Bondholders in particularly hard-hit sectors like energy, travel and leisure have another issue to watch for as companies struggle to survive the economic shutdown — getting demoted by new debt issues.
This phenomenon is known in the market as getting “primed” or “layered.” It’s when a company in need of cash offers a bond backed by collateral, or secured debt, which has seniority over any previously issued unsecured debt. Being at the top of the capital structure means that in a bankruptcy, those investors get paid back first.
Since the start of the coronavirus epidemic, this has happened to investors in the debt of movie theater chain AMC Entertainment, Six Flags Entertainment and Cedar Fair theme parks, propane supplier Ferrellgas Partners FGPR.PK, and cruise line Carnival Corp – according to Reuters. Of the new issues currently trading, all are priced far higher than where the remainder of the company’s debt is trading.
“Many companies, especially in high yield, are going to look for ways … to come up with a debt offering that is sellable, period,” said Tom Graff, head of fixed income at Brown Advisory. “The most obvious way to do that is to secure the new bonds, but that ‘primes’ old bondholders, effectively reducing the security for the old holders in favor of new buyers.”
Graff said that companies have lately been forced to give bond buyers more security in these deals, but also added that if they need to come back to market as the public health crisis drags on, “that’s going to get tough.”
Overnight Market Intel
Asian stocks look set to bounce on Friday to recover towards a one-month high as investors, following Wall Street’s lead overnight, saw silver linings in a run of data that showed the world is in its worst recession in decades.
E-Mini futures for the S&P 500 index rose right from the closing bell and jumped 3.5% to a five-week high, while Nikkei futures pointed to gains of 545 points.
U.S. stock indices had eked out gains overnight in a session of choppy trade, after shares of Amazon and Netflix surged to record highs.
Shares of Gilead Sciences Inc also soared 15% after a media report suggested that patients suffering severely from the coronavirus were responding positively to the drugmaker’s experimental treatment remdesivir.
Help on the Way
More small business help is coming!
The U.S. House of Representatives approved another coronavirus relief bill worth $484 billion on Thursday, funding small businesses and hospitals, and pushing the total spending response to the crisis to an unprecedented $3 trillion.
The measure passed the Democratic-led House by a vote of 388-5 with one member voting present at a time. House members met for the first time in weeks since the coronavirus pandemic.
Lawmakers, many wearing masks, approved the bill during an extended period of voting intended to allow them to remain at a distance from one another, in line with public health recommendations.
The House action sent the latest of four relief bills to the White House. Republican President Donald Trump, who backs the measure, said he would probably sign it into law on Thursday evening.
The next step will be harder. The two parties have set the stage for a fight over additional funding for state and local governments reeling from the impact of lost revenue. Republicans refused to include such funds in the current relief bill.
Trump said he supports more funding for states and promised to back it in future legislation.