• GB Davis

A Kessel Run in less than 12 Parsecs - 5/12/20

One day this past November (2019), I decided, on whim after starting to run regularly and jump in a couple of local San Diego 5ks after the young woman (31) I was dating left for summer travels back home to Moscow and to Montengro, to show up for a San Diego Track Club (SDTC) weekly run on a moderately cool San Diego evening at San Diego High School, where Mebrahtom "Meb" Keflezighi  launched his running career, becoming arguably the best U.S. Distance Runner of all-time and not knowing what to expect.  The San Diego Track Club, for a west coast institution, is fairly storied, established in 1954, and having had some fairly good athletes over the years, and some Olympic Trial qualifiers just this year.  We ran repeat 200 meter runs, with about 90s rest between a set of ten intervals.  I brought track spikes, the same pair I wore in 1993 as a high school freshman.  It felt pretty good to run on the track, where I ended my high school running career (1996) as a two-time League Champion at (1) 800m, and also (2) as a 4 x 400m anchor (49s), while finishing second in my prelim 800m heat and coming up short by 4/10 of a second to advance to the CIF Final and make a go for the California State Meet.  I was always projected to run ~1:52 in high school, after running 2:02 as a freshman, based on my speed -and I guess I just never put enough work in - well that's not the case anymore.  

At the next SDTC weekly track session at San Diego High (Balboa Stadium), I graciously asked the Coach, a very good distance runner himself, if he wouldn't mind hand timing me in a 400m prior to the workout - he obliged, and I clocked 63.77. I  spent the next ten (10) weeks training, losing 20 lbs in the process and entered the Southwest Masters USA Track & Field (i.e. officially sanctioned) Indoor Regional Championships in Houston, Texas on February 16, 2020 at the University of Houston, one of the most storied Track & Field Programs in collegiate history - home to Carl Lewis - and its current coach, Olympic Gold Medalist, Leroy Burrell - also President of USA Track & Field.  Just the year before, the University of Houston imported a custom indoor banked hydraulic track - and this was new territory for many on many levels - it's one thing to run a 5k and test out your fitness, and then try to improve upon such, it's a little different to show up to a Track Meet.  It was an exciting race - indoors, you start in your assigned lane and run 150m of 400m in that lane, and then break at 150 to the 200m mark (1 lap) and everyone is go for the last 200m.  I was the only person to not use starting blocks - I must have looked out of place - plus I was the only white person in my race too.  In a six lane indoor track, I had lane six, far outside and hit the 150m and broke towards the starting line (200m, 1 lap) - I was neck and neck one of the best runners in the country.  I sat on his right shoulder, not knowing to race (this was my first time running on a banked track or indoors - and I had not run a race in 23 years) - should I pass him? what if I look stupid?  We rounded the curve through 250m onto the backstretch.  I felt like we weren't going fast enough.  I audibly yelled at him at 280m, "C'mon man" (I'm not really sure why in hindsight).  We hit 300m, and he started to pull away rounding through 350m and onto the home stretch, hitting the tape at 56.00s. I came through less than 1.5s later at 57.45s, almost achieving All-American (M40) status.  With the shortened track season, that currently ranks #4 in the United States, and in 2019, would be a top-25 mark.  

Through this lock-down, I've continued to run every week - today I ran six (6) 400m repeats on a two minute rest at ~60s - and I have goal to be a 3x All-American (400m, 800m, 1600m) next year and maybe even compete for a medal at 800m.  The REAL GOAL is this though: I want to break 2:00 min at 800m next year.  To put that in context, there have been ~ 1,400 runners that have ever broken the 4:00 min mile barrier - there have been less than 100 runners over the age of 40 that have ever broken 2:00 min and none that have broken the 4:00 min mile barrier.  Do what you can with what you got they say? (one goal at a time)

"A Kessel Run in less than 12 Parsecs" 

