Certares-Knighthead Travel Distress Fund Raises $1.5 Billion

Knighthead Capital Management and Certares Management raised $1.5 billion for their fund focused on distressed travel and tourism investments, closing the vehicle to new money after exceeding an initial $1 billion goal.

The firms will deploy the capital into a seemingly tough environment for distressed investing: troubled U.S. company debt has shrunk to less than $80 billion, down from more than half a trillion a year ago, and easing pandemic restrictions are giving many travel companies a boost. Still, founders of the New York-based firms -- who recently won a bidding war to bring Hertz Global Holdings Inc. out of bankruptcy -- say opportunities remain.

“Based on the information we’re seeing, not every company that should be distressed is distressed yet,” Tom Wagner, the co-founder and director of Knighthead, said in an interview. “There are a lot of businesses where the investors have gotten caught up in the euphoria.”

Certares-Knighthead Travel Distress Fund Raises $1.5 Billion

Wagner, who has over 20 years of experience investing in distressed debt, teamed up with Certares for the fund early in the pandemic after identifying travel and tourism as a major area of company trouble. Certares specializes in private equity investments in travel, hospitality and related industries.

The CK Opportunities Fund has put $300 million to work since its June launch, and its first two investments generated triple-digit returns as of the end of last year, according to people with knowledge of the matter who asked not to be named discussing private results. The firms’ purchase of Hertz will bring that sum to $650 million. The remaining funds are set to be invested by the second quarter of 2022.

First Looks

Certares, founded in 2012, is the largest private equity firm focusing on travel and tourism. The niche gives Certares unique access to potential deals, Founder and Senior Managing Director Greg O’Hara said in the interview.

“Oftentimes we’re the only party getting a look at a given company,” O’Hara said, adding that many companies hope to benefit from connections with the firm’s other investments. “We’re not just offering capital like anyone else so we see opportunities that others don’t.”

And Certares has seen plenty since Covid-19 took hold. In the early months of the pandemic, it started getting two to three calls a week from companies looking for financing, O’Hara said. That number soon became 10 a week. As travel restrictions ease, O’Hara said he’s looking for opportunities in sectors that haven’t yet benefited from the recovery, like business travel, trains and cruise companies.

The CK Opportunities Fund’s early investments included convertible bonds issued by Brazilian airline Azul SA, a bankruptcy loan for Latam Airlines Group SA, and an equity investment in the privately held Portuguese cruise company Mystic Logistics Holdings LLC, the people said. Hertz became the vehicle’s largest deal yet after the firms won the car renter’s bankruptcy auction with a bid that gave the reorganized company an enterprise value of $7.43 billion and offered a rare recovery for equity holders.

Amid red hot credit markets and massive fiscal stimulus, a number of troubled travel companies have seen their debts recover from deeply distressed levels to par, or higher. Despite sinking revenues, many have had luck selling low-cost debt in the public high-yield and leveraged loan markets as yields hover near record-lows.

Knighthead’s Wagner said some struggling struggling companies now look mispriced.

“For companies operating in the more challenged components of the market, whether its business travel or meetings and events and such, I think we have yet to see the underlying reality reflected in their trading levels,” Wagner said. “You’re going to start seeing some of those businesses reflect reality a little more.”

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