The high yield market had been rallying for most of 2012, however some names had been left behind - one of those was Travelport (TPORT). In the middle of 2012 TPORT was doing roughly $2bn of revenues and $500MM of EBITDA (going lower) with a roughly 24% EBITDA margin. As of June 2012 TPORT had:
- 1,862MM of secured and second-lien debt - 3.8x EBITDA
- 1,019MM of senior debt - 6.0x
- 424MM of sub. debt - 6.9x
The market was very nervous about TPORT for a few reasons:
- EBITDA had been slightly declining and 1st lien covenants were stepping down from 4x to 3.85x in 3Q13, leaving roughly 17% margin in cov. EBITDA
- TPORT lost roughly $60MM in revenue (would be reflected in EBITDA in later quarters) due to a lost contract from United and Continental Merger
- American Airlines contract with TPORT was up for renewal at the end of the year, and given that AA was suing TPORT, there was speculation that the contract would not be renewed or would potentially be at a lower rate
- There were concerns that airlines would build out proprietary systems to circumvent GDS providers
- Most importantly (in my opinion), there was a large maturity wall in 2014 (senior notes and the 2015 TL would move to 2014 if they were not refinanced)
The 9-2015 TL was trading around 98, the 9.875% senior 9-2014 bonds were trading around 79 (23% YTW) and the 11.875% subs 9-2016 were trading around 38 (52% YTW).
There were clearly risks around the business, but I felt that the concerns were overblown and if anything the credit had been exposed to negative groupthink, with every analyst and trader I spoke to regurgitating the same sentiment. I was a bit more bullish, especially given the risk/reward:
- Yes, EBITDA had been declining but not many analysts were expecting TPORT to breach 1st lien covenants. The CLO machine was back in full swing in mid 2012 and the TL was trading well - I was relatively confident that TPORT would be able to do an ammend and extend.
- TPORT in my opinion was actually a pretty good SasS business, and it would take years to build a better system or internal competitor. Hiring experienced developers and creating a great product is very difficult, expensive, and time consuming - a fact I did not expect other Wall Street traders and analysts to really grasp.
- Yes, TPORT lost a $60MM contract, but growth does not always come in a perfectly consistent Madoff-like form that investors always crave.
- The AA lawsuit was concerning but TPORT won a partial dismissal in November 2011 and it seemed AA was suing every reservation system operator: Orbitz, Sabre, TPORT. American was also facing problems of its own at the time and not renewing with TPORT would really hurt AA.
- TPORT had many levers to pull: TPORT had over 300mm of liquidity (cash + revolver) and also owned roughly 50% of Orbitz, which at the time was worth a couple hundred million dollars.
- Ultimately extending/refinancing debt becomes a self fulfilling prophecy (akin to Soros’ Theory of Reflexivity), refinancing looks difficult/impossible when bond prices are low and yields are high, but as bond prices improve the probability of refinancing increases which in turn can improve the bond price. TPORT was very levered to a hot high yield market in which both the Sponsor and bondholders were incentivized to get something done.
- I felt a lot of traders were scared to be long TPORT because everyone thought it was a poor credit, and if it actually filed they would look stupid/get fired. It is difficult for humans to process probabilities and risk distributions that are different that 50-50 and I felt like this was one of those cases. In my experience, most analysts would be hesitant to get long a credit they didn’t like (or short one they did) at almost any price - when in reality price matters much more than fundamentals for most credits. I personally would rather deploy less capital into a 30% chance of a 30% return than put more capital into an investment which gave me a 90% chance at a 6% return. While most investors understand this in theory they do not follow this rule in practice, as these probabilities are extremely difficult to handicap.
Many funds were getting long the 9.875% of 9/14 at ~79, betting on a refi getting done. However, I felt the best risk/reward trade was to buy the subs at 38 which had the following scenarios:
- TPORT files. The subs are worth 0 as the business has deteriorated and leverage on the subs is over 7x. However, timing really matters. If the default occurs at the 9/14 maturity, the subs will already have received 2 years of coupons. Expected loss as a result is somewhere between 38 and 14 pts (let’s say avg. 24pts).
- TPORT is able to extend the 2014 bonds. In this scenario, the company demonstrates its ability to extend out the rest of the cap structure, simultaneously implying EBITDA #s are okay as well. In this case the subs could rally to near par. Assuming the subs are called in 2014, this would result in a gain of ~86 pts.
The upside scenario here is over 3.5x better than the downside for taking risk which in the short term is very levered to a red hot HY credit market. Ultimately TPORT was able to extend and refi, and the subs traded over par. This was a risky trade but I felt the risk/reward validated it given the market conditions. TPORT ended up going public and you can review what they ended up doing with the cap structure in a 2014 10-Q and in the table below.
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