July 12th 2020
Currently tracking 237 credits from 145 companies.
If you wish to view the Distressed Watchlist within Google Sheets, please request access to it and I will shortly grant you access to it.
Leaders for the Week
Laggards for the Week
AMC Entertainment (AMC) announced a proposed exchanged offer for its Senior Subordinated notes. If bondholders choose to accept the exchange, they will receive new 12% Cash/PIK Second Lien Secured Notes due 2026. The exchange is anywhere between 49-52% of par depending on the note and whether it is tendered early. AMC 10.50 ’25 First Lien Secure Notes moved higher by 5pts to 91. The AMC Sub Notes also moved higher by 5-6pts to 30/32 context.
Continued demand and strength in Royal Caribbean (RCL) made the company return back to the debt markets only two weeks after issuing 3B+ of new secured debt. This time the company raised additional $2B of debt consisting of $1B new 9.125% Senior Notes and $1B new 4.25% Convertible Notes. On Friday, RCL Equity rose over 20% pushing its newly issued convertibles to trade up 20pts in its first day of trading.
Other cruise-related credits such as Norwegian Cruises (NCLH) saw strength as well. NCLH 3.625 24 traded up 21pts to 81. NCLH 12.25 ’25 traded up 8pts to 115 to yield 8.4%.
Avis Budget Car (CAR) left the distressed watchlist after the bonds traded higher by 8-10pts yielding around 8.50-9.00% now. Only 30 days ago their debt was yielding over 20%.
Hertz (HTZ) 2nd priority notes traded up 27pts to 71 while the senior notes traded up 16pts to 34. Surprisingly, HTZ equity also traded up 157% to $2.57.
United Airlines (UAL) traded up again into the high 80s to yield around 8.50-9.00%. While Delta Airlines (DAL) traded up 5-10pts to yield around 6-7%.
QEP Resources (QEP) traded up 20pts across the capital structure after announcing a newly amended credit facility. It will provide the company with increased liquidity of around $500M to help turn its business around. QEP 5.625 ’26 are now trading at 72.50 yielding 17.25%.
Triumph Group (TGI 7.75 ’25) posted another strong week. The notes traded up 20pts to 85. The notes have been up 30pts in the past two weeks.
Volatility + Leverage = Dynamite
The use of financial leverage (debt) is very important for a business. There are many reasons why a company decides to add debt to its capital structure. The ultimate reason is to enhance shareholder equity or value.
Leverage doesn’t add value or make an investment better. Like everything else in the investment world other than pure skill, leverage is a two-edged sword – in fact, probably the ultimate two-edged sword. It helps when you’re right and hurts when you’re wrong.
– Howard Marks (Oaktree Capital Management)
During the 2008 financial crisis, Howard Marks wrote an excellent memo about leverage. If you do not have time to read it completely, skip to page 4 and read the section about “The Right Level of Leverage”. It is a simple explanation how much leverage a company should have. After finishing that section, move towards the end of the memo on page 12. Read the three bullet points under “The financial markets have delivered a lifetime of lessons in just the last five years”.
Covid-19 brings volatility back
Before Covid-19, volatility has been relatively low for the past 8 years as measured by the VIX index (see below). The combination of COVID-19 and the collapse in oil prices in March sent the VIX soaring to heights not seen since the Financial Crisis of 2008.
Levered / Distressed Equity Watchlist
The past few weeks have seen these companies and industries rebound in dramatic fashion. Leverage is indeed a double-edged sword and the trading activity the past few months have helped to highlight that fact.
I have put together a shared Koyfin dashboard. All publicly-traded companies within the Distressed Credit Watchlist are listed as well as some other highly levered companies. Feel free to follow it using your free Koyfin account.
I have highlighted some industry groups below.
Out of all the major airlines, American Airlines (AAL) has the most debt outstanding at $34B as of March 2020. The drop in demand from Covid-19 has caused its 3-month volatility to rise to over 160. At the beginning of the year, it was at 30.
Like Airlines, cruise lines companies like Norwegian Cruise (NCLH) and Royal Caribbean (RCL) have taken on loads of additional debt this year. Volatility for the industry group has also risen to all time highs.
Oil & Gas (Energy)
The price of WTI Crude Oil has been extremely volatile this year. Many energy names are high leverage. Below are graphs of Matador Resources (MTDR) and Chesapeake Energy (CHK) just to give you and idea of the price volatility seen in the oil & gas space as of late.
When E&P companies experience turbulent times so do energy services like Nabors Industries (NBR) and Seacor Marine Holdings (SMHI).
Radio broadcaster Cumulus Media (CMLS) is highly levered with $1.2B in debt and only a market capitalization of $118M.
AMC Entertainment (AMC) the largest movie theater chain in the US has issued new secured debt bringing its debt total to over $10B. The stock last traded with a $616M market capitalization.
Macy’s (M) recently raised an additional $1b+ in new financing bring its debt total to over $8.5B.
Hertz Global (HTZ) recently filed for bankruptcy two weeks ago, as highlighted in a previous “Distressed Credit Digest”. Carl Ichan, who owned nearly 40% of the company, sold all his shares for under $1 as it is expected that shareholders will see no value in bankruptcy.
Whiting Petroleum (WLL) went into bankruptcy with a plan restructuring support agreement (known as a “RSA”) a little over a month ago. Upon emergence, current shareholders will own 3% of the reorganized company as well receive warrants.
As we saw during March’s sell off – highly levered companies (especially those in consumer sensitive industries) sold off and got hit harder than their less levered counterparts. They are all relatively highly levered and have only added more debt + leverage as of lately.
Stay tuned as this story is still very much playing out for these companies – some will fall on this sword and others will use it to their advantage in order to attain financial success.