Coronavirus Diligence Briefing

Our briefing for Thursday October 29, 2020:

Written by Coronavirus | Oct 29, 2020 8:46:23 PM
  • United States House Speaker and Democrat Nancy Pelosi is continuing a push towards a coronavirus stimulus package agreement with the Trump administration. Pelosi has been negotiating with Treasury Secretary Steven Mnuchin and has tried to make her pitch via the media – stating she sent a letter to Mnuchin for responses as talks toward a deal have stalled since Senators left the capitol ahead of the general election in a matter of days. In the letter she cited a number of differences that were not resolved during the pre-election scramble talks, including a national testing strategy, state and local government relief, enhanced unemployment insurance, along with several other areas for credit/relief for Americans. The Treasury Department did not immediately respond to media’s requests for an answer to Pelosi’s demands.

  • In Canada, the two most populous provinces – Ontario and Quebec continue to deal with surges of new cases. Quebec reported more than 1,000 new cases on Thursday, but government officials at least received some good news after hearing a group of gym owners backed off their threats to reopen in spite of lockdown orders. The counter threat from government officials stating not only the owners of the gym, but clients as well, would be fined was enough to get the gym owners to back off for now. The province hardest hit by COVID-19 was also expected to receive 30,000 COVID-19 rapid tests, which was their first batch. Meanwhile, Ontario reported 934 new cases on Thursday, pushing their seven-day average to nearly 900. Canada’s largest city – Toronto set a new record with 420 cases beating their previous record of 330 by a considerable margin.

  • In the United Kingdom, the Financial Times is reporting more than 500,000 companies are showing signs of “significant financial distress” due to the coronavirus pandemic. Significant distress is defined as those businesses with minor county court judgement (an order for a company to pay off its debts) of less than £5,000 filed against them, or which have been identified by a credit scoring system. The rise comes even as rules around insolvency and closing down have been relaxed and the government pouring in billions of dollars through the job furlough scheme. However, many of those schemes are coming to end this year, which are sparking concerns of more corporate failures to come in 2021.

  • In a televised address, France’s President Emmanuel Macron announced a new coronavirus lockdown Wednesday evening. The President admitted a curfew for Paris and other major cities imposed two weeks ago hasn’t been able to halt the second wave. Therefore, starting Thursday evening bars, restaurants and non-essential businesses will be forced to close and written statements will be required for people to leave their homes. The latest enforcements are expected to be in place until at least December 1st.

  • In Spain, the parliament has approved another six-month state of alert. The move gives the central government emergency powers aimed at putting a dent in the rapid spread of COVID-19 through the country. Earlier in the week, Prime Minister Pedro Sanchez’s government imposed a nationwide curfew between 11PM to 6AM and allow regional governments to close their borders and ban meetings of more than six people. Spain has been one of the hardest hit countries in Europe becoming the first to surpass one million total cases of the coronavirus in the EU bloc.

  • Philippines President Rodrigo Duterte said he would favour a government-to-government deal for the purchase of future COVID-19 vaccines as a way to prevent corruption. “Let me tell everybody that we will not beg, we will pay”, said Duterte in a pre-recorded address earlier in the week. President Duterte has repeatedly said he has received assurance from China that his country would be a priority when a vaccine becomes available, but is looking more like a mid-2021 release and not the December 2020 timeline Duterte pitched in previous messages. During his announcement, Duterte also ordered the extension of the quarantine in Metro Manila, along with six other areas in the country until the end of November.

Covid-19 – Due Diligence And Asset Management

Credit Suisse Shutters Funds in Asset Management Review

Brief: Credit Suisse Group AG is closing down funds and laying off employees at its alternative asset management business after several of the strategies struggled to perform in the volatility caused by the Covid-19 pandemic. The bank’s actions include shuttering a quantitative fund and taking a 24 million Swiss franc ($26 million) charge on seed capital in a U.S. real estate fund in the third quarter, Chief Financial Officer David Mathers said in an interview, declining to name the funds or detail the extent of the layoffs. Asset managers are facing challenging market conditions amid the pandemic, with hundreds shuttering or in the process of closing down, including AJO Partners, a $10 billion quantitative fund manager, and macro hedge fund firm Tse Capital Management. Credit Suisse earlier this month said that Aventicum Capital Management, a joint venture with the Qatar Investment Authority, will close two groups of funds and return capital to investors. “We have seen some of these funds struggling in this environment -- their strategies have not succeeded in the volatility that has happened with Covid-19,” Mathers said Thursday. “The credit business is doing fine, it’s some of the smaller ones.”

