Some fixed income investors have taken advantage of the Reddit retail rage to exit risky bond positions, according to a new analysis by US firm Eaton Vance Management.
Eaton Vance says while the price of shares in a handful of short-targeted companies such as GameStop hogged most of the attention in the January, the chaos helped at least one fixed income manager escape a looming bond disaster.
In a note, Eaton Vance portfolio managers, Stephen Concannon and Donal Kinsella, said: “If we look a little deeper, we can see that the impact has reverberated through to the bond market in certain instances.”
During the Reddit run, US movie theatre firm AMC Entertainment was pumped higher by retail investors looking for another GameStop win.
However, Concannon and Kinsella said AMC bonds and loans were “trading at levels indicating significant stress” at the beginning of 2021 as the COVID-hit movie business continued to struggle.
“In our opinion, the company faced a reasonable probability of default or restructuring — despite raising a combination of public and private debt and equity capital throughout 2020 to add much needed cash to its challenged balance sheet,” the note says.
But as AMC bond investors braced for losses, the Reddit-inspired spike in the company’s share price offered an unexpected rescue route. At the peak of the frenzy, AMC raised equity at the new high prices.
“When the stock price climbed further, one large institutional investor converted a $600 million loan to the company into equity and sold this equity hundreds of percentage points higher than where the stock was trading at the start of the year,” Eaton Vance says.
In the wash-up, AMC substantially reduced its debt while fluffing up an equity cushion to help withstand further liquidity challenges.
“What makes the situation so interesting is that the fundamental health of the issuer improved without anything changing in the company’s core operations. As a result, we think it is much less likely to default on its debt or enter into a restructuring arrangement,” Concannon and Kinsella said.
“We suspect that may not be what those retail investors had in mind. But this is just one example of what experienced investors already know: Often the unintended consequences of large-scale actions can reverberate through financial markets in hard-to-predict ways.”
AMC shares are currently trading at US$5.70, almost a quarter of the January high.
