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‘Let them go bankrupt’: Billionaire bond king Jeffrey Gundlach explains why the government should let cash-strapped airlines go belly-up — and says intervention will just end up juicing their profits


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‘Let them go bankrupt’: Billionaire bond king Jeffrey Gundlach explains why the government should let cash-strapped airlines go belly-up — and says intervention will just end up juicing their profits

Jeffrey Gundlach — the CEO and chief investment officer of DoubleLine Capital — thinks US airlines that have used most of their cash to buy back their own stock don’t deserve a government bailout.He points to imprudent leverage, overconfident corporate projections, and a lack of “rainy-day” savings to bolster his thesis.By Gundlach’s logic, US airlines…

‘Let them go bankrupt’: Billionaire bond king Jeffrey Gundlach explains why the government should let cash-strapped airlines go belly-up — and says intervention will just end up juicing their profits
  • Jeffrey Gundlach — the CEO and chief investment officer of DoubleLine Capital — thinks US airlines that have used most of their cash to buy back their own stock don’t deserve a government bailout.
  • He points to imprudent leverage, overconfident corporate projections, and a lack of “rainy-day” savings to bolster his thesis.
  • By Gundlach’s logic, US airlines are garnering a 27% profit on the shares they already bought back from the government’s bailout.
  • “It doesn’t seem right,” Gundlach said on a recent webcast.
  • Click here for more BI Prime stories.

With the US economy running at a fraction of its normal capacity because of the coronavirus, industries that have relied on active consumers are under extreme duress.

Now $2 trillion of government aid is on the way. But not all think every portion of the economy is deserving of a bailout.

Jeffrey Gundlach, the CEO and chief investment officer of the $140 billion investment firm DoubleLine Capital, thinks $58 billion of government aid earmarked for US airlines isn’t justified.

“Let them go bankrupt,” he said in a recent DoubleLine webcast. “The planes aren’t going to disappear.”

Gundlach isn’t mincing words in his assessment of the airline industry’s current bind. But his lack of sympathy toward the cohort isn’t without merit — and he points to the imprudent usage of cash and overzealous corporate forecasts to bolster his thesis.

Airlines have already come under scrutiny in recent weeks as it’s come to light that they’ve used 96% of their free cash flow to buy back shares over the past 10 years. Gundlach’s latest comments add to the chorus of outrage.

“These companies leverage themselves so much up through buybacks and overconfident projections — and now they have a terrible situation that’s been dealt to them,” he said. “But when you buy back $45.5 billion of your stock, you’ve obviously drained a lot of liquidity that could have been used for a rainy day.”

Now Gundlach thinks that the government’s intervention in the space is essentially rewarding careless behavior. 

“But getting $58 billion — one way to think about that — it’s like the government is buying back the shares that the companies bought themselves for $45.5 billion … for $58 billion — for a massive profit,” he said.

Before the $58 billion in government aid was approved for the airlines, Gundlach tweeted about the situation.

—Jeffrey Gundlach (@TruthGundlach) March 19, 2020

If we apply Gundlach’s logic in the tweet above to the government’s approved bailout, the 10% profit he spoke of on March 19 is about 27% today.

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“That doesn’t seem right to me,” he said.

To Gundlach, the airlines that are having trouble making ends meet do not deserve such an outlandish bailout. If the $45.5 billion was allocated differently, $58 billion worth of government aid would not have been necessary. 

With all that under consideration, Gundlach ultimately sees the bailout putting more strain on Main Street’s already dubious relationship with Wall Street.

“I think these types of things are going to raise a lot of rancor from Main Street America,” he said. “But the buybacks, obviously, are going away — and that’s one major underpinning that’s not coming back anytime soon for large-cap US stocks.”

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