Friday Fixed Income - September 7th 2018

Every Friday, I share something I’ve learned from researching the fixed income space.  That is often a list of attractive Closed End Funds, or individual discounted bonds I think have a good risk to reward profile.  Other times, I share long or short equity ideas that my research has turned up.  Today, I’m looking to add short exposure to five companies that I think could find themselves in dire straits with a liquidity crisis preventing them from refinancing debt at attractive rates.

The first is Tenet Healthcare (THC).  This is a healthcare company with a market cap of about three billion dollars.  Amazingly, the company carries almost 15 billion in debt that is due in the next twelve months.In the most recent full year, the company had Free Cash Flow (FCF) of 403 million.  At the same time, interest expense was 1.028 billion.  The most recent quarter looks pretty ugly too.  FCF was 223 million while interest expense was 254 million.  This is a company that cannot afford to both pay its bills and maintain its facilities.  If they can get replacement financing at all, the interest rate will likely be punitive.  Look for the company to sell assets or dilute shareholders in the comingyear.  Their finances are that desperate.  I have purchased the 20 strike long put with 17JAN2020 expiry for 2.15 a share to gain exposure to a collapse in share price.

The next is General Motors Company (GM).  The big three automaker didn’t learn its lesson about excessive debt from its 2008 disaster.  The company continues to hampered by crushing legacy pension obligations.  Most importantly, sales are largely driven by sales to sub-prime credit.  Subprime credit expansion is going be the theme of this these and the next three as well.

Nearly 40% of the $1.1 trillion in auto loans outstanding is to less-than-prime borrowers. Of that, more than $200 billion is subprime.  Experian reports new subprime loans are down 2% in the last year and deep subprime is down a massive 6%.  Credit is tightening and GM is going to lose its source of critical revenue.  Look for things to get really bad for subprime lenders (and industries that rely on subprime borrowers for sales) when the yield curve inverts.  The spread between the two and ten year treasury is already down to a mere 24 basis points, putting an enormous amount of pressure on subprime lenders.  When the dominoes start to fall, look for GM to be looking for another government bailout.  I have positioned myself to profit from another collapse in GM share price by buying the 35 strike long put with 17JAN2020 expiry for 3.65 a share.  My puts are already in the money.

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