Everybody Hertz

I have not done exhaustive research, but I believe that every financial services office has a framed bond certificate somewhere as a decoration. A quick search on Ebay shows nearly 3,000 old certificates for sale at prices ranging from $1.99 all the way up to $5,600. That is to say, they’re not terribly unique.

Centennial’s former Chairman, Bill Alsover, had one that was special, though. Years ago, when someone purchased a bond, they received the certificate with coupons that were clipped off and mailed to the company for payment. Bill’s certificate had only one coupon clipped because the bond holder clipped the first coupon, mailed it in, and never received a single interest payment. The company was bankrupt shortly after issuance. It was a unique piece of history.

The rental car company Hertz joined an infamous group last week when they defaulted on their first interest payment on bonds they issued in November of 2019. Based on current trends, they will not be the last to join this club in 2020.

So far in 2020, investment-grade US corporations have issued $1 Trillion of bonds according to Bloomberg. Prior to this year, 2017 held the record for fastest to $1 Trillion in issuances when the number was breached in August. Last year, which Bloomberg classifies as “a fairly typical year” we didn’t cross the $1 Trillion plateau until November.

In part, this is good news. The steps the US Federal Reserve took in March and April made it easier for US corporations to issue bonds rather than seek out government funded bailouts. Boeing, specifically, has said that they were prepared to ask for a bailout before the credit market freed up and they were able to issue bonds into the market, bypassing US taxpayers.

The likely end result, though, is that there will be additional defaults in the corporate bond world in the near future. While some sectors of the economy have remained resilient, there are areas that have been deeply wounded. Companies in those areas - think hotels, airlines, and cruise ships - will likely rebound eventually, but may have to declare bankruptcy first.

I have long believed that vanilla investing, specifically in the bond market, is a good strategy. That’s not to say I won’t at times recommend a high-yield bond or that none of our holdings will go bankrupt, but by focusing on quality, I feel we can lesson the risk of default and let others purchase the wall art of the future.

Photo by Jordan Graff on Unsplash