Monday Musings: October 5, 2020

Oct 05, 2020

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Public Trust Credit Team
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Global COVID-19 Update

Officially declared a pandemic in March by the World Health Organization (WHO), the COVID-19 outbreak has now spread across more than 200 countries with global confirmed cases exceeding 35 million. Accounting for roughly 40% of total COVID-19 deaths per day, Latin America is at the forefront of the pandemic led by a surge in fatalities in Brazil and Mexico. Europe has experienced a recent surge in new daily cases, but the region currently accounts for just 11% of the new daily global count according to data reported by the Financial Times, significantly down from the peak of 80% in March. On Monday, the French government declared a “maximum alert” for COVID-19 infections in Paris and the neighboring suburbs zones, ordering the closure of all bars and cafes in the French capital for at least two weeks. The Spanish capital of Madrid is also preparing for a new stay-at-home lockdown this week with the country reporting over 813k cases since March, the highest total in the European Union. The U.S. continues to be challenged by the spread of COVID-19 with over 7.4 million reported cases, the highest case count among any nation. On a positive note, hot spots such as Florida, California, Texas, and Arizona have seen new reported infections drop significantly from their mid-summer highs.

Moody’s downgrade of New York City shows that high-grade municipal credits still face downgrade risk

New York City was downgraded by Moody’s on Thursday from ‘Aa1’ to ‘Aa2,’ bringing its rating in line with S&P Global Ratings. Because it was the worst affected city in the country by COVID-19 for quite a while and already had a debt load that was high compared to rated peers, New York City has been intently watched by most market participants since March. A downgrade certainly wasn’t unexpected and the timing corresponds with the typical release of municipal annual reports, but it came as somewhat of a surprise given the progress NYC has made tackling lockdowns and its infection rate. Unfortunately for NYC, Mayor Bill DeBlasio injected fresh uncertainty with a proposal to lock down nine zip codes that are experiencing significantly higher infection rates (~8% vs. 1.72% for NYC as a whole). The lockdowns require permission from Governor Cuomo, who has yet to comment on the proposal, but another lockdown brings material risk back to the forefront of the discussion surrounding the city’s credits. Overall, the ups and downs of NYC since March along with the late in the year downgrade shows that even in the high-grade space where defaults are minimal, a strong, repeatable credit research processes is important to stay ahead of possible ratings migration.

M&A activity in the pharmaceutical industry sees a substantial uptick in the second half of 2020

This week, Bristol-Myers Squibb was the latest of the major pharmaceutical companies to announce a planned acquisition to strengthen its drug therapies pipeline. The company plans to acquire MyoKardia, a commercial-stage biotech company, for approximately $13.1 billion in cash. This recent planned acquisition comes a year after Bristol finished its $74 billion acquisition of Celgene Corp.
 
Other large pharma peers have been in M&A of late. In September, Gilead Sciences announced its intention to acquire Immunomedics for $21 billion; Immunomedics is a biopharmaceutical company specializing in antibody-drug conjugates, a new class of biological drugs designed to attach a small molecule anti-cancer drug or therapy to an antibody. Additionally, Gilead completed its $4.9 billion acquisition of Forty Seven, a clinical-stage immuno-oncology company back in April of this year. In August, Johnson & Johnson announced that the company would be acquiring Momenta Pharmaceuticals for $6.5 billion, a late-stage company focused on developing novel therapies for immune-mediated diseases. The trend of sizeable M&A activity within the pharmaceutical industry from recent years does not appear to be dampening anytime soon. With the potential for blockbuster drug therapies developed from early-stage biotech firms and increased legislative pressure from both political parties, the pharma industry will remain extremely competitive in the fight to secure new, potentially life-saving therapies. 
 
Overall, the trend for increased M&A and elevated leverage metrics should constrain ratings for some companies as they focus on acquisitions rather than debt repayment. Ultimately, these acquisitions may translate into negative rating actions across the industry. Bristol’s latest move resulted in a negative rating outlook at S&P Global Ratings while the company was already on a negative rating outlook at Moody’s from the Celgene acquisition. Gilead’s planned acquisition of Immunomedics has resulted in a negative outlook at Moody’s and is now on CreditWatch negative at S&P Global Ratings. Given the industry’s current dynamic, it is more than plausible that large pharma will continue to see additional planned acquisitions with possible negative rating actions to follow.
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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