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Coronavirus Diligence Briefing

Our briefing for Friday July 10, 2020:

Jul 10, 2020 3:23:43 PM

  • In the United States, Florida, Texas and California – the three most populous states in America each experienced a record jump in the number of deaths on Thursday. During all of this, United States President Donald Trump is visiting Miami-Dade County on Friday in an attempt to shore up votes ahead of November’s election. Miami-Dade County is seen as the epicenter of the crisis in Florida right now with a 33% positivity rate. However, there might be some good news for America – the drug remdesivir has shown a 62% reduction in risk of death due to COVID-19 compared to standard care, according to a new study. Remdesivir was the drug the United States government recently purchased three months’ worth of, which was almost the entirety of Gilead Sciences production.

  • The Canadian government is saying any decision about the Canada-United States border will be made, “by Canadians, for Canadians”. The news comes after a bipartisan group of 29 lawmakers in the United States sent a letter to Canada’s Public Safety Minister Bill Blair and United States Acting Homeland Security Secretary Chad Wolf urging both countries to “immediately craft a comprehensive framework for phased reopening of the border.” The Canada-US land border has been shut down to all but essential travel since March 21st and will remain closed until at least July 21st.

  • During an online question and answer session with the public, United Kingdom Prime Minister Boris Johnson said the government will likely become increasingly insistent that citizens wear face masks in confined spaces but wants to return to a situation where people feel comfortable to shake hands again. While shaking hands in the near future might be wishful thinking, UK residents can go on vacation abroad if they so choose. As of Friday, quarantine measures for those travelling to the UK from around 70 countries have been lifted. Those arriving from high-risk countries still need to quarantine for 14 days, but with many destinations exempt, millions of Britons can take summer holidays without having to stay at home upon returning.

  • France’s prosecutors are launching an investigation into massive fraud of the country’s temporary unemployment scheme with criminals pocketing €1.7 million. Investigations first launched in the Toulouse and Limoges regions revealed 13 of the 16 offices “were confronted with massive fraud in the payment of compensation.” France had launched the unemployment scheme in late March with 13.6 million workers taking advantage of the program as of June 22nd.

  • Heading into the weekend, Japanese host and hostess clubs have been asked to ensure they abide by the rules to help stop the spread of the coronavirus. The nightlife spots in Tokyo have become the new hotspots in a resurgence of infections with a record high of 243 new cases in the area on Friday. COVID-19 infections in Tokyo have been slowly rising since the government lifted a state of emergency about a month ago.

  • Australia’s state of Victoria reported a record 288 new cases of COVID-19 on Friday. Brett Sutton, Victoria’s chief medical officer said the new record was “a pretty ugly number” and warned of higher tallies in the coming days. Sutton also urged Melbourne residents who are now in the midst of a six-week lockdown, to wear facial coverings in situations where physical distancing is impossible.

Covid-19 – Due Diligence And Asset Management

Financial PR Firms Took PPP Money. Do They Need It?

Brief: For the most part, hedge funds were not among the small businesses announced this week that qualified for the 4.9 million low-interest government loans granted so far under the Paycheck Protection Program. But several of the public relations firms they employ to burnish their brands and finesse negative headlines were. Among the recipients are Prosek Partners, which was approved for a loan of between $2 million and $5 million, according to data from the Small Business Administration; Gasthalter & Co., which was approved for between $150,000 and $350,000, Dukas Linden Public Relations, which was approved for between $350,000 and $1 million; and Peppercomm, which received between $350,000 and $1 million, according to the data.  Prosek’s clients include Bridgewater Associates — the largest hedge fund firm in the world, managing roughly $160 billion — while Gasthalter & Co. represents several other boldface hedge fund names. Asset managers have performed strongly relative to other industries amid the pandemic, thanks to solid profit margins and strong performance in some strategies. But executives at public relations firms that represent them say that their advisors and attorneys advised them to apply for the loans, given that they qualified under small business guidelines — and that the aid has enabled them to continue to service their clients without disruption.

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A $6 Billion UBS Hedge Fund Crushes Peers

Brief: A UBS Asset Management hedge fund beat peers in the first half with relative-value trades that shorted pandemic-struck stocks, and is now pouncing on the market’s next dislocations. The $2.2 billion UBS O’Connor multi-strategy fund gained 11.5% through the end of June, according to a person with knowledge of returns who declined to be identified as the data isn’t public. A spokesman for the firm declined to comment on performance. Funds that follow a multi-strategy relative value approach are down 0.7% over the same period, according to Hedge Fund Research Inc. Their relative-value trades offer a glimpse into survival strategies of hedge funds that rode the first half’s roller-coaster crisis markets. The UBS team paired securities of the same company up against one another, like shorting the stock of an airline while buying its credit. That paid off as the Federal Reserve dove into corporate bonds and stoked a rally that’s lifted the credit of the riskiest companies which are foundering in an uneven stock recovery. “We aggressively grossed up risk across all our credit strategies as the Fed embarked on its monetary policy support program,” Kevin Russell, the New York-based chief investment officer at UBS O’Connor which manages $6.1 billion overall, said in a phone interview.

