Outlook 2021: Hertz navigates bankruptcy; energy awaits demand recovery; theaters seek cash

By James McCandless

San Antonio, Dec. 31 – The distressed debt market was roiled by the coronavirus pandemic, with much of the focus placed on travel, energy and retail names over the past year.

The S&P U.S. High Yield Corporate Distressed Bond index, as of Dec. 14, was showing a year-to-date return of minus 3.09%.

Traders and market professionals interviewed by Prospect News warned of continued weakness in the first half of the year and the beginnings of a recovery in the second half.

Hertz stumbles

Of the bankruptcies that occurred in 2020, Hertz Corp.’s May Chapter 11 case generated the most headlines.

After racking up about $24 billion in debt by the first half of the year, the company filed after the onset of the coronavirus pandemic halted virtually all non-essential travel.

Trading in the company’s debt focused on its 6¼% senior notes due 2022 and the 5½% senior notes due 2024.

Before the coronavirus proliferated in the United States, both tranches were trading around par but sank to the 70’s context as lockdowns began in March.

Amid reports of the company seeking a financial rescue package, the paper fell even lower, hitting single digits as it filed for bankruptcy on May 22.

But before the name sought a traditional financing deal to work through the process, it sought to take advantage of a spike in interest from retail investors, filing a plan in bankruptcy court to sell up to $1 billion in common stock.

“This is where things went off the rails,” a trader said. “They wasted some valuable time.”

As the company prepared to issue $500 million of common stock, the Securities and Exchange Commission stepped in with “comments” on the deal, prompting Hertz to pull the plug entirely.

Eventually, in October, Hertz lined up traditional financing and became entangled in a dispute over the management of its fleet of vehicles.

“There are still some things they have to sort out, but it looks like they will be exiting just in time for a recovery to start,” the trader said.

Energy weak

As travel restrictions took effect in March, crude oil prices started a precipitous fall, culminating in an unprecedented drop on April 20.

That day, West Texas Intermediate crude oil futures dipped below a dollar price of zero for the first time, hitting a floor at in the minus 30’s context.

As consumers and companies reduced the amount of oil they consumed as travel dwindled, supply overcame demand as storage space for barrels of oil dwindled.

Crude prices quickly hopped back up into the teens, steadily moving into the 40’s context toward the end of the year.

The turmoil in the sector led to the bankruptcy filings of over-levered producers like Sanchez Energy Corp., Whiting Petroleum Corp., Ultra Petroleum Corp., Denbury Resources Inc. and others.

Analysts at S&P Global Platt said in a December note that crude prices will remain in the low 40’s context for the first half of 2021, moving to just under $50 per barrel by the end of 2021.

The analysts assume a recovery in the second half of 2021, spurred by higher energy demand as more people receive vaccinations for Covid-19.

The U.S. Energy Information Agency expects WTI to average $49 per barrel in 2021 due to a combination of higher global oil demand and restrained OPEC production.

Theaters strapped for cash

Throughout the year, movie theater operators were perpetually weak as government mandates on social distancing and non-essential businesses kept theaters empty for months.

AMC Entertainment Holdings, Inc.’s and Cinemark Holdings, Inc.’s capital structures spent much of the year under pressure as they raised capital and tried to bring customers back into theaters.

Beginning the year with its paper moving along the 90’s context, AMC’s structure moved quickly through March into the 30’s, later weakening into the 20’s and straddling the 30 mark for the rest of the year.

After spending the summer with its locations lying dormant, the company began a systematic reopening plan that saw a majority of its theaters reopen in October.

Despite this, customer demand lagged and revenues were weak, prompting the company to begin a push to raise capital.

Though the last few months, AMC has warned that without a significant capital raise it would have trouble maintaining operations.

Compounding its troubles, movie studio Warner Bros. announced on Dec. 3 that its 2021 films would be released in theaters and on the streaming platform HBO Max simultaneously.

In a note, analysts at Deloitte said that in the future, “studios will probably take a portfolio approach to movie distribution rather than a one-size-fits-all strategy.”

“If they can raise the money and hold out until the summer, there will be significant upward bias on these names,” a trader said.

Retail to rebound

As retailers also weathered the storm of store closures for part of the year, analysts expect the sector to return to pre-pandemic performance levels by the end of 2021.

While experiencing missteps and lost revenue in 2020, L Brands, Inc., Revlon, Inc. and Party City Holdco Inc. managed to avoid bankruptcy.

While hitting a floor at 62 bid in March, L Brands’ 5¼% senior notes due 2028 have steadily climbed to above par at the beginning of December on the back of robust online sales and the resilience of its Bath & Body Works unit.

Despite strength for some, already under water names like Neiman Marcus Group Ltd. LLC, J.C Penney Co., Inc. and Guitar Center, Inc. filed for Chapter 11.

Fitch Ratings analysts said in a note that “a number of factors specific to 2020 that have produced vastly divergent trends across retail” will reverse course, resulting in operating trajectories similar to 2019 levels.

Despite this, Fitch holds a negative outlook for the sector.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.