• GB Davis

Lock, Stock and a Loaded Chamber - 5/2/20

  • Remember in recent weeks when we said that oil was likely to remain in the $20 level? and migrate towards a global $30bbl target later this year?  WTI closed at just under $20 on Friday

  • We usually NEVER watch the Baker Hughs oil rig count weekly releases (Friday's), but we are paying closer attention here.  Baker Hughes US oil rig count 408 vs 465 prior (5/1)

  • Tiff Macklem (58) named next Bank of Canada governor He was Mark Carney's top deputy from 2010-2014 and before that was a top advisor to the finance minister during the financial crisis. Currently he is the dean of the University of Toronto's business school with various other responsibilities including as a Director for Scotiabank.  His 7-year stint (everything in 7yr cycles people) begins on June 2.

  • Las Vegas and Las Vegas Gaming to see a Downturn Significantly Worse than '08-10.  Bank of America analyst Shaun Kelley said investors shouldn’t expect business as usual. Kelley said it’s likely properties will open in stages, not all at once. Casinos will also implement social distancing measures at tables, slot machines and other facilities. In addition, large events like concerts, sports and conventions will likely remain banned for the foreseeable future. “Given the market’s reliance on air travel and large scale events, this suggests a full reopening of the Strip could take a significant period of time even if the virus remains under control,” Kelley wrote in a note.  MGM said it could potentially begin its reopening process with the Bellagio and New York-New York, but it needs at least 30% occupancy to reach cash flow breakeven.  Even once the Vegas casinos reopen, it will be a long path back to normal for investors. Casinos in Macau, China reopened in March, but gross gaming revenue for the month of April was still down 96.8% from a year ago.

  • Kroger Begins Limiting Purchases On Ground Beef And Pork In Some Stores  

  • NY FED TO PURCHASE UP TO $30 BLN IN RESIDENTIAL MBS NEXT WEEK - NY FED WEBSITE 

  • The 30-Year Mortgage Rate in the US hit a new all-time low this week. 

  • Georgia reports nearly 1,000 new Covid-19 cases in the past 24 hours  

  • US credit card spending is down 25% on last year 

  • Exxon Mobil reports first quarterly loss in 32 years

  • Markit April Manufacturing final: - Output expectations turn negative for first time in the series history -Factory closures were widely reported and the frequent cancellation or postponement of orders resulted in the largest monthly drop in the new orders index on record.

  • CORONAVIRUS UPDATE: WUHAN, ALL THOSE PATIENTS WERE NEGATIVE AT SOME POINT AFTER RECOVERY, SOME PEOPLE FOUND IT POSITIVE AGAIN, UP TO 70 DAYS LATER; MANY ARE REPOSITIVE AFTER 50-60 DAYS 

  • Airline passenger traffic is still only 5% of normal

  • Dallas Fed PCE Data for March 2020 prints Negative (i.e. Deflation) at -3.2%, -1.0% ex-Food and Energy, and of course their Trimmed Mean (which cut basic food items this month, in addition to Consumer Discretionary such as Recreational Vehicles / Boats and the like) at 1.1%, well below the Fed's 2.0% Mandate, and while 1-month in this series does not make a trend - it is telling about what is happening (as is review of the excel sheet continuing the 178 series components).       

  • Fed cuts daily Treasury purchases to $8B/day from $10B/day

  • ISM Employment Index fell to 27.5 in April, the lowest level since 1948.

  • Germany where the lockdown of consumers led to a crash of private consumption. Retail sales collapsed in March, falling 5.6% from Feb, a 96.7% annualized rate of decline, acc to HFE calculations. Sales were only 3.3% lower than a year ago 

  • ECRI’s U.S. Weekly Leading Index (WLI) increased to 115.8, while the growth rate rose to -38.8%.

  • NY Federal Reserve US GDP Nowcast.  The advance estimate from the Commerce Department of real GDP growth for 2020:Q1, released on April 29, was -4.8%. The latest New York Fed Staff Nowcast for 2020:Q1 was -0.3%.  The New York Fed Staff Nowcast stands at -9.3% for 2020:Q2.  News from this week’s data releases decreased the nowcast for 2020:Q2 by 1.5 percentage points. Negative surprises from personal consumption data drove most of the decrease. 

