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Coronavirus Diligence Briefing

Our briefing for Wednesday June 17, 2020:

Jun 17, 2020 3:56:43 PM

  • In the United States, Dr. Anthony Fauci, a leading member of the White House coronavirus task force has urged states including Arizona, Texas and Florida that have seen recent surges to remain vigilant. The director of the National Institute of Allergy and Infectious Diseases is asking state leaders to move aggressively to prevent current cases from turning into a surge. Dr. Fauci’s comments follow United States Vice President Mike Pence, and head of the coronavirus task force, who penned an op-ed piece for the Wall Street Journal. In the article, Vice President Pence blamed the possibility of a second wave on media hype, and that “such panic is overblown”.

  • In Canada, the federal Liberal government will update the country on the state of government finances on July 8th. The government’s usual budget unveiling was shelved back in March due to the coronavirus pandemic. Prime Minister Justin Trudeau warned that because of the economic uncertainty created by the global pandemic, the budget update will be a “snapshot” and not a full-blown report, as per usual. Government opposition leaders, including the Bloc Quebecois accused the Liberals of unveiling the information during a time people will likely be paying little attention.

  • According to a YouGov survey, half of the United Kingdom’s businesses would have to cut staff within three months of the furlough scheme ending, due to the poor state of the economy in the aftermath of the coronavirus pandemic. Fifty-one percent of about 500 businesses surveyed said they would cut staff as under the current plan, companies will begin to shoulder costs related to the furlough scheme in August until its proposed ending in October.

  • The European Union (EU) has unveiled a plan that would see the European Commission centrally purchase a COVID-19 vaccine on behalf of all EU countries. The plan would see the commission pay upfront for some of the costs faced by vaccine producers, in exchange for the right to buy a set number of doses at a fixed price. The EU hopes their process would cut the red tape and produce a single point of contact for vaccine producers instead of dealing with 27 (the number of countries in the EU) separate processes.

  • Earlier in the week, Philippine President Rodrigo Duterte said partial restrictions would remain in place in the capital city of Manila for another two weeks. The area is still battling with the virus as one of the world’s longest and strictest lockdown measures were eased on June 1st to reduce the economic impact. President Duterte also reinstated strict lockdown rules in Cebu City, the country’s fifth most populous city, following increases in new infections.

  • China has raised its emergency level to its second highest level and has cancelled more than 60% of the flights in and out of Beijing due to the latest coronavirus outbreak in the country’s capital city. The raising of the threat level for the city of 20 million people means the cancellation of classes, suspended reopenings and stronger requirements for social distancing. China had relaxed many of its coronavirus controls after declaring victory over the pandemic in March.

  • Just one week after declaring themselves coronavirus free, New Zealand Prime Minister Jacinda Ardern called 2 new cases of the virus an “unacceptable” failure of the system. After a 24-day run with no new cases, two women who recently arrived from the United Kingdom were allowed out of quarantine early without being tested for the virus, even though one had mild symptoms. The two women then made a 650 KM (400-mile) road trip to see a dying relative. The pair were eventually swabbed and proved to be infected, but the realization was only made after their road trip. Prime Minister Ardern has now ordered the military to oversee New Zealand’s border controls to prevent similar failures in the future.

Covid-19 – Due Diligence And Asset Management

Bain Capital Raises $3.2 Billion for Latest Distressed Fund

Brief: Bain Capital Credit has closed a new distressed debt and special situations fund, with more than $3.2 billion in commitments, according to Jeff Robinson, one of the firm’s managing directors. About 50% of that total has been invested and committed, with the majority being deployed in the last three months, Robinson said. “While we do this in all market environments, now is one of the most attractive ones we’ve seen,” Robinson said in an interview. “On the distressed side, in any 10-year period, there are maybe two great years to be a distressed investor, and we’re in the midst of those two great years.” The firm raised capital from existing and new investors for the program called Bain Capital Distressed and Special Situations Fund 2019. It invests globally, including in North America, Europe, Asia and Australia. Bain joins firms like Blackstone Group Inc., Oaktree Capital Group LLC and Carlyle Group Inc. in looking to capitalize on potential opportunities created by the coronavirus pandemic that has hammered businesses. The first wave of deal flow early in the crisis included companies that needed to raise liquidity as they contended with high levels of cash burn and an erosion of enterprise value, according to Robinson.

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HSBC Revives 35,000 Job Cut Plan After Pandemic Pause

Brief: HSBC is resuming plans to cut around 35,000 jobs which it put on ice after the coronavirus outbreak, as Europe’s biggest bank grapples with the impact on its already falling profits. It will also maintain a freeze on almost all external hiring, Chief Executive Noel Quinn said in a memo sent to HSBC’s 235,000 staff worldwide on Wednesday and seen by Reuters. “We could not pause the job losses indefinitely - it was always a question of ‘not if, but when’,” Quinn said, adding that the measures first announced in February were “even more necessary today”.  An HSBC spokeswoman confirmed the contents of the memo. HSBC (HSBA.L) had postponed the job cuts, part of a wider restructuring to cut $4.5 billion in costs, in March saying the extraordinary circumstances meant it would be wrong to push staff out.However, Quinn said it now had to resume the programme as profits fall and economic forecasts point to a challenging time ahead, adding that he had asked senior executives to look at ways to cut more costs in the second half of 2020.The bulk of the job cuts are likely in the back office at Global Banking and Markets (GBM), which houses HSBC’s investment banking and trading, a senior executive familiar with the plans said.

