FT : Hertz goes brrrrrrrrrrr. Is there a crash coming?

Hertz goes brrrrrrrrrrr. Is there a crash coming?
There has been one company we haven’t stopped talking about at DD over the past few days: Hertz. 

Quick recap: DD took a look at the car rental company a couple of weeks ago when it announced that it was filing for bankruptcy. That made sense. Hertz has a $19bn debt pile, $15bn of which comes from debt in the asset-backed securities market that is backed by its fleet of cars. 

Coronavirus has dealt a huge blow to Hertz’s business. Few people are travelling or renting cars and the company can no longer afford to service its debts.

Even legendary investor Carl Icahn, who was Hertz’s largest shareholder, threw in the towel and decided to dump his stake in the company at a more than $1.5bn loss. After all, what’s the point in holding equity in a company that is going through bankruptcy protection when you will almost certainly be wiped out?

Let’s ask some Robinhood traders. If you haven’t come across the app before, Robinhood allows retail investors to easily trade stocks. Its 10m users have become the go-to answer for any sort of irrational moves in markets. Here’s our Lex column on the app. 

Remember when Tesla’s stock price more than doubled in the space of a few short weeks for no obvious reason? A lot of people pointed the finger at Robinhood users. 

Hertz filed for bankruptcy on May 22. Its stock price tanked to about 40 cents. Yet, since it filed for bankruptcy, Hertz shares have been on a tear, rising 675 per cent to $4.50. 

Hertz shares are trading higher now than before the company declared itself bankrupt. To be clear, Hertz is still very much bankrupt. 

“This is insane” or “the markets have gone mad” are some of the phrases we’ve seen banded around by people who are truly baffled by so-called zombie companies rallying. 

Hertz might be the most well-known but Robinhood users have also helped to resurrect the likes of JC Penney (bankrupt), Whiting Petroleum (also bankrupt) and Chesapeake (almost bankrupt). The chart below shows how much these stocks had rallied by Tuesday. 


Now DD isn’t here to give financial advice. But if someone like Icahn, who has made billions of dollars as an investor, chooses to exit a company at a huge loss for fear that its stock price could go to zero, it’s probably wise to stay away. There’s a reason people like him are called “smart money”. 

That being said, stocks have erased all their losses over the past three months and made a roaring comeback despite the fact that we’re still in the midst of a global pandemic, millions are unemployed and there is social unrest in two of the world’s big financial centres. 

Maybe the best way to describe the markets is: ¯\_(ツ)_/¯

Alphaville’s Jamie Powell has written about the zombie rally and Hertz shares defying gravity. 

FT : Will EssilorLuxottica and Brussels see eye to eye?

Will EssilorLuxottica and Brussels see eye to eye? 
Here’s one merger that’s still on the cards despite the coronavirus turmoil: EssilorLuxottica’s €7bn deal to buy Dutch rival GrandVision. Wanting the tie-up to go ahead isn’t enough though. 

The two eyewear companies have to make Brussels see things their way to get the deal approved. 

First, EssilorLuxottica needs to convince EU regulators that the deal won’t undermine competition by creating a dominant player in both wholesale and retail markets that could crush small players and eventually lead to fewer choices and higher prices for consumers. 

This week the EU sent the company a formal “charge sheet” outlining its concerns about the acquisition. It has almost two months to decide on the deal and it could decide to block it, waive it through or ask for concessions.


© Reuters
Second, the transaction must survive calls from independent opticians in the bloc — including the UK, Austria and France — to block it. Ashley Fox, a former conservative Member of the European Parliament who works for an unnamed rival party to the transaction, has already asked the commission to reject the merger. 

“There is much talk in Europe at the moment about creating ‘European champions’ to rival those in the US and China,” he said. “That is all very well, but if the result is an anti-competitive behemoth that gouges profits at the expense of consumers, we will all be worse off.”

Third, EssilorLuxottica might need to reconsider its offer. When it agreed to buy a 76.72 per cent stake in GrandVision at €28 per share, things were looking rosier for the eyewear company. Now, its stock price is trading at about €24 which could prompt EssilorLuxottica to seek a better deal. It wouldn’t be the first (ahem LVMH). 

Brussels insiders tell DD the deal could still happen but warn that it may come at a price in the form of concessions. That is to say, EssilorLuxottica may be forced to sell some juicy assets to get it done. Here’s the full story from DD’s Javier Espinoza and the FT’s David Keohane.

