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Coronavirus Diligence Briefing

Our briefing for Tuesday September 8, 2020:

Sep 8, 2020 3:15:42 PM

  • As politicians head back to Washington after their August recess, the United States don’t appear to be any closer to passing the next stage of coronavirus relief to Americans. The Senate will vote Thursday on a procedural motion to advance a scaled down version of a COVID-19 stimulus bill that will be $500 billion. The bill would need 60 votes to advance, but it is not expected to reach that number. Republicans would like to get at least 51 GOP votes, so they can show the American public it’s the Democrats who don’t want to compromise. From the Democratic side, they have called for a bill that is four times the size of the Republicans current offer – in the two trillion range. House Speaker Nancy Pelosi claimed the offer on the table is not even an attempt to do the right thing for Americans and is just an attempt to satisfy Republicans who don’t want to spend one more dollar on a stimulus package. 

  • In Canada, as the average number of cases rose by 40% in the past two weeks, that steady increase is a cause for concern in the mind of the country’s chief public health officer. In a news conference on Monday, Dr. Theresa Tam noted the country experienced an average of 545 new cases in the past week – up from 390 cases during the week of August 24th. “As we enter the fall, Canadians will need to be even more vigilant about following public health guidance, particularly as the cold weather shifts activities indoors,” said Tam. To add to the concern in the increase in numbers, several of Canada’s 10 provinces have reopened its school doors to students and teachers for the first time in months on Tuesday.

  • The United Kingdom is starting to experience a surge in new cases as well – with close to 6,000 in the past two days. Prime Minister Boris Johnson has warned against “complacency” and some government officials are concerned the UK are following the same path as France and Spain, where hospitalizations have begun to rise. In order to curb the spread, a Bloomberg report notes the prime minister’s team is looking at cutting the maximum number of people who are allowed to gather in a private home. Current guidelines in the UK suggest no more than six people should meet, but police can only take action against groups of more than 30. Options on the table include tougher police enforcements to break up groups that are too large. 

  • Over the weekend, India surpassed Brazil with the world’s second highest COVID-19 cases, trailing only the United States. India now has more than 4.2 million confirmed cases after recording 90,802 overnight on Sunday and more than 71,000 people have died from the virus – the third largest number of deaths. The country though continues to lessen restrictions as no other major economy suffered more than India in the last quarter, with its gross domestic product shrinking 23.9% compared to a year earlier.

  • Australia’s Victoria state didn’t exactly get the news they were hoping for over the weekend. The country’s government announced only a gradual easing of one of the world’s strictest current lockdowns. Key sectors of the economy such as retail, hospitality, tourism and entertainment will stay restricted and the five million residents of Melbourne will remain under stay-at-home orders until October 26th, or until there are fewer than five new COVID-19 cases a day. Victoria state Premier Daniel Andrews has also asked office staff to work from home until at least November 23rd. 

  • Nine drugmakers, considered to be the leaders in COVID-19 vaccine development, have signed an unprecedented pledge on Tuesday to ensure when/if a vaccine will be released to the public, it will be at its highest ethical and scientific standards. The pledge was signed by the CEO’s of American drugmakers Johnson & Johnson, Merck, Moderna, Novavax and Pfizer, along with European companies AstraZeneca, BioNTech, GlaxoSmithKline and Sanofi. The news comes as drugmakers try to boost public confidence in vaccines and amid concern that the United States Food and Drug Administration were considering pushing through a COVID-19 vaccine under its emergency measures next month due to political pressure.

Covid-19 – Due Diligence And Asset Management

JPMorgan Says Some Employees Have ‘Fallen Short’ as Bank Probes Abuses of Government Relief Funds

Brief: JPMorgan Chase welcomed employees back from a long holiday weekend with a troubling message in their inboxes: Some of them may have been involved in potentially illegal activity. The bank’s operating committee, led by CEO Jamie Dimon, sent an email Tuesday morning to 256,710 employees saying that while the pandemic has brought out the best in many workers, there have been instances where customers abused the government’s coronavirus relief programs. “Unfortunately, we’ve also seen conduct that does not live up to our business and ethical principles — and may even be illegal,” the bank’s committee said. “This includes instances of customers misusing Paycheck Protection Program loans, unemployment benefits and other government programs. Some employees have fallen short, too.” The government’s mammoth $2.2 trillion coronavirus relief package included the Paycheck Protection Program for small businesses, enhanced unemployment benefits for individuals and support for larger companies. 

