Delayed Vaccine Rollout Spells Risk For Debt Investors

 Delays in administering Covid-19 vaccine shots pose a fresh risk to investors who bet on a speedy vaccination process to help risky U.S. companies bounce back from the pandemic.

The approval of coronavirus vaccines made by Pfizer Inc. and Moderna Inc. last year propelled rescue financing packages for several cash-strapped companies, supplying them with what investors thought would be enough liquidity to keep them afloat until widespread immunity took hold. Cineworld Group PLC, AMC Entertainment Holdings Inc., Carnival Corp. and other companies with bleak outlooks because of the pandemic found financial lifelines to tide them over.

These deals continued a trend dating back months before the vaccines were approved, as actions taken by the Federal Reserve and Congress, coupled with investors' eagerness to continue lending, kept the corporate default rate well below analysts' expectations.

But the sluggish rollout of the vaccines is now undermining the timeline that investors projected when extending emergency credit. The U.S. government fell well short of its goal of vaccinating 20 million Americans in 2020, having administered just 2.8 million doses by the end of last year, according to federal figures, in part due to differing state policies that have led to confusion and shipment delays. The emergence of the more-contagious U.K. coronavirus mutation in the U.S. has also raised the likelihood of further government restrictions and consumers being more cautious about leaving their homes.

So far, more than 25.4 million doses of vaccine have been distributed, but only 8.9 million Americans have received a shot, according to the Centers for Disease Control and Prevention.

Dan Zwirn, founder and chief executive of asset management firm Arena Investors LP, said many investors willing to prop up struggling companies "are making a bet on the duration of the vaccine comeback."

"It baffles us. You're running a ton of risk that it will take longer than you thought," said Mr. Zwirn, whose firm during the pandemic has focused on making investments that are fully covered by the underlying asset value.

Federal Reserve Bank of Boston leader Eric Rosengren said Tuesday the inoculation rate " has been disappointing, which likely will impact public health and the economy in the near term," though he predicted "a robust recovery starting in the second half of the year."

Companies in hard-hit industries such as movie theaters, retail and live entertainment have largely subsisted though the pandemic on borrowed money. Speculative-grade debt issuance surged to near-record levels last year as the Federal Reserve kept rates low, amounting to roughly $694 billion, blowing past the $559 billion issued in 2019 and $573 billion in 2018, according to Barclays PLC.

AMC, the world's largest movie theater chain, has so far survived temporary shutdowns of virtually all its theaters with several rounds of debt financing and sales of stock to risk-hungry equity investors. Cineworld, owner of Regal cinemas, also landed a rescue from lenders in November.

Cosmetics maker Revlon Inc., whose recent struggles stemmed from less demand for its products as women stayed home and eschewed makeup, swapped out debt in November and received a new investment from its private equity owner to relieve an impending bond maturity and avert a bankruptcy filing. Others, such as fashion retailer Express Inc., are still seeking the financing they need to outlast Covid-19.

Carnival was able to raise billions of dollars of debt during the pandemic, even while the cruise industry has been incapacitated, having been identified as the source of numerous infections.

In a sign of confidence that a post-pandemic future is in sight, Live Nation Entertainment Inc. in December landed a low interest rate of 3.75% on a secured bond sale, even though its live-events business is effectively frozen. Live Nation's revenues plunged to $184 million in the third quarter, compared with $3.8 billion over the same period the prior year.

While many companies that obtained debt financing in 2020 did so to avoid running out of cash and needing to seek bankruptcy protection, much of the surge in debt issuance in 2020 was due to companies opportunistically taking advantage of low interest rates to either refinance existing debts or pad their balance sheets with liquidity in case they might need it. Many of these companies are keeping such "rainy day funds" as cash on the balance sheet and are expected to use it to repay their debts if the economy recovers, investors said.

However, doubts about whether some of those debts will be repaid even after consumers return to theaters and malls, are fueling projections by analysts and investors of a steady march of corporate defaults. Whether the debts taken on during the pandemic can be paid off or refinanced depends largely on sustaining the frenetic market activity of 2020.

Barclays expects bond defaults to decline in 2021, but still be elevated compared with more benign years. The bond default rate for full-year 2021 is expected to be 5%-6%, down from a recent high of 8% in October, according to Barclays.

However, the added debt issued during the pandemic, much of which has a four to five-year lifespan, could be the source of defaults in years to come especially if companies struggle with changed consumer behavior following the pandemic, investors said.

Martha Metcalf, head of U.S. credit at asset management firm Schroders PLC, said the high volume of sub-investment-grade debt added on during the pandemic will mean that "idiosyncratic risk will remain elevated," as certain companies and industries have trouble servicing their obligations.

"The challenge now is to make that distinction, which industries and companies got access to capital that they didn't deserve," Ms. Metcalf said. "You need to be careful about those companies that got access to capital markets when they probably shouldn't have."

There will be an increasing rate of credit defaults heading into the spring as certain companies struggle while waiting for the vaccine rollout, but "we're getting into the neighborhood of peak defaults," according to Ms. Metcalf.

Damian Schaible, co-head of the restructuring practice at law firm Davis Polk & Wardwell LLP, said that history suggests the music eventually stops.

"Many capital structures will suddenly tumble," he said. "The layers of debt accumulated during both the easy times and through the pandemic will lead to more complicated restructurings."

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