Category: Stock Market

Airlines have been the among the worst hit by the coronavirus crisis, which brought travel to a virtual standstill around the world. “The company has also recently experienced a modest improvement in passenger demand and bookings in June 2020,” Southwest said in a regulatory filing.

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(Bloomberg) — As the Federal Reserve pulls out all the stops to bolster credit markets, corporate America is gorging on debt.From Carnival Corp., Marriott International Inc. and Delta Air Lines Inc. to Gap Inc. and Avis Budget Group Inc., many of the companies hardest hit by the coronavirus outbreak have priced billions of dollars of bonds and loans in recent weeks.Never mind that profits have been wiped out, and that their business operations aren’t viable right now or likely anytime soon. As long as they’re propped up by the Fed, investors are willing to lend.Yet as expectations of a V-shaped economic recovery vanish rapidly, more and more industry veterans are starting to express concern about these debt dynamics. Some warn that the Fed is putting credit markets on course for a future wave of defaults that makes the current stretch of corporate bankruptcies look timid by comparison.Others see an outcome even more dire.In this scenario, they say, moribund companies in industries deeply scarred by the pandemic will just keep borrowing. Market watchers such as Deutsche Bank AG chief economist Torsten Slok fear that a new breed of so-called zombie companies — firms that don’t earn enough to cover interest payments and are kept alive in part by central bank largess — could have profound and painful consequences for everyone from workers to investors for years to come.“The Fed and the government are interfering in the process of creative destruction,” Slok said in an interview. “The consequence is that we are at risk the longer this persists –- companies being kept alive that would otherwise have gone out of business — that it will begin to weigh on the overall potential for growth of the economy and on productivity.”It’s not that these risks mean the Fed’s current policy tack is misguided. Given the scope of the economic collapse and the unprecedented spike in unemployment that has accompanied it, most analysts say policy makers had to throw everything they could at the problem. It’s just that such dramatic intervention comes with great risks that will have to be addressed down the road.“The Fed had no other choice than to do what it did,” Slok said.Still, it’s precisely this dramatic intervention that’s emboldening money managers to take greater chances and seek fatter returns.“You can’t say ‘we’ll do whatever it takes’ and not do it,” said Jack McIntyre, who helps oversee about $60 billion at Philadelphia-based Brandywine Global Investment Management. “Otherwise, the Fed will lose credibility.”McIntyre said he’s buying select investment-grade corporate bonds in lieu of Treasuries “because the Fed has backstopped the market — if spreads widen, the Fed will step in.”That’s just the sort of sentiment that can ultimately lead to the proliferation of zombies, economists say.Fed BackstopThe actual definition of what makes a company a zombie varies depending on who you ask, but most agree that it’s generally meant to encompass firms that can’t cover their debt servicing costs from current profits over a select period.A snapshot of the market reveals no shortage of companies that would fit that description should the economic rebound take time to gain momentum.Earnings for companies, excluding financials, in the S&P 500 are forecast to drop a staggering 42% in the second quarter from the previous year as the full effect of global lockdowns are felt, according to estimates compiled by Bloomberg.At the same time, net corporate debt issuance has ballooned, and could approach as much as $1 trillion this year, according to Bloomberg Intelligence.Delta and Marriott declined to comment, while Avis didn’t respond to requests seeking comment.Carnival referred Bloomberg to a press release highlighting the strength of its balance sheet and continued customer bookings for the second half of the year and 2021.A representative for Gap directed Bloomberg to a statement noting its financing and cash preservation efforts, adding that the company plans to have 800 stores open by the end of May.If the pace of the recovery is quick enough, corporate-bond buyers say plenty of hard-hit companies should be able to turn things around.But the question on the minds of investors and economists alike is: how long will the Fed be willing to support firms via its pledge to buy corporate debt if the recovery is slower to develop than expected?