IFR 03.21.2020

International Financing Review March 21 2020 37

BONDS HIGH-YIELD

h7EûREMAINûACTIVELYûENGAGEDûINû

CONSTRUCTIVEûDISCUSSIONSûWITHûOURû

bondholders as the company continues to

EVALUATEûITSûCAPITALûSTRUCTUREûWITHûANûEYEûTOû

reducing debt and interest expense,”

Frontier said in a statement.

3OMEûOFûTHEûlRMSûBONDSûWEREûALREADYû

TRADINGûATûDISTRESSEDûLEVELSûONûEXPECTATIONSû

of a debt restructuring.

)TSûûûûSûANDûû

2022s last traded in the low 20s, according

to MarketAxess.

&ITCHûDOWNGRADEDûTHEûlRMSûISSUERûRATINGû

on Tuesday to C from CC after the missed

coupons.

The ratings agency expects Frontier to

REPORTûAûDROPûINûREVENUEûINûûBUTû

SLIGHTLYûLESSûTHANûTHEûNEARLYûûDECLINEûINû

2018.

h2EVENUESûCOULDûREMAINûPRESSUREDûINû

2020 due to economic weakness arising

from the slowing economy and disruptions

FROMûTHEûCORONAVIRUSûPANDEMICvûTHEûRATINGSû

agency said.

30ûMOVEDûTHEûCOMPANYSûISSUERûRATINGSû

ONû-ONDAYûTOûSELECTIVEûDEFAULTûFROMû###



Although the missed coupons did not

constitute a payment default, S&P said it

DOESûNOTûBELIEVEûPAYMENTSûWILLûBEûMADEû

WITHINûTHEû

DAYûGRACEûPERIOD

“Frontier has little ability to meet its

lNANCIALûCOMMITMENTSûLONGERûTERMûWHICHû

COULDûRESULTûINûTHEûCOMPANYûlLINGûFORû

Chapter 11 bankruptcy protection,” the

ratings agency said.

CINEMARK ON WATCH AS MOVIEGOERS

KEEP THEIR DISTANCE

CINEMARKûWASûPUTûONûNEGATIVEûWATCHûBYû30û

and Fitch last week, with cinema attendance

plunging in the wake of social distancing

measures being put in place and distributors

POSTPONINGûNEWûMOVIEûRELEASESû

Fitch said Cinemark Holdings and

subsidiary Cinemark USA, were at risk of a

one to two-notch downgrade.

S&P said on Wednesday the company

could be at risk of a more than one notch

downgrade if the company experiences a

liquidity shortfall that cannot be met by

CASHûONûHANDûORûREVOLVERûBORROWINGS

Cinemark Holdings has BB/BB- issuer

ratings from S&P and Fitch.

The company’s two bonds, its 5.125%

SûANDûûSûHAVEûBOTHû

dropped this month from around par to 75

ANDûûRESPECTIVELYûACCORDINGûTOû

MarketAxess.

The company operates 345 theatres

ACROSSûûSTATESûINûTHEû53ûASûWELLûASûû

across Latin America. Cinema attendance

has plummeted as social distancing

measures come into force across the US in

RESPONSEûTOûTHEûCORONAVIRUS

$OMESTICûBOXûOFlCEûGROSSûRECEIPTSûOFû

53MûTOPûûlLMS   ûFORûTHEûWEEKENDû

ending March 15 are down by about 44%

from the weekend before and marked the

lowest weekend gross in nearly 20 years,

according to Fitch.

&ILMûSTUDIOSûHAVEûBEENûDELAYINGûNEWû

releases, such as MGM Grand’s latest James

"ONDûMOVIEûh.Oû4IMEû4Oû$IEvûBEINGûPUSHEDû

BACKûTOû.OVEMBERû

h&ITCHûBELIEVESûTHEûIMPACTûTOûTHEATRICALû

lLMûATTENDANCEûISûLIKELYûMOREûTEMPORARYûINû

NATUREûANDûANTICIPATESûIMPROVEMENTûONCEû

CONCERNSûOVERûTHEûCORONAVIRUSûAREû

ALLEVIATEDvûTHEûRATINGSûAGENCYûSAIDû

h(OWEVERûTHEATRICALûlLMûATTENDANCEûISûINû

a slow secular decline and Fitch notes that

THEûWIDE

REACHINGûSCALEûOFûTHEûCORONAVIRUSû

could accelerate that shift in consumer

preferences towards in-home entertainment

options.”

&ITCHûSAIDûTHATû#INEMARKûHADûAûRELATIVELYû

strong balance sheet compared to peers but

anticipates margin pressure.

The cinema chain had US$488m in

BALANCEûSHEETûCASHûANDû53MûAVAILABLEû

UNDERûAûREVOLVINGûCREDITûFACILITYûATûTHEûENDûOFû

ûANDûACTUALûCONSOLIDATEDûNETûSENIORû

SECUREDûLEVERAGEûRATIOûOFûONLYûX

)TûHASûAROUNDû53BNûOFûLONG

TERMû

debt on its balance sheet as of year-end

ûINCLUDINGûTHEûBONDSûANDûAûSENIORû

secured term loan credit facility due 2025.

