On t’Mark – Normal Service, Crazy Hertz, Bondholders Squeezed, Second Wave?

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On t’Mark – Normal Service, Crazy Hertz, Bondholders Squeezed, Second Wave?

Just as life in Australia seems to be getting back to normal, it was also more of the same in financial markets, as we saw a small recovery from the savage sell-off on Thursday. As I suggested on Friday, there appears to be more cash on the sidelines looking to chase the rally – equities were up, and US credit was tighter.

Just to highlight this alternative valuation reality and in one of the most bizarre episodes of what Greenspan dubbed ‘irrational exuberance’, bankrupt Hertz won court approval to issue up to $1bn in new shares! That’s right you can buy shares, when the bonds are trading anywhere between 20-40c/$1, which implies that the equity is worthless. But small technicalities like that probably won’t stop Robinhood and DaveyDayTraders from piling in.

There are a few more signs that a second wave of COVID-19 could become reality. An area in Beijing has been put under strict lockdown measures after the city’s first coronavirus cases in more than 50 days. The outbreak seems to have started in Beijing’s largest wholesale market. It is reasonably small now, with 45 people testing positive out of 517 tested at the Xinfadi market.

With more demonstrations and mass gatherings globally and US political rallies recommencing, it is more likely than not that there will be additional pockets of outbreaks. How many and how well these are contained will likely be the key driver for global economic recovery.

Bloomberg reported that companies are playing dirtier and more aggressive with bondholders. The article names, Sinclair Broadcast, Revlon and SM Energy, as examples of companies that have been taking advantage of weaker covenants. This has allowed companies to shift assets and issue new secured debt, to try to force bondholders to accept distressed exchanges.

Since bonds were first issued, companies and their owners have tried to push document language and covenants in the bond IMs. It is always up to bondholders to make sure they are happy with the terms, when the bonds are issued, or they have the option of walking away.

It is no secret that covenants have been getting more loosey-goosey, as investors have pushed for yield over protection. Moody’s gauge of bond covenant quality remained near the weakest on record in April. In addition, a similar gauge for loans reached its lowest ever in Q419, the most recent data available.

This week, on Tuesday it’s the RBA Minutes and on Thursday we get Australian jobs figures, with a consensus for a loss of 125K and an unemployment rate of 7%.

On Friday, US equities closed up 1.1-1.9%. European bourses were mixed and closed between up 0.9% (Holland) and down 0.5% (Switzerland).

UST 10yr yields closed at 0.67% (+3bp). ACGB 10yr yields closed at 0.90% (-1bp). The Aussie dollar was 0.2c higher at USD68.7c.

Credit was mixed: US IG closed at 79 (-3) and HY was at 487 (-17). In European credit, IG closed at 71 (unch.) and XO was at 404 (+2). Aussie iTRAXX was at 92 (+4).

US economic data were mixed: Export Prices – MISS; Import Prices – HIT; and University of Michigan Consumer Sentiment – HIT.

Elsewhere, oil was mixed – Brent was up 0.5% and WTI was down 0.2%. Iron ore was up 1.2%.

Tin hats on!

 

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