“The government has done more than I could have imagined to allow businesses to access capital, and if the markets shut down again the government will do even more,” said Bill Zox, chief investment officer of fixed income at Diamond Hill Capital Management, which manages around $19.5 billion.Borrowing BingeIt’s an especially salient question when it comes to the sectors hardest hit by the Covid-19 outbreak.Cruise lines have borrowed more than $8 billion via the bond market in recent weeks, selling notes secured by everything from ships to islands. Airlines, for their part, have gotten more than $14 billion in new financing from banks and investors, even as the vast majority of flights remain grounded.“We have entire industries that are going to be protracted long-term if not permanently disrupted because of this,” said Vicki Bryan, a veteran credit analyst who runs Bond Angle LLC. “The cruise industry is ripe for elimination of companies. It should logically renounce the weaker players but that’s not happening because we have dirt-cheap money that we’re willing to throw back into the market from the Fed.”Beyond just lending them money, creditors are also waiving or loosening financial markers on existing debt, allowing companies that have seen revenue dry up stave off potential tumult.Vail Resorts Inc. — owner of the eponymous winter vacation destination — was granted a two-year reprieve on key debt covenants last month, paving the way for the company to raise $600 million with a new bond offering. Marriott, one of the world’s largest hotel chain, struck a similar agreement with lenders.A representative for Vail said that the company’s bank covenant waiver provided additional flexibility given the short-term dislocation from Covid-19, and that it remains confident in the long-term outlook for both profit and cash flow.‘Catch-22’Yet amid the waivers, lenders are extracting higher interest rates or other concessions.Norwegian Cruise Line Holdings Ltd., AMC Entertainment Holdings Inc. and Avis all paid double-digit yields to borrow in recent weeks. That could depress their capacity to make capital expenditures and adapt to shifting consumer tastes as the coronavirus changes how people spend money.“Taken together with margin contraction and leverage that was already near record highs, you may end up with a corporate sector that has less capacity to invest in growth,” said Noel Hebert, director of credit research at Bloomberg Intelligence.Norwegian has a “long-standing track record of strong financial performance which includes over a decade of financial growth,” a company spokesperson said in an emailed response to questions. “The cruise industry has been hit the hardest by Covid-19 as our operations have been completely shut down, which certainly impacts us in the short-term but has no bearing on our long-term success.”AMC didn’t respond to requests seeking comment.Read more: Corporate debt loads are growing fast as Fed opens up spigotsSome say as successful as the Fed has been boosting credit-market liquidity, the support is only temporary, and will result in a wave of distress when it steps back.“There will be plenty” of debt defaults and bankruptcies when corporate borrowers start running out of cash in the months ahead, Howard Marks, co-chairman of Oaktree Capital Group, said in a Bloomberg TV interview. “There are large, highly levered companies and investment vehicles that the government and Fed rescue program is not likely to reach and take care of.”Others see central-bank intervention keeping companies alive for much longer, crowding out investment and employment at healthy firms, similar to what occurred in Japan during the nation’s ‘lost decade’ of the 1990s, where the ‘zombie company’ term was first applied.“You are misallocating capital to businesses that are not productive and in some sense taking resources away from companies that have high growth,” Deutsche Bank’s Slok said.The repercussions may only become apparent years from now, according to Marc Zenner, a former co-head of corporate finance advisory at JPMorgan Chase & Co.“It’s hard for me to think that something like that doesn’t have a cost,” Zenner said. “What you’ll see is some of these costs will probably only emerge years later. Are we going to have reduced capacity to act? Is it that other economies will be less burdened and will attract more capital? Is there another crisis that will come because of this misallocation of capital?”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.

