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Coronavirus Diligence Briefing

Our briefing for Thursday November 12, 2020:

Nov 12, 2020 4:23:42 PM

  • In the United States, one of President Elect Joe Biden’s COVID-19 advisors says a four-to-six-week national lockdown could drive down surging coronavirus cases across the country. Dr. Michael Osterholm, director of the Center for Infectious Disease Research and Policy at the University of Minnesota made the suggestion during an interview on Wednesday. Dr. Osterholm suggested government support for a package to cover the wages lost for individual workers, while also covering losses for small to medium sized companies. If the lockdown happened, Dr. Osterholm said, “then we could really watch ourselves cruising into the vaccine availability in the first and second quarter of next year and bringing back the economy long before that.”

  • In Canada, the western part of the country is struggling on how to deal with its surging COVID-19 case count. Manitoba’s strict “code red” COVID-19 restrictions went into effect on Thursday with schools staying open, but everything from non-essential retail stores, theatres and restaurant dining will be closed. In neighbouring Saskatchewan, more than 300 doctors have signed a letter asking provincial leaders to do more to fight the coronavirus. The letter stated: “If more is not done to change our course we are confident that winter will bring overflowing hospitals, cancelled surgeries, overwhelmed health-care providers and needless death.” Alberta’s health officials including doctors and three major unions representing health-care workers sent a similar letter to Premier Jason Kenney asking for tighter restrictions, including a suspension of many indoor group activities.

  • United Kingdom Prime Minister Boris Johnson’s inner circle seems to be falling apart due to the stress of Brexit and the coronavirus pandemic. Prime Minister Johnson’s communications chief, Lee Cain resigned. One of the prime minister’s longest serving aides, Cain quit after Johnson reversed his decision of making him chief of staff. Other key members of Prime Minister Johnson’s team threatened to quit if Cain was placed in that role. Many Conservative MPs actually see this being potential good news as they blame Prime Minister Johnson’s advisers for a series of mistakes made in handling the coronavirus.

  • France will maintain its current lockdown for another two weeks and laid out what potential future plans may hold on Thursday. Prime Minister Jean Castex hopes the current restrictions being in place until the beginning of December will allow the country to slightly ease the restrictions thereafter and loosen a little more in time for Christmas. The “R” number, which indicates how many new infections are caused by each infected person have fallen below one. This suggests that new infections should continue to decline over time. Prime Minister Castex said the government would continue to provide support to businesses, such as restaurants forced to close as a result of the pandemic. 

  • Just two days after a Brazilian health regulator halted a clinical trial of China’s Sinovac COVID-19 vaccine, it has been allowed to resume. The original decision by Brazil’s Anivsa was severely criticized by trial organizers who said the move had taken them by surprise. The “adverse, serious event” mentioned on Monday for the reason behind the suspension was a death, but later deemed via suicide, so it was determined there was no need to stop the trial. Brazil’s President Jair Bolsonaro, who has criticized China in the past, has baselessly dismissed the Sinovac vaccine as lacking in credibility. President Bolsonaro was happy with the decision to stop the trial on Monday, so it remains to be seen how he will respond to its reboot.

  • In Australia, the secretary of the Victorian state health department has resigned from her position. Kym Peake faced significant pressure and criticism during the hotel quarantine debacle that was ground zero for the coronavirus outbreak, which sent the state’s largest city Melbourne, into one of the world’s longest and strictest lockdowns. Peake had served in the role for the past five years and will be replaced by Professor Euan Wallace.

Covid-19 – Due Diligence And Asset Management

Top Performing Fund Isn’t Swayed by Travel, Stay-at-Home Trends

Brief: A high-performing equity fund manager isn’t buying into Covid-19 thematics like the so-called stay-at-home or reopening trades that are sensitive to virus developments. Instead, Castle Point Funds Management Ltd.’s Richard Stubbs said he’s targeting companies with strong fundamentals that he expects can withstand such short-term market gyrations. Focusing on near-term earnings, election outcomes and other uncontrollable factors can often prove unproductive in times of volatility, said the Auckland-based fund manager, who invests in Australian and New Zealand shares. News about a possible vaccine breakthrough earlier this week prompted a global shift among equity investors from fast-growing companies into parts of the market that have struggled with lockdowns and economic pain. That transition has since tempered on the realization that a return to normalcy is still a ways off. “Trying to predict what sectors are going to do better than others in this period of extreme uncertainty is unlikely to be successful,” said Stubbs. His Castle Point Ranger Fund has returned about 22% this year, beating 92% of peers, according to data compiled by Bloomberg.

