Tuesday 7 April 2020 ★ FINANCIAL TIMES 9
C O M PA N I E S & M A R K E T S
Robert Smith
Markets Insight
Optimism around Covid-19 death rates
meant US markets were led higher by
travel stocks such asWynn Resorts,
Carnival andExpedia.
ButDelta Air Linesunderperformed
following news that Berkshire Hathaway
had cut its stake.
Teslarose after better than expected
first-quarter deliveries and a Jefferies
upgrade to “buy”.
It saw Tesla as the only automaker for
whom electric vehicle sales volume
growth was a positive-sum game,
meaning it would be alone in delivering
earnings growth in 2020 and 2021.
“Tesla’s ability to attract capital” was
also “a strong positive as pressure on the
industry’s transformation accelerates”,
Jefferies said.
Spotifyslid after Raymond James
turned cautious. Stay-at-home advice will
hit demand from commuters, it said.
Video-conferencing app makerZoom
slid after Credit Suisse advised selling.
It said the stock’s recent surge implies
sales growing from $600m last year to
$6.7bn in 2029, which would outstrip the
median path of “mega” software firms
over the past 50 years.
Nasdaq-listedAkers Biosciences
jumped after saying its vaccine
development collaboration with Premas
Biotech had successfully cloned all three
coronavirus antigens.Bryce Elder
Wall Street Eurozone London
Rexelof France led a rally for the
European capital goods makers as signs
of improvement in Chinese demand
helped revive risk appetite. Cars stocks
also benefited withVolkswagen,Renault
andPorscheall closing sharply higher.
UBS said its checks with local analysts
in China “confirm that recovery as of end
of March is progressing rapidly, with
activities normalising in local transport,
coal consumption, online sales and
exports”. The potential for Chinese
growth to accelerate through the second
half was “a ray of light amid Covid-
darkness” and came in contrast to the US
and European outlooks, said UBS. It
advised that clients buy Schneider, Atlas
Copco, ABB, Knorr-Bremse and Hexagon.
Thyssenkruppgained after Kepler
Cheuvreux repeated “buy” advice. The
steelmaker’s 60 per cent drop in the year
signalled investor fears that the €17bn
sale of its elevators unit to private equity
would fail, said the broker, which put a 75
per cent chance on the deal completing.
ASM Internationalrallied after
shareholders approved the chip-
equipment maker’s 2019 dividend.
Sodexogained after Denis Machuel,
the catering group’s chief executive, said
in an interview that the first quarter had
been “pretty good”. The company is
scheduled to deliver results on Thursday.
Bryce ElderRolls-Royceled the FTSE 100 gainers
after drawing down credit lines and
cancelling its dividend, which investors
hoped would provide enough liquidity to
avoid an emergency share issue.
Aerospace sector peers includingMeggitt
andMelrose Industriesrallied in tandem.
Carnival, the dual-listed cruise-line
operator, jumped after Saudi Arabia’s
sovereign wealth fund was revealed to
have bought an 8.2 per cent stake.
EasyJetgained after revealing it had
borrowed £1.1bn to shore up its balance
sheet by tapping the Bank of England-
backed commercial paper guarantee
programme and drawing down existing
debt facilities secured against its fleet.
A relief rally liftedGVCafter the
Ladbrokes owner revealed a monthly
cash burn of £15m, against cash in hand
of £250m at the end of March, and
management outlined further savings to
get the bookmaker to break even.
Analysts said that, with GVC’s
competitors suffering, the company had
an opportunity to take market share
either organically or by acquisition.
Legal & Generalled the financial stocks
higher after saying late on Friday that it
intended to pay its 2019 dividend, in spite
of advice from the European Insurance
and Occupational Pensions Authority and
several regional regulators requesting
that insurers hoard capital.Bryce Elder3 Global stocks rally on signs of Covid-
cases peaking
3 South Korean equities up more than 20
per cent from mid-March lows
3 Oil tumbles after Opec’s meeting with
Russia is delayed
Global stocks rallied yesterday, lifted by
signs that government lockdowns were
having an effect on curbing the spread of
coronavirus.
The region-wide Stoxx Europe 600
gained 3.7 per cent after Spain, Italy,
Germany and France all saw the number
of new Covid-19 cases drop significantly
from recent highs.
“The ongoing slowdown in the growth
of new cases is giving investors some
hope that the lockdowns will be gradually
eased later this year and thereby allowing
global activity to pick up,” said Lee
Hardman, analyst at MUFG Bank.
