Our Experts Comment on The Grapples

See All Entries

Cruise Optimism

29 May 2020 by jbchevrel

Another leg in the reversal for US cruise names. Today Royal Caribbean (RCL) keeps going tighter -0.5% despite broader market small wider. The RCL new 11.5 2025 bond priced earlier this month finally stopped rallying though, now stable in 106 (-) area. The RCL stock is about 2.5x the lowest level, COVID-to-date. CCL is also tighter -50bp today and the CCL 11.5 2023s issued ~7w ago is now trading at 106.5 (-0.5). Earlier this month, RCL issued $3.3bn 3y 5y notes secured by ships and related IP, including trademarks and customer lists. Until the company is rated IG at both S&P and Moody's, the collateral will be subject to a cap of up to $1.662b (5% of total assets) per the credit agreement limitation on liens. The use of proceeds from the new issuance was the repayment of RCL's secured 364d term loan and GCP. While the 3y had priced at 10.875% and the 5y had priced at 11.5%, we have had an amazing rally since then (more than +6pt on the 5y!). The fundamental picture is still weak, but much less than in Q1. The reopening theme has been a relief for RCL and the broader sector. Indeed, ports/regions/countries are gradually opening back up to cruise. The company is currently in dialogue with tens of different ports and destinations around the world in terms of planning a return to service. Bookings had started to deteriorate in mid-Feb, before dropping further in mid-Mar. Overall, 130 itineraries were canceled in 1Q20. So RCL had to pull its guidance in March. RCL noted that interest expense is expected to be around $600m for all quarters from Q2-20 to Q4-20. RCL’s debt maturities for the remainder of 2020 and 2021 were $400m and $900m. By the end of 2020 interest expense may acheive around 40% of revenue what will result negative Eps so the equity picture looks dark. It seems that the best case is that RCL goes back to profitability in Q4-20. Bookings are pacing better since this month, really (Q4-20 and 2021 itineraries being the most frequently booked). There hasn't been (at least not yet) an abnormal level of cancellations for 2021 bookings. The pro-forma total liquidity, as of April 30th, was ~$3.4b (or ~$3.0b net of 2020 debt maturities). That means that RCL has ~12 months of operating cushion, which the market sees as a comfortable buffer, at this juncture, further reinforced by the various cap-ex reductions and other cost-cutting initiatives that have been taken. Ultimately, the next game-changer for this credit is a potential COVID vaccine, like it is for most of the market, except that RCL is a high-beta play.

The World’s Learning Company

28 May 2020 by jbchevrel

Today Pearson plc (PSON) was the worst single-name CDS in the Main. The 5y contract is wider by +34bp to 134bp. PSON was pricing GBP350m of a new 10Y (June 4, 2030) fixed coupon note at 355bp above Gilts. The guidance had been in the UKT + 370bp area, the books were above GBP3.7b. The issuer is Pearson Funding PLC guaranteed by Pearson PLC and the ratings of the note are expected to be: Baa2/BBB-. As ESG is an increasingly trendy scheme, it is worth noting that these 2030s are part of the PSON’s social bond framework. This Social Bond Framework has been created by PSON and aims to comply with ICMA Social Bond Principles, setting out that any bonds issued under it will be spent on projects whose primary objective is to advance the UN’s SDG 4 –Quality Education. Pre covid (2/21) PSON CDS was 65bp. it peaked close to 170bp (c2c). it has now retraced c35% of the initial widening, while it had retraced as much as c81% of that move, earlier this month. That is to be compared with a c73% retracement of the iTraxx Main index, over the same period of time, neglecting the roll. The RV 5y PSON/Main is marking a new top of the post-roll range of [5bp , 64bp]. the previous local high in this RV, post-roll, was 50bp. Yesterday, PSON estimates was cut again at Berenberg to reflect likely “severe disruption” to college enrollments in 2020 from coronavirus impact and PSON stock was downgraded to Sell. Bloomberg reported that broker Berenberg’s analyst said she assumes a -10% decline in student enrollment in fall 2020, and sets estimates at -22% below consensus for 2020 and -7%/-8% lower for both 2021 and 2022. She also noted that the falling US birth rate is likely to see declining number of university students in 2nd half of decade.

A Boost For French Autos

27 May 2020 by jbchevrel

Today French auto CDS and French auto part CDS are leading the Main’s fair value tighter by almost -5bp. Yesterday French President Emmanuel Macron has announced an €8bn rescue plan to revive the French car industry. His proposal, which came during a visit to the Valeo (FRFP) car factory in Etaples, includes €1bn to provide grants of up to €7,000 to encourage the French consumers to buy electric vehicles. This breaks down to €5,000 for each company purchase and €2,000 per hybrid rechargeable car. In exchange for the exceptional measure, PSA (PEUGOT) and Renault, France’s two main car manufacturers, have promised to focus production in France. French President Emmanuel Macron said: "We need a motivational goal - make France Europe's top producer of clean vehicles by bringing output to more than one million electric and hybrid cars per year over the next 5y.” Over the past two sessions, FRFP has come -50bp tighter from 300 to 250. Similarly, PEUGOT has come -55bp tighter from 300 to 245. Even RENAUL joined the move, having come -40bp tighter from 300 to 260, name discussed Friday evening in this blog (‘Renault could disappear But it won’t’). Car sales have tumbled in the area of -80% during France’s 2-month nationwide lockdown, which ended now two weeks ago. By the end of June, it is estimated that ~500k passenger cars will have gone unsold.

Say Yes (to the world): LHAGR update

26 May 2020 by jbchevrel

Deutsche Lufthansa AG (LHAGR) 5y CDS is the best performing single-name in the iTraxx Main today, tighter by more than -30bp. the CDS closes at around 370bp, vs a previous wide of 460bp (on a close-to-close basis) and a pre-COVID level (2/21) of around 60bp. this squeeze tighter comes after we got hit by the news that Germany will offer LHAGR a €9b bailout. This is the biggest corporate rescue in Germany, covid-to-date. The state will also back a 3y loan of €3b.This aid package implicates that the German State will take an initial 20% stake in LHAGR equity, which could rise to 25% + 1 share (blocking minority) in the event of a takeover. The plan requires EU approval. MOF Scholz said the German state’s investment would be temporary, but he also stressed that the timing of an exit would depend on the pace of LHAGR recovery. The German government has set up a €100b fund to buy stakes in distressed companies as part of its effort to stabilize the economy. The German government will pay €300m for new LHAGR stock at a discount €2.56/sh., which is the nominal value of LHAGR shares on its balance sheet. The deal also includes a €5.7b investment via a silent participation, a debt-equity hybrid instrument that wouldn’t dilute shareholder voting rights. LHAGR will pay a guaranteed dividend on the investment of 4% in 2020 and 2021, rising to 9.5% in 2027. A portion of the hybrid can be turned into 5% LHAGR equity if they do not pay the guaranteed dividend. The official timeline is that the German government aims to sell its stake in LHAGR by the end of 2023, although it depends on LHAGR capacity to repay LHAGR share price level.