  • Fitch on the tape this week DOWNGRADING its Credit Rating of Comerica to A-, and Outlook from Stable to Negative on Comerica. Bauer Ratings still has Comerica ranked as a 5-star (of 5-star) though based on 12/31/19 financials.  Outlooks, but not downgrades, were also in tow for  -Fifth Third Bancorp (LT IDR A-); --Huntington Bancshares, Inc. (LT IDR A-); --KeyCorp (LT IDR A-); --M&T Bank Corporation (LT IDR A); --Truist Financial Corporation (LT IDR A+); --U.S. Bancorp (LT IDR AA-);  and--Zions Bancorporation, N.A. (LT IDR BBB+).  First Republic and PNC did not have their "Outlooks" lower and remain stable.  Financial Sector began selling off late last week ($XLF Financial SPDR ETF as proxy).

  • One of the most pleasant Cash Flow modeling experiences from my Investment Banking days was always the Revolver, a close second to PIK-toggle Preferreds wedged in a cap structure.  Fitch out with a report (4/23/00) on U.S. Corporates drawing down on their respective Revolvers, analyzing "activity of 350 U.S. and Canadian corporate issuers since late February, documenting the amount, type of draw, size of facility and company commentary regarding use of proceeds where available. The data set includes investment- and non-investment-grade issuers who have reported revolver draws YTD for the purpose of increasing liquidity during the pandemic. Nearly 70% of activity occurred during the last three weeks of March, a period that corresponded with an increasing number of U.S. states implementing shelter-in-place orders."  In aggregate, our sample indicates that U.S. corporate issuers have drawn approximately $190 billion of cash. Based on our review of company filings, revolving credit line commitments for these companies totaled approximately $280 billion. Nearly 40% of the companies drew down the remaining availability on revolvers. For some high-yield companies, availability was reduced by borrowing base adjustments reflecting reduced receivables amidst government-mandated lockdowns.  Most companies’ indicated actions were to increase liquidity due to coronavirus. Some investment-grade companies tapped revolvers to repay maturing commercial paper (CP) due to dislocation in the CP market last month.  Retail, gaming lodging & leisure, REITs, technology and consumer were the five most active sectors, which together represented 53% of the companies in our analysis. However, the top five sectors in terms of amount drawn down were auto and related ($39 billion), retail ($26 billion), gaming lodging & leisure ($27 billion), REITs ($17 billion) and technology ($18 billion). Together, these sectors represented $124 billion of drawings or approximately two-thirds of our sample. Companies across the rating spectrum drew on revolvers.

  • Baseline and Downside Coronavirus Scenarios (Fitch).  Fitch has a common set of coronavirus baseline and downside-scenario parameters that analysts are using to evaluate the impact of the coronavirus pandemic. Core assumptions for the baseline scenario include a two- to three-month lockdown in key economies with a five- to six-week period of peak movement restrictions. The cumulative U.S. corporate high-yield and leveraged-loan default rates would be 12%–15%, with sustained spread widening and volatile capital-market conditions resulting in market-access challenges. Fitch's downside scenario assumes a hypothetical re-emergence of infection in major economies that prolongs the health crisis and confidence shock. Cumulative U.S. corporate high-yield and leveraged-loan default rates would be higher than in the baseline scenario at 17%–25% with a prolonged downturn in financial markets and sustained difficulty in funding conditions. Fitch’s downside coronavirus scenario would further escalate liquidity risk, given the potential inability for some companies to access capital markets and tighter credit

  • Baseline.  Core Narrative.  Sharp economic contractions hit major economies in 1H20 at a speed and depth that are unprecedented since World War II. Sequential recovery begins from 3Q20 onward as the health crisis subsides after a short but severe global recession. Eurozone experiences the most prolonged recession among major economies but the U.S. also is hit very hard. GDP remains below its 4Q19 level until mid-2022. Although this baseline scenario is aligned with the current Global Economic Outlook (GEO), published April 22, 2020, future changes in the GEO will prompt a revision of the scenario if they are considered material.

  • Key Assumptions • Lockdown measures of varying degrees in place for 2–3 months in key economies, with 8–9 weeks of peak stringency. • Rapid spike in unemployment coupled with sharply reduced personal income. • Sharp falloff in demand for discretionary goods and services. • Cumulative corporate high yield (HY)/leveraged loan (LL) default rates of 12%–15% in Europe and U.S. in 2020/2021. • Sustained spread widening, high volatility in funding costs, and market access challenges outside of issuance eligible for government programs. • Oil prices ranging from $20–$30 bbl for much of 2020.