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Oil companies may be facing uncertainty as the coronavirus pandemic triggers a collapse in demand for their products, but auto makers are betting the crisis will help accelerate an electric future. With economies reeling from lockdowns to curb the virus, the sharpest plunge in oil prices in two decades has slashed the cost of filling up a tank of gas, eroding some of the incentive to make the switch to cleaner fuels. Looking ahead, cuts in capital spending forced upon energy companies as their revenues crumble could tighten supply enough to cause a spike in oil prices, making electric vehicles more attractive just as automakers ramp up production, analysts say.

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Shares of Home Depot, which have gained 12.4% this year, dropped nearly 3% to $238.50 in premarket trading, as the company also scrapped its full-year outlook, citing uncertainties stemming from the pandemic. Home Depot said it incurred about $850 million of pre-tax expenses in the first quarter, as it provided additional bonuses, doubled pay for overtime and added more hours of paid time-off for employees working during a surge of panic buying of cleaning supplies and masks. The company’s net earnings fell to $2.25 billion, or $2.08 per share, in the first quarter ended May 3, from $2.51 billion, or $2.27 per share, a year earlier, as it spent heavily to compensate its store employees working during the health crisis.

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Carvana (CVNA), the e-commerce platform for buying and selling used cars, has announced a public offering of 5,000,000 shares of its Class A common stock.The stock closed Monday’s trading at $98.59, and is currently falling 7% in Tuesday’s pre-market trading. According to Bloomberg the offering will be within the price range of $93-$96 per share.“The underwriters will offer the shares from time to time for sale in negotiated transactions or otherwise, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices” the company stated.Citigroup and Wells Fargo Securities will act as book-running managers for the proposed offering.Carvana intends to use the proceeds for general corporate purposes and to partially repay borrowings under its floor plan facility.“While COVID-19 headwinds are apt to persist nearer term, we increasingly believe that on the other side of the crisis, a sustained, even more-favorable backdrop for preowned vehicles and well-positioned, digitally-driven players, such as CVNA will take hold” comments Oppenheimer analyst Brian Nagel.He recently reiterated his buy rating and ramped up his Carvana price target from $95 to $127, arguing that CVNA should prove capital self-sufficient and generate meaningfully positive adjusted EBITDA in 2022.Nagel admits that Carvana shares are not inexpensive, but believes investors will “continue to seek long-term growth and safety in equities of firms situated to thrive amid now-rapidly shifting consumer dynamics.”Overall the stock has a cautiously optimistic Moderate Buy consensus. With the stock up 7% year-to-date, the average analyst price target suggests 11% downside potential lies ahead. (See CVNA stock analysis on TipRanks).Related News: Tesla’s China Car Registrations Plummet In April- LMC Auto Amazon Is Said To Be In Talks To Buy Bankrupt J.C. Penney Saudi Arabia’s Sovereign Fund Snaps Up $7.7B Of US Stocks, Including Boeing and Facebook More recent articles from Smarter Analyst: * Boeing Embarks on Industry-Wide Safety Initiative For New Covid-19 Era * GameStop Pops 5% Amid ‘Significant Progress’ On Turnaround Plan * Tesla’s China Car Registrations Plummet In April- LMC Auto * Novavax Seeks To Raise $250 Million From Share Sale; Top Analyst Bumps Up PT

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(Bloomberg) — Oil held near a two-month high of $35 a barrel as supply curbs tighten the market and demand rebounds in the world’s largest consuming countries.Prices for oil cargoes from Russia to Brazil have surged as fuel demand has recovered. Indian fuel sales have jumped in the first half of May and Chinese consumption has all but returned to where it was before the coronavirus outbreak. South Africa’s biggest oil refinery restarted operations as the country eases coronavirus-lockdown measures.Tuesday also marks the expiry of the June West Texas Intermediate futures contract. While prices plunged at the end of the May contract’s trading period, oil has since staged a stellar recovery as producers embarked on deeper-than-expected output cuts. In a sign that the market is finding a new equilibrium, the premium traders pay for bearish put options versus bullish calls fell to the lowest since early March.On the supply side, shale oil output from the U.S., the world’s biggest producer, is forecast to fall to the lowest since late 2018 next month, according to the Energy Information Administration. There’s also been a “stunning reversal” in OPEC+ shipments so far in May, data intelligence firm Kpler said, after the alliance’s deal to curb production kicked in at the beginning of the month.“There’s a lot of optimism baked in here,” said Paul Horsnell, head of commodities research at Standard Chartered. “The market has balanced by supply coming off faster than expected.”The prospects of a rebound in consumption were buoyed on Monday after American biotechnology company Moderna Inc. said its vaccine showed signs it can create an immune-system response to the virus. Italians were allowed to go back to restaurants and New York is set to open a sixth region as some of the hardest-hit areas in Europe and North America move ahead with restarting their economies.As the recovery gets underway, the nearest corners of the oil market are tightening sharply. WTI’s closest contract settled above the next month on Monday for the first time since January, a sign that concerns over a glut have eased.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.

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Top news and what to watch in the markets on Tuesday, May 19, 2020.

