Collateral is the Name of the Game
Cracks in the Credit Markets Reappear
While U.S. equities continue to appear calm and stable, a look at the U.S. credit markets reveal that chaos is still roiling beneath the surface. Two stories in particular captured my attention.
United Airlines Shocking Bond Failure
United Airlines were expecting to price bonds $2.25 billion last Thursday, but its plans were foiled as investors balked at the 360 planes United Airlines pledged as collateral. Even juicing the yield up to 11% from ~9% was insufficient to attract enough buyers to the trough, and United Airlines bowed out of the deal before a funding setback became a financial disgrace.
Investors’ rejection of the terms sends a strong signal to the bond market: we want quality collateral, not aging aircraft that could be worthless in a few years.
Some borrowers are all too willing to satisfy investors’ need for quality assurances, with Norwegian Cruises having pledged several islands as collateral for a new risky issuance.
If banks continue to de-risk by getting high-yield bonds off their books, companies with shaky balance sheets may find this “arm and a leg”-style financing the new normal.
WeWork Continues to Be in Peril
The second story that drew me was WeWork’s move to defer rent payments and renegotiate their leases. Now, Commercial Mortgage-Backed Securities (CMBS’s) backed by WeWork’s rental payments have already plummeted:
A look at the captions reveals that, unsurprisingly, the lower-rated tranches have suffered the worst losses compared to their higher rated brethren.
As many of WeWork’s tenants are cancelling leases and freezing payments, WeWork itself might do the very same thing to its landlords, as we covered on today’s Real Vision Daily Briefing. WeWork’s future is looking pretty bleak, as it’s unclear when their tenants will return to work—if at all, so it will be interesting to see how the CMBS market reacts to these drastic and desperate measures to skip rent or negotiate payments.