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Powell Warns of U.S. Economy Risk with Pandemic at Deadliest Yet

Brief: Three of the world’s top central bankers warned Thursday that the prospect of a Covid-19 vaccine isn’t enough to put an end to the economic challenges created by the pandemic. “We do see the economy continuing on a solid path of recovery, but the main risk we see to that is clearly the further spread of the disease here in the United States,” Federal Reserve Chair Jerome Powell said during a panel discussion at a virtual conference hosted by the European Central Bank. “With the virus now spreading, the next few months could be challenging.” Powell was joined on the panel by Bank of England Governor Andrew Bailey and ECB President Christine Lagarde. Both echoed his caution, and added to recent warnings from other central bankers against complacency. Bailey called recent vaccine news “encouraging” and said he hoped it would reduce uncertainty but added “we’re not there yet.” Lagarde said while it’s now becoming possible to see past the pandemic, “I don’t want to be exuberant.” The words of warning come as much of the U.S. and Europe is enveloped in a new wave of coronavirus outbreaks. In the U.S., hospitalizations are at record highs. In Europe and the U.K., governments have moved to reimpose lockdowns to limit the spread of the virus. Worldwide, cases top 52.3 million and deaths exceed 1.28 million.

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Insurer Legal & General Scales Back Dividend Plans, Shares Fall

Brief: Shares in Legal & General LGEN.L fell more than 3% on Thursday as the British life insurer kept its final dividend payment for 2020 flat due to the coronavirus pandemic and cut its dividend growth target for the next five years. L&G has not suffered a major impact from the pandemic but executives told reporters that housing sales dropped in Britain following the country’s first lockdown in March, while U.S. life insurance claims increased due to the virus. L&G is a direct investor in housing and commercial real estate. L&G is also a major player in the market for annuities, which pay pensioners a fixed income for life. It also invests in infrastructure and is one of the largest investors in the UK stock market. On the 2020 dividend, Chief Financial Officer Jeff Davies said: “We felt that a pause year was a good balance between rewarding shareholders - where many aren’t rewarding at all - versus holding back for potential uncertainty.” L&G paid its final dividend for 2019, unlike other British insurers such as Aviva AV.L and RSA RSA.L.

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Private Equity Cash Boosts Fortunes of America’s Mid-Sized Firms

Brief: America’s mid-sized companies are faring better than industry watchers feared at the start of the pandemic, as private equity owners step in to help tide them over. Sponsors have provided more cash to portfolio companies compared to the 2008 crisis, with a view that keeping businesses afloat will be more advantageous than potential restructurings or lender takeovers, according to Lincoln International, a middle-market advisory firm. Private equity owners have also been very proactive in coming up with new ways to generate revenue and cut costs to keep companies going, according to Ron Kahn, co-head of Lincoln’s valuations and opinions group. “Sponsors and lenders have worked very well together to make sure these companies have staying power,” Kahn said in an interview. Some analysts had predicted that credit quality for business development companies, a roughly $100 billion industry that mainly lends to mid-sized borrowers, would get worse before it gets better. But those dire forecasts are now being dialed back in certain cases amid a slowdown in soured loans. Businesses that initially positioned their budgets conservatively are now revising projections upward, according to Lincoln. Mid-sized companies have updated earnings projections to show an expected 13.1% Covid-related decline, down from forecasts for a 23.4% drop just three months ago.

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Varde Partners Closes Fund Targeting Pandemic Induced Dislocation Opportunities

Brief: Alternative investment firm Värde Partners has held a final close of The Värde Dislocation Fund with more than USD1.6 billion of commitments. Raised entirely with no in-person meetings, 55 per cent of commitments to the fund come from new investors. “The strong demand for this strategy from a diverse, global investor base underscores expectations for a deep credit cycle,” said president Jon Fox. “We took innovative steps to engage investors through virtual platforms and were able to exceed our target in just five months.” The fund will invest in opportunities presented by the market dislocations and economic disruption following the pandemic. It has a global mandate to pursue a broad universe of mispriced, stressed, and distressed credit, according to the firm. “We believe the profound impact of Covid-19 has marked the start of a major, connected cycle,” said George Hicks, co-founder and co-chief executive officer.  “Having established a deep expertise in credit over the past 27 years, we bring to bear our experience investing through many credit cycles to guide us as the crisis unfolds,” added Hicks.

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Marathon CEO Cites NYC Costs, Covid, Crime for New Miami Outpost

Brief: Marathon Asset Management is setting up an office in Miami as the Covid-19 pandemic upends New York City as a financial hub, according to co-founder and Chief Executive Officer Bruce Richards. “Marathon South will be an option for our employees,” Richards said in an interview on Bloomberg Television Wednesday. The Miami office will mainly be for non-investment professionals and the investing team will remain in New York, he said. “I’m certainly committed to New York City,” Richards said. “I love New York City.” But he sees cities like Atlanta, Nashville and Charlotte benefiting from travel and business in the next few years, with New York not as attractive as it once was. Lower taxes and less crime outside of New York will also lure companies elsewhere, Richards said.  The distressed-debt specialist looked at Charlotte, Atlanta and Miami as possible locations for another office, ultimately choosing the Florida city, he said. Marathon has had a presence in New York, London and Tokyo, according to its website. Marathon follows peers like Balyasny Asset Management and Bluecrest Capital Management in establishing an office outside of New York City as the pandemic pushes office dwellers to work from home for the foreseeable future. Currently 20% of Marathon’s workers are in the office Monday through Thursday, with 10% on site on Friday, he said. “New York is not what it once was,” he said. “Vacancy rates are going to go up, and it’s going to be ugly for property owners.”

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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