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All Over The Place

07 November 2017 by lberuti

Over the last few weeks, even though the market direction was for risk premia to go tighter, the reporting season and the disparity in earnings have generated a decent amount of dispersion. Today was no exception, and there were a number of underperformers of both sides of the Atlantic. In Europe, NEWLOK (New Look) caught a fair amount of attention. The company reported results for the second quarter of 2018 which were operationally much weaker than many analysts had expected, with comparable brand sales down 8.6% during the first half of the year. The results were so worrying that Brait Capital, the South African investor which owns the UK retailer, decided to value the company at 0 until some kind of turn around takes shape. NEWLOK’s 5-year risk premium was pushed 2.5pts wider – you have to pay 49pts upfront to insure NEWLOK’s debt for 5 years plus another 5pts every year -. But the company also announced that on top of securing access to a £100mln revolving credit facility, it has restruck some swaps, an operation that has generated a £11mln cashflow and should bring another £30mln over the next 3 months. It looks as if NEWLOK has ample liquidity at the moment, and has managed to buy itself some time to try and turn things around. Investors took notice and sent the 1 year risk premium 3pts tighter. On the same day, while the 5-year default probability went up 4% to 88%, the 1-year default probability went down 4% to 32%.