The coronavirus outbreak could drag down debt-bloated companies. These are some of the most vulnerable

Date: Tuesday, March 3, 2020
Source: Fortune

From Richard Branson’s Australian airline to U.S.-based cinema chains and casino operators, the companies most vulnerable to the coronavirus outbreak are facing mounting pressure in global credit markets.

An escalating outbreak that drives off customers and revenue could lead to ratings downgrades, hinder refinancing efforts, and in some cases trigger defaults. And it’s more than just travel companies: Debt-laden commodities producers, shipping firms and luxury automakers have endured waves of selling by bondholders as they ratchet down expectations for global growth.

Investors who’ve spent years pouring money into nearly everything the credit markets had to offer are balking now that the outbreak has spread to more than 65 countries. That’s stoking fears of a prolonged slump in riskier assets. While central banks from the U.S. to the U.K. and Japan have all said they stand ready to roll out stimulus to support credit markets, it’s not clear the tactic will work if the problem is an historic slump in consumer demand.

“We should all be worried,” said Azhar Hussain, head of global credit at Royal London Asset Management, who manages 6.1 billion pounds ($7 billion) of assets. “First-order effects are likely to be travel and cyclicals with long supply chains, but the concern is that it spreads to the developed-market consumer.”

Diamond Hill Capital Management’s Bill Zox and John McClain told investors Monday morning that they see little upside from more rate cuts if business activity is increasingly disrupted by the virus and everyone is forced to work from home. “Corporate CFOs won’t be Skyping in plans for new capital projects,” they wrote.

Below are some of the companies on the watch lists of credit investors and ratings firms as the human and economic toll of the virus increases.

Airlines

  • Virgin Australia Holdings: The carrier, part of billionaire entrepreneur Richard Branson’s Virgin Group, saw its $425 million of bonds due in 2024 plunge nearly 12 cents since the start of last week to a record low of 85.2 cents on the dollar on Monday. The airline warned last week that the coronavirus is expected to reduce earnings by A$50 million ($33 million) to A$75 million in the second half of 2020. S&P Global Ratings last week lowered its outlook on the company to negative, citing restrictions on inbound tourism from Chinese nationals.
  • Garuda Indonesia: The flag carrier’s $500 million global sukuk due in 2020 has slumped nearly 37 cents since the start of last week to a near record low of 60.6 cents on the dollar on Tuesday. Tourism to the country is faltering, and the government forecasts $4 billion of losses on travel restrictions.
  • Airline vendors are also feeling the pressure. WiFi companies Gogo Inc. and Global Eagle Entertainment Inc., which provide passenger internet for airlines including United, Delta and Southwest, are declining in debt and equity markets on concern that if more companies suspend business travel, the demand for in-flight WiFi could drop significantly. Both companies carry some of the weakest junk ratings and high debt relative to their earnings.

Gaming

  • Codere: If the spread of the virus in Europe isn’t contained, the Spanish gaming company may find it more difficult to refinance bonds due next year, according to Lucror Analytics. The debt, 500 million euros of notes due in November 2021, has plunged 9 cents on the euro since Feb. 21 to about 87 cents, Bloomberg data show.
  • Macau casinos: China’s gambling hub shut down 41 casinos for 15 days to contain virus exposure, triggering a record drop in gaming revenue in February. March may bring more of the same, writes Bloomberg Intelligence’s Margaret Huang.
  • That could pressure U.S. casino companies with significant business in Macau. MGM China, a unit of MGM Resorts International, sought to ease covenants tied to a HK$9.75 billion ($1.25 billion) loan to address what MGM China CEO Grant Bowie said “may be an extended recovery period.” The company’s junk-rated $750 million of notes due in 2026 have dropped 5.25 cents on the dollar to a nine-month low of 101.25. Meanwhile, the $1 billion of notes that Wynn Resorts Ltd.’s Macau unit issued in December have plunged to 97 cents from almost 102 on Feb. 12.

Travel

  • Cruise lines: Passenger ships have been among the worst-hit in markets after a quarantined ship off Japan’s coast with more than 600 confirmed cases led to cancellations and profit warnings. While most of the sector brags of investment-grade ratings and relatively strong balance sheets, the escalating crisis is raising concern that those ratings may be at risk if the virus isn’t contained. Take the credit-default swaps market, where credit investors buy insurance against losses. For cruise operator Royal Caribbean Cruises Ltd., the cost of the contracts has more than tripled in less than a week.
  • Tui AG: The German travel service provider was downgraded to BB- from BB with a negative outlook on Friday by S&P, which said the coronavirus could jeopardize bookings, adding to risks it was already facing from the grounding of Boeing’s 737 Max and unusual weather patterns. Tui’s 300 million euros of notes due in October 2021 have dropped almost 7 cents on the euro to 95.

Entertainment

  • Companies and municipalities have been shutting doors to venues like museums, casinos and movie theaters to prevent widespread exposure. AMC Entertainment Holdings Inc.’s bonds plunged to stressed levels last week after the chain closed 22 of its 47 theaters in Italy. While the closures in aren’t expected to have a major impact on the company, an outbreak in the U.S. could be a problem, Chief Executive Officer Adam Aron said on an earnings call Thursday. The company has already been suffering from a decline in movie theater attendance, reporting that ticket sales in the U.S. slipped 4.4% in 2019. AMC’s $600 million of notes due in 2025 dropped to 81.5 cents on the dollar to yield more than 10%.

Energy

  • The world is facing the biggest commodity demand shock since the global financial crisis as the virus outbreak spreads, according to Goldman Sachs Group Inc. Oil and gas companies across the globe have come under pressure amid fears of a global slowdown. Some, such as Chesapeake Energy Corp. and Whiting Petroleum Corp., have plunged to distressed levels in credit markets, with Chesapeake’s notes due 2025 dropping to 60 cents on the dollar and Whiting’s plunging to about 38 cents.
  • In Asia, India’s Vedanta Resources Ltd.’s 2024 bonds fell 7.5 cents last week as the virus weighed on commodity prices, and Indonesia’s Medco Energi Internasional Tbk has also fallen some in the bond market.

Shipping

  • China has grown into the maritime industry’s main source of cargoes, and sailings to ship goods to consumers around the world has been disrupted. As the virus wreaks havoc on physical supply chains and global trade, the shipping industry is rife with canceled voyages, idle containers and falling rates. CMA CGM, the world’s third-largest shipping company is seeking to refinance $1 billion of debt coming due next year, but coronavirus might disrupt the plans of the highly leveraged shipping operator, which opened shop in Shanghai in 1992. The company’s notes due January 2025 are currently up 1 point to 65 cents, but were trading at 70 cents last Monday.

Autos

  • Aston Martin’s bonds lost around 6 cents on the dollar last week, with its April 2022 notes bid at around 92 cents on Monday after it declined to divulge its latest sales figures for a new SUV. The company is relying on growth in China to double its sales output. Notes issued by Jaguar Land Rover also lost around 6 cents on the euro in the same period. Its November 2024 notes were bid at around 95 cents on Monday as coronavirus fears nixed its plans to issue a U.S. dollar bond.

 

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