  • On March 16, 2020, we commented via Twitter the Idea of a 14-day Luxury Self-Quarantine Hotel(s) for International Travelers.  Today, Fitch (5/12), "the UK requirements to impose a 14-day quarantine on international arrivals, including air travellers, will delay recovery in air travel demand and test airlines' financial resilience, Fitch Ratings says. Risks for airlines will increase should these measures stay in place for a prolonged period."  Cross-border travel restrictions will be a key consideration for our future rating-case reviews. We currently assume no flights until end-June, followed by a 15% capacity utilisation of the entire fleet from July, to gradually increase to more than 60% by December 2020.  The UK government COVID-19 recovery strategy, published on 11 May 2020, will require all international arrivals, bar those on a short list of exemptions, to self-isolate in their accommodation for fourteen days upon entering the UK. We expect this regime to begin at the end of May. Exemptions include journeys within the Common Travel Area (the UK, the Republic of Ireland, the Isle of Man, Guernsey and Jersey) and passengers arriving from France. It is unclear when and how often this measure will be reviewed. New arrival requirements will discourage travellers from flying to the UK, especially for short business trips, and will adversely affect carriers such as British Airways (BA), Ryanair, Wizz Air and EasyJet. Wizz Air resumed a fraction of its flights from London Luton airport prior to the announcement. Ryanair and BA had anticipated resuming 40%-50% of their flights from July due to increased demand during the summer holiday season. BA, Ryanair and Wizz Air have strong liquidity positions, which will enable them to finance their activities if the flight recovery is delayed for several more months. Fitch estimates that the existing cash balances and available revolving credit facilities (RCFs) will help these companies to avoid a liquidity crunch in 2020, subject to their ability to manage working capital efficiently. However, a substantial cash burn rate during the aircraft grounding period will further impair the airlines' ability to deleverage.  

  • On May 11, in " Don't Buy into the V-Shape Recovery that Will Not Happen - 5/11/20 we cited to "Pandemic Recession: L or V-Shaped? by Victoria Gregory, Guido Menzio, David G. Wiczer (NBER Working Paper No. 27105).  In that academic paper on pg 13, Figure 1, shows the fraction of workers by industry for the duration of unemployment in three variable sets - and, we, ourselves queue on this as to where cylicality will be more or less severe, anecdotally, and in some but not all regard, but with third party empirical rigor.

  • On April 29, in "Winners & Losers - Sector Analysis - Where to Begin," we shared third party rating agency data on what sectors would be more and less impacted during this deep recession.

Where else do we look?  CREDIT - we've indicated some of our favorite short-side sectors: Lodging, Gaming, Restaurants, Retail, Consumer Discretionary - and all are getting HIT.  Let's check-in (info via Fitch):

  • Several recent debtors had their bankruptcy cases derailed as the ability to access exit financing markets has been compromised. Similarly, decreased lender appetite for equitized debt and a lack of third-party interest in certain distressed assets has also disrupted the streamlined trend of pre-coronavirus Chapter 11s. Lender fears with respect to debtor-in-possession (DIP) facilities and an increased frequency of liquidation outcomes will likely further impede the goal of preserving value in U.S. bankruptcies during the crisis. Given that recoveries are tied to distributable value, a prolonged pandemic may contribute to lower creditor recoveries for debtors with disrupted processes.

  • An efficient and predictable bankruptcy process is key to preserving going concern value that underlies recoveries stemming from reorganized enterprise valuations. The disruptions imparted by the coronavirus, therefore, can affect ultimate recoveries in multiple ways. In the first instance, the operational impact the coronavirus may have on borrowers can impact recoveries as a result of lower going concern EBITDA forecasts and thus lower valuations. However, the procedural impact to an otherwise streamlined bankruptcy process can further impair creditors as borrowers struggle to maximize value through a short and efficient bankruptcy process.  

  • VIP Cinema, manufacturer of movie theater seats, filed for bankruptcy in February with a consensual prepackaged plan and restructuring support agreement aimed to significantly reduce its debt load. However, with the mandated shutdown of movie theaters due to the coronavirus, the feasibility of the plan was called into question and creditors backing the plan decided to terminate their support. Once the RSA was terminated, VIP acknowledged that in the current social distancing environment, a going concern restructuring was unlikely to be achieved. The company is now pursuing a liquidation of its assets

  • In late March, Craftwork, the parent company of restaurant chain Logan's Roadhouse announced that the negative impact of the coronavirus outbreak led to a default under its $138 million post-petition DIP facility and a complete cessation of all its operations. The company had filed for Chapter 11 protection in early March, listing $235 million in debt and was pursuing a bankruptcy code "section 363 sale" of all its assets as a going concern. Although the company is still pursuing a sale, it has acknowledged that the shutdown of its restaurants may be permanent.

