IFR 03.21.2020

38 International Financing Review March 21 2020

and also that companies can’t defer the

payment of hybrid coupons while still

PAYINGûDIVIDENDSûHEûSAIDû

If a company decides not to pay a hybrid

COUPONûITûHASûEFFECTIVELYûJETTISONEDûITSû

access to the capital markets.

h-OSTûCORPORATEûHYBRIDûINVESTORSûALSOû

hold the seniors. They expect those

coupons to be paid. They also expect the

bonds to be called,” said Marks.

In addition, hybrid coupons are

CUMULATIVEûWHICHûMEANSûTHEûCOMPANYû

UPONûITSûRECOVERYûWOULDûHAVEûTOûPAYû

missed coupons back in full before paying

DIVIDENDS

“As a going concern, loss-absorbing

features are not meant as a macro remedy

for borrowers, but they may be a part of an

issuer’s response to a credit or liquidity

crisis,” said a hybrid structurer at a

European bank.

h"UTû)ûTHINKûEVERYûCOMPANYûSHOULDûTAKEû

into consideration and seriously make

EVERYûEFFORTûTOûACCESSûWHATûOTHERûMEANSûOFû

SUPPORTûAREûPROVIDEDûASûANûALTERNATIVEûTOû

exercising loss-absorbing features.”

(OWEVERûITûISûIMPORTANTûTOûDIFFERENTIATEû

between rated and unrated corporate

hybrid borrowers, said the banker.

“The non-rated borrowers can do

WHATEVERûTHEYûDEEMûAPPROPRIATEvûSAIDûTHEû

banker.

“When it comes to rated borrowers, I

THINKûASûLONGûASûTHEYûAREûINVESTMENTûGRADEû

I don’t think the ratings agencies would

expect a company to exercise the right to

DEFERû

ûBUTûEVENTUALLYûTHEûCOMPANIESûWILLû

HAVEûTOûLOOKûATûTHEIRûLIQUIDITYûPOSITIONv

Still, if issuers go bankrupt - or come

UNDERûSEVEREûlNANCIALûSTRESSûTHEYûAREû

unlikely to be making any payments to

bondholders at all.

h)FûITSûABOUTûPREVENTINGûINSOLVENCYûTHENû

no one will hesitate to exercise deferral,”

said the banker.

(OWEVERûCOMPANIESûMAYûNOTûHAVEûTOû

MAKEûTHATûDECISIONûASûGOVERNMENTSûAROUNDû

the world are beginning to discuss state aid

for stressed companies in particular

sectors, he said.

“If a company accesses state aid and a

support mechanism, they might suspend

THEûDIVIDENDûPAYMENTû4HATSûAûSMALLERû

PRICEûTOûPAYûOVERûTHEûLONGûRUNûTHANû

deferring on their hybrids,” said the

banker.

JUNK BOND INVESTORS SHIFT FROM

HORROR TO OPPORTUNITY

With high-yield bond spreads touching a

POST

CRISISûHIGHûOFûMOREûTHANûBPûONû

4HURSDAYûINVESTORSûAREûSAYINGûNOWûCOULDû

be a good time to pick through the

wreckage of the market for opportunities.

)NSTITUTIONALûINVESTORSûABLEûTOûTAKEûAû

LONGER

TERMûVIEWûONûTHEûMARKETûAREûLOOKINGû

at higher-quality credits with larger capital

structures, especially in those businesses

that should be more resilient to the impact

OFûCORONAVIRUSû

4HEûBPûMARKûISûANûIMPORTANTû

PSYCHOLOGICALûLEVELûFORûINVESTORSûINûBOTHû

Europe and the US, and accounts are

therefore on the lookout for buying

opportunities.

“With a horizon of a year or more, an

INVESTORûHASûNEVERûLOSTûMONEYûINûû

examples buying [US dollar] HY bonds as

SPREADSûCROSSûBPvûWROTEû*0û-ORGANû

analysts in a report published on March 17.

Jeff Mueller, a London-based portfolio

manager of high-yield bonds at Eaton Vance,

SAIDûLONG

TERMûINVESTORSûINûTHEûASSETûCLASSûCOULDû

ENJOYûDOUBLE

DIGITûGAINSûOVERûTHEûNEXTûlVEûYEARSû

“We’re looking at the parts of the market

THATûWEûBELIEVEûHAVEûBEENûUNDULYûHURTûINû

the sell-off,” said Mueller.

h,IQUIDûBONDSûANDûSTRUCTURESûHAVEû

underperformed on a risk-adjusted basis

BECAUSEû;INVESTORS=ûHAVEûBEENûSELLINGûWHATû

THEYûCANû&ORûSECTORSûLIKEû4-4ûORûDEFENSIVEû

low-coupon Double B names, there’s a deep

bid. It’s at a low price – but at least it’s a bid.”

One feature of the sell-off is that single-

bond liquidity has been in the doldrums,

ACCORDINGûTOûINVESTORSûANDûTRADERSûWHOûHAVEû

found it easier to sell CDS and ETFs in

decent size.

(OWEVERûONEû,ONDON

BASEDûDISTRESSEDû

player told IFR he had picked up some ALTICE

unsecured bonds that were trading around

80, down from around par in February.

