A quick follow-on from our Hertz post earlier.
Hertz’s equity market movements, as we wrote last week, are part of a recent trend where the shares of companies either in bankruptcy, or teetering on the edge of it, have rocketed for no apparent reason. Bar, perhaps, a spiralling feedback loop between momentum, quantitative and retail traders.
This is despite each company’s bonds trading at a severe discount to par, which implies little-to-no value for the equity holders once the company is reorganised under American bankruptcy law.
Of course, the bondholders could be wrong. That is a possibility. But how often are they wrong?
Well we just got a solid answer from the wonks at Verdad Cap, a quantitative asset manager based out of Boston. The answer, as you might have guessed, is “not very often”.
Verdad’s director of credit Greg Obenshain has run the numbers on the equity returns if you ran a strategy that invested in leveraged companies, both investment grade and junk, whose dollar bonds traded at distressed levels. For instance, if you purchased the shares of companies whose fixed income securities traded at under 10 cents on the dollar, or between 10 and 20 cents on the dollar, and so on.
The data set goers all the way back to the end of the Britpop era (1996 for those not au fait with that particularly high point of British culture).
And this is what he found:
(Do note, Verdad’s database uses the average bond price for unsecured bonds and when those aren’t available, secured and then unsubordinated bonds.)
With Hertz’s October 2022 $500m senior unsecured bond trading at 41 cents on the dollar according to S&P Capital, the historical data for its new equity investors doesn’t look too pretty.
But this is a new era, so maybe this time is different?
Perhaps not. In early Monday trading Hertz’s shares are off 18.3 per cent for a price of $2.32.
Is this the nuttiest risk factor of all time? – FT Alphaville
Bankrupt Hertz given approval for unprecedented share sale – FT
The zombie rally – FT Alphaville
Today, in efficient markets – FT Alphaville