Friday Workout

MoMo, FoMo, or SloMo; Time to take a cruise, Friday 13th Part II

Since the Pfizer and Moderna vaccine announcements markets are back in FOMO mode. The crossover has broken through the 300bps barrier with shares in beaten-up borrowers rising sharply as investors look beyond the pandemic and second wave and rotate out of Momentum Stocks.  

Positioning confirms the fear of missing out, funds are the most bullish on equities since 2018. Over the last two weeks, we had the largest inflows into global stocks ever, according to BofA and EPFR Global. The Q4 European High Yield Investor survey showed investors are overweight and 60% expect positive returns in Q4 with only 24% thinking that valuations are rich. Risk appetites are rising too, witness the spate of stressed refinancing – Boparan followed this week, and now Carnival is taking a European HY cruise.  

But forget MoMo and FOMO, we are currently in SloMo.

Economic activity is turning down once more – as pent-up from resumptions demand fizzles out and second lockdowns (albeit with less severe restrictions) bite. 

But most investors are discounting the latest fall in activity as a mere bump in the road, reassured by Q3 earnings releases showing substantive corporate liquidity buffers. 

Thyssen Krupp is a stunning example, the billions of cash from the elevators business masking the €4.8bn of cash burn (€3bn from R&D write downs) and negative €1.6bn EBIT loss, its bonds are yielding around 3%!

DCM bankers are taking advantage of the optimistic mood by feeding the HY beast. 

How many of you would have bet in September that Pure Gym, Boporan, Aston Martin and Lowell could get away?

Don’t worry, after Q3 earnings our list of stressed/distressed candidates is growing, despite attempts to bid them all the way into the 90s. We don’t just look at price in our analysis. 

The Economist is a contra indicator – remember their “Is the world ready for $10 Oil” headline? 

Notwithstanding logistical concerns over cold transport and the sheer scale of vaccination exercise, the consensus is that the bulk of business activity will return next summer. Therefore, for downside planning if you can survive 2021 from your liquidity buffers, you can then look at your future solvency and how to deal with refinancing walls. 

eDreams has less issues with refinancing with no debt due until 2023, but as an online travel retailer it was hit hard by the drop in air traffic and travel restrictions. Activity in the summer at one point was ‘only’ 60% down on a year earlier, but it is 73% lower in November due to the second wave. But under its No Action plan, it can survive 2021 with bookings 70% down for the calendar year. This presupposes that it will still have access to its super senior revolver, which provides almost all of the available liquidity, the gross leverage waiver runs out at end-March. Gross Leverage is now at 13.6x

Time to take a Cruise?

Regular readers of the Friday Workout will be aware of our recent focus on the travel industry, Airlines and Cruise companies. Their bookings dominated news-flow this week. 

Carnival said this week it would delay US sailings until at least the end of March while it complied with the CDC’s Framework for Conditional Sailing Order, with cruises longer than seven days sailing in and out of US ports until 1 November 2021. But undeterred by this and soaring US Covid cases, it launched a US equity offering this week to take out $499.4m of its 5.75% dollar converts, leaving $627.5m outstanding. It then sailed across to Europe and launched $2bn equivalent of 5.25-year non-call 3.25-year senior unsecured bonds, having maxxed out on secured debt capacity in August – with a $28bn collateral package. 

As 9fin HQ tweeted there are still unencumbered assets – but granting security on them would trigger negative pledge provisions on older debt. Complicating matters the senior secured notes rank ahead of the unsecured for 25% of assets, but the remaining 75% is split pari passu between secured & unsecured. Second-hand Cruise Ships are seeing significant falls in value, I would suggest looking at realisation values for the 18 vessels Carnival is seeking to offload. 

On a relative value basis, the new Euro paper looked cheap at mid-8s IPTs compared to existing, our curve suggested a high 7-handle is where it should trade. Some Carnival bonds have posted 10-15 point gains this year. But it may still be the ideal candidate to leverage the post-pandemic return to normality, if you think the $19bn equity cushion provides buoyancy for $28bn of debt. 

Norwegian Blues – an ex-Airline?