  • Average credit quality of the portfolios backing U.S. and EMEA CLOs started to deteriorate in March 2020, Fitch notes in its most recent Global CLO Quarterly. U.S. broadly syndicated loan (BSL), U.S. MM and European CLOs saw negative rating migration within portfolios, including upticks in ‘CCC+’ and below exposure. In Europe, exposure to ‘CCC’ assets doubled over the quarter and Fitch expects the rapid deterioration in credit quality to lead to a majority of Fitch-rated EMEA CLOs to breach their WARF covenant and ‘CCC’ limitation in the near future.

  • Mohegan Tribal Gaming Authority launched its offering of a $100 million first-lien term loan. Price talk is set at L+1,200bps with a 1.0% floor. Proceeds from the term loan will fund general corporate purposes and refinance revolver borrowings

  • Staples, Inc. saw its $1 billion of 10.75% senior notes due 2027 and $2 billion of 7.5% first-lien notes due 2026 increase 7.5 points 86.5. This is notable given the company has seen yoy declines of 12.3 points

  • J.C. Penney Company, Inc. (C) (JCP) announced on May 7 that it would skip its $17 million interest payment on its senior secured term loan. The company has entered into a five-day grace period before the non-payment is considered a default. Fitch recently downgraded the company to ‘C’ from ‘CCC–’ following the company’s April 15 disclosure that it skipped a $12 million interest payment with respect to its 6.375% senior notes due 2036. JCP is also in a grace period for those 2036 notes that expires May 15. Given the current operating environment which has been adversely affected by the coronavirus pandemic and significant projected cash burn, Fitch believes a restructuring or default is probable.

  • Apparel retailer, Chinos Holdings, Inc., the parent company of J. Crew Group, Inc. and its affiliates, filed Chapter 11 on May 4 with a RSA supported by holders of approximately 71% of the term loans, 78% of the notes issued by J. Crew Brand, LLC and J. Crew Brand Corp. (IPCo notes). The company’s pre-petition debt is approximately $2 billion and comprised of $311 million outstanding under its ABL facility, approximately $1.34 billion under its term loan due 2021, and $346.6 million of IPCo notes, which includes $250 million of 13% senior secured notes due 2021 and $97 million of 13% senior secured notes due 2021. Under the terms of the proposed agreement, holders of the ABL facility will receive cash, holders of the term loan will receive shares of 76.5% of the new common equity, and holders of the IPCo notes will receive shares of 23.5% of the new common equity. J. Crew was on our Top Loans of Concern list since January 2019

  • Neiman Marcus Group LTD LLC filed Chapter 11 on May 7 with a restructuring support agreement (RSA) supported by approximately 99% of holders of the company’s second-lien notes, 70% of its third-lien notes, and 78% of the its first-lien term loans and debentures. Neiman’s pre-petition debt totals $5.14 billion and the RSA proposes debt reduction of approximately $4 billion with the following terms

  • The high-yield primary market continues to gain momentum with The Kraft Heinz Company (BB+/Stable) pricing $3.5 billion of notes across three tranches. The company priced $1.35 billion of 3.875% senior notes due 2027, $1.335 billion of 4.25% senior notes due 2031, and $800 million of 5.5% senior notes due 2050. All three tranches were upsized. Proceeds will be used to fund a $2.2 billion tender offer of a portion of the company’s outstanding senior unsecured notes due between 2021 and 2026 as well as redeem two debt issuances due in 2021 and 2025.

  • Avis Budget Group, Inc. priced $500 million of 10.5% secured notes due 2025. The notes were upsized by $100 million and fund general corporate purposes.

  • Leveraged loan funds saw another week of outflows with approximately $484.8 million in redemptions, nearly the same amount as last week’s $484.7 million in redemptions. Last week’s outflows were an increase from the $391.5 million withdrawn two weeks prior.

  • High-yield bond funds saw $3.5 billion on inflows for the week ending May 6, a jump from last week’s $742.8 million of inflows. Two weeks prior, high-yield bond funds saw $2.2 billion of inflows  (maybe, people front running the Fed though given the outflow in Leveraged Loans, and may be optimistic as well).

Our Gyms open up next week, and I will be there.

Every second counts,

Gavin Davis

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