Ms. Gove, Mattress Bathtub & Past’s chief govt, and her staff sought a delay. They instructed the lenders they wanted extra time to arrange financial institution accounts to make payroll in chapter, the individuals stated. Additionally they had been searching for a lifeline.

Watching the drama from his house workplace in suburban Connecticut, George Antonopoulos, a managing associate at hedge fund Hudson Bay Capital Administration, noticed a troubled firm that had at the very least one factor going for it: the passionate curiosity of particular person traders who had been maintaining its inventory worth afloat regardless of an anticipated chapter. 

Working with Hudson Bay’s co-founder,

Yoav Roth,

and others on the fund, Mr. Antonopoulos decided Mattress Bathtub & Past’s shares could possibly be a lovely funding—so long as the fund might get a assured below-market worth, in line with individuals near the matter.  

Their pondering: Mattress Bathtub & Past was a storied model. If it in some way might flip round its fortunes, an funding at these ranges would result in large features. But when the corporate’s prospects turned bleaker, the Hudson Bay staff knew there was likelihood they may dump the retailer’s shares with out dropping an excessive amount of cash, because of the excessive investor curiosity within the inventory.

The weird $1 billion financing association—with $225 million upfront and installments paid over the remainder of the yr—will purchase the unprofitable retailer extra time to repair its enterprise. The hedge fund stands to revenue so long as the corporate can keep out of chapter court docket this yr and its inventory stays above 72 cents. 

Traders, workers and distributors are divided on whether or not it will likely be sufficient. Mattress Bathtub & Past misplaced greater than $1 billion within the 9 months ended on Nov. 26. It has projected steep gross sales declines for one more quarter and must stem its losses to keep away from burning by its rescue package deal, because it did with a September financing deal. 

The corporate’s inventory, which was buying and selling close to $6 the day the rescue was introduced, has fallen again beneath $2 this week. The shares fell 6% to $1.82 on Thursday afternoon. The bonds are buying and selling at between 11 and 29 cents on the greenback, in line with Finra information.

Mattress Bathtub & Past continues to be going by the type of painful restructurings that sometimes occur in chapter. The corporate is closing tons of of shops. It’s slicing hundreds of jobs and has filed to liquidate its Canadian operations. 

“Preserving the corporate out of chapter provides them the best likelihood of survival,” stated

Jonathan Duskin,

chief govt of Macellum Capital Administration, an activist funding fund that in 2019 nominated Ms. Gove to serve on Mattress Bathtub & Past’s board. 

Ms. Gove has steered a number of retailers by chapter. She spent twenty years rising by the monetary ranks at jewellery retailer Zale Corp. earlier than operating Golfsmith, a retailer of golf gear. 

Her expertise at Zale, which went by chapter throughout her tenure, and her time as a board member at males’s clothes chain Tailor-made Manufacturers Inc., which additionally restructured in chapter, ready her for among the challenges dealing with Mattress Bathtub & Past, say individuals who have labored along with her.

She stepped in to run Mattress Bathtub & Past final June when CEO

Mark Tritton

was ousted. Quickly after, she stated the corporate’s push into personal labels went too far, and he or she would woo again the massive manufacturers. She labored to reassure banks and distributors by the vacations after the corporate’s finance chief,

Gustavo Arnal,

died by suicide in September.

By January, Mattress Bathtub & Past was warning it won’t be capable to keep in enterprise. 

A gaggle of lenders led by

JPMorgan Chase

& Co. grew alarmed that month after they realized concerning the fast deterioration within the worth of Mattress Bathtub & Past’s stock, which served as collateral for his or her loans, in line with individuals near the matter. 

They gave the corporate every week to arrange for chapter. When the corporate didn’t observe by, the lenders despatched a default discover, requested for instant compensation on their loans and set a deadline for the corporate to file, the individuals stated. 

Ms. Gove and others searched for methods to save lots of the corporate. They had been well-aware that traders typically have little curiosity in offering financing to save lots of struggling retailers. Fairness financing is even tougher to acquire as a result of shares, in contrast to senior loans, don’t have a declare on collateral. Making issues worse, Mattress Bathtub & Past had beforehand bought the bulk of its real-estate holdings.

Nonetheless, Mattress Bathtub & Past had turn out to be one thing of a meme inventory following

GameStop Corp.

Chairman

Ryan Cohen’s

short-lived flirtation with the corporate. The inventory had been buying and selling at excessive volumes regardless of a potential chapter submitting. The issue for Mattress Bathtub & Past was that it didn’t have time to attempt to increase cash from particular person traders. 

Funding bankers at

Lazard Ltd.

and

B. Riley Monetary Inc.

sounded out institutional traders on a pitch to guess on Mattress Bathtub & Past because it shut down unprofitable shops and tried to show itself round. To make the funding extra enticing, Mattress Bathtub & Past would allow them to accumulate shares at a considerable low cost to the market worth.

Amongst these was Hudson Bay Capital, which manages $19 billion however likes to remain beneath the radar. A liquidation of the retailer was set to start on Friday, Feb. 3, placing strain on the negotiators. Knowledgeable {that a} new investor would possibly emerge, the corporate’s lenders agreed to pause the liquidation proceedings over the weekend, the individuals stated. After negotiations over video calls, Hudson Bay offered a proposal that topped a rival bid, the individuals stated. 

The banks accredited the deal after a junior lender, Sixth Avenue Companions, agreed to offer a brand new $100 million mortgage—funds that Mattress Bathtub & Past might use to pay again the banks and supply severance to workers laid off by the corporate. The corporate additionally agreed to nominate a brand new chief monetary officer with restructuring expertise.

On Feb. 6, the cash was wired to the banks, giving the corporate some respiration house. It additionally allowed workers at a retailer in Oceanside, N.Y., to put up an indication by the money register that reads: “This Retailer Is Not Closing.”

—Suzanne Kapner contributed to this text.

Write to Gregory Zuckerman at Gregory.Zuckerman@wsj.com, Soma Biswas at soma.biswas@wsj.com and Alexander Gladstone at alexander.gladstone@wsj.com