Of the 43 high yield-style bonds syndicated to investors since the post-pandemic market freeze, the vast majority have performed well, with nine holding on to gains of four or more points as of yesterday’s close. Meanwhile, just five issuers have fallen below their issue price, including bonds backing Ford Motor Co, AMC Entertainment and Spirit AeroSystems.
The bonds that have underperformed have largely done so for credit-specific reasons, said three buysiders and a trader. Ford, for example, sold off by as much as six points after a report on Friday (17 April) by Manheim Auctions disclosing that its Used Vehicle Value Index – a benchmark for industry pricing – fell 11.8% month-over-month for the first half of April, and is down 9.6% compared to April 2019.
For Ford, the newly minted USD 8bn in bonds represented its first attempt to tap the bond market as a fallen angel. Ford was downgraded from investment grade to high yield by S&P and Moody’s in March and now has issuer ratings of Ba2/BB+.
Ford’s USD 3.5bn 8.5% senior unsecured notes due 2023 fell as low as 93.5 to yield 11.11% Tuesday (21 April), though retraced today to 98 to yield 9.282%, according to MarketAxess. The bounceback was largely driven by a JD Power report stating that auto retail sales are beginning to show signs of recovery, compared to March, the sources added.
Still, the implications of the Manheim data extend to stressed issuers like Hertz Corp and Avis Budget whose assets comprise large fleets of used cars – and that need additional capital to see them through the coronavirus crisis, sources said. Hertz bonds traded down further on the Manheim report, with its USD 900m 6% senior unsecured notes due 2028 trading today at 25.75 to yield 33.07% from trades at 32.938 to yield 27.079% on Monday, according to MarketAxess.
Concerns over the declining fleet value had already contributed to a collapse in its bonds last week, as reported.
Top 5 Advancers:
Top 5 Decliners:
The other major decliner of the post coronavirus era is AMC Entertainment. Like most issuers that have tapped the market – including restaurant chains, theme parks and a cruise line – AMC is dealing with a shutdown of most or all of its business due to the public health crisis. But the theater industry also faces secular pressure from streaming services, and AMC’s balance sheet was the most at-risk of the levered theater operators even before the crisis, sources noted. Its unsecured bonds traded in the 80s yielding high single digits in mid-February.
The Caa1/CCC- rated AMC’s newly issued USD 500m 10.5% senior secured notes due 2025 have fallen to 89.5 to yield 13.469% today, compared to issue price of 98 to yield 11.031%, according to MarketAxess.
In contrast, fellow theater operator Cinemark (B2/BB-) had a healthier balance sheet before the crisis, and it issued a USD 250m 8.75% senior secured note due 2025 on 13 April that has held up in trading. The notes most recently changed hands yesterday at 100.25 to yield 8.686%.
Cinemark had lower leverage as of 31 December, at 3.4x compared to AMC’s 6.6x, according to Moody’s calculations. And Cinemark generated USD 292m of free cash flow last year (USD 993m of EBITDA less USD 535m of capex and USD 165.5m of interest expense) compared to AMC’s cash burn of USD 31m (USD 1.59bn of EBITDA less 931.5m of capex and USD 692.5m of interest expense), according to SEC filings for the respective issuers.
AMC has hired legal counsel, while a group of lenders has hired advisors to assess liquidity options, as reported.
The Cinemark deal, as well as the other pandemic-hit issuers that have performed wel,l illustrate that “at the right level, people are willing to front you the money until you’re back on your feet,” one of the sources said.
But similar to AMC, Spirit AeroSystems also faces a more existential risk, as its near-term fate is tied to the production of the controversial Boeing 737 MAX in addition to the fall-off in airline activity.
Spirit’s recently issued USD 1.2bn 7.5% second lien bonds due 2025 last traded today at 98.5 to yield 7.87%, after issuing at par on 14 April, according to MarketAxess.
The only other deals that have traded off are add-ons for Change Healthcare and TransDigm.
Change’s USD 1.325bn 5.75% senior unsecured notes due 2025 last traded yesterday at 98.362 to yield 6.143%, down from an issue price at par.
TransDigm’s USD 4.4bn 6.25% senior secured notes due 2026 traded today at 98.5 to yield 6.56%, compared to an issue price of 101 for the add-on. The company’s other recently issued bond, its USD 1.1bn 8% senior secured notes due 2026, traded up to 104.875 to yield 6.58%.
Meanwhile, the bonds that have traded well have done so in large part due to demand for secured paper with generous pricing, and books for those deals were largely oversubscribed, sources noted.
“Any time the market starts to heal after a massive dislocation, first you get some people dipping their toes in and then others follow. And then you get everyone jumping in and books go to 5-6x oversubscribed, and the new issue concession evaporates. For example, Six Flags started at 8%, they priced at 7%, and it’s now trading at 6%,” said a trader.
Click here for a comprehensive list of high yield bond deals issued since 27 March.