COVID-19 Daily Update: April 24, 2020

As a growing body of research shows the coronavirus pandemic may have started earlier and been more infectious than previously realized, economic uncertainty for large countries and local communities is increasing—particularly in the U.S. and Europe. 

The year-to-date global corporate default tally reached 57 this week after six new defaults, three of which were U.S.-based retailers J.C. Penney, Neiman Marcus, and Mister Car Wash, according to S&P Global Ratings. Thus far, there have been 15 defaults from the consumer and services sector, which includes the consumer, retail and restaurant sectors, and 14 of these were based in the U.S. At this point last year and in 2018, there had been 42 and 31 total global defaults, respectively.

The U.S. Congressional Budget Office expects the federal budget deficit to reach $3.7 trillion this fiscal year, according to a forecast released today. The CBO said it projects second-quarter inflation-adjusted GDP to decline 11.8% and unemployment to reach 14%. (This week, an additional 4.4 million people filed joblessness claims, bringing the total of unemployed Americans to more than 26 million.) Suggesting a slow recovery, the CBO estimates 2.8% GDP growth next year and a $2.1 trillion deficit for the 2021 fiscal year.  

In a recent survey, 451 Research, part of S&P Global Market Intelligence, found that 75% of high-income U.S. consumers are planning to reduce their spending in the next few months. Many of these consumers also say they are turning more often to at-home products and services as the coronavirus continues to spread. Just 7% of respondents plan to spend more in the next 90 days than during the same period last year—indicating a rapid shift from two months ago, when 30% planned to spend more and 18% intended to pull back. 

On Monday, the U.S.’s Paycheck Protection Program will reopen, according to Treasury Secretary Steven Mnuchin. The Small Business Administration, which officiates PPP loans, will be refreshed with $310 billion in funding from the $484 billion relief package passed by lawmakers yesterday, after its initial $350 billion cash flow was exhausted in 13 days on April 16. Public companies received millions from the initial loan payout—including the fast-food chain Shake Shack. The company, with a market capitalization of $2 billion, announced it would return its $10 million in funds. The salad company Sweetgreen, reportedly valued at $1.6 billion, also said it would give back its $10 million loan. Ruth’s Chris Hospitality Group, known for its steakhouses, said it would return the $20 million PPP loan it had received. 

The Treasury issued guidance yesterday for publicly traded companies to return loans received from the SBA to the federal government by May 7. The guidance stated “it is unlikely that a public company with substantial market value and access to capital markets” could prove “in good faith” that the federal loan was necessary to maintain liquidity. Hedge funds and private-equity firms are also barred from receiving these small business loans. Small enterprises without substantial market value and access to capital markets faced difficulty obtaining funding in the first round of PPP loans, according to news reports. 

Analysis by S&P Global Market Intelligence showed that the tally of U.S. corporate entities drawing on existing revolving credit lines since March 5 grew $8.6 billion yesterday as companies continue efforts to shore up liquidity.

Other countries are acting similarly. U.K. Finance Minister Rishi Sunak is considering offering 100% state guarantees on small business loans amid criticism over delays in the government's lending plan. The U.K.'s Coronavirus Business Interruption Scheme offers 80% state-guarantees on loans of up to £5 million ($6.2 million) for firms with a turnover below £45 million ($55.7 million). The pace of loan approval under Britain’s program has been slow, as banks must cover 20% of the risk, compared with other countries’ programs, according to S&P Global Market Intelligence. 

The E.U.’s 27 leaders yesterday endorsed the €500 billion ($542.15 billion) short-term package negotiated by the bloc’s finance ministers to help eurozone countries suffering most from the crisis’ chaos—but didn’t agree on what their coronavirus “recovery fund” would look like. “We have to design a common, future-proof answer to this to ensure the integrity and cohesion of the single market and its shared prosperity," EU Commission President Ursula von der Leyen said at a press conference following the meeting. She said that in discussing the size of the fund, “we are not talking about billion, we are talking about trillion.” 

Ms. von der Leyen said on April 16 that European Green Deal investments will be key to the bloc’s recovery efforts. The European Commission proposed a plan pre-crisis to mobilize at least €1 trillion of sustainable investments over the next decade to aid the goal to become climate-neutral by 2050.

