Monday Musings: November 16, 2020

Nov 16, 2020


Public Trust Credit Team
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Moderna, Inc. COVID-19 vaccine candidate shows strong interim results from its Phase 3 study

This morning, Moderna released data regarding its COVID-19 vaccine candidate, mRNA-1273, as it reached its primary efficacy endpoint in the Phase 3 study. With an efficacy of 94.5%, the vaccine beat the 50% efficacy rate required by the U.S. Food and Drug Administration (FDA) and had no reported significant safety concerns involving the current study of more than 30k participants in the U.S. Based on the interim safety and efficacy data, the company plans to submit their vaccine for emergency use authorization (EUA) with the FDA in the coming weeks. By the end of 2020, Moderna anticipates having approximately 20 million doses ready to ship in the U.S. and is on track to produce 500 million to 1 billion doses worldwide in 2021. 
One week ago, Pfizer and BioNTech reported robust top-line data for their COVID-19 vaccine candidate, BNT162b2, with an efficacy rate greater than 90% based on interim results; both the Moderna and the Pfizer/BioNTech vaccines are based on similar messenger RNA technology. The recent string of positive results from these potential COVID-19 vaccines continues to advance the fight against the COVID-19 pandemic as the hope is to now have two approved vaccines available as early as this year.

Top concerns among credit investors change post-election

According to a recent survey by Bank of America, there has been a large shift as to where high-grade credit investors see their top risks post-election. Previously, the majority of respondents cited the election as their top concern, but with the election now behind us, the top concerns have shifted to COVID-19 and a slow recovery. With Joe Biden the presumptive winner of the election, geopolitical risk and the U.S./China trade war have seen their share decline, signaling that investors believe Mr. Biden’s foreign policy will be less risky than the prior administration and that the COVID-19 pandemic is still the number one concern as cases continue to surge. Looking to 2021, credit investors appear to be more concerned with the domestic economy and are less worried about the global financial picture.

Largest global trading block, the Regional Comprehensive Economic Partnership (RCEP), signed over the weekend

At a regional summit in Hanoi, Vietnam, fifteen Asia-Pacific countries formed what is now the world’s largest free trade bloc that covers an estimated market of 2.2 billion people. The partnership aims to gradually lower tariffs between the ten-member Association of Southeast Asian Nations (ASEAN), China, Japan, South Korea, Australia, and New Zealand. According to an article in the Financial Times, economists expect the trade agreement could add approximately $200 billion annually to the global economy by 2030 or roughly 0.2% of the gross domestic product of its members. The RCEP is the first major trade deal linking the world’s second and third largest economies (China and Japan, respectively) and demonstrates the Asia-Pacific region’s support for growing interdependence at a time when global growth has been halted amid the COVID-19 pandemic.

PNC strikes a large deal with BBVA

PNC announced that it has signed a definitive agreement to acquire BBVA USA Bancshares for $11.6 billion in an all-cash deal. PNC was expected to make a large acquisition following the sale of its very lucrative 22% ownership stake in Blackrock six months ago that generated net proceeds of more than $14 billion. The transaction is expected to close in mid-2021 and will generate about $900 million in cost savings. Pending regulatory approval, PNC will become the fifth largest retail lender in the U.S. behind JP Morgan Chase, Bank of America, Citigroup, and Wells Fargo. The BBVA USA integration will significantly expand PNC’s national presence, particularly in Texas, Arizona, California, Colorado, Alabama, and Florida, as PNC primarily has a midwestern, mid-Atlantic, and Southeast footprint. 
BBVA intends to use the cash proceeds to complete a “sizable buyback” when the transaction closes in six to nine months. Following the announcement of the transaction, shares in the Spanish lender jumped by almost 20%. The new PNC/BBVA deal is the largest following the 2019 BB&T/SunTrust merger that resulted in the creation of Truist. In terms of acquisitions this year, the U.S. banking sector has been particularly timid outside of acquisitions that had already been in the works pre-pandemic. Consolidation is expected to speed up once the economic outlook becomes clearer and management teams have a better view of the credit fundamentals of potential bank targets. 

Home Depot, the world’s largest home improvement retailer, announces its planned acquisition of HD Supply Holdings, Inc.

This morning, Home Depot announced it intends to acquire HD Supply for around $8 billion, or roughly $56 per share, in an all-cash transaction. HD Supply specializes in maintenance, repair, and operations (MRO) products within the multifamily and hospitality markets. According to the company, the deal should improve Home Depot’s position in the $55 billion MRO marketplace. Home Depot has averaged approximately $7.8 billion in share repurchases over the last five fiscal years but suspended its share repurchase program in response to the COVID-19 outbreak earlier this spring and to bolster liquidity and financial flexibility. 
Overall, Home Depot has had a healthy operating performance during the current downturn and is essentially deploying its average cash distribution for share repurchases towards the HD Supply acquisition. Consolidation and acquisitions by companies that have performed well during the downturn may be a trend to watch going forward, as debt financing remains cheap and companies look to build for long-term growth in a post-pandemic world. Home Depot has approximately $14 billion of cash on hand (as of Q2 2020) and intends to access debt via the capital markets to support the acquisition. The transaction is planned to close during its fiscal fourth quarter, ending on January 31, 2021.
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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