>>> US After Hours Summary: FIVE +10.4% gets high five on earnings; VR

After Hours Summary: FIVE +10.4% gets high five on earnings; VRNT -9.3%, GME -6.2%, CHWY -2.6% are lower on earnings

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: LAKE +48.3%, AGX +10.8%, FIVE +10.4%, AMC +4.7%, ITI +4.6%

Companies trading higher in after hours in reaction to news: APT +16.5% (up in sympathy on strong quarter from LAKE), APAM +7.9% (reports assets under management), BEN +2.2% (reports assets under management), BBY +0.4% (updates in-store COVID-19 shopping policies; to permit shoppers inside stores starting Jun 15), LM +0.1% (reports assets under management)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: VRNT -9.3%, GME -6.2%, CHWY -2.6%, LMNR -0.9%

Companies trading lower in after hours in reaction to news: CSII -9.1% (commences offering of $125 mln of its common shares), NKLA -8.8% (profit taking after big run past two days; also plans to open pre-orders in late June, according to TechCrunch), SALT -7.8% (announces $60 mln share offering), DNLI -6.8% (provides update from RIPK1 program with partner SNY; pausing clinical activities for DNL747), NIO -6.6% (stock offering), SITM -5.6% (files for 3.5 mln share offering), AB -4.3% (reports assets under management), MNRL -4.1% (files for 6 mln share offering by selling shareholders), ALK -2.3% (S&P Downgrades To 'BB-'), IVZ -1.5% (reports assets under management), CDNA -1.5% (announces $100 mln offering; also files mixed securities shelf offering), COUP -1.1% (announces $1.1 bln convertible note offering), SNY -0.5% (provides update from RIPK1 program with partner DNLI; pausing clinical activities for DNL747)

>>> US Close Dow -1.09% S&P -0.78% Nasdaq +0.29% Russell -1.94%

Closing Stock Market Summary

The S&P 500 declined 0.8% on Tuesday, but strength in the mega-cap technology stocks limited its decline and drove the Nasdaq Composite up 0.3% to close at a record high. The Dow Jones Industrial Average (-1.1%) and Russell 2000 (-1.9%) fell more than 1% after a recent streak of outperformance. 

Apple (AAPL 343.99, +10.53, +3.2%), Amazon (AMZN 2600.86, +76.80, +3.0%), Microsoft (MSFT 189.80, +1.44, +0.8%), Alphabet (GOOG 146.16, +9.55, +0.7%), and Facebook (FB 238.67, +7.27, +3.1%) -- which represent approximately 20% of the S&P 500's market weight -- posted solid gains, as money appeared to rotate out of cyclical sectors and back into these tech behemoths. 

Those cyclical sectors included the energy (-3.6%), industrials (-2.5%), and financials (-2.1%) sectors, which remain this month's leaders. Conversely, the information technology (+0.5%), communication services (+0.2%), and consumer discretionary (unch) sectors performed relatively well amid gains in the aforementioned stocks. 

The rotation was a balancing act between taking profits and parking money in the mega-caps for their perceived safety. There was no strong inclination to sell the broader market, though, especially with the Fed set to announce its latest policy decision on Wednesday.

Within the transportation space, profit-taking interest cooled down the airline stocks. The U.S. Global Jets ETF (JETS 20.45, -1.27, -6.8%) declined nearly 7% after rallying 45% over the prior six sessions. The Dow Jones Transportation Average fell 2.3%. 

U.S. Treasuries ended the session on a higher note, driving yields lower across the curve. The 2-yr yield declined two basis points to 0.20%, and the 10-yr yield declined six basis points to 0.83%. The U.S. Dollar Index declined 0.2% to 96.42. WTI crude gained 1.8%, or $0.68, to $38.92/bbl. 

Reviewing Tuesday's economic data:

  • The NFIB Small Business Optimism Index for May increased to 94.9 from 90.9 in April.
  • April job openings decreased to 5.046 mln from a revised 6.011 mln in March (from 6.191 mln).
  • Wholesale inventories increased 0.3% in April (consensus +0.4%) following a revised 1.1% decline in March (from -0.8%).

Looking ahead, investors will receive the FOMC Rate Decision, the Consumer Price Index for May, and the weekly MBA Mortgage Applications Index on Wednesday. 

  • Nasdaq Composite +10.9% YTD
  • S&P 500 -0.7% YTD
  • Dow Jones Industrial Average -4.4% YTD
  • Russell 2000 -9.7% YTD

>>> Astronomers have found a planet like Earth orbiting a star like the sun

Astronomers have found a planet like Earth orbiting a star like the sun
The discovery of the exoplanet KOI-456.04 orbiting the star Kepler-160 suggests we should more aggressively look for habitable planets around sun-like stars.

