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.
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 high–yield 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.