Leading stock markets in Frankfurt and
Paris closed up 5.8 per cent and 4.6 per
cent, respectively, yesterday.
Meanwhile, the major bourses in Covid-
19 hotspots Italy and Spain both ended
the day 4 per cent higher.
But Jim Reid, macro strategist at
Deutsche Bank, suggested investors
needed to remain cautious. “It is still
unclear to me what the exit strategy will
be in the west from the lockdowns,” he
said. “I’m starting to wonder how you can
loosen restrictions... without seeing new
cases increase again.”
Mark Haefele, chief investment officer
at UBS Global Wealth Management, said
he expected “the pandemic in Europe to
peak early April and the US to follow by
mid-April”, leading to “a subdued U-
shaped economic recovery from the third
quarter into the first quarter of next
year”.
Wall Street was higher after New York
state, a region hit hard by coronavirus,
reported its first daily drop in new cases
on Sunday since the crisis began.
The S&P 500 had risen 5.6 per cent by
midday in New York while both the tech-
heavy Nasdaq Composite and the Dow
Jones Industrial Average advanced more
than 5 per cent.
Stocks in Asia also rose, with Japan’s
Topix up 3.9 per cent while South Korea’s
Kospi rose by the same margin, leavingthe latter up more than 20 per cent from
its mid-March lows.
Brent crude sank as much as 12 per
cent in early trading after Opec’s meeting
with Russia was postponed from
yesterday until Thursday.
The global benchmark later recovered,
falling 4 per cent on the session to $32.
a barrel, while WTI, the US marker, dipped
6.6 per cent to $26.47 a barrel.
The bout of optimism led to a sell-off in
haven assets such as core government
debt, with the yield on the 10-year US
Treasury rising 7 basis points to 0.66 per
cent.Ray DouglasWhat you need to know
European stocks climb on signs of virus spread slowing
Indices rebasedSource: RefinitivSpain’s Ibex Italy’s FTSE MIB Jan AprThe day in the markets
Markets update
US Eurozone Japan UK China Brazil
Stocks S&P 500 Eurofirst 300 Nikkei 225 FTSE100 Shanghai Comp Bovespa
Level 2615.28 1263.02 18576.30 5582.39 2763.99 74957.
% change on day 5.09 3.58 4.24 3.08 -0.60 7.
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 100.777 1.078 109.130 1.226 7.090 5.
% change on day 0.200 -0.185 0.576 0.000 0.000 -1.
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 0.657 -0.429 -0.001 0.332 2.705 7.
Basis point change on day 8.660 1.400 1.250 2.600 0.000 -21.
World index, CommodsFTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 293.80 33.00 26.89 1613.10 14.39 2275.
% change on day 4.70 -5.53 -6.99 -0.23 1.52 -1.
Yesterday's close apart from: Currencies = 16:00 GMT; S&P, Bovespa, All World, Oil = 17:00 GMT; Gold, Silver = London pm fix. Bond data supplied by Tullett Prebon.
Main equity markets
S&P 500 index Eurofirst 300 index FTSE 100 index||||||| ||||||||| ||||
Feb 2020 Apr1920256032003840
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Feb 2020 Apr960128016001920|||||| |||||||| ||||||
Feb 2020 Apr3840512064007680Biggest movers
% US Eurozone UK
UpsCapri Holdings 23.
Carnival 21.
Pvh 21.
Kohl's 20.
Ulta Beauty 17.Thyssenkrupp 14.
Oci 14.
Renault 14.
Porsche 13.
Bouygues 13.Rolls-royce Holdings 18.
Melrose Industries 17.
Legal & General 16.
Carnival 16.
Barratt Developments 16.
%
DownsRobert Half Int -6.
Carrier Global -5.
Raytheon -4.
Diamondback Energy -2.
Eog Resources -2.
Prices taken at 17:00 GMTVopak -4.
Galp Energia -4.
Iliad -2.
Coloplast -2.
Ageas -2.
Based on the constituents of the FTSE Eurofirst 300 EurozoneSainsbury (j) -3.
United Utilities -2.
Halma -2.
Spirax-sarco Eng -1.
London Stock Exchange -1.
