COVID-19 Daily Update: March 18, 2020

Markets continued to tumble as equities—especially the restaurant, telecoms, and automotive sectors—continue to suffer the coronavirus outbreak’s human and economic effects.

S&P Global Ratings believes that the negative impact on business securitizations from the COVID-19 pandemic in the U.S. will almost certainly be substantial, particularly for the restaurant sector. As communities around the globe close their restaurants, bars, and additional spaces in support of social-distancing measures aimed at protecting populations from spreading the contagion, work-from-home policies are pressuring the strength of telecoms’ virtual private network capabilities. The outbreak has had an outsized effect on automotive companies, with multiple automakers halting production from now through March 31.

The Federal Reserve is unveiling a rapid string of emergency actions, reintroducing many of the strategies and programs it designed during the 2007-2008 financial crisis in a matter of days. European banks may not be able to emulate such efforts, as research by S&P Global Market Intelligence shows that many of Europe's major banks went into the coronavirus crisis with their liquidity positions worsening.

The  CEO of Raiffeisen Bank International AG,  Johann Strobl, assumes state-imposed restrictions to contain the new coronavirus outbreak and government packages for affected businesses will lead to a gradual normalization from the third quarter, and Société Générale SA CEO Frédéric Oudéa said that the bank has enough capital to manage through the crisis should it need to dip into its reserves.

Sovereigns and regulators are focusing on their debt-restructuring efforts, giving citizens flexible utility bill payments, and the current capabilities of shipping crews and essential industries.

The oil market hasn’t recovered from the March 8 collapse of the OPEC+ negotiations. ICE Brent crude futures dropped Tuesday to the lowest level in more than 16 years as global markets continued to respond to OPEC output concerns and the global coronavirus pandemic. Buried amidst the omnipresent coronavirus news was the U.S. State Department’s naming on March 17 of nine entities under new sanctions for continuing to trade petrochemicals with Iran.

Today is Wednesday, March 18, and here is essential insight on COVID-19 and the markets.

OVERALL BUSINESS

U.S. Whole Business Securitizations Under Stress From COVID-19

While difficult to measure at this early stage, the negative impact on whole business securitizations (WBS) from the coronavirus outbreak in the U.S. will almost certainly be substantial, particularly for the restaurant sector. Restaurant issuers reliant on dine-in sales are likely to experience the greatest impact, though increased off-premise sales, including delivery and take-away, may soften the blow. Primary risk factors shared with other WBS sectors are the financial resilience of operators and geographic diversification.

S&P Global Ratings has assessed the permanent cash flow reduction that each rated WBS transaction can tolerate before impairing timely interest or ultimate principal payments. Although most transactions have a substantial excess cash flow cushion, negative rating actions are possible if liquidity concerns emerge, debt service coverage weakens, or business risk profiles are revised downward.

—Read more from S&P Global Ratings

PODCAST OF THE DAY

Listen:  Sugar in the time of coronavirus

With commodities weakening on the back of the coronavirus epidemic and the oil price crash, Robert Beaman of S&P Global Platts talks to sugar specialists Nicolle Monteiro de Castro and Beatriz Pupo about the impact on the Brazilian sugar market.

Brazilian sugar has been in the news following February's reversal of fortunes in Brazil's Center-South region, which saw sugar prices starting to pay producers better than ethanol for the first time since 2017.

Joined by global manager Piero Carello, the team investigates the impact on the Brazilian sugar and ethanol markets and looks at the global context of these changes.

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

TELECOMS

VPN use spikes during coronavirus, boosting business, exposing limitations

The coronavirus outbreak has led to a surge in demand for VPNs across the globe, and this trend is set to intensify as more people are forced to work from home in efforts to contain the pandemic.

VPNs, or virtual private networks, provide an encrypted connection that allows users to securely connect to networks over the public internet. Many companies and organizations rely on these secure connections to ensure that only designated users are able to access their networks remotely.

Although VPN usage has been common for a while, most use-cases have involved remote employees who do not usually make up the bulk of a typical workforce. However, the virus has changed this dynamic, resulting in a massive uptick of virtual users who require VPN services. Analysts and industry insiders expect this demand will lead to challenges that will need to be addressed both by enterprises and by VPN providers themselves.

—Read more from S&P Global Market Intelligence  

CHART OF THE DAY

As COVID-19 Cases Surge, Pockets of Risk Emerge for Certain U.S. Telecom and Cable Providers

U.S. telecom and cable providers can withstand the effects of a surge in COVID-19 cases and a sinking stock market with limited impact to credit quality near-term. Longer-term credit implications will depend on the severity and duration of COVID-19 outbreaks and their impact on the U.S. economy. A handful of issuers' operations have direct exposure to the virus, some of which have cushion at current ratings while others are in the 'CCC' rating category already.

—Read more from S&P Global Ratings

AUTO SECTOR

UAW, Big Three US automakers agree to partial production suspension

Ford and General Motors will halt production at their North American manufacturing facilities through March 30 to thoroughly clean and sanitize the companies' plants in the wake of the coronavirus outbreak, the companies said Wednesday. Ford will suspend production following Thursday evening's shifts, it said. GM's plants will suspend operations in a cadence to ensure production stops in a safe and orderly fashion, according to the company. Production status at GM's facilities will be reevaluated week-to-week after March 30, the company said.

The news of the production stoppage comes amid pressure from the United Auto Workers union, which had requested a two-week production halt at Ford, General Motors and Fiat Chrysler Automobiles (FCA) facilities. The UAW late Tuesday said it had reached an agreement with the Big Three US automakers to implement a rotating partial shutdown of auto production plants in North America, with details expected to be released Wednesday.

