Stay-at-Home Pandemic’s Junk Winners Brace for Return to Normal
By Irene García Pérez
(Bloomberg) — European junk-rated companies that gained
from people staying home during the pandemic are set for a
reckoning as normalcy starts to return.
French supermarket group Casino Guichard Perrachon SA, its
Spanish peer Distribuidora Internacional de Alimentacion SA,
Dutch maker of plastic garden furniture Keter Group BV, German
packaging company Kloeckner Pentaplast and France’s shipping
giant CMA CGM are among high-yield corporate borrowers that
improved their debt profiles during the pandemic.
“Some of these companies accessed the debt markets after
showing robust results, others after selling assets,” said
Benjamin Sabahi, head of credit research at Spread Research.
“The question is what will happen once the bullish primary-
market trend we’ve seen since the first news of efficient
vaccines comes to an end, and how will normal results post-Covid
19 look.”
Markets sloshing in liquidity, together with ultra-low
interest rates and an upbeat outlook after vaccine rollouts have
made high-yield bonds an attractive asset class for yield-hungry
investors willing to take on more risk. But when governments and
central banks start easing off the emergency support that fueled
a 14-month global debt binge, the era of cheap-money may come to
an end, raising questions about whether high-risk issuers did
enough during the pandemic to put their houses in order.
While even companies without debt pressures that benefited
from people being stuck at home, like Netflix Inc., home-gym
equipment firm Peloton Inc. and Delivery Hero SE, will need to
work out their return-to-normal strategies, for the heavily
indebted ones, the challenge could be steeper.
Take Casino Guichard Perrachon, for instance. The parent
company of Casino supermarkets and online retailer Cdiscount,
which was in a deep restructuring at the onset of the pandemic,
saw food and online sales jump as restaurants and non-essential
stores shut down. It sold assets and cut debt by 1 billion euros
($1.2 billion), while also tapping credit markets twice in the
past six months to refinance borrowings. For all that, Casino
may not be where it needs to be as normalcy returns, making
asset disposals critical, said Charles Allen, a Bloomberg
Intelligence senior analyst.

Grocery Boom

“Casino seems to have gained less in food than most of its
supermarket peers during the pandemic,” Allen said. “It has also
lagged because it hasn’t put as much focus on ‘drives,’ like
online click & collect, as almost all competitors.” The company
declined to comment.
Like Casino, Spain’s DIA was also restructuring at the
onset of the pandemic. The stockpiling effect in the early days
of the first lockdown in March 2020 and strong demand during the
rest of the year boosted sales, helping it refinance debt. DIA
wouldn’t have been able to ride the surge in demand if it hadn’t
put its turnaround plan in place the previous year, a
spokeswoman said. Like-for-like sales jumped in 2020 and the
company managed to cut losses by 54%.
Still, “defending domestic market share may be tougher if
normal shopping patterns resume,” Bloomberg Intelligence analyst
Conroy Gaynor wrote in a note on May 13. Like-for-like sales
fell 0.4% in the quarter ended March.
Keter Group is another company whose fortunes were turned
by the pandemic. The debt-burdened maker of plastic garden
furniture registered revenue gains last year. Its credit rating
was upgraded out of the triple-C category and term loans —
marked at around 70 cents on the euro in April 2020 — are now
close to face value again.
Keter Chief Executive Officer Alejandro Pena said the
company’s sales boost “positions us well for future growth.”
Giuliana Cirrincione, an analyst at ratings firm Moody’s,
concurs — up to a point. Keter will “continue to benefit from
efficiency gains” from measures put in place before the
pandemic, like a focus on e-commerce and better inventory
controls, she said. Still, she cautioned that Keter faces
challenges inherent to its business profile, like earnings
volatility from input-cost fluctuations.
At Germany’s Kloeckner Pentaplast, the pandemic brought
gains. Demand for plastic packaging for pharma and health
products and lower raw material costs in some quarters, buoyed
earnings 29% in 2020. And while supply bottlenecks and higher
raw-material prices hurt first-quarter results, Kloeckner
expects to meet its guidance of 6% earnings increase for the
year.
The company, whose payment-in-kind notes traded as low as
35 cents on the euro in December 2018 and were exchanged with a
discount of at least 40% during 2019, managed to cap costs by
refinancing debt in February at more attractive prices.
“The refinancing stabilized the capital structure,
addressed upcoming maturities, and going forward it should be
able to capitalize on demand recovery,” said Maria Maslovsky, a
senior analyst at Moody’s.

Future Stress

Meanwhile, French shipping giant CMA CGM, whose bonds
traded at a discount at the back-end of 2019, refinanced 525
million euros of borrowings in October and cut some of its debt
pile.
The world’s third-largest container company is riding the
boom in online sales of goods, which has boosted shipping rates.
In March, S&P bumped up its rating by a notch to BB-, or three
steps below investment grade. While CMA is benefiting from a
surge in trade, it remains to be seen if the higher shipping
tariffs will last, said Spread Research’s Sabahi.
Like for CMA, a return to normal will bring new challenges
to scores of pandemic winners. Question is, are they ready for
it?
“The difficulty from here is to identify future credit
stress,” said Olivier de Larouzière, chief investment officer of
global fixed income at BNP Paribas Asset Management. “Investors
have factored in stronger growth, so it’s hard to see what
breaks the market. Until we have seen how well companies and
sectors capture that growth, almost everyone gets a free pass.”