Coronavirus Diligence Briefing

Our briefing for Friday August 7, 2020:

Written by Coronavirus | Aug 7, 2020 7:48:36 PM
  • In the United States as the overall coronavirus case total closes in on five million, a new model suggests the country could almost double their death toll in just under four months. The model from The University of Washington suggests coronavirus deaths could hit 300,000 by the beginning of December. America’s death toll currently sits at just over 160,000. As dire as these numbers look, experts behind the model say 70,000 lives could be saved off that estimate if people would wear a mask every time they walk out their front door.

  • The latest numbers from Statistics Canada shows steady progress as the country emerges from its coronavirus lockdown, but still have a long way to go. July’s job gain added 419,000 to the tally dropping the unemployment rate to 10.9%. Over 1.6 million jobs have been recovered since May, but Canada’s economy still has 1.3 million fewer jobs than it had in February before widespread lockdowns gripped the country.

  • With coronavirus cases growing in neighbouring nations such as France, United Kingdom chancellor Rishi Sunak announced on Friday the country would not hesitate to reintroduce mandatory 14-day quarantine requirements. Sunak stated the list of countries subject to the two-week quarantine are under constant review with Belgium, Andorra and Bahamas added to the list on Thursday. Boris Johnson’s government is also under pressure to extend the job furlough scheme that has currently supported 9.5 million jobs. Currently the plan is for the program to end in October, but the Scottish National party would like to see it extended into 2021.

  • Reuters is reporting Germany and France have quit talks on reforming the World Health Organization (WHO) in frustration at attempts by the United States to lead the negotiations, despite announcing its decision to leave the organization just a few months ago. A senior European official involved in the talks was quoted as saying, “Nobody wants to be dragged into a reform process and getting an outline for it from a country which itself just left the WHO.”

  • India’s highest daily coronavirus numbers to date pushed the country’s total case count past two million on Friday. The Health Ministry noted 62,538 cases in the past 24 hours as India now joins the United States and Brazil as the only countries that have surpassed the two million mark. To make matters worse, CBC in Canada is reporting 900,000 female workers who have served the country as door-to-door contact tracers went on a two-day strike citing months of harassment, underpayment and lack of protection from infection as reasons for doing so.

  • Australia’s Victoria state reported 450 new coronavirus cases on Friday. Out of those 450 cases, 139 are healthcare workers prompting state Premier Daniel Andrews to urge residents to protect themselves from the virus, which in turn will help the nurses, doctors, paramedics and other hospital workers. The Financial Times is reporting 1,500 healthcare workers have contracted the virus in Victoria state. Premier Andrews also said they have expanded the door knocking program and conducted 1,150 recent checks on residences of people under isolation orders. Of those 1,150, 150 (13%) were not home.

Covid-19 – Due Diligence And Asset Management

KKR Makes Bet on Brooklyn Apartment Rentals in $860 Million Deal

Brief: KKR & Co. is betting on Brooklyn apartments as the pandemic rattles the housing market in New York City. The New York-based alternative asset manager is in contract to purchase a portfolio of newly developed rental buildings in Brooklyn from Bruman Realty in a deal that’s worth about $860 million including debt, according to people familiar with the matter. KKR is partnering with apartment operator Dalan Management on the deal and will provide the bulk of the equity, the people said, asking not to be named because the matter is private. Representatives for KKR and Bruman declined to comment. Dalan didn’t immediately respond to a request for comment. The deal would be one of the biggest commercial real estate acquisitions in New York this year. The market has largely been frozen as the pandemic roils the economy. Second-quarter apartment transactions dropped 70% in the U.S. from last year, according to Real Capital Analytics. Rental apartments have historically been considered recession-proof, performing well in times of economic turbulence as more people are priced out of owning homes. That thesis could best tested in the Covid-19 era with high unemployment and a sluggish recovery landing hard on renters.

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The Savvy Symbiosis of GSO and Blackstone

Brief: In April, GSO and Blackstone’s Life Sciences division said they would provide $2 billion to Alnylam Pharmaceuticals to acquire drug royalties, develop new programs for the company, purchase common stock, and provide $750 million in financing from GSO. The transaction was one of the largest financings ever of a biotech company. Dwight Scott, global head of GSO, said the deal originated with Nicholas Galakatos, global head of Blackstone Life Sciences, but ultimately evolved into a comprehensive deal that included GSO, Blackstone Alternative Asset Management, Blackstone’s Tactical Opportunities Fund. “One of my core areas of focus for GSO over the last few years has been to establish tighter integration between liquid and private strategies and across Blackstone. In this quarter, we showed exactly why this has been valuable,” said Scott, speaking in his first interview since the Covid-19 crisis began. In the first half of the year almost 40 percent of the private originations that the firm did were related in some form to the rest of Blackstone’s business. It’s easy to see how GSO would benefit from doing more with colleagues in private equity, real estate, or BAAM, the largest hedge fund business in the world. In the second quarter, assets under management in credit were up by about 6 percent to $129 billion, with inflows of $6.5 billion.

