For most of the pandemic in 2020, it seemed like travel was dead. That sentiment emanated from events like Hertz’ filing for bankruptcy protection, endless rows of lifeless aircraft, and countless shuttered hotels. Would we ever fly again, let alone get on a cruise ship? Yet here we are. Leisure travel stared us in the face and pronounced in that most Terminator way: “I’ll Be Back.”
Maine to Arizona, up and down the coasts, across the country, and beyond, leisure travel is on fire as people get on the road, eager for a break from the ennui of video calls, mini-series binges, and potato chips. According to the TSA, traveler throughput in January was running at 40% of January 2019 levels. By June, it was 74% of June 2019 levels, and in the first 2 weeks of July, over 80% of the same two weeks in 2019. Travel is coming back.
Financial markets, usually a few steps ahead of us, recognized this trend and rewarded travel companies with financing at attractive pricing. American Airlines and United issued a combined $5.5 billion in 5-year senior notes in March and April, respectively. American’s deal in March priced at 470 bps over treasuries; a month later, United priced 120 point tighter at 350 bps over treasuries. By June, Hilton Vacations sold $500 million in 10-year notes at 330 bps over, continuing the trend of spread compression (an indication of demand), with a doubling of term. The trends solidified in June when both Royal Caribbean Cruise Lines and Carnival Cruise Lines refinanced their bank facilities at meaningful discounts. Notably, Carnival refinanced a $1.9 billion term loan from Libor + 750 bps to Libor + 300 bps. Back indeed.
While traditional markets and banks are financing the airline and cruise industries, technology companies are making travel easier for consumers and small businesses. Alfred is helping those frequently on the go take care of laundry, pet care and grocery shopping. Timeshifter is minimizing the effects of jetlag. Uplift allows travelers to pay for leisure travel over time with innovative buy now, pay later (“BNPL”) solutions. Several have seen meaningful pickup in their businesses in 2021 with the surge in travel demand.
While people are eager to get away from home and travel, fixed income investors are looking to find a home for their capital allocations. Much has been covered in the media about this topic during the second quarter, including numerous stories describing non-existent returns on deposits and high yield bonds delivering zero, and in some cases negative real yields. We suggest these investors look for a home in digital private credit: short duration, small balance, amortizing private credit originated through Fintech companies. A handful of innovative and open-minded investors have started to skip plain vanilla liquid credit options to explore this alternative yield asset class.
Relative to many other fixed income options, several digital private credit opportunities – with like for like, or better risk profiles – may offer attractive positive real net yields (defined as gross asset yield adjusted by several items, including reserves for future losses) over their life, with lower duration. In our view, when owned as a portfolio, a high count of these small balance assets that amortize regularly offer powerful risk mitigation features. Digital private credit may not be the right home for all, but we suspect that those who explore it will be back for more, especially given the backdrop of accelerating digital transformation across financial services. Hasta la vista negative yields.