Worries about virus impacts on balance sheets may be obscuring business resilience.

The rise in COVID cases has given investors reason to reconsider the global growth outlook - particularly when it comes to companies labeled “reopening trades”. In recent weeks, credit spreads in travel and leisure (hotels, amusement parks, cruise lines, etc.) have reflected concerns that slower progress against the virus will impact balance sheet recovery. However, wider credit spreads may not entirely reflect bottom up fundamentals and could present opportunities in these industries.

In early June, spreads for the high yield leisure index were largely in-line with broader high yield, but this relationship widened to as much as 75 basis points over June and July. While worries around “reopening” increased, this move in spreads should be considered against the relatively modest deceleration in business trends.

For example, weekly U.S. RevPAR (a key barometer for hotel revenues) has approximated 95% of 2019 levels since the end of June and was 85% after Labor Day, representing an acceleration from earlier months. Large hotel brands have similarly indicated a cautious optimism that increased COVID cases have not translated into a significant slowdown in demand, even as the market expects some seasonal deceleration after the summer.

Lodging and leisure issuers have provided outlooks for 3Q that have begun to ease investor concerns. A conference-oriented hotel owner said they expect to report results above previous consensus expectations. Similarly, a leading casino operator said that revenue in 3Q has actually accelerated relative to 2Q. Finally, an owner of Caribbean resorts expects metrics in excess of 3Q 2019.

We recognize that spreads reflect forward risks to credit quality. However, our conversations with executives indicate that, so far, the recent rise in COVID cases is having only a modest impact on lodging and leisure demand beyond this fall. 2022 bookings for cruises remains encouraging, while the aforesaid convention hotelier noted above said that it has more revenue on the books for 2022 than the company had at this point in 2018 for its record-breaking 2019.

The “late stages” of the pandemic may prove longer than investors once anticipated. However, wider travel and leisure spreads reflect both concerns relative to recent trends and longer-term indicators which drive credit quality. We continue to favor a bottom up approach, investing in issuers who can position their businesses to navigate the pandemic and effectuate sustainable balance sheet improvement. To that end, we maintain our favorable sector view and continue to be positioned for improving credit quality among many issuers in lodging and leisure.