By Alexander Gladstone
Delays in administering Covid-19 vaccine shots pose a fresh risk
to investors who bet on a speedy vaccination process to help risky
U.S. companies bounce back from the pandemic.
The approval of coronavirus vaccines made by Pfizer Inc. and
Moderna Inc. last year propelled rescue financing packages for
several cash-strapped companies, supplying them with what investors
thought would be enough liquidity to keep them afloat until
widespread immunity took hold. Cineworld Group PLC, AMC
Entertainment Holdings Inc., Carnival Corp. and other companies
with bleak outlooks because of the pandemic found financial
lifelines to tide them over.
These deals continued a trend dating back months before the
vaccines were approved, as actions taken by the Federal Reserve and
Congress, coupled with investors' eagerness to continue lending,
kept the corporate default rate well below analysts'
But the sluggish rollout of the vaccines is now undermining the
timeline that investors projected when extending emergency credit.
The U.S. government fell well short of its goal of vaccinating 20
million Americans in 2020, having administered just 2.8 million
doses by the end of last year, according to federal figures, in
part due to differing state policies that have led to confusion and
shipment delays. The emergence of the more-contagious U.K.
coronavirus mutation in the U.S. has also raised the likelihood of
further government restrictions and consumers being more cautious
about leaving their homes.
So far, more than 25.4 million doses of vaccine have been
distributed, but only 8.9 million Americans have received a shot,
according to the Centers for Disease Control and Prevention.
Dan Zwirn, founder and chief executive of asset management firm
Arena Investors LP, said many investors willing to prop up
struggling companies "are making a bet on the duration of the
"It baffles us. You're running a ton of risk that it will take
longer than you thought," said Mr. Zwirn, whose firm during the
pandemic has focused on making investments that are fully covered
by the underlying asset value.
Federal Reserve Bank of Boston leader Eric Rosengren said
Tuesday the inoculation rate " has been disappointing, which likely
will impact public health and the economy in the near term," though
he predicted "a robust recovery starting in the second half of the
Companies in hard-hit industries such as movie theaters, retail
and live entertainment have largely subsisted though the pandemic
on borrowed money. Speculative-grade debt issuance surged to
near-record levels last year as the Federal Reserve kept rates low,
amounting to roughly $694 billion, blowing past the $559 billion
issued in 2019 and $573 billion in 2018, according to Barclays
AMC, the world's largest movie theater chain, has so far
survived temporary shutdowns of virtually all its theaters with
several rounds of debt financing and sales of stock to risk-hungry
equity investors. Cineworld, owner of Regal cinemas, also landed a
rescue from lenders in November.
Cosmetics maker Revlon Inc., whose recent struggles stemmed from
less demand for its products as women stayed home and eschewed
makeup, swapped out debt in November and received a new investment
from its private equity owner to relieve an impending bond maturity
and avert a bankruptcy filing. Others, such as fashion retailer
Express Inc., are still seeking the financing they need to outlast
Carnival was able to raise billions of dollars of debt during
the pandemic, even while the cruise industry has been
incapacitated, having been identified as the source of numerous
In a sign of confidence that a post-pandemic future is in sight,
Live Nation Entertainment Inc. in December landed a low interest
rate of 3.75% on a secured bond sale, even though its live-events
business is effectively frozen. Live Nation's revenues plunged to
$184 million in the third quarter, compared with $3.8 billion over
the same period the prior year.
While many companies that obtained debt financing in 2020 did so
to avoid running out of cash and needing to seek bankruptcy
protection, much of the surge in debt issuance in 2020 was due to
companies opportunistically taking advantage of low interest rates
to either refinance existing debts or pad their balance sheets with
liquidity in case they might need it. Many of these companies are
keeping such "rainy day funds" as cash on the balance sheet and are
expected to use it to repay their debts if the economy recovers,
However, doubts about whether some of those debts will be repaid
even after consumers return to theaters and malls, are fueling
projections by analysts and investors of a steady march of
corporate defaults. Whether the debts taken on during the pandemic
can be paid off or refinanced depends largely on sustaining the
frenetic market activity of 2020.
Barclays expects bond defaults to decline in 2021, but still be
elevated compared with more benign years. The bond default rate for
full-year 2021 is expected to be 5%-6%, down from a recent high of
8% in October, according to Barclays.
However, the added debt issued during the pandemic, much of
which has a four to five-year lifespan, could be the source of
defaults in years to come especially if companies struggle with
changed consumer behavior following the pandemic, investors
Martha Metcalf, head of U.S. credit at asset management firm
Schroders PLC, said the high volume of sub-investment-grade debt
added on during the pandemic will mean that "idiosyncratic risk
will remain elevated," as certain companies and industries have
trouble servicing their obligations.
"The challenge now is to make that distinction, which industries
and companies got access to capital that they didn't deserve," Ms.
Metcalf said. "You need to be careful about those companies that
got access to capital markets when they probably shouldn't
There will be an increasing rate of credit defaults heading into
the spring as certain companies struggle while waiting for the
vaccine rollout, but "we're getting into the neighborhood of peak
defaults," according to Ms. Metcalf.
Damian Schaible, co-head of the restructuring practice at law
firm Davis Polk & Wardwell LLP, said that history suggests the
music eventually stops.
"Many capital structures will suddenly tumble," he said. "The
layers of debt accumulated during both the easy times and through
the pandemic will lead to more complicated restructurings."
Write to Alexander Gladstone at email@example.com
(END) Dow Jones Newswires
January 13, 2021 05:44 ET (10:44 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.