4HEûDISTRESSEDûINVESTORûSAIDûHESûTREADINGû

cautiously.

h4HEûKEYûQUESTIONSûFORûUSûAREûHOWûLEVEREDû

ISûTHEûBUSINESSû(OWûHIGHûAREûlXEDûCOSTSû

Can the borrower raise new liquidity? Can

they draw down on their RCF?” he said.

“Before jumping into distressed names we

HAVEûTOûDEALûWITHûTHEûQUESTIONûOFûHOWûCOMPANIESû

CANûSURVIVEûTHEûNEXTûCOUPLEûOFûMONTHSv

MERLIN ENTERTAINMENTS has also been

mentioned as a potential buying

opportunity, with the Blackstone-owned UK

company waiting for the go-ahead to reopen

some of its theme parks in China.

-ERLINSûû.OVEMBERûSûISSUEDûASû

PARTûOFûTHEû,"/ûlNANCINGûINû.OVEMBERû

were bid at 70 on Friday, according to

Tradeweb data. The €370m bond was

trading at 104 in February.

h)TûISûAûNEWERû,"/û-ERLINûDOESNTûHAVEû

ANYûMATERIALûMATURITIESûINûTHEûNEXTûSEVERALû

years, and we think it has the ability to

WITHSTANDûTHISvûSAIDûAûHIGH

YIELDûINVESTORû

%UROPEANûINVESTORSûAREûTRYINGûTOûBALANCEû

the potential for a buying opportunity with

CONCERNSûABOUTûOUTmOWSûANDûFURTHERû

VOLATILITYû

h)ûWOULDûSAYûMOSTûINVESTORSûAREû

understandably bearish,” said a second high-

YIELDûINVESTORûh)ûNEEDûAûBITûMOREûVISIBILITYû

ONûTHEûTIMEûFRAMEû;OFûCORONAVIRUS=ûTOûCHANGEû

MYûVIEWv

4HEûMEDIANûANNUALISEDûRETURNûOVERûTHEû

FOLLOWINGûûûANDûûMONTHSûFORûHIGH

YIELDûASûSPREADSûCROSSûBPûISûûû

and 20.8%, said JP Morgan analysts.

European high-yield has often seen bigger

price falls than US high-yield because euro

DEALSûTYPICALLYûHAVEûLOWERûCOUPONSûSAIDû

-UELLERû4HATûCOULDûREVERSEûONCEûMARKETSû

stabilise.

“I don’t think we’re going tighter in the

short-term, and we’re going to see

CONTINUEDûVOLATILITYvûSAIDû-UELLERû

h4HEûTYPEûOFûENVIRONMENTûBEINGûPRICEDû

NOWûISûHUGELYûAGGRESSIVEûnûANDûIFûREALISEDû

WOULDûBEûTHEûWORSTûEVERûSEENû"UTûIFûLONG

TERMûINVESTORSûCANûSTOMACHûTHEûVOLATILITYû

they could be pretty handsomely rewarded.”

JP Morgan analysts said three conditions

need to be met for them to call the bottom

of the market: stronger measures taken to

PREVENTûSYSTEMICûCONTAGIONûCORONAVIRUSû

cases plateauing, and the announcement of

LARGE

SCALEûlSCALûSTIMULUSûPACKAGESûTOû

PREVENTûRISINGûUNEMPLOYMENT

h4HEREûISûVALUEûINûMARKETSûONûAûBASELINEû

VIEWûTHATûûWILLûDELIVERûTHEûSHORTESTûEVERû

recession, but markets need a green-shoots

CATALYSTûTOûREVERSEûHIGHERûONûAûSUSTAINEDû

basis,” the analysts said.

ASTON MARTIN BONDS DROP

ON DOWNGRADE

Aston Martin bonds dropped precipitously

after S&P downgraded the car company by

two notches to CCC–, wiping out all gains –

and more – from its recent cash injection.

Aston Martin’s 5.75% April 2022 bonds

WEREûSEENûBIDûATûAûCASHûPRICEûOFûûONû&RIDAYû

according to MarketAxess data.

4HATûBONDûWASûAROUNDûûAFTERû#ANADIANû

BILLIONAIREû,AWRENCEû3TROLLûANDûINVESTORSû

said at the end of January that they would be

GIVINGû!STONû-ARTINûAûaMûCASHûINJECTION

30ûANALYSTSûSAIDûTHEYûBELIEVEûTHATûEVENûIFû

Aston Martin successfully executes its

placement and rights issue, declining sales

of core sports cars and uncertainties related

TOûTHEûCORONAVIRUSûWILLûPROBABLYûWEAKENûITSû

lNANCIALûPERFORMANCEûANDûRESULTûINûFURTHERû

LIQUIDITYûPRESSUREûDOWNûTHEûLINEûOVERûTHEû

next six to 12 months.

Without the planned capital raise, Aston

Martin would face a “liquidity crisis” and

lNANCIALûSTRUCTURINGûWOULDûMOSTûLIKELYû

follow, said analysts.

4HEû###nûRATINGûISûONû7ATCHû.EGATIVEû

ANDû30ûSAIDûITûWILLûRESOLVEûTHEû

CreditWatch once Aston Martin has

completed its rights issue and analysts can

6 IFR Bonds 2325 p 23 - 45 .indd 38 20 / 03 / 2020 19 : 59 : 41