Three thousand light-years from Earth sits Kepler 160, a sun-like star that’s already thought to have three planets in its system. Now researchers think they’ve found a fourth. Planet KOI-456.04, as it’s called, appears similar to Earth in size and orbit, raising new hopes we’ve found perhaps the best candidate yet for a habitable exoplanet that resembles our home world. The new findings bolster the case for devoting more time to looking for planets orbiting stars like Kepler-160 and our sun, where there’s a better chance a planet can receive the kind of illumination that’s amenable to life.

Most exoplanet discoveries so far have been made around red dwarf stars. This isn’t totally unexpected; red dwarfs are the most common type of star out there. And our main method for finding exoplanets involves looking for stellar transits—periodic dips in a star’s brightness as an orbiting object passes in front of it. This is much easier to do for dimmer stars like red dwarfs, which are smaller than our sun and emit more of their energy as infrared radiation. The highest-profile discovery of this type is near our closest neighboring star, Proxima Centauri—a red dwarf with a potentially habitable planet called Proxima b (whose existence was, incidentally, confirmed in a new study published this week).

Data on the new exoplanet orbiting Kepler 160, published in Astronomy and Astrophysics on Thursday, points to a different situation entirely. From what researchers can tell, KOI 456.04 looks to be less than twice the size of Earth and is apparently orbiting Kepler-160 at about the same distance from Earth to the sun (one complete orbit is 378 days). Perhaps most important, it receives about 93% as much light as Earth gets from the sun.

This is critical, because one of the biggest obstacles to habitability around red dwarf stars is they can emit a lot of high-energy flares and radiation that could fry a planet and any life on it. By contrast, stars like the sun—and Kepler-160, in theory—are more stable and suitable for the evolution of life.

The authors found KOI-456.04 by reanalyzing old data collected by NASA’s Kepler mission. The team employed two new algorithms to analyze the stellar brightness observed from Kepler-160. The algorithms were designed to look at dimming patterns on a more granular and gradual level, rather than seeking the abrupt dips and jumps that had previously been used to identify exoplanets in the star system.

Right now the researchers say it’s 85% probable KOI-456.04 is an actual planet. But it could still be an artifact of Kepler’s instruments or the new analysis—an object needs to pass a threshold of 99% to be a certified exoplanet. Getting that level of certainty will require direct observations. The instruments on NASA’s upcoming James Webb Space Telescope are expected to be up to the task, as are those on ESA’s PLATO space telescope, due to launch in 2026.

FT : UK landlords face loss of restaurant rental income

UK landlords face loss of restaurant rental income
Chains are preparing to close sites or use insolvency procedures to push through rent cuts

UK landlords face widespread loss of rental income from restaurants, as some of the biggest chains prepare to close sites or use insolvency procedures to push through rent cuts.

The Restaurant Group, which owns Frankie & Benny’s and Chiquito, said on Monday that it was considering a “company voluntary arrangement” — a process that would allow the company to cut its debts, including rents — as one option, alongside a move to turnover-based rents and the closure of unprofitable restaurants.

“Our industry is facing exceptional challenges in what is an unprecedented operating environment,” said the company, which last week confirmed that it was looking to close permanently up to 120 sites, affecting 3,000 jobs.

Mid-market restaurant chains were already struggling before the pandemic, said Douglas Jack, an analyst at Peel Hunt, “with many operators suffering from falling demand, rising costs, too much debt, too much rent and an over-reliance on selling through delivery.”

Chains including Prezzo, Byron and Giraffe are among those that had already gone through CVAs to cut costs.

PizzaExpress is now considering a CVA as part of a wider restructuring of the group, while fast-food chains Pret and Leon have also hired consultants to negotiate with landlords. Burger King is in discussions with landlords over moving to turnover-based rent.

Landlords complain that government intervention has given tenants the upper hand in negotiations. The corporate insolvency and governance bill, currently making its way through parliament, makes it harder for property owners to issue legal demands for unpaid rent.

The bill also creates a moratorium of 20 working days on creditors enforcing debts owed by struggling businesses, with the aim of giving them time to assess restructuring options.

“No landlords like the idea that companies can use this restructuring moratorium to shield themselves from enforcement while they restructure all their leases,” said Mathew Ditchburn, head of the real estates disputes team at law firm Hogan Lovells, adding that there would likely be “a raft of casual dining CVAs later in the year”.

Mr Jack said that The Restaurant Group, which has already put its Chiquitos and Food+Fuel brands into administration, was in a relatively strong negotiating position because it had relatively short terms left on many of its leases. It could keep lossmaking sites boarded up at a rent cost of around £20m per year, which would be detrimental to landlords looking to attract other tenants and consumers.

The restructuring discussions will not affect the group’s Wagamama or pubs businesses, which could reopen outdoor spaces this month, if the government gives the go-ahead.