A repricing tells you where the market clears B2 Petco risk; it hurts current TLB holders.
• Use of pari-debt capacity: any incremental pari debt or new secured notes dilutes existing holders' recovery directly (§5 sketch: ~15–20pp).
• Sponsor activity: a secondary sale or an approach for the company. A change of control triggers a 101 put on the notes. I did not check whether a CoC is an event of default under the TLB.
• UA: the S&P CreditWatch resolution, Q2 FY27 results (early November), and revolver utilization. Rising draws erode the notes' position directly.
• EYE: its TLA and revolver mature in June 2028. Watch for a 2027 refinancing; any TLB it issues would be the first like-for-like comparison with Petco's.

8. Not verified / gaps

• No live loan or bond quotes. Marks are company-reported Level-2 fair values (Petco 8/1, UA 6/30); today's prices are estimates (§5).
• Petco and UA instrument-level ratings and current S&P ratings: n/a (unverified), beyond what §3 and §5 state.
• EYE's maintenance-covenant levels, collateral detail and any rating: not checked.
• Covenant (Consolidated Adjusted) EBITDA for the current test period is not disclosed. Basket and sweep math uses the $543mm Closing Date figure (est.).
• Recovery and scenario figures are illustrative estimates, not outputs of a model.

Sources (retrieved 2026-10-08)

• Petco 10-K FY2025 (filed 2026-03-13): https://www.sec.gov/Archives/edgar/data/1826470/000119312526106114/woof-20260131.htm
• Petco 10-Q Q2 FY2026 (filed 2026-09-04): https://www.sec.gov/Archives/edgar/data/1826470/000119312526383639/woof-20260801.htm
• Petco Q2 FY2026 earnings release (8-K, 2026-09-02): https://www.sec.gov/Archives/edgar/data/1826470/000119312526380189/woof-ex99_1.htm
• Petco refinancing 8-K (2026-02-02), with Indenture (Ex. 4.1) and Credit Agreement (Ex. 10.1): https://www.sec.gov/Archives/edgar/data/1826470/000119312526033607/woof-20260202.htm · https://www.sec.gov/Archives/edgar/data/1826470/000119312526033607/woof-ex4_1.htm · https://www.sec.gov/Archives/edgar/data/1826470/000119312526033607/woof-ex10_1.htm
• Moody's Petco upgrade (Investing.com, 2026-09-28): https://www.investing.com/news/stock-market-news/moodys-upgrades-petco-as-operational-turnaround-fuels-voluntary-debt-reduction-4921168
• National Vision 10-K FY2025: https://www.sec.gov/Archives/edgar/data/1710155/000162828026014379/eye-20260103.htm · 10-Q Q2 FY2026: https://www.sec.gov/Archives/edgar/data/1710155/000162828026056493/eye-20260704.htm · Q2 release (2026-08-12): https://www.sec.gov/Archives/edgar/data/1710155/000162828026055930/ex991-q22026earningsrelease.htm
• Under Armour 7.25% notes, 8-K (2025-06-23) and Second Supplemental Indenture: https://www.sec.gov/Archives/edgar/data/1336917/000119312525144658/d17064d8k.htm · https://www.sec.gov/Archives/edgar/data/1336917/000119312525144658/d17064dex42.htm
• Under Armour 10-K FY2026: https://www.sec.gov/Archives/edgar/data/1336917/000133691726000073/ua-20260331.htm · FY2026 Q4 release: https://www.sec.gov/Archives/edgar/data/1336917/000133691726000059/exhibit991-fiscal2026q4.htm · 10-Q Q1 FY2027: https://www.sec.gov/Archives/edgar/data/1336917/000133691726000111/ua-20260630.htm · Q1 FY2027 release (2026-08-07): https://www.sec.gov/Archives/edgar/data/1336917/000133691726000108/exhibit991-fiscal2027q1.htm
• Moody's UA downgrade (Investing.com, 2025-12-04): https://www.investing.com/news/stock-market-news/moodys-downgrades-under-armours-rating-to-b1-amid-turnaround-challenges-93CH-4392322 · S&P CreditWatch (2025-11-25): https://www.investing.com/news/stock-market-news/sp-global-puts-under-armours-ratings-on-downgrade-watch-4378028
• Prices: Yahoo Finance chart API (WOOF, EYE, UAA, UA), 2026-10-08. Rates: FRED DGS2, DGS3, DGS5, SOFR (latest 2026-10-06 / 10-07; history 2026-06-30 and 2026-08-03).