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Now this is not the end…

The vultures are on the hunt. And barbarians are at the gate. The unseemly side of capitalism, private equity is on the march to buy distressed assets – particularly those with Covid-19 impaired balance sheets. And the rescue/ransom price is high. 

A snapshot of the world’s largest and most aggressive in corporate reconstruction, the US based Apollo Global Management is spending $1 billion on 10 distressed companies. And ponying up for more in bets most other PE funds wouldn’t touch. Apollo has about $18 billion of dry powder in reserve. 

To get ahead of the Covid-19 re-financing curve, local listed majors Cochlear and Webjet are tapping equity markets to stabilize balance sheets. And this trend will accelerate as the private and public capital markets circle around more listed equity and debt opportunities.

Cochlear, a $9.7 billion business is raising $850 million, largely through an institutional placement at a whopping 16% discount ($140) to its recent closing price. It has also announced it is suspending paying dividends until conditions improve and has downgraded full year’s earnings guidance.

Equity discount of this size is more akin to non-investment grade, than Cochlear. And it is dilutive to existing shareholders who participate in the $50 million Share Purchase Plan (SPP). The discount cost and the speed of the deal underlines the urgency of Cochlear to close this deal and avoid the corporate equivalent of Vlad the Impaler. Webjet shareholders are looking at an up the goizitsa $250 million capital raise at a suspected 50% discount to the last closing price. The $1.80 raise is not pretty in contrast to the $13 it started the year at. The raise will buy the company time. Enough hopefully to keep the lights on until, once again, aviation travel normalizes.

For private equity and fund managers these capital raises are almost once in a lifetime buying opportunity. Because that distant bell tinkling, if it is to get louder, for the market’s bottom relies on a number of things. Two of the most important are stopping the exponential Covid-19 growth and making sure the various government central bank stimulus packages coordinate and work. The Donald is a big factor in both.

Over the next few weeks, declared half year dividends, like BHP’s second largest payout of $3.3 billion has hit or will hit shareholders bank accounts. And with bank term deposits struggling to get much into the positive, the only alternative is bottom pick some of the better quality listed stocks.  

We speak vomitously of the high yield of resource stocks. Others offering interesting upside opportunity are infrastructure related stocks like Sydney Airport. Obviously there is a significant but temporary reduction in international and domestic traffic.

But SYD has good upside to potentially $9. It has a strong balance sheet. Length of average debt maturity is over 6 years and the airport operator holds over $370 million in cash with a further $1 billion in undrawn credit lines. Capital expenditure has either been significantly reduced or put on hold until current travel restrictions are reviewed.

If anything is certain, the coming weeks and months, there will be big volatility swings. And the temptation will be to double up on winning bets, when the momentum trade wins for you. Be careful of gamblers regret. The outcome can be binary. Averaging down maybe less exciting. But in my book it wins in the end.

In W. Churchills words “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” It’s a pretty apt description of where we presently sit.  

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