Distressed Credit Digest
May 31, 2020
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Distressed/High Yield Watchlist
Tracking 266 credits from 152 companies
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‣ American Airlines (AAL 5.00 ’22) traded up 13 to 59 as the airline industry saw strength for the second week in a row.
‣ All cruise lines credits saw massive gains this week. Royal Caribbean (RCL 3.700 ’28 & RCL 7.500 ’27) higher by 10-13.
‣ Ahern Rentals (AHERN) bounced off its lows and traded up 15 points to end the week back in the mid-40s.
‣ The week following the Hertz bankruptcy filing, both distressed car rental credits (Hertz – HTZ & Avis Budget Car – CAR) were stronger due to other travel related buying. Hertz (HTZ) unsecured notes traded up 4 points to 17.50 while Avis Budget Car (CAR) unsecured notes gained another 10 points across the capital structure. The CAR bonds are now yielding between 10-12%.
‣ Recently defaulted retail credits (Neiman Marcus -NMG and JCPenny – JCP) saw their notes trade down by 2-3 points to low single digits.
‣ Party City (PRTY) jumped 11 points after it announced its intent to exchange their unsecured notes for a combination of stock, first lien notes, second lien notes and rights to purchase a new 15% first lien note.
“Nobody Has More Party for Less” than Party City bondholders
Party City has not given its stock and bondholders a reason to party over the past year. The company ended 2019 with its stock down 76.5% as it saw EBITDA drop 39% from the previous year due to soft Halloween sales and helium supply problems.
The first half of 2020 has been no better. As social distancing has become the normal, party and gatherings have disappeared. Not such a great thing if you are in the business of selling balloons and party supplies.
In March, the stock hit a low of $0.27 cents ($25M market cap) which was down 88% for the year. The stock is currently down 45% YTD after the recent rally. With a current market cap of roughly $120M, the company continues to face liquidity issues and struggles with its debt.
Many investors expected Party City would become another casualty of the Covid-19 epidemic and ultimately be forced into bankruptcy. Before the announced exchange, both senior bonds (PRTY 6.125% due 2023 and PRTY 6.625% due 2026) were trading between 4-6 cents on the dollar as bondholders feared little to no recovery value.
Buying Time with a Debt-Exchange
In an attempt to reduce its total debt, the company announced a debt exchange deal on Friday (May 29 2020) . If accepted, it will decrease total debt by $450 million. Due to pre-negotiations with certain bondholders, 52% of the combined $842M senior notes have already agreed to the terms.
In order for this exchange to go through, the company will need to get over 98% of the bondholders to agree. Before going into greater detail about the terms of the exchange, let us take a quick overview of the company and its structure.
Overview of Company
Party City Holdco Inc., through its subsidiaries, designs, manufactures, sources, and distributes party supplies in the United States and internationally. The company operates in two segments, Retail and Wholesale. It offers paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts, and stationery. As of August 8, 2019, the company operated approximately 900 specialty retail party supply stores, including franchise stores throughout North America under the Party City and Halloween City names, as well as e-commerce Websites principally through the domain name PartyCity.com.
Historical Graph of Party City
Little value to work with
As seen in the capital structure table below. The market value of the secured debt is currently around $431M or 50 cents on the dollar. Making it harder to extract value in a bankruptcy for the senior notes.
Current Capital Structure
Debt-Exchange into balloons?
The Exchange Details
Breakdown of the value for bondholders
Full Recovery Breakdown
Current Valuation Breakdown
(estimated values of new debt)
It seems like this exchange will get done as it provides the best option for bondholders. It gives the company additional time to hopefully stage a recovery during the 2nd half of 2020. If it is successful, bondholders will be partying with stockholders as they both celebrate the new year.
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.