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Don’t Bet Against the U.S. Market, it’s Likely Going Higher, BlackRock’s Rieder says

Brief: The U.S. stock market’s two-day tech-led fall last week has revived investor worries about a spiral of selling that could crash the broader market, but Rick Rieder, head of the BlackRock Global Allocation team, does not see stocks going off a cliff. Indeed, the $23.2 billion BlackRock Global Allocation Fund (MALOX.O) that Rieder runs currently has options trades that would benefit from a rebound in stocks. Last week’s pullback in U.S. stocks from record highs came after investors piled into big tech names such as Apple - particularly buying bullish call options. That has caused debate about whether shares are over-extended as investors, buoyed by central bank support, try to look beyond the coronavirus pandemic. “I think the market is going to keep going higher,” Rieder, said in a Reuters interview. The Global Allocation Fund has been selling calls against existing long positions in large-cap, high-flying tech stocks to benefit from gains if they shake off recent weakness. Rieder says investors’ concern that stock markets are overpriced is misplaced. While some stocks are grossly over-valued, the generic market is not, he said.

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Private Equity Giants to Unwind Remote Working Arrangements

Brief: After months working from home, employees of global private equity firms are now being encouraged to get back to the office. Blackstone has told staff worldwide to avoid public transportation in their commute and is offering to pay for its workers’ taxi fare, a person familiar with the matter confirmed to Private Equity News. Despite the push, “returning to the office remains purely voluntary”, the person said. Similarly, Advent International, which employs around 100 people in its London office, has introduced a new commute policy, which forbids the use of public transportation. And although the firm will pay employees’ taxi fares to attend business meetings or events, it refuses to pay for workers’ everyday commuting, a second person told PEN. Both firms are also implementing a new Covid-19 testing policy. Blackstone is asking its London office workforce to register on an app that they have no symptoms before any return. Advent is sending a testing kit to the homes of UK staff every 14 days so that they can be cleared to access the office…

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Managers Assess Portfolios After Shift to Suburbs

Brief: Before the pandemic, everyone wanted to invest in the largest coastal cities that were thriving, thanks to easy access to work and play — but things have changed. The open question that managers and investors are having to answer now, without the benefit of transaction data or across-the-board write-downs, is how to position real estate portfolios for the long term. At the moment, few real estate managers want a high rise in a big coastal city. Some are following millennials to the suburbs from the cities or grabbing smaller buildings, such as garden-style apartments and low-rise office buildings located adjacent to cities. The once-hot cities of San Francisco and New York are being replaced by less expensive cities such as Phoenix, Boston, Denver and Austin, Texas, where people and companies can get more space for their money as telework becomes normalized and social distancing, air filtration and other health requirements are incorporated into office design. These trends are driving investors to reconsider their core real estate portfolios.

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Gulf Asset Managers to Face Pressure Amid Twin Shock

Brief: Asset managers in most of the Gulf will face moderate-to-high pressure on their profitability over the next year to 18 months as a result of low oil prices and the coronavirus pandemic, rating agency Moody's said on Monday. The twin shocks of the oil price crash earlier this year coinciding with the spread of the coronavirus in the region have put pressure on the six-member Gulf Cooperation Council's (GCC) economies, leading most governments to cut spending and raise debt. "Current weak oil prices will hold back economic growth and public spending across the region, with negative consequences for asset managers," Moody's said. "Oil is also a key source of revenue for the sector's investor base, which consists largely of local high net worth individuals, family offices and government-related institutions, including sovereign wealth funds." But the ratings agency said GCC countries' plans to reduce their dependence on hydrocarbons, as well as privatisation efforts, "should contribute to medium-to-long-term growth, and encourage the development of capital markets". Though Moody's expects diversification to take time, it will eventually spur private investment, attract international investors and therefore support the asset management industry's growth.

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Hedge Fund’s Buying Spree During Credit Slump Fuels 36% Return

Brief: Distressed-assets specialist Alp Ercil went on a billion-dollar buying spree in March and April, bargain-hunting amid the indiscriminate selloff in credit markets, a person familiar with the matter said. Ercil’s Hong Kong-based Asia Research & Capital Management Ltd. deployed almost 80% of the $1.6 billion raised for his latest fund in the two months, having sat on the sidelines for most of 2019 waiting for more attractive opportunities, the person said. Most of the capital was channeled into dollar-denominated developed-market credit with a duration of 10 years or more, said the person, who asked not to be identified because the information is private. ARCM purchased mostly investment-grade names in the latest upheaval, the person said. The spree paid off, with the fund up 36% in the first eight months of the year, the person said. Most of the gains came between April and August when credit spreads tightened after blowing out during the March rout. Yusuf Haque, ARCM’s chief operating officer, declined to comment. ARCM raised its fourth and largest fund early last year, but deployed only 20% of the capital during 2019 as it waited for more favorable markets. Those materialized in March when the Covid-19 pandemic and Russia-Saudi Arabia oil price war sparked panic selling across all assets, including debt of fundamentally sound companies. Spreads have since tightened as central banks unleashed unprecedented stimulus to shore up their economies and investors chase yields amid low and negative rates.

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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