The coronavirus pandemic will prove that renewable energy needs state support, Alessandro Boschi, head of the renewable energy division at the European Investment Bank, told S&P Global Market Intelligence in an interview. The EIB started financing unsubsidized wind and solar projects following a broader shift within the industry and is now preparing to increase its climate financing. Mr. Boschi said renewables still need state backing because “you will need central planning. You cannot develop that scale of capacity [needed for the energy transition] and just expect that this happens. Because you need to have sites available, you need to have the grid connection, you need to have permits and who's going to be putting that in place? You cannot leave that to the private initiative.” 

In the meantime, an impending shortage of inland fuel storage in Europe may render attractive the economics of floating storage for marine fuel. 

According to S&P Global Platts, oil demand destruction related to coronavirus has exposed weaknesses in Asia-Pacific refineries. Fuel producers in the region are reviewing operation plans as they face falling margins and fast-filling onshore storage. Australian refiners were among the hardest hit by tumbling refining margins and fuel producers have been forced to slash operating rates, although the production cuts haven’t been sufficient. Complex refineries in China are now turning toward domestic sales. For other refiners, fast-filling onshore storage facilities have spurred requests for government intervention. 

At the end of a week that started with the U.S. crude benchmark price falling into negative territory for the first time in history, equities and oil prices rallied slightly today. 

Today is Friday, April 24, 2020 and here’s an overview of today’s essential intelligence.

GLOBAL ECONOMY

Default, Transition, and Recovery: The 2020 Default Tally Jumps To 57 After Six Defaults

The 2020 global corporate default tally has reached 57 this week after six defaults, three of which were U.S.-based retailers including J.C. Penney Co. Inc., The Neiman Marcus Group LLC, and Mister Car Wash Holdings Inc. There have been 15 defaults from the consumer/services sector (which includes both consumer and retail and restaurants sectors) so far in 2020--14 of which were based in the U.S.

—Read the full report from S&P Global Ratings

Consumers cut spending, but open to digital offerings during COVID-19 – survey

Three-quarters of high-income U.S. consumers plan to draw down their overall spending over the next few months, but many also say that they are turning more often to a host of at-home products and services as the novel coronavirus spreads, according to a new survey.

Just 7% of respondents said that they are planning to spend more overall during the next 90 days than during the same period in 2019, 451 Research's Voice of the Customer Macroeconomic Outlook, Consumer Spending found. 451 Research is an offering of S&P Global Market Intelligence.

—Read the full article from S&P Global Market Intelligence

THE FUTURE OF CREDIT & PROFITABILITY

Coronavirus-related US revolving credit drawdowns grow to $240B via 487 issuers

The tally of U.S. corporate entities drawing upon existing revolving credit lines since March 5 grew by $8.6 billion yesterday as companies continue efforts to shore up liquidity amid the coronavirus crisis.

The revolving credit drawdown total since March 5 — when LCD began tracking this info — is now $240 billion, via 487 credit facilities. Historically, these revolving credit lines could go largely undrawn and might be used for working capital, as a backup line of credit or for corporate cash emergencies. Many of these debt issuers have cited, in SEC filings, the coronavirus as the reason for tapping these lines, along with an "abundance of caution."

—Read the full article from S&P Global Market Intelligence

Amid shutdown, investors ponder what it will take to open leveraged loan market

With the $1.2 trillion U.S. leveraged loan new-issue market largely in lockdown and the prospects for a near-term return of widespread activity uncertain, to say the least, investors and originators remain on the sidelines, waiting for the segment to reopen. But what will it take for that to happen?

Of course, this depends largely on how well countries manage the coronavirus pandemic, and the resulting economic shutdowns. But one technical dynamic is clear enough at present: For new-issue activity to return to the U.S. loan market, loans must bridge what is now a wide-yield gap between what it would cost investors to take on a new deal today, versus the relative bargains on offer in the trading market.

—Read the full article from S&P Global Market Intelligence

US banks detail exposure to reeling hotel industry in Q1 filings

Western Alliance Bancorp. reported that hotel borrowers accounted for 8.5% of its outstanding gross loans as of the first quarter, while hoteliers represented 7.1% of gross loans at Home BancShares Inc. and 7.0% at Simmons First National Corp.

The figures, newly reported in first-quarter filings, place the banks among those most exposed to the hotel industry, which is in the middle of an unprecedented downturn stemming from the COVID-19 pandemic. By total loan balance, Wells Fargo & Co. led all reporting lenders with $12.1 billion in outstanding lodging exposure, for 1.2% of gross loans.

