This Is No Lehman. Meet Me At Dave & Buster’s!

There’s talk of “lockdowns 2.0,” which I suppose is market parlance for politicians’ latest efforts to craft a response to rising virus caseloads that doesn’t entail the kind of sweeping, stay-at-home orders and business closures that plunged the world into a mini-depression earlier this year.

One thing that stood out last week as big bank earnings rolled in was the extent to which the worst-case scenario in terms of losses, delinquencies, and other types of pandemic-related credit events didn’t materialize.

I can already hear the pushback: “Well, no, because consumers and households benefited from cushions built thanks to government assistance in Q2, while deferral programs and other sorts of relief during the worst days of the lockdowns helped consumers build a small safety net to help them make it through the third quarter.”

That’s all true, and you could scarcely find anyone who’s spent more time warning about the long-term, structural damage than me. Even in the near-term, consumers and households are likely to face severe economic challenges in the absence of additional fiscal support. Of course, severe economic challenges have a way of metamorphosing into other types of “challenges,” including and especially health problems.

Read more: ‘It’s Running Out’ – Yellen, Chase Researchers Say Americans May Be Tapped Out

For now, though, the worst hasn’t panned out, or at least not at the aggregate level. This comes with the (important) caveat that for many individual households and workers, these are some of the darkest days they’ve ever faced.

“Looking at loan loss provisions by US banks, the picture we get following [last] week’s Q3 earnings reports is of a benign credit cycle in the US that is less than half as severe as the post Lehman credit cycle,” JPMorgan’s Nikolaos Panigirtzoglou said, in a new note.

Again (because it cannot be emphasized enough), it’s too early for apples-to-apples comparisons on these kinds of metrics.

Indeed, one of the reasons cited for a lack of follow through in share prices last week to what, sans Wells Fargo anyway, were decent big bank earnings, was a lingering sense that even if it’s not quite accurate to say “the worst is yet to come,” it’s probably fair to suggest that the third quarter offered but a temporary reprieve. That would be in line with what you’d expect considering efforts on the part of both government and banks themselves to cushion the blow for households and consumers.

Panigirtzoglou also notes that “the default rates of HY loans and bonds… look less than half as severe as those seen after the Lehman crisis.”

In this instance, it helps that the Fed stepped in to effectively guarantee investment grade credit and fallen angels. That has a “down-the-line” effect (if you will), as yield-seeking investors are pushed out the risk curve, thereby creating demand for junk bonds, which in turn helps companies that might have otherwise lost market access.

2020, you’re reminded, is the biggest year on record for high yield issuance.

If you really want to get a sense of the disconnect between what the market is willing to countenance and economic reality, consider that Dave & Buster’s was all set to price a $500 million highyield bond deal on Tuesday.

As Bloomberg patiently explains, “pandemic shutdowns sent revenue at the chain plunging, and it risked breaching the terms of a $500 million credit line.”

Apparently, November 1 was the deadline for a waiver from lenders, and the same linked article notes that the company “has previously warned that it may need to file Chapter 11 to restructure its obligations” although it’s “been showing improving sales in October.” JPMorgan is leading the new sale, which is expected to price in the mid-to-high 8% range.

There are no guarantees in life, and a turnaround at Dave & Buster’s is no exception to that general rule. Philip Brendel, one of Bloomberg Intelligence’s credit analysts, gently noted that when it comes to indoor venues where folks gather to get drunk and play carnival games, it’s not clear whether “funding losses with high-cost debt” is a viable, long-term solution given the realities of the post-COVID world. “Barring Herculean turnarounds, they may just be Chapter 11 filers in ‘21 or ‘22′,” Brendel remarked.

Dave & Buster’s has updated their official website. It now features a kind of tetraptych with a bemused, neon-lit worker wearing a branded mask, a panel featuring the words “DING, DING, DING”, some fried chicken tenders, and a pair of hands working the joystick on an arcade game.


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8 thoughts on “This Is No Lehman. Meet Me At Dave & Buster’s!

  1. I drove 1,000 miles (each way) last week to visit parents. First time I have spent a night in a hotel since early February. I was shocked at the number of people out at restaurants and bars in Kansas City MO. The outdoor shopping and eating area was crowded. I do not think this is an isolated situation- people eating and drinking in close proximity all around the country- without masks, obviously.
    I got carryout (my first Shake Shack burger–which was delicious) and ate on a park bench.

      1. Exactly. This is why the US can’t keep a lid on COVID and it’s the same unwillingness to engage with science, facts, and reality that makes America vulnerable to foreign misinformation campaigns, unwilling to commit to combatting climate change in a serious way, and so on, and so forth. The country, on aggregate, seems to get more undereducated and misinformed by the year — in some cases on purpose. Not that you shouldn’t go visit your parents or eat a burger. I’m talking about the crowded restaurants with no masks.

        1. Everyone should be making decisions about going out and interacting with others, including family, as a “calculated risk vs reward” decision.

  2. Haven’t heard anyone opine about the effect of no new stimulus on holiday sales. For some retail businesses, this season is the bulk of their sales. With no new checks in the mail added to a Covid spike, it could get ugly.

  3. if you look inside the ADP there is a good amount of dynamism and hiring in the small business area, say 1-49 less in big companies. Also, in surveys of capital expenditure they are surging, which post election ought to mean more investment, particular in tech or intellectual property type stuff…and then there is the general disruption—I worry less about the economy and more about the fragility of asset prices which jump around wildly, which seems a warning sign of something that is about to break

  4. Is it just me, or does “half a Lehman” still sound pretty bad? After Lehman, just about everybody was suffering. Now we have a K-shaped “recovery,” where roughly 50% of the country is suffering (you know, the folks who don’t own equities). Now the 3rd wave is here (or is it really just part of the first wave, which never ended?), and Nancy and Steve and Mitch are playing politics – it’s painfully obvious that they care more about playing to their base and the effect a stimulus bill will have on the upcoming election than they do about the folks lining up for hours at food banks (I live in one of the wealthiest counties in the country, and our local food bank is overwhelmed). They should remember that although the folks who are suffering now don’t make political contributions, or summer in the Hamptons or Nantucket, they DO vote…

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