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Tesla’s (TSLA) car registrations in China plummeted 64% in April, compared to March, according to consultancy firm LMC Automotive’s data.Specifically, the electric-vehicle maker’s China registrations dropped to 4,633 units from 12,709 units the previous month. This includes imported cars. “Tesla’s sales in the first month of each quarter are usually lower than the remaining two months” points out Reuters.Meanwhile sales of Tesla’s Model 3 sedan in China plunged 64% in April vs March, according to the China Passenger Car Association (CPCA). Tesla sold 3,635 Model 3 cars in April, a significant decrease from the 10,160 vehicles sold in March.Commenting on the stock after a meeting with Tesla’s investor relations, Emmanuel Rosner at Deutsche Bank, kept to his Hold rating with a $850 price target, despite saying that the company’s message was positive.“While management provided few details about its 2Q/2020 outlook, it believes Fremont production can ramp back up very quickly given its experience in China and that the supply chain is already coming back online,” Rosner told investors.Indeed, for the second quarter, Morgan Stanley analyst Adam Jonas is forecasting a 2Q delivery drop of 13% Q/Q (19% Y/Y) and free cash burn of $2.7bn. He is also sticking to the sidelines, arguing that with Tesla’s stock trading at 13x projected 2025 EV/EBITDA there are likely better ways to invest in tech right now.Overall, the Hold consensus is based on 9 Sells, 9 Holds, and 8 Buys. Following the stock’s jaw-dropping 94% YTD rally the $604 average price target projects 26% downside potential in the shares in the next 12 months. (See Tesla’s stock analysis on TipRanks).Related News: Uber’s Latest Takeover Offer Said To be Rejected By GrubHub Tesla Gets County Nod To Reopen California Auto Plant – Report Saudi Arabia’s Sovereign Fund Snaps Up $7.7B Of US Stocks, Including Boeing and Facebook More recent articles from Smarter Analyst: * Novavax Seeks To Raise $250 Million From Share Sale; Top Analyst Bumps Up PT * Baidu Pops 8% After-Hours On Strong Earnings Beat * Amazon Is Said To Be In Talks To Buy Bankrupt J.C. Penney * Starbucks Back To Business In Japan Today

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Curations by Elaine Welteroth, Blair Eadie and interior designer Sarah Sherman Samuel are featured in Pinterest's new Shopping Spotlights tool.

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Amazon.Com Inc. (AMZN) is said to be interested in snapping up debt-strapped J.C. Penney Co. Inc., (JCP) in a deal that would bolster the online retailer’s apparel business, Women’s Wear Daily reported.Shares in J.C. Penney plunged another 23% to $0.18 before being halted on Monday. The report comes after the U.S. apparel and home retailer on Friday filed for bankruptcy protection proceedings.As part of its “renewal” plan, the Plano-based company said it will to cut its debt, streamline operations, close stores and spin off a real estate division in a move to come back in a stronger position. It has about 850 stores across the U.S. and Puerto Rico.“There is an Amazon team in Plano as we speak,” according to the WWD report. “There is a dialogue and I’m told it has a lot to do with Amazon eager to expand its apparel business.”J.C. Penney has $500 million in cash on hand as of the Chapter 11 filing date, the retailer said in a SEC filing. In addition, the company received commitments for $900 million in financing from its existing first lien lenders, which includes $450 million of new money.“This financing, combined with cash flow generated by the company’s ongoing operations, is expected to be sufficient to meet J.C. Penney’s operational and restructuring needs,” the company said. “As part of the commitment from its existing lenders, J.C. Penney will explore additional opportunities to maximize value, including a third-party sale process.”It looks like Amazon is on a shopping spree as the economic crisis induced by the coronavirus pandemic is creating opportunities for mergers and acquisitions. The world’s largest online retailer has reportedly also held talks to buy debt-strapped theatre operator AMC Entertainment Holdings Inc. (AMC).Wall Street analysts are bearish about J.C. Penney’s stock with 2 Sells and 2 Holds adding up to a Moderate Sell consensus. Should the $0.36 average price target be met, investors could be looking at 98% upside potential in the shares in the coming 12 months. (See J.C. Penney stock analysis on TipRanks).Related News: AMC Pops 11% Amid Potential Acquisition Talks by Amazon Uber’s Latest Takeover Offer Said To be Rejected By GrubHub Apple is Said to Snap Up Startup NextVR For Virtual Reality Content; Top Analyst Sees Buying Opportunity More recent articles from Smarter Analyst: * Baidu Pops 8% After-Hours On Strong Earnings Beat * Starbucks Back To Business In Japan Today * Moderna Prices $1.3B Equity Offering at $76/Share * Uber Pops More Than 6% On Second Round Of Layoffs, Site Closures

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