—Read the full article from S&P Global Market Intelligence

Focus on gas utilities' Q1 earnings turns to pandemic's impact on future profits

Wall Street expects most gas utilities to report higher first-quarter earnings than a year ago, though many analysts will be more focused on the future, listening for commentary on how the coronavirus pandemic and a steep economic downturn will impact the gas distribution business.

Several analysts believe gas utilities are relatively insulated from the crisis since sector revenues are largely based on long-term investment in safety and reliability programs. However, analysts have raised concerns in recent weeks about debt and equity issuances, sluggish gas demand and companies' ability to collect on bills and staff infrastructure projects.

—Read the full article from S&P Global Market Intelligence

UK considers 100% SME loan guarantees as coronavirus lending lags foreign peers

Britain’s finance minister Rishi Sunak is considering offering 100% state guarantees on loans to smaller firms hit by the coronavirus pandemic amid criticism over delays to the government's lending scheme.

The U.K.'s Coronavirus Business Interruption Scheme, or CBILS, offers 80% state-guarantees on loans of up to £5 million for firms with a turnover below £45 million. But as banks have to cover 20% of the risk, the pace of loan approval under the scheme has been slow compared with that in other countries such as the U.S., where loans are 100% state-guaranteed.

—Read the full article from S&P Global Market Intelligence

How COVID-19 Risks Prompted European Bank Rating Actions

Despite European governments' measures to contain the sanitary effect of the COVID-19 pandemic on their population, they face an unprecedented challenge to their economies. The economic outlook has steadily worsened in recent weeks, mainly because of stricter public health measures across Europe and in many countries around the world to combat the coronavirus. S&P Global Ratings now expects GDP in the eurozone and U.K. to shrink by 7.3% and 6.5% this year before rebounding by 5.6% and 6% in 2021. Even under this gloomier outlook, risks remain skewed to the downside at least until a vaccine can be developed. The ongoing global recession is different from the global financial crisis, however, which was the consequence of excessive leverage. In contrast, the current global recession has been intentionally induced by governments in their efforts to contain a global pandemic. Most European financial and nonfinancial institutions enter the current maelstrom with considerably lower levels of debt.

—Read the full report from S&P Global Ratings

ESG IN THE TIME OF COVID-19

Coronavirus will prove renewables need support, says EU bank's clean energy head

The European Investment Bank is responding to subsidy phaseouts by taking on additional project risks, says head of renewable energy division. Unsubsidized renewables to remain "a minor part" of the market, as power price drop due to coronavirus worsens economics. In the long run, governments need to keep providing revenue stabilization.

—Read the full article from S&P Global Market Intelligence

EVs are on a roll. How will US power grids manage rising demand for charging?

The large size of the US auto market and high GDP per capita, as well as easy access to financing options, make it a leading candidate for EV uptake. However, the lack of a strong regulatory foundation represents a substantial barrier, as does the relatively low cost of gasoline and diesel.

Depending on the region, S&P Global Platts Analytics forecasts plug-in electric vehicles to reach total cost of ownership parity with internal combustion engine vehicles over the next 10 years.

—Read the full article from S&P Global Platts

US Supreme Court rejects Trump administration's Clean Water Act interpretation

In a decision cheered by environmental groups, the U.S. Supreme Court on April 23 established a new test for Clean Water Act jurisdiction by finding the statute applies to groundwater pollution when a source discharges into nearby surface waters.

The 6-3 ruling rejected a legal interpretation advanced by the U.S. Environmental Protection Agency that the court's majority said would create a "large and obvious loophole" in one of the key regulatory elements of the Clean Water Act.

—Read the full article from S&P Global Market Intelligence

OIL & ENERGY MARKETS IN CRISIS

PODCAST OF THE DAY

Listen: Pandemic oil markets have products tankers buzzing

Pandemic oil demand destruction has converted clean products tankers into offshore storage containers as onshore storage is approaching tank top. Forced floating storage as a result of discharge problems has the products tanker markets buzzing arguably at a faster pace at present than their larger sisters on the crude side. Barbara Troner, Marieke Alsguth and Chris To of the S&P Global Platts shipping team put their heads together with Platts' Beth Brown to explore the dynamics of current products forward pricing structures and floating storage opportunities.