Boeing’s final go-ahead for the 737 Max this week came too late for Norwegian Air Shuttle. The troubled low-cost airline is locked in legal action seeking compensation for their grounding, plus cancelling orders for 92 Max aircraft. It may be shuffling off this mortal coil with some observers parroting that it is about to become an ex-airline. 

The low-cost airline was struggling well before the Covid-19 pandemic, forced to raise equity three times from 2017 to 2019. It tried to avoid extinction via a series of debt for equity swaps, yet another equity raising and a state-aid from Norway with NOK 3bn of loan guarantees. 

But to avoid being bereft of life, it required further funds to fund 2021 working capital. But the Norwegian government decided it was not merely stunned, having lost the capability of flight.  

On Wednesday, it filed for Irish Examinership. Norwegian counters that it is merely resting and that the process will allow it to reduce debt, right size the fleet and secure new capital. The jurisdiction may be a surprise to some, but most of its aircraft and leases are based in Ireland and the process has some advantages over the US which has just a 60-day enforcement stay for aircraft equipment. 

Friday the 13th Part Two

Gategroup aptly chose after dark on Friday 13th to announce the latest sequel to its capital structure horror. The airline catering group pulled an IPO in the Spring of 2018 (I broke the story about their first attempt to explore an IPO ten years earlier) with revenues dramatically affected by the collapse in air travel following the pandemic. Under the restructuring plan shareholders RRJ Capital and Temasek will provide CHF 500m of new funding via CHF 25m in equity and a CHF 475m subordinated, convertible loan upon completion plus:

  • CHF 200m provided as a senior secured interim liquidity facility extended by shareholders repayable upon completion of the Transaction or latest 6 months after issuance; and

  • The extension of the maturity of the Group’s syndicated loan facilities to October 2026 and certain other amendments.

It is still not fully cooked, as the deal is conditional on bondholders agreeing to the extension of its CHF‐denominated February 2022 bonds to February 2027.

Fellow Swiss corporate struggler Swissport provided a trading update late last Friday. The release might be overshadowed by its latest restructuring, but it will provide some encouragement to the senior unsecured noteholders who are mulling a challenge to a UK scheme to sanction a restructuring plan that wipes them out. Group liquidity was CHF 490m as at 16 October, much better than envisioned when the plan was submitted in the summer

In Brief

Cineworld was back on our screens this week, with media rushes on its attempts to reduce its rent bill via a company voluntary arrangement. The Cinema operator is facing legal action from a number of landlords over unpaid rent. Lenders recently sent a letter to the company warning against pulling a J.Crew, one lender confirmed to 9fin this week. 

Raffeniere Heide posted just €1.4m of EBITDA in the third quarter, with its liquidity remaining unchanged at €199m with another €72m of availability. It also renewed its receivables facility with NordLB. The Nov 2022 bonds are indicated around 80, with an investor call next week.  

Prisa has confirmed a newspaper report that Spanish investor Blas Herrero had submitted an unsolicited non-binding offer for a stake in certain print media and radio stations. Last month the group agreed a stressed amend and extend with lenders in conjunction with a paydown from proceeds from its Santialla Spanish business.  

Navias Armas is seeking €100m of public sector funding as it seeks to agree a debt for equity swap with its bondholders. El Confidential said that bondholders included Deutsche, Blackrock and Axa. 

Wirecard has sold its core European business to Santander for just €100m, according to the Financial Times. This doesn’t bode well for creditor recoveries, with over €12.5bn of claims filed with the German court. 

Travelodge has signed a £60m Super Senior RCF from Avenue and GoldenTree. The group remains locked in talks with its landlords, confirming its largest landlord will not be exercising its break rights. 

Reasons to be fearful – what we were reading this week

China’s corporate bond market had a number of high-profile defaults this week prompting concerns of spill-over effects for State-owned entities. 

Not everyone has benefited from the Pfizer and Moderna vaccine announcement – there was an abrupt reversal in momentum stocks and a switch into value, causing momentum funds to have their worst day since 2010. Is it time for value investing to make a comeback?

Sovereign debt defaults are rising, Zambia was the sixth this year to default on its bonds. 38 countries are rated B+ or worse by Fitch. New rules are needed to deal with sovereign debt insolvency