The yield on Sky's $100 million bond issue has spiked to 11.46 per cent as Covid-19 fears tighten liquidity.
Forsyth Barr analyst Matt Henry told the Herald that while the pay TV broadcaster clearly faced a number of business challenges, it was a "relatively small" bond issue, and the immediate cause of the spike was the broader coronavirus effect on the market.
"Liquidity has really dried up so it is a very difficult," he said.
The 6.25 per cent coupon $100m bond matures in May next year. It was trading at a price per $100 value of $94.90 late in today's NZDX session.
At the same time, Sky's banking headroom is lowering. In a note last month, Jarden questioned if Sky is generating enough cash to support the business and said it may struggle to access additional finance as its $200 million bank facility, which is already drawn to $90 million, shrinks to $150 million in July 2021.
Even before the full extent of coronavirus scare became apparent, Sky chief executive Martin Stewart told investors - at the company's interim results briefing - that the company was reviewing its capital structure.
"Sky clearly needs to recapitalise," Henry told the Herald this afternoon.
Earlier, he told clients the company's net debt to market cap ratio was "Certainly not sustainable. Some form of equity raising appears highly likely."
He had anticipated a rights issue at some point after the company had updated investors at an investor day scheduled for later this month, he told the Herald.
But now the company had been overtaken by events.
"Sky has been blindsided by Covid-19, just like everyone else." he said.
It was likely the company would accelerate its capital raising plans, with a discounted rights issue on the cards.
Harbour Asset Management's Shane Solly also saw an equity raise in the near future.
"With an equity a market capitalisation of just $120m there is a very small equity cushion for bond-holder," he said.
"It's a tough time to be raising equity, but doing it early makes sense if has to be done."
The lack of liquidity in stocks was hurting the bond market overall, Solly said.
Sky, which has seen key sports content suspended or cancelled, withdrew its 2020 revenue and earnings guidance yesterday. The company did not issue revised forecasts. It said it would update investors once the impact of Covid-19 had become more clear.
In a note to clients today, Henry and colleague Ashton Olds said, "The risk for Sky is that some of the revenue impact is not temporary. Customer attrition and bundle trimming trends may be accelerated. Revenue from financially distressed corporate advertisers and commercial subscribers may not bounce back quickly."
But they added, "All that said, Sky's share price has dramatically de-rated. At the current level investors are effectively paying option-value for the potential Sky is successful in repositioning itself as NZ's aggregator of sporting content in a streaming world. We believe long-term there is likely a role for a sport content aggregator in NZ, and Sky is positioned to potentially fill that role. We upgrade [from underperform] to neutral."
Its 12-month price target - 80c in November - is now 35c.