Monday Musings: March 30, 2020

Mar 30, 2020

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Public Trust Credit Team
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What is in the very large $2 trillion COVID-19 relief bill?

A bipartisan stimulus package was signed into law by President Trump on Friday, March 28, and will help both U.S. consumers and businesses navigate the COVID-19 pandemic – at least for a little bit. Some of the most notable items of the bill include a one-time payment to individuals, strengthened unemployment insurance, guaranteed loans and grants to businesses to discourage layoffs, additional health-care funding, and support to state and local authorities. At this time, there is still much uncertainty regarding how companies can access the $454 billion of government funds with the Treasury Department expected to provide details within 10 days of enactment. Recipients are expected to face restrictions on buybacks, dividend payments, and executive compensation while it remains to be seen how much credit risk the Fed is ready to take by supporting troubled companies. This week, monitoring several economic indicators will be important to get a sense of how the domestic economy is holding up including employment numbers and the latest ISM manufacturing and non-manufacturing data.

The credit market hits a new milestone while the Fed continues its massive support for the markets

The investment grade (IG) market had a record of $109.3 billion in new issuance last week, shattering the previous high of $74.8 billion from September of 2019. Massive support from the Fed also arrived last week with the announcement that the central bank would add IG bonds to the list of securities it plans to support. The programs include the establishment of the Primary Market Corporate Credit Facility for new bond issuance as well as the Secondary Market Corporate Credit Facility to provide liquidity for outstanding corporate bonds. The Fed stated that these new programs are designed to “support credit to large employers.” In conjunction with the approved stimulus package, the two facilities assisted fueling opportunities in the credit market last week. Additionally, money markets appear to be opening up with both the Money Market Mutual Fund Liquidity Facility and the Primary Dealer Credit Facility coming operational. Support from the Fed has resulted in a positive tone considering the current environment and challenges ahead.

The last two weeks were the fastest pace of downgrades since 2002

Over the last two weeks, the rating agencies have downgraded a large swath of companies in response to the oil rout and economic fallout of COVID-19. This has been the fastest pace of downgrades since 2002, showing that the rating agencies are not being shy about making changes. The oil & gas and automotive sectors have borne the brunt of the downgrades so far. Fortunately, there is a bright spot; while this has been a record pace of downgrades, it represents about 20% of what we saw in the first year of the financial crisis with analysts expecting far fewer downgrades and fallen angels this time around.

The ECB urges banks to delay dividend distribution until October at the earliest

European banks have received significant relief from the ECB this month as the central bank has allowed banks operating under its supervision to temporarily tap capital buffers. In response to this relief, the ECB has strongly advised banks to withhold from distributing dividends until at least October to preserve their capital strength. Today, Dutch lenders ING and ABN announced that they will follow the ECB’s recommendations and will suspend any dividend payments until October 1, 2020, at the earliest. It is now expected that the largest French banks will be the next banks to follow suit and heed the ECB’s advice of dividend suspension. Should all European banks suspend dividend payments, analysts expect European banks would have an extra €30 billion in freed up capital in aggregate. Delaying returns to shareholders is a credit positive for the European banking sector as banks can use this additional capital to continue funding the European economy while bolstering their reserves for loan losses in the face of inevitably higher credit costs over the coming months
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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