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Oaktree’s Marks Praises Fed, Even as Distressed Debt Shrinks

Brief: Oaktree Capital Group Co-Founder Howard Marks says the Federal Reserve’s intervention at the peak of the pandemic was necessary to keep companies afloat and avoid a potential economic shutdown, even if that’s giving his firm fewer distressed-debt targets. “If they had not done the things they did, we would be talking about a much more serious economic event, we may even be using the word depression,” or perhaps global recession, Marks said during an interview with Bloomberg TV Thursday. Global credit and equity markets have staged a dramatic rebound since March, when the Fed first took unprecedented steps to steady the economy. But the central bank has fueled such a rally that distressed debt, which approached $1 trillion outstanding at the height of the pandemic, has since fallen dramatically, presenting fewer options for firms like Oaktree to put billions of dollars to work. Distressed-debt specialists have raised record amounts of cash through the coronavirus outbreak as companies falter and bankruptcies mount. But for many corporations, additional liquidity spurred by the Fed has pushed borrowing costs to near record lows, taking the lowest-rated junk bonds out of distressed territory this week for the first time since late February. Los Angeles-based Oaktree is one of the largest distressed-debt investors in the world, with more than $19 billion committed to credit from troubled companies. The fund has thrived most in times of economic stress, when prices on bonds of companies in danger of defaulting fall to deep discounts.

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Is There an ESG Silver Lining to Covid?

Brief: The pandemic has certainly not dampened enthusiasm for sustainable investing. In the US, for example, Morningstar reported almost $10bn (€8.5bn) of inflows to sustainable open-end mutual funds and exchange-traded funds in Q1 2020 – over half the total for the whole of 2019.Of course there is always an argument that money follows transitory themes and because ESG portfolios avoid the oil/energy sector – then relative strong performance (as we have seen in recent months) is a given. But is there more to the story than ESG funds simply doing better (and attracting greater interest) because they conveniently don’t invest in hard-hit sectors? Philippe Zaouati, chief executive at Mirova, an asset manager specialising in sustainable finance, insists there is. “We have seen outperformance against the benchmark for several years – with last year a particularly good year. There is a Covid impact – but we were well positioned anyway.” Since the beginning of the year, the pandemic has led to oil price slumps and Zaouati does not see this a short-term pricing anomaly with ‘normalisation’ – so to speak – soon reversing this trend. “I think we are witnessing a cultural change. Covid is a long-term crisis and it is a crisis that is happening at a time when we need to decarbonise the economy. Oil companies’ capex in the near future is going to be low and the sector at a global level is already at a plateau – it won’t go up strongly again.” Which begs the question will we ever see a return to a high demand for oil? After all, the EU Green Deal is spearheading a lot of the recovery efforts and it is prioritising infrastructure and investments that don’t target oil and gas sectors.

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Insurer AXA says 1 Billion Euro Asset Sale Collapses, Income Slides

Brief: French insurer AXA said on Thursday the planned 1 billion euro ($1.2 billion) sale of its AXA Life Europe unit to Cinven had collapsed, and that it would make no fourth-quarter shareholder payouts after net income fell 40% in the first half. AXA, led by chief executive Thomas Buberl since 2016, also dropped 2020 earnings target following a hike in COVID-19 related claims. The second-largest European insurer after Allianz said first-half net profit fell to 1.43 billion euros from 2.33 billion a year before. Overall revenues fell by 10% to 52.4 billion euros. Underlying earnings at the property and casualty business were down 72% to 544 million euros, largely due to COVID-19-related claims stemming from business interruption contracts and event cancellations. “In the context of the material estimated impact from Covid-19 on underlying earnings in 2020, AXA’s management has withdrawn its Ambition 2020 underlying earnings per share and adjusted return on equity targets,” the insurer said. AXA said its board of directors had decided it would not propose an exceptional distribution of reserves to shareholders in the fourth quarter, following discussions with regulators.

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Aviva Investors sees Operating Profit Nearly Halve

Brief: Aviva Investors, the asset manager owned by insurer Aviva plc, saw its operating profit tumble in the first half of the year to £35 million from £60 million in the same period of 2019. The firm said this was due to capital market weakness, de-risking of asset strategies by internal clients and lower levels of private assets investments. But Aviva Investors said it had diversified its third-party client list and “maintained the positive customer momentum” seen in the second half of last year. Flows from external clients were £1.3 billion compared to outflows in the first half of 2019 and were driven by the UK and North America. At the group level, financial performance was described as “solid”, with an operating profit of £1.25 billion, which was down from £1.39 billion in the same period last year. Amanda Blanc, who has been CEO of Aviva plc for a month, said “we must transform our business” and that this would focus on the UK, Ireland and Canada, places where Aviva has the size and “brilliant customer service”. “I have been CEO for one month and I am confident we have many of the ingredients to make Aviva a winner. From this moment on, we must deliver. Nothing else will do. My focus is making sure it happens and at pace”.

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Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.