Dividends and Beleaguered bondholders contend with potential of being ‘primed’

When governments around the world ask me to stay inside and not met in groups of 5 or more, the economic fallout was and will be immense. One could easily have looked to companies which need people to mix and mingle – entertainment, leisure and travel companies would be bleeding red ink. The question on everyone’s mind is how long? For generations, people have flowed predictable patterns and industry expect economic returns to follow the same pattern. For most urban workers, go to somewhere warm is desired when it is cold; spring comes and outdoor events happen – from concerts to amusement parks to weddings. Each of these events people make a living around them, in normal times it was a good thing to do.

Now think about the financial aspect, aside from the personal aspect of the virus. Companies that previously could go into the bond market to raise money, the option is very different.

In an article by Kate Duguid of Reuters, existing bondholders are getting demoted by new debt issues. The layer approach is called “primed” or “layered” where a company in need of cash offers a bond backed by collateral, called secured debt. Being at the top of the capital structure means that in a bankruptcy those investors get paid paid first.

Since the start of the coronavirus epidemic, this has happened to investors in AMC Entertainment Holdings (movie theatres), theme parks Six Flags Entertainment and Cedar Park Entertainment, cruise ships Carnival Corp and propane supplier Ferrellgas Partners according to a Reuters analysis.

AMC Entertainment raised $500 million secured debt at a cost of 10.5%, that twice the cost of the last issue of debt. About 80% of high-yield bonds issued since 2011 is unsecured. Why? the cost of borrowing from Central Banks has been at all time lows, so issuers put in less investor protection, including the ability to issue new subordinate debt without telling bondholders.

Linking to dividend paying stocks, the economic world has changed because of the virus, that is expected and understood, but cash in the corporate world is always king. The ability to generate profits is important and when the company can not do that, unless you hope the government will bail out the industry, it is better to exit and leave it to vulture investors.

There are more questions than answers, till the next time – to raising questions.

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