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“A Better Way to Invest”: Big Society Capital’s Sir Harvey McGrath says Structural Change is Coming to the Asset Management Industry

Brief: At a time when governments around the world are burning through billions attempting to rescue citizens from the financial pain of coronavirus, which has created severe crises in healthcare and employment, Big Society Capital says there is a crucial opportunity to use private money to fund social causes.Big Society Capital was one of the first institutions to champion impact investing in the UK. It was established in April 2012 as a private company with the purpose of building the social impact investment market, under a pledge made by former Prime Minister David Cameron. “There's no doubt that the Covid crisis has really reinforced the momentum that was already there,” says its chairman, Sir Harvey McGrath, adding that there has been a “fairly strong flow” of recent inbound inquiries from investors. Some of this interest is “directly a function of the crisis”, but McGrath also considers this to be part of a broader paradigm shift taking place in the finance industry at large, as generational change boosts demand for value-aligned money management.

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Investors Pull $2.5 Billion from Junk Debt, Most Since September

Brief: U.S. high-yield bond funds suffered the biggest outflows since the end of September, as investors sought to limit their risk exposure amid growing coronavirus infections across the world and ahead of the upcoming U.S. election. High-yield investors pulled $2.5 billion out of retail funds during the week ended Oct. 28, according to data compiled by Refinitiv Lipper. It’s the first withdrawal since the $3.59 billion yanked in the reporting period ended Sept. 30, and follows an inflow of $150.9 million last week. Investors fleeing the asset class to seek safety elsewhere are also taking out cash from high-yield exchange-traded funds. Two junk-bond sales were pulled from the primary market this week, and other borrowers are sweetening terms to get deals done. High-yield spreads had widened 47 basis points this week through Wednesday, the most since the week ended Sept. 25, according to Bloomberg Barclays index data. Junk bonds sold off alongside stocks and oil, which both fell to new lows this week.

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Companies are Planning for Remote Work Through 2021 Due to Covid, says ServiceNow CEO

Brief: ServiceNow CEO Bill McDermott told CNBC on Thursday that business leaders are making preparations for their employees to work remotely through next year due to the coronavirus pandemic. McDermott, whose company provides cloud-based software that automates IT and employee workflow, was responding to a question about his conversations with fellow chief executives as they seek to navigate a world upended by Covid-19. There will undoubtedly be a long-term shift with a larger percentage of employees who can work remotely doing so, McDermott said on “Squawk on the Street.” He predicated a “hybrid world,” where employees routinely split time between working in the office and at home. But more near term, he said, “the other thing I’m hearing is people are already preparing for working from home or working from anywhere through 2021, because even if you do get a vaccine, it’s obviously not going to get through the global population for somewhere upwards of a year, probably a year and a half from now.”

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BlackRock Defies Stock Chaos With Small-Cap Value ETF Launch

Brief: Few things divide opinion on Wall Street like the outlook for small-cap stocks or the fate of the value strategy. Yet most market players would probably agree it’s a tough time to launch a product combining the two. That’s exactly what BlackRock Inc. is doing with a new exchange-traded fund. The iShares Factors US Small Cap Value ETF began trading on the New York Stock Exchange under the ticker SVAL on Thursday. The fund screens for value-oriented stocks in the Russell 2000 Index based on liquidity, volatility, leverage and analyst sentiment and then weights securities equally. It’s an eye-catching arrival given the backdrop. Small-cap shares and value strategies have been battered anew this year as the coronavirus sparked an economic crisis. U.S. equities endured yet another bout of volatility this week, a broad selloff that has spared few sectors. Even after those declines, the S&P 500 Index has still gained 1.2 per cent year-to-date. The Russell 2000 Index, by contrast, is roughly 7.5 per cent lower and value stocks -- those that look cheap relative to fundamentals -- are down more than 15 per cent.

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Brace for a ‘Fairly Scary Time’ on Wall Street, Wells Fargo Warns

Brief: Wells Fargo Securities’ Michael Schumacher has a message for investors: Buckle up. The firm’s head of macro strategy warns Wednesday’s market turbulence may just be a preview of what’s ahead. “When you think about the U.S. elections, Covid worsening [and] all sorts of other news items coming out in the next couple of weeks, it could be a fairly scary time,” Schumacher told CNBC’s “Trading Nation.” On Wednesday, the S&P 500 and Dow had their worst days since June 11 due to growing fears over rising coronavirus cases across the nation. There’s speculation they could spark new containment measures and closures. While jitters over rising virus cases drove the latest sell-off, Schumacher warns election uncertainty has the potential to pummel stocks even more. “One thing we pointed to for a while at Wells Fargo is the chance the election results are delayed. In that case, it’s almost certainly risk-off. So, a lot of reasons to be concerned over the next week to ten days,” he said. “Right now, it seems the virus has the upper hand, but it’s a very close call. And, frankly, these things are intertwined.”

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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.