Updated as of September 21, 2020
We continue to aim to strike an appropriate balance between our commitment to the health and safety of all our employees, and our obligation as a firm and individuals to continue providing essential services to our clients. To that end, and in line with Federal, Provincial, and Municipal recommendations for businesses, we have implemented a Return To Work Plan that, with appropriate and reasonable safeguards to protect them, will see employees work on site and from home on a rotational basis. We have enacted standard health and safety measures such as: avoiding non-essential travel outside of Canada, maintaining physical distancing between workstations, frequent hand washing, and wearing a mask whenever physical distancing is not possible. In addition to these standard health and safety measures, we have enhanced the air filtrations system in our offices by adding air purifiers and high grade filters to our HVAC system to boost the air quality throughout the building. RPIA will endeavour to update these efforts as the pandemic evolves and new expert advice becomes available.
Expedia: When the Stars Align
Following on from the recent market update discussion and our monthly newsletter, we thought it an opportune moment to provide an update on one of our high conviction positions – Expedia – as the company returns to the debt markets, this time to repurchase debt and issue it.
The travel sector was arguably the hardest hit sector by COVID-19, and as an online travel agency (OTA), Expedia’s business was severely impacted. As a result, the company needed to take various actions to secure its balance sheet in 2020. It issued $1.2bn of preferred equity and $2.75bn of bonds in April, and an additional $1.25bn of bonds in July. These actions proved sufficient to ride out the near-term challenges.
Through our analyst’s credit work, we gained comfort in EXPE’s liquidity profile, the strength of its underlying business, and the trajectory of its credit ratings. The company had raised a significant amount of cash, and management was on track to reduce fixed costs by $700-750mm – much more than its initial goal of $300-500mm. Also, EXPE was benefitting from increased demand for easily accessible leisure travel options in some of its brands, such as Vrbo (Airbnb equivalent).
Expedia’s low triple-B ratings had been placed on a negative outlook by three rating agencies (Fitch, Moody’s, and S&P) in March-April. However, after speaking with the agencies in early December, we believed that downgrade concerns were overblown. All three agencies were positive on the travel sector outlook given the strong pent-up consumer demand. They had a favorable view on EXPE’s position as an OTA and were willing to give it another 1-2 years to return to pre-COVID metrics.
We had accumulated a position in Expedia’s bonds late in 2020 (including the 6.25% 2025 notes) when prices fell on increasing concerns of lockdown due to spreading variants of the COVID-19 virus. Based on our extensive work, we believed that EXPE bonds offered compelling value. That value was crystallized this week when the company issued a new 10-year bond and a 5-year convertible bond to refinance its 7% 2025 notes and to partially tender for its 6.25% 2025 notes, both of which were issued at the height of the pandemic in April 2020.
Given the limited disclosure about ESG from EXPE currently, we have engaged with management, and we hope that this will improve with time as ESG continues to be a core analytical focus. We are very pleased to have been able to add value to investors across our portfolios through the continued collaboration between research and execution at a sector and individual company level.