Distressed Credit Digest
May 24, 2020
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‣ Airlines credits rebounded sharply this week. United Airlines (UAL) saw its unsecured notes gain 15pts+ to yield now around 14-16%. Delta Airlines (DAL) saw strength as well ending up 10-12pts to yield now around 8.50-10.50%
‣ Avis Budget (CAR) unsecured notes continued to rally despite concerns circling around Hertz. The bonds were stronger by 10-15pts to yield now around 16-18%.
‣ Ahern Rentals (AHERN), a provider of rental equipment, has fallen every week since the beginning of March when it was trading at 80. The AHERN 7.375 ’23 are currently trading at 29.00 down 7.00 to yield 64.5% to maturity.
‣ JC Penney (JCP) dropped this week after it filed for bankruptcy the previous. The majority of the bonds are now trading around 2-4 context, down from 9-10.
‣ Cruise line credits were mixed for the week as investors focused on buying the newer secured notes for both Carnival (CCL 11.500 ’23) 105.000 +3.75 9.4% ytm and Royal Caribbean (RCL 10.875 ’23) 101.750 +3.75 10.2% ytm.
‣ High-yield/distressed investors continue to take energy credits higher for another week. Out of the 70 credits tracked, 55 were higher this week. Most notable movers were Denbury Resources (DNR 9.000 ’21) 37.00 +10.00 160% ytm, QEP Resources (QEP 5.250 ’23) 50.00 +14.00 21.0% ytm, and SM Energy (SM 5.625 ’25) 46.00 +10.50 25.2% ytm.
Recent Filings + Bankruptcy Watch
‣ Hertz (HTZ) filed for bankruptcy late Friday night after it could not reach an agreement with lenders. More detail below.
‣ Hornbeck Offshore (HOSS) , supplier of offshore transport services, filed for bankruptcy this week. It has been struggling for quite some time as the the number of deep and ultra-deepwater drilling rigs in service have continued to decline.
‣ Exide Technologies (XIDE) , maker of batteries, filed for bankruptcy for the third time in the last 20 years.
‣ The following companies are on watch as certain debt payments are due within the next two weeks. CBL Associates (CBL), Briggs & Stratton (BGG), and Calfrac Holdings (CFWFF).
Hertz puts you in the bankruptcy seat… Investors Hertz.
After failing to get another extension from its lenders, Hertz filed for bankruptcy protection Friday night. Fueled by a sharp decline in global travel due to Covid-19, Hertz experienced a major liquidity crisis and ultimately fell victim to its massive debt.
“Bad companies are destroyed by crises; good companies survive them; great companies are improved by them.” — Andy Grove
Hertz has struggled in the past. The company’s market capitalization was once valued over $14 billion back in the summer of 2014. It then fell over 80% over the following three years. After that, Hertz spent the last three years fighting tough competition as riding sharing services like Uber and Lyft became more popular.
During that span, the company continued to borrow and saw its leverage increase each year.
Losers from this bankruptcy
‣ Hertz (HTZ 6.00 2028) senior notes were issued back in November 2019. It was a popular new issue that was upsized and proceeded to trade above par for the first few months. In the last few months, it has fallen straight down to the low teens. These new notes were suppose to pay their first coupon payment on July 15th. That will not happen now as it officially joins the exclusive NCAA (No Coupon At All) club.
‣ Carl Ichan, as of March 2020, owned a 39.8% stake in Hertz equity at a reported average cost of ~ $13 a share.
‣ Robinhood investors raced to buy Hertz at what they thought was an opportunity to buy a well known company on the cheap.
Winners from this bankruptcy
‣ Short sellers. Short interest rose from 10.8% to 40.8% this year. The stock traded as low as 1.50 during extended hours trading and is expected to fall further when trading resumes on Tuesday.
‣ Apollo Global Management disclosed that it had acquired sizable CDS (credit default swaps) trade betting the failure of Hertz. The Wall Street Journal article goes into further detail on how much they plan to gain from it.
This is going to be an interesting bankruptcy case.
A quick glance of Hertz’s org chart shows the vast number of businesses operating under the Hertz corporate umbrella.
— Cheeseburger Capital (@CheeseburgerCap) May 23, 2020
Bankruptcy Docket Preview
Quick Capital Preview
Hertz had total debt of $18.7B consisting of $14.4B of vehicle debt and $4.3B of non-vehicle as of March 2020. Below is a simple breakdown of the non-vehicle debt.
It will be interesting to see how the corporate notes will trade during bankruptcy. At the current distressed levels, a reorganization through bankruptcy should allow Hertz to emerge a stronger company but only time will tell.
I am Rich, the co-founder of Koyfin. As a former distressed high-yield trader now designer/developer, I wanted to share some thoughts and observations I see in the distressed high-yield corporate bond market. During my trading days, I shared a daily distressed digest with clients containing trading color and news. Now, I hope to share them with you. Feel free to follow me on Twitter @koyfinTrader as well as share any feedback. My DMs are always open.