13 May 2020 by jbchevrel
Today from a London close-to-close standpoint, IG34 fair value went wider by +5.5bp. This move was mainly driven by high-beta retailers and cruise names (close: RCL 35% +500 rng CCL 33% +100 rng). Among high-beta retailers, Kohl’s Corp (KSS) operates department stores (~1.1k) and sells stuff (moderately-priced private label and national brand apparel, footwear, accessories, beauty and home products) online. KSS widened by a bit less than 50bp to about 650bp. this is the new all-time wides for KSS 5y CDS. For reference, GFC wide was around 400bp. After opening retail locations in four states, Kohl’s said it intends to open stores in 10 more states on Monday (May 11) as it follows a phased approach to retail reopening. The company said in an announcement that it will also open further retail locations in the weeks to come with “the same deliberate, measured approach.” On May 8th KSS said it would welcome shoppers and staffers back to all locations in Arizona, Alabama, Georgia and Texas, among other states in addition to a “majority” of shops in Tennessee and Florida. The retailer had opened stores again on May 4th in South Carolina, Utah, Oklahoma and Arkansas. This is in theory good news, but Amazon sales probably mean that shoppers won’t have so much to catch up as KSS opens back. KSS got less than $1B on balance-sheet and more than $6B debt. It was generating about $20B top line $1B bottom line in permanent regime, ie pre-COVID. The bottom line is broadly seen as close to 0 this year and next. Revenue is projected to lose -20% this year and next ($20B area to $16B area, with downside risk) and EBITDA is consequently projected to be divided by 2 ($2.5B area to $1.3B area). The risk to see KSS downgraded to HY is high, it is under Negative watch at the 3 big agencies. Ba2n / BBB-n / BBB-n. Today the KSS stock was on the back foot (-3%) but most notably 1m atm implied soared to 100pt today. KSS market cap has been divided by more than 5 in 2y. In the middle of April (16th ), KSS entered into a new $1.5B senior secured asset-backed revolving credit facility, in big part to refinance the previous $1B old facility. That new credit facility will mature in July 2024. The Credit Agreement contains covenants including a restriction on dividends in 2020 if KSS outstanding borrowings under the Credit Agreement exceeded $1B. So KSS dividend is discontinued since then. At the end of April (27th ), KSS sold $600M of 5y (may 2025) unsecured with a provision to increase the coupon (from the current 9.5%) if the company is downgraded below IG. Coupon step-ups are going to be 25bp per agency (Moody’s and S&P) and per notch, up to a maximum of 200bp. So this coupon has all chances to break higher than 10% very soon. The bond keeps trading at a premium for the time being, with yield below 9%. These May25s have a Z-spread of around 850bp so that’s a decently negative CDS-cash basis (c -200bp) in 5y sector.