The aviation, oil, and gas industries have been inexorably changed.
Still, Dan Zwirn, chief executive and CIO of Arena Investors, believes they will be areas of future investment opportunities for the firm. In a letter to investors obtained by Institutional Investor, Zwirn wrote that aviation, oil, and gas “are areas that actually did experience permanent damage as a result of the virus.”
He believes that the current market environment presents one of the best opportunities for aviation companies since 2001. Adding to the the sector’s woes well before the virus hit, including overcapacity and high costs, the industry is now likely to permanently retire a broad range of older aircraft.
“Airlines and lessors are desperately seeking to raise liquidity from asset sales and sale lease-backs, and many are not going to survive despite significant government assistance,” Zwirn wrote. A spokesman for Arena declined to comment on the letter.
Zwirn said that risk has already been re-priced in many sectors since the start of the global pandemic, but he believes more is coming. He also has plenty of criticism for government actions over the years.
“It is likely that ‘whatever it takes’ for global monetary authorities and governments would have been ultimately necessary given the severity of the pandemic. However, perhaps it had to be the first tool used because a decade of artificial rate suppression had left no other tools in the toolbox in addition to creating a massive asset and credit bubble the likes of which the world has never seen,” Zwirn wrote. “We have seen a level of currency debasement on a global scale that has rarely, if ever, occurred. The repercussions of this are difficult to predict, but any reasonable reading of economic history suggests they are daunting.”
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In oil and gas, Arena sees an opportunity in an industry that is now devoid of capital and which had already been facing distress for years. “There is a ‘private equity apocalypse’ among the firms that bought large amounts of land for development, as many in the industry believed that ’unconventional shale’ was a once-in-a-lifetime land grab.” Unfortunately, as Zwirn pointed out in the letter, fracking got efficient and as a result there’s no longer scarcity.
“The extreme recent volatility globally and among international suppliers will only increase Arena’s ability to finance and purchase assets inexpensively while hedging away commodity price exposure,” Zwirn wrote in the letter.
Arena also believes there will be potential opportunities in areas that were essentially priced where nothing could go wrong in order to retain their value. Now the firm can use what it calls “2020-post-virus-level-pricing” as an entry point. “These range from corporate loans where banks and BDCs have vanished and commercial mortgages where lender warehouse lines have been withdrawn to structured finance assets where over-aggressive hedge funds have had to recede,” Zwirn wrote.