  • Future Trajectory.  Fiscal stimulus and balance sheet support extend to large swathes of the economy. Widening deficits and easing monetary/ fiscal policy limit the depth of the initial downturn to some extent, but only become more effective once the health crisis subsides. This helps growth to recover, but incomes fall sharply from 4Q19 levels through 2H20 and remain depressed through 2022. Wide-ranging debt relief programs are implemented, spanning multi-month payment holidays for consumers and business lessees to sovereign debt suspension for low-income countries. Overhang and eventual unwind of liability transfer on such an unprecedented scale have long-lasting effects on credit conditions.

  • Downside.  Core Narrative Re-emergence of infections in the major economies prolongs the health crisis and confidence shock, prompting extensions and/or renewals of lockdown measures and preventing a recovery in financial markets. This provokes a longer-lasting, negative wealth shock and confidence shock that depress consumer demand and lead to a prolonged period of below trend economic activity, with recovery to pre-crisis GDP levels delayed until around the middle of the decade.

  • Key Assumptions • Even sharper economic contractions in the U.S. and Europe, with major setbacks in containing the spread of the virus necessitating extensions or re-impositions of lockdowns that cause GDP to fall by ~12% in 2020. • Double-dip slowdowns in China/East Asia, and recessions across most other emerging markets for FY 2020. • Wage declines/job losses across income brackets in major economies • Cumulative corporate HY/LL default rates of 17%–25% in the U.S. and Europe by 2021. • Prolonged downturn in financial markets and sustained difficulty in funding conditions. • Demand collapse continues to depress oil prices and constrain spending in oil economies.

  • Future Trajectory. Extensive fiscal interventions become a mainstay in major economies, but government largesse merely contributes to arresting a downward spiral. Assumed daily loss of GDP during lockdown is 30%, compared to our baseline assumption of 25%; the latter accounts for roughly half of the additional shock to 2020 GDP relative to the baseline, with the remainder explained by a longer lockdown. As significant portions of the economy cease to be productive, wide-scale corporate zombification delays a meaningful recovery beyond a technical rebound in growth in 2021. Outside of official-sector programs, credit markets are only reliably open to the strongest borrowers with the lowest risk business profiles. Episodes of social and political instability could emerge in some jurisdictions.

  • The shadow-financing system in China will come under growing pressure in 2020 as the coronavirus pandemic takes a toll on private companies' ability to generate cash flow, says Fitch Ratings. We expect the Chinese government to prioritise economic stability over financial deleveraging in 2020, as it looks to restore economic growth to something like its pre-crisis track. Partly as a result of this, the clampdown on shadow banking will ease this year, as the authorities look to stave off a potential wave of defaults associated with the pandemic and its fallout. We believe that efforts to reduce system leverage will instead focus on cracking down on irregular financing activities. Despite the easing official clampdown, we expect that shadow-banking assets as a share of GDP will continue to fall in 2020, reaching 41% of GDP by end-2020 from an estimated 43% at end-2019. In part this will reflect risk aversion among the sector's lenders, who will be reluctant to increase their exposure at a time when economic conditions are particularly tough for borrowers. We forecast that China's economic growth will slow to 0.7% this year because of the effects of the coronavirus and efforts to contain it. In line with this, corporate and asset-management products are likely to see a new wave of defaults, on top of the already fast deteriorating conditions in 2019. As a result - and in contrast to the loosening in overall credit conditions - Fitch expects private-sector companies that rely heavily on shadow-banking activities for funding to face increased liquidity pressure in 2020. Cash flows will be hit with diminishing liquidity buffers, while funding availability from shadow-financing activities continues to contract.  (Fitch, 4/28/20)

  • Fitch on European Banks (for general context, and timing).  Reported problem loans are unlikely to show a widespread spike in 1Q20. However, we expect that disclosure on forward economic guidance under IFRS9, movements into Stage 2 and Stage 3 loans and details on volumes of loans under moratoria and exposures covered by new state guarantees will provide helpful insight into sources of potential future asset quality deterioration and ultimate loan losses at the banks.   Asset quality deterioration will add pressure on already weak first lines of defences for most European banks. Pressure on earnings will become apparent for some banks in 1Q20 as we expect a spike in LICs and pressure will intensify during the coming quarters once the impact of the crisis becomes more evident.  The nature and severity of the current crisis is unprecedented and considerably heightens the likelihood of rating downgrades for banks in 2020. Fitch has recently taken more than 100 rating actions on Western European banks, the vast majority of which were negative, including downgrades, Rating Watch Negative (RWN) or Negative Outlooks. Eleven of the 20 banks covered in the report now have a Negative Outlook, and nine of the banks have been placed on RWN since the onset of the crisis

