Reorg on the Record: Inflationary pressures, supply-chain disruptions, labor shortages and commodity costs… (03/23/22)
Written by Mark Fischer, Director of Credit Research || In a surprising move last week, movie theater company AMC Entertainment said it is buying a 22% stake in gold mining company Hycroft Mining Holding Corp. and its 71,000-acre Hycroft Mine in northern Nevada. While operationally, the connection is still not clear, the headline at least can be used to highlight the intersection of risks in the credit markets between companies still trying to recover from the effects of Covid-19 and how companies can adapt to inflationary pressures brought on by supply-chain disruptions, labor shortages and commodity costs.
Equity markets last week posted their strongest performance since November 2020. However, as credit analysts we are acutely focused on the cash flow considerations brought on by inflationary pressures. The supply-chain issues in the automotive sector have been well documented, but after a sharp increase in nickel prices, Reorg initiated coverage of American Axle. Natural gas and power prices have hit companies in a number of ways, including squeezing margins at paper companies, forcing Norske Skog to take downtime at one of its mills. Reorg initiated coverage of another paper company, Sylvamo, which in addition to energy concerns also has considerable operations in Russia. Certain companies that hedge power prices and need to meet margin requirements are feeling pressure, such as Talen Energy.
Unfortunately, unlike its movie theater competitor, Cineworld is unable to deploy excess cash to buy a mine and take advantage of higher metal prices. The company hopes its theaters can return to 85% of 2019 admission levels later this year, but whether it can meet upcoming covenant tests is still uncertain.
However, amid all the market volatility, the week might be remembered as the week during which the commonwealth of Puerto Rico, after its nearly four-year stint in Title III bankruptcy, had its joint plan of adjustment go effective on Tuesday, March 15.
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Buyk
Buyk, an “ultra-high speed” grocery delivery business with 39 locations throughout New York City and Chicago, filed for chapter 11 protection on Thursday, March 17, in the Bankruptcy Court for the Southern District of New York. After funding sources ran dry upon Russia’s invasion of Ukraine and the debtor having “relatively little cash on hand,” Buyk terminated “virtually all” of its employees and entered into a “relatively small” $6.5 million loan with Legalist DIP GP LLC to fund a liquidating chapter 11 case. » Continue Reading
Cineworld
Amid uncertainty over its liquidity, Cineworld may have to pay down roughly $300 million on its revolver to address a June covenant test. The company said that its board is assessing several options regarding additional sources of liquidity, including an increase of the rest of world, or ROW, private placement loan. Reorg concludes that the ROW segment likely has the debt capacity to incur incremental loans and should be able to generate positive free cash flow despite a potential increase in cash interest, assuming last-12-month EBITDA continues to improve following Cineworld’s reopening of theaters in the second quarter of 2021. » Continue Reading
Talen Energy
Concerns about Talen Energy’s hedge positions have intensified as power prices in the PJM Interconnection have held at near their highest levels this year, according to sources. PJM Western Hub Peak Calendar Month futures for April 2022 are currently trading at $55.75/MWh, compared with about $43/MWh at the start of the year and a contract high of $58/MWh seen in early February. » Continue Reading
Puerto Rico
Restructured Puerto Rico bonds consisting of $7.4 billion in Series 2022A general obligation debt and $8.7 billion in general obligation and clawback contingent value investments, or CVIs, broke for trading this week after the Tuesday, March 15, plan effective date. During a press conference on Thursday, March 17, to present his fiscal 2023 budget proposal, Puerto Rico Gov. Pedro Pierluisi said that market reception to the issuance of the restructured GO bonds “has been very good,” noting that some bonds have traded at a premium. » Continue Reading
American Axle
Automotive and mobility supplier American Axle, which had reported declining results driven by supply chain effects on the auto industry from semiconductor shortages and rising raw material prices, said it had expected results to stabilize in 2022, predicting flat EBITDA off an increase in revenue. However, subsequent to the company providing guidance, certain raw material costs have increased dramatically, including nickel. » Continue Reading
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Join Reorg on Wednesday, March 30, at 12 p.m. ET as we discuss how companies facing mass tort liabilities, including Johnson & Johnson, have used the “Texas two-step” maneuver to box litigation claims in a new asset-lite subsidiary and use the tools available in chapter 11 to reduce their overall liability while continuing to operate normally outside of bankruptcy. Register here.