—Read more from S&P Global Platts

Honda to temporarily suspend North American auto production: company

Honda on Wednesday said it is suspend production at all of its automobile production plants in North America, including the US, Canada and Mexico, due to an anticipated decline in market demand related to the economic impact of the coronavirus pandemic. Honda will halt production for six days beginning March 23, with current plans to return to production on Tuesday, March 31, it said. Additionally, Honda transmission and engine plants in North America that serve Honda auto plants also will suspend production for the same time period.

—Read more from S&P Global Platts

Coronavirus pandemic stokes demand concerns ahead of peak PVC season in Europe

As the coronavirus pandemic intensifies across Europe, resulting in factory closures by major car makers and affecting other PVC consumer segments as well as logistics networks, market sources expressed concerns over demand in the coming weeks and months, which are typically regarded as peak season for the commodity. German car maker BMW group, which has been affected by this week's closures, said global demand in the car market is expected to drop, and the company is responding by adjusting its production well in advance and using a broad spectrum of flexibility tools.

—Read more from S&P Global Platts

BANKS

RBI CEO optimistic about COVID-19 containment, expects normalization in H2 2020

Raiffeisen Bank International AG currently assumes state-imposed restrictions to contain the new coronavirus outbreak and government packages for affected businesses will lead to a gradual normalization from the third quarter, CEO Johann Strobl said March 18. The CEO struck an optimistic note despite RBI reducing its 2020 loan growth guidance and projecting a higher provisioning ratio this year given the recession forecasts for its core markets in Austria and Central and Eastern Europe.

—Read more from S&P Global Market Intelligence

SocGen has 'margin of maneuver' on capital as coronavirus hits economy

Société Générale SA has enough capital to manage the economic impact of the coronavirus should it need to dip into its reserves, the bank's CEO said. While the lender has no plans to change its capital management at the current time, "we have a lot of margin of maneuver, we entered this crisis with a good buffer beyond our 12% target," Frédéric Oudéa told investors through a webcast of a Morgan Stanley conference March 17. The bank's common equity Tier 1 ratio — a key measure of financial strength — stood at 12.7% at the end of 2019.

The current crisis might be "much shorter in terms of impact" than the 2008 financial crisis, and the bank's ratios across the board, be it capital or liquidity, were strong enough to meet any difficulties, Oudéa said. "We are very well armed to manage these issues."

—Read more from S&P Global Market Intelligence

Where Europe's banks stand on liquidity, as coronavirus profit warnings grow

Many of Europe's major banks went into the coronavirus crisis with their liquidity positions worsening, according to research by S&P Global Market Intelligence, even as the European Central Bank resorted to paying banks to keep liquidity flowing.

Italy's Banca Monte dei Paschi di Siena SpA, the U.K.'s Standard Chartered PLC and France's Société Générale SA were among banks that saw their liquidity coverage ratios decline in the final quarter of 2019, compared with the previous three months. The ratio measures banks' ability to withstand cash outflows and is calculated by dividing a bank's stock of high-quality liquid assets by total net cash outflows over a 30-day period.

S&P Global Market Intelligence's sample includes 34 leading financial institutions in Europe. Of these, 12 reported a quarter-over-quarter decline in the ratio or no change, while 17 reported an increase. For five companies, data was not available.

—Read more from S&P Global Market Intelligence

SME loans, not mortgages, may be pain point for Italian banks during pandemic

A moratorium on mortgage payments in Italy amid the coronavirus outbreak will be a useful safety valve for both borrowers and banks, according to industry experts, who warn that small and medium-sized enterprises could be the bigger worry. The entire country has been on lockdown for more than two weeks. It has recorded around 31,500 cases of COVID-19 and more than 2,500 deaths as of the morning of March 18.

—Read more from S&P Global Market Intelligence

Fed unloads arsenal to combat coronavirus crisis

As it becomes increasingly clear that the coronavirus pandemic is driving a sudden and sharp drop in economic activity, the Federal Reserve is unveiling a rapid string of emergency actions, reintroducing many of the strategies and programs it designed during the 2007-2008 financial crisis in a matter of days. The interventions come as corporations' and intermediaries' efforts to secure cash resources appear to be rippling across a wide range of markets, and raising fears about limits to the capacity of banks' balance sheets.

The good news is that the Fed's maneuvers a decade ago during the most severe financial crisis in a century were largely successful in restoring market functioning and, ultimately, setting the groundwork for a return to economic growth. The bad news is that the full scale and scope of the coronavirus shock remain unknown and markets are still showing signs of strain.

—Read more from S&P Global Market Intelligence

SOVEREIGNS AND REGULATORS

Coronavirus further complicates Argentina's debt restructuring efforts

The market impact of the coronavirus pandemic has battered emerging market bond prices, making Argentina's attempt to renegotiate some $68.8 billion of foreign-currency bonds even more difficult. Argentina Economy Minister Martín Guzmán had hoped to present the government's offer to bondholders in the second week of March and reach a deal by month's end, a timeline many already considered to be optimistic. Country officials have yet to make a formal presentation on its restructuring plans, but it has identified which foreign-currency bonds it will include in it.

But as severe market volatility has taken hold across global markets, many creditors "do not even have the capability to judge (the real value) of an offer right now," Alejandro Cuadrado, BBVA's emerging markets and Latin America strategist.

—Read more from S&P Global Market Intelligence

UK regulator pushes for flexible utility bill payments as coronavirus hits

As the coronavirus spreads through the U.K. and social distancing rules put pressure on businesses to retain their workforce