  • Fitch's (Current) Downside Scenario on U.S. CMBSMultiborrower Conduit.  Impact to below-investment-grade ratings and some impact to low investment-grade ratings would be expected. Rating impact will depend on pool-level concentrations. Some AAAsf and AAsf ratings could come under pressure in the downside scenario. 2010 -2014 Vintage may be disproportionately more affected due to near-term underlying loan maturities and retail concentration. Recent vintage 2018-1Q20 with high proportions of hotel may also see greater impact. Liquidity risk is mitigated with servicer advancing, except potentially concentrated, older vintage transactions.  Hotels and Retail are two of the harder hit sectors.  Fitch's universe of Single Borrower Hotel Deals are all on Negative Ratings Watch (NRW) and it notes that even Investment Grade issuers may be downgraded in the downside scenario.  and their Basecase for CMBS: Fitch is projecting close to a 19% cumulative default rate for 2020, as the coronavirus pandemic weighs heavily on the sector. Especially vulnerable will be hotels, retail, student-housing and single tenant properties with non-credit worthy tenants. 'Hotels will see the most immediate effect with travel essentially grinding to a halt, room rates resetting daily and advance bookings cancelled,' said Fitch Director Roxanna Tangen. 'Many retail tenants will face difficulty paying rent, adding pressure to already stressed shopping centers.' Fitch expects defaults to rise across all CMBS 2.0 vintages (2010 and later) as a result of the coronavirus pandemic. The highest defaults last year occurred from those loans securitized in the 2014 vintage, which has the highest 2.0 default rate at 3.7%. The vintage with the highest cumulative default rate is 2007 at 37.6%; even with the spike in defaults in 2020, the 2007 vintage is still expected to finish 2020 with the highest cumulative default rate due to the proforma cash flows that never materialized during the global financial crisis.

  • Mexico: State Oil Giant Pemex Records $24 Billion in First-Quarter Losses (May 1, 2020 | 19:46 GMT, Stratfor)  What Happened: Mexican state oil company Pemex announced its first-quarter losses totaled nearly $24 billion, 62 percent higher than the accumulated losses of all of 2019, Reuters reported April 30. Pemex attributes a majority of the losses to the 20 percent depreciation of the Mexican peso at the beginning of the year, and the sharp decline in crude oil prices due to the COVID-19 outbreak.  Why It Matters: Pemex’s operational and financial losses continue to grow as the global oil market falters. Despite the company's poor performance and massive debt, President Andres Manuel Lopez Obrador’s administration has continued to support Pemex with tax breaks and increased pension and budgets as part of its pledge to increase Mexico’s energy independence.  Background: Credit rating agencies have already downgraded Pemex’s debt to junk status, claiming that the government’s policy choices were "insufficient to effectively address both the country’s economic challenges and Pemex’s continued financial and operating problems."

  • We Shall See if Lock-Down Lift Euphoria and Delusion translates to a Risk-bid on Monday (5/4), in which case we may look to fade on a 7-day time horizon, as:  Asia-Pacific: Hong Kong to begin easing its domestic restrictions related to COVID-19 with civil servants returning to workplaces. Europe: Spain to allow some small business allowed to reopen. Europe: Greece to lift movement restrictions to be lifted and allow more shops to reopen. Europe: Poland to reopen hotels, museums and shopping centers. Europe: The EU to hold an online conference for governments and organizations willing to support the search for a COVID-19 vaccine. Eurasia: Kazakhstan to allow some small businesses to reopen. MENA: Turkey to end 3 day weekend lockdown. MENA: Iran to reopen some mosques and shrines. MENA: Tunisia to begin the first phase of easing its COVID-19 restrictions. MENA: Egypt to auction 800 million USD in dollar-denominated treasury bills. Sub-Saharan Africa: Rwanda to begin easing its COVID-19 restrictions.

  • On Tuesday (5/6)  The Russian Central Bank to auction $13.5 billion to increase Russian commercial banks’ capacity to offer credit.


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