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Why Investors Should be More Terrified of a ‘Blue Wave’ of Democrats than Trump Being Re-Elected

Brief: Another four years of President Trump may not excite everyone, but it could be way better than having what’s known as a ‘blue wave’ of Democrats taking control over the House and Senate in November — at least from an investor standpoint. “I think the markets will be most concerned of what they call the blue wave, not just the executive branch going Democratic but certainly the Senate swings as well,” said Wells Fargo Investment Institute chief investment officer for wealth and investment managementDarrell Cronk on Yahoo Finance’s The First Trade. “I think why they would be concerned of that, mostly, is because it would put in jeopardy the 2017 Tax Reform Act. There are discussions that certainly the Democrats would like to repeal that legislation and bring the tax rates back up somewhere around 28% to 29%, which would be pre-2017 levels. That would certainly challenge margins and earnings growth in an environment where it’s already challenged.” Of note is that there are 35 seats identified as up for grabs in the Senate in November, according to polling tracker 270toWin. Currently the Senate has 53 Republicans and 47 Democrats. In the House, Ballotpedia estimates 74 of the 435 House races are in play. The Democrats control the House, 233 to 197. But a blue wave must not be ruled out amid dissatisfaction among voters with how Trump has handled the twin crises of the COVID-19 pandemic and racial injustice.

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How Covid-19 is Reshaping Asset Management

Brief: Covid-19 continues to take its toll on financial markets, presenting major challenges for asset managers, from active funds to passive investments. The implications have been significant and central banks have now injected close to $100 billion to prop up investment funds hit by the market turmoil, raising questions about the systemic risks posed by the sector. With the effects of the crisis likely to be felt for several years ahead, how can asset managers adapt to this ‘new normal’ and begin to prepare for future challenges? Given the scale of Covid-19 and its impact on the global economy, asset managers were always likely to face high levels of volatility and challenging market conditions. However, the immediate reaction to the crisis produced varying results for different investment strategies and approaches. Passive funds tracking equity and bond indexes, which have proved highly popular with investors in recent years, have been exposed to the full extent of market volatility from the very beginning of the crisis. These funds suffered significant losses in value throughout February and March, but they weren’t the only immediate losers. Funds managed with traditional quantitative methods have experienced a similar struggle. These funds typically work on the assumption that patterns can be found in historical data and then used to inform investment choices.

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Hedge Fund Industry Split Over Return to Work and Client Meetings, as Lockdown Measures Ease

Brief: Most hedge fund industry employees have been working remotely during the coronavirus pandemic, but now firms are split over when staff should return to work and when businesses can resume face-to-face contact with investors and other clients, a new study by the Alternative Investment Management Association has found. The survey data suggests firms with smaller headcounts are more confident on resuming client contact and overseas travel later this year. But firms with larger staff numbers do not expect to return to normal until 2021, suggesting they face bigger practical challenges in ensuring social distancing among employees.  AIMA, the trade body for the globally hedge fund industry, recently surveyed 240 members – two-thirds of which were hedge fund management firms, with the remaining third comprising service providers and investors - altogether representing more than 67,000 employees. The survey found that some 92 per cent of hedge fund industry employees have been working either entirely (67 per cent) or mostly (25 per cent) from home throughout the Covid-19 lockdown. As countries begin to ease lockdown measures, AIMA’s study has found that the hedge fund industry is divided over how to proceed back to work.

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M&G, Legal & General, Standard Life Keep Property Funds Frozen

Brief: Asset managers M&G, Legal & General, Standard Life and Janus Henderson said they were keeping their property funds frozen as valuers continue to struggle to assess real estate assets due to the coronavirus crisis. M&G froze its $3.2 billion UK Property Portfolio in December, as uncertainty over Brexit and weakness in Britain’s retail commercial property sector prompted redemption requests. Most other UK property funds also halted redemptions in March, as valuers said there was “material uncertainty” about property values at the end of the first quarter due to the coronavirus pandemic. As the second quarter draws to a close, M&G said its valuers were still applying a material uncertainty clause due to the lack of property deals. However, it said its clause did not apply to the industrial and logistics property sectors where there had been transactions. Legal & General said there was no change to the lock-up of its 2.9 billion pound ($3.7 billion) fund. Standard Life said two funds totalling about 500 million pounds remained frozen due to valuation difficulties, while Janus Henderson said the material uncertainty clause still applied to its 500 million pound fund. The funds are expected to remain frozen till at least September due to the valuation challenges, and some of those which usually offer daily redemptions may need to change structure to survive, industry sources say.

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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