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Hedge Fund Managers Grudgingly Accept Mayfair Life Will Stay in the ‘Zoomosphere’

Brief: For the $3tn hedge fund industry — which heavily revolves around networking, meetings, in-person conferences and events — remote working has been a wake-up call. Tech apps like Zoom, and the UK government’s easing of lockdowns and reopening of pubs and restaurants have come as little comfort to workers in one of the most relationship-dependent corners of the industry. “I’ve got no idea when I’ll attend my next event,” says a hedge fund manager, speaking on condition of anonymity. “Everything is so hard to arrange. When the pubs re-opened, a group of us who used to regularly meet at The Market Tavern [a pub in Shepherd Market in Mayfair] wanted to meet up during the week. But they told us there would be a limit of six people, we would have to sit at a reserved table and we couldn’t drink outside.” They ended up cancelling their plans: “It’s like, why bother meeting at the moment?” More are starting to accept that life will be slow to return to the old normal. While some hedge fund conference organisers are still holding out hope — Context Summits’ European Conference is still scheduled for late September at etc. venues in Liverpool Street — many in the industry are not holding their breath for the networking conferences carousel to resume.

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Hedge Fund Says Bonds Close to ‘Tipping Point’ After Debt Binge

Brief: The deluge of debt sold around the world is raising risks for bond buyers, according to Man Group Plc, the world’s largest publicly listed hedge fund firm. Companies around the globe have sold over $2 trillion of bonds this year, a 55% jump from the same period last year and a record tally, according to Bloomberg-compiled data. With Covid-19 wreaking havoc on the global economy, government and state-related agencies have also raised $1.6 trillion this year to fund stimulus spending, the most since 2009, the data showed. “Post the market selloff in March, the supply could be easily absorbed by demand as investors added risk back at cheaper valuations, but we think we may now be close to a tipping point,” said Lisa Chua, portfolio manager at Man GLG, a unit of Man Group, which had $104 billion of assets under management as of the end of March. Man Group joins other big funds such as Oaktree Capital Management in warning that markets could turn after a steep rally. Since March, when the Federal Reserve unveiled unprecedented steps including buying corporate bonds, risk assets from U.S. stocks to junk bonds have soared.

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Private Credit Lenders Seek Protection in Minimum Liquidity Protocol

Brief: Private credit firms are requiring their borrowers maintain a strong liquidity cushion as the coronavirus pandemic forces middle market companies to wrestle with spiking leverage levels and falling profits. These investors, also known as alternative lenders, are amending existing deals to put minimum liquidity covenants in credit agreements, provisions that require businesses to have a certain amount of cash on hand, as a way to safeguard their investments, according to several private credit sources. The covenant measures the amount of money a company needs to run its business and meet its financial obligations. The provision has increased in usage since the onset of the health crisis. Companies, reckoning with dwindling profit margins – often measured as earnings before interest, taxes, depreciation and amortization (Ebtida) – are seeking relief from tests in their credit agreements, noted law firm Ropes & Gray. As Ebitda falls, leverage can rise, making a borrower more likely to trip covenants, which are provisions to help keep the borrower on the financial straight and narrow.

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David M. Rubenstein Says the World Has “Changed Forever” and “We’re Going to be in a (non-technical) Recession for Quite a While”

Brief: The Carlyle Group Co-Founder and Co-Executive Chairman, David M. Rubenstein, says in the latest edition of CERAWeek Conversations that the United States is going to be in a (non-technical) recession for “quite a while” and that it is “going to be a different economy” when it comes back; that “you can’t have free money forever” and that when interest rates go up from near-zero levels it will precipitate some hard budgetary decisions. In a conversation with IHS Markit (NYSE: INFO) Vice Chairman Daniel Yergin, Rubenstein says that globalization has been “an overall plus” for the global economy but not everyone has benefited; that the deterioration in U.S.-China relations will take time to repair; he talks about his devotion to what he calls “patriotic philanthropy;” lessons in leadership, and more. In addition to his role at The Carlyle Group, David Rubenstein is chairman of the boards of trustees of the John F. Kennedy Center for the Performing Arts in Washington D.C. and the Council on Foreign Relations. Until recently, he was the chairman of the Smithsonian Institution. He hostsTheDavid Rubenstein Show: Peer to Peer Conversationson Bloomberg TV and PBS, andLeadership Live with David Rubensteinby Bloomberg Media. Along with medical research and education, he has focused his philanthropy on preserving the history of the United States via a practice he has coined “patriotic philanthropy”. The Carlyle Group is one of the world’s largest and most successful private investment firms, with investments in over 260 companies around the world and more than $215 billion under management. It was founded in 1987.

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Contact Castle Hall to discuss due diligence

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.

Topics:Coronaviruscovid-19