Management could reduce operating

expenses including leases as well as cutting

back on capex, and it has a discretionary

ANNUALûDIVIDENDûOFûAROUNDû53MûTHATûITû

COULDûCURTAILûTOûPRESERVEûLIQUIDITYû&ITCHûSAID

EUROPE/MIDDLE EAST/

AFRICA

BANKRUPTCY FEARS HIT AIRLINE

HYBRIDS HARD

!IRLINEûHYBRIDûBONDSûHAVEûCOLLAPSEDûHITû

hard by concerns that the impact of

CORONAVIRUSûCOULDûTRIGGERûAûWAVEûOFû

bankruptcies in the sector.

#OUNTRIESûAROUNDûTHEûWORLDûHAVEûCLOSEDû

THEIRûBORDERSûANDûPASSENGERûNUMBERSûHAVEû

plummeted, causing a sharp shock to

AIRLINESûWHICHûHAVEûSUFFEREDûMASSû

downgrades and seen their cost of

borrowing rocket.

As hybrids allow corporates to skip

coupon payments or extend that debt

WITHOUTûITûBEINGûAûDEFAULTûTHEYûHAVEûBORNEû

the brunt of the sell-off.

AIR FRANCE-KLM@SûONEûHYBRIDûBONDûAûõMû

ûPERPûCALLABLEûINû/CTOBERûWASûTRADINGû

at a cash price of 80 on Friday, according to

MarketAxess data. It was bid at 102 at the

beginning of March.

DEUTSCHE LUFTHANSA‘s €500m 5.125% August

2075 bonds, callable in 2021, were seen bid

at a cash price of 82 on Friday. Those bonds

were seen bid at par just 10 days prior,

although the lack of liquidity in credit

MARKETSûGENERALLYûISûMAKINGûITûDIFlCULTûTOû

GAUGEûWHATûACTUALûTRADINGûLEVELSûAREû

Still, these hybrids are being eyed as

potential test cases for what could happen to

the structure as companies come under

stress and defaults escalate.

,UFTHANSAûHASûCUTûûOFûLONG

HAULûmIGHTSû

It was downgraded to junk on Tuesday by

Moody’s, which cut the German airline’s

credit rating by one notch to Ba1, citing a

hSEVEREûANDûEXTENSIVEûCREDITûSHOCKvû

,UFTHANSAûISûLIKELYûTOûSEEûSIGNIlCANTû

NEGATIVEûFREEûCASHmOWûINûûAûWEAKENINGû

LIQUIDITYûPROlLEûANDûSIGNIlCANTLYûHIGHERû

LEVERAGEûWROTEû-OODYSûANALYSTSû

The company also has a BBB rating from

S&P.

Michelle Chalker, an analyst in the credit

strategy and standards team at Moody’s, said

HYBRIDûBONDûmEXIBILITYûhHASNTûBEENûTESTEDû

that often in the past.

“If companies choose to defer, it might

impact their ability to access the capital

markets after the fact,” said Chalker.

h"UTûIFûDEFERRALûPOTENTIALLYûHELPSûSAVEûAû

BUSINESSûTHATSûOBVIOUSLYûAûPOSITIVEû4HEYû

AREûCREATEDûTOûPROVIDEûmEXIBILITYûBUTû

whether in practice a company will use

THEMûISûSOMETHINGûWELLûHAVEûTOûlNDûOUTv

The decision will be down to the

borrowers’ management team, said Chalker.

h(YBRIDSûPROBABLYûARENTûGOINGûTOûSAVEûAû

COMPANYûBUTûTHEYûCOULDûDElNITELYûPROVIDEû

some short-term liquidity.”

Still, airlines remain particularly

VULNERABLEû-ANYûHYBRIDûBONDSûHAVEûBEENû

issued by utility and telecoms companies -

CONSIDEREDûTOûBEûRELATIVELYûINUREDûFROMûTHEû

CORONAVIRUSûFALL

OUT

-ANYûBELIEVEûBORROWERSûWOULDûBEû

reluctant to skip coupon payments on

hybrid bonds.

Since 2013, more than €125bn in

CORPORATEûHYBRIDûBONDSûHAVEûBEENûISSUEDûBYû

NON

lNANCIALûCOMPANIESûINûEUROSûACCORDINGû

to IFR data.

4HEYûSAWûHIGHûINVESTORûDEMANDûINûTHEû

LOW

YIELDûENVIRONMENTûCREATEDûBYûTHEû%#"Sû

QE programme, allowing companies to issue

THEMûATûATTRACTIVEûCOUPONS

"UTûASûSTRESSûRISESûINû%UROPESûlNANCIALû

MARKETSûBECAUSEûOFûTHEûCORONAVIRUSûTHATû

mEXIBILITYûLOOKSûFAIRLYûlCTIONALû

#OMPANIESûHAVEûANûhEXTREMELYûSTRONGû

INCENTIVEvûTOûKEEPûPAYINGûCOUPONSûSAIDû

Julian Marks, senior portfolio manager and

lead PM of Neuberger Berman’s corporate

hybrid strategy.

The main arguments against deferring

coupons is the risk of reputational damage

6 IFR Bonds 2325 p 23 - 45 .indd 37 20 / 03 / 2020 19 : 59 : 41