All data provided by Morningstar unless otherwise noted.I
twas the deal that sounded like an
April Fools’ joke — bond investors
falling over themselves to give a
cruise ship company a boat load of
money. Carnival Corporation, the
world’s largest cruise operator, received
$17bn of orders last week for $4bn of
debtbackedbyitsfleetofships.
Carnival printed the secured bonds as
part of a wider $6.25bn rescue financing
on April 1. Coronavirus has killed
passengers on several of Carnival’s
cruise ships — incidents that have put
theterm“floatingPetridishes”firmlyin
thepopularlexicon.
Yet the company and its bankers con-
structed an appealing investment case
forbondfundmanagers,potentiallyset-
ting a template that other asset-heavy
companiesindirestraitscouldfollow.
It is not hard to see why Carnival
neededthecash—itishavingtorideout
an unprecedented global shutdown of
thecruiseindustry.
Even after raising billions in the capi-
tal markets and drawing down a $3bn
creditlinewithbanks,thegroupwarned
that it might only have enough liquidity
to stay afloat for eight months as it leaks
amonumental$1bnofcashamonth.
So why the rampant demand for the
bond sale? The first thing to make clear
is that the $17bn order book number is
essentiallynonsense.
When a big bond deal gains enough
momentum, it attracts hedge funds
looking to buy a piece of the offering
using borrowed money and then sell it
onalmostimmediatelyforaquickprofit
— “new issue flippers”, as the portfolio
managers at more staid investment
firmsdisdainfullycallthem.
These longer-term investors are not
blameless either, many of them also
increase their orders beyond what theyactually want in the hope of getting as
bigapieceofthepieaspossible.
If you needed any evidence of the dis-
torting effect this has on the true level of
demand, Carnival’s bonds traded down
the afternoon after pricing. So much for
the $13bn of extra money that did not
findahomeinthesale.
But while the order book number was
undeniably inflated, Carnival’s bond
dealwascertainlyabigsuccess.
Alargefactorinthatisprettystraight-
forward — the Panama-incorporated
company paid up. Carnival still some-
how carries an investment-grade rating
and yet it had to offer investors anannual coupon of 11.5 per cent to
borrowforjustthreeyears.
As the bonds were sold at a slight dis-
count, the yield that investors make is
closer to 12 per cent, a rate more nor-
mally associated with companies in the
lowestreachesofthejunkbondmarket.
If that is not enough, investors could
get back more than the money they
invested. If Carnival wants to retire the
bonds before 2023, the company has to
payasubstantialpremiumtoinvestors.
Given that it is paying a massive
annual interest bill of more than $450m
on these new bonds, if the cruise ship
industryreturnstoanysenseofnormal-
ity in the next year, the chances of an
earlyrepaymentarehigh.
But what if it all goes wrong? Carnival
assuaged investor concerns by offeringthem a lot of collateral — the $4bn in
bonds are secured on $28bn worth of
ships and other assets such as intellec-
tualproperty.
The value of these boats would be
questionable if the cruise industry col-
lapsed entirely. But investors can still
mark down their value severely and
potentially get their money back, as
bondholders share this collateral with
lessthan$500mofotherdebt.
Carnival had so much freedom to
pledge its assets because its investment-
grade rating meant it was previously
able to borrow freely on an unsecured
basis. The new bonds would rank ahead
of $16bn of the company’s existing debt
inabankruptcy.
This is not great for the company’s
existing bondholders, which have just
seen a new slice of debt layered ahead of
them.
Bonds are supposed to have safe-
guards against this happening — a
phenomenon known as getting
“primed”indebtmarketsparlance.
But these restrictions often have big
enough loopholes to steer one of
Carnival’s cruise ships through, particu-
larly in the borrower friendly invest-
ment-grademarket.
Unsurprisingly, bond investors are
nowrunningtheslideruleovertheasset
bases of other companies that have seen
sharpdropsinliquidity.
Airlines are one obvious candidate,
with European carriers such as easyJet
and Ryanair still retaining investment-
graderatings.
Now the taboo against paying up and
pledging assets has been broken, you
can expect that more companies will be
willingtofollowsuitand“doaCarnival”.[email protected]Carnival’s bond sale is a
template for asset-heavy
groups in dire straits
The group warned it might
only have enough liquidity
to stay afloat for eightmonths as it leaks cash
APRIL 7 2020 Section:Markets Time: 6/4/2020 - 18: 58 User: stephen.smith Page Name: MARKETS2, Part,Page,Edition: USA, 9, 1