—Listen and subscribe to the Commodities Focus podcast from S&P Global Platts

Coronavirus cases increasing at Russian oil, gas projects

A series of coronavirus outbreaks at Russian oil and gas assets is forcing companies to introduce quarantines and changes to shift patterns, raising the risk that the outbreaks could hit production. So far, local authorities and companies have not reported any changes to output plans. They are combating risks by introducing mandatory self-isolation, changing shift patterns and reducing the number of employees on site to a minimum.

The energy ministry set up committees mid-March to limit the spread of the virus as well as monitor the situation and minimize the impact on energy companies. However, the number of cases reported at upstream projects, many of which are at isolated locations across the country, continues to increase.

—Read the full article from S&P Global Platts

Iraq seen struggling to invest $10 bil to wean itself off Iranian gas and electricity imports

With just three days remaining to the expiry of a 30-day US waiver to import Iranian gas and electricity, Iraq will struggle to drum up some $10 billion in investments over a four-year period to stop these imports at a time when US patience with OPEC's second-largest oil producer is wearing thin. The 30-day waiver, the shortest since Iraq started getting exemptions in 2018, is complicated by geopolitics as Iran still wields power in Iraq at a time when a caretaker government has been in charge since late last year and a third prime minister designate is yet to form a cabinet.

—Read the full article from S&P Global Platts

Prolonged coronavirus impact exposes cracks among Asia, Oceania refiners

An extended period of coronavirus-related oil demand destruction has exposed weaknesses in Asia and Oceania refineries, with a slew of fuel producers in the region reviewing 2020 operation plans in the face of falling margins and fast filling onshore storage. In Oceania, Australian refiners were among the hardest hit by tumbling refining margins, forcing the fuel producers to slash operating rates, though the run cuts have not been enough, industry sources noted.

Even the more complex refineries in China are not exempt from the demand destruction overseas, and are now turning toward domestic sales. "It is a lot better to sell domestic than export. The export market is doing very badly now," one source with an Chinese independent refiner said. The spot domestic gasoline retail price was in a range of Yuan 4,800-4,900/mt (around $79.70-$81.36/b), market and trade sources with direct knowledge of the matter told Platts. In contrast, the price of FOB Singapore 92 RON gasoline, the most liquid gasoline benchmark in Asia, was assessed at $19.66/b at the 0830 GMT close of Asian trade Thursday, Platts data showed.

For other refiners, fast filling onshore storage facilities have spurred requests for government intervention. Vietnam is home to 148,000 b/d refinery at Dung Quat and 200,000 b/d refinery at Nghi Son. "Stockpiles of gasoline have risen to more than 90% of storage capacity," state-owed PetroVietnam said in a proposal last week, seeking Vietnam government's help to curb imports of oil products. In South Korea, state-run Korea National Oil Corp is expected to lease part of its storage tanks for local refiners to help ease their storage facilities' shortage, Platts reported earlier.

—Read the full article from S&P Global Platts

Fuel oil floating storage options loom in Europe

Global fuel oil demand may be holding up better than its jet fuel and gasoline peers, but with inland storage facilities at high levels it appears only a matter of time before the economics of floating storage in Europe start to make sense for the marine fuel, according to market sources.

Shipping's importance to the world economy — 90% of global trade is seaborne — means it has been given exemptions to keep operating through the widespread global lockdowns. However, the coronavirus pandemic has not left fuel oil demand unscathed as dry bulk, cruise ships and the container market all suffer, with inland builds of stocks in Europe and stocks spilling over on to floating storage in Singapore.

—Read the full article from S&P Global Platts

FEATURE: Clean oil products being stored in Europe by any means necessary

The global coronavirus pandemic has hit global demand for oil products with transport fuels such as diesel, gasoline and jet fuel seeing extreme contango structures, leading to companies looking at any way to store product. Typically in a contango structure, participants would opt to purchase product on the prompt, store in land storage, or in extreme cases floating storage, and hold the fuel until demand and, in turn, value increases.

However, global lockdowns, which have sharply hit transportation fuel demand, are an extreme the market has never seen. With demand across the globe seeing record lows, typical inventories and storage options are limited, leading to refiners, blenders and traders looking at more exotic ways to store their product and await more attractive prices. "Everything that can hold product is being used — barges, pipelines, Handys," one source said, while a second said: "I think people will soon fill up their bathtubs at the speed it is going."

—Read the full article from S&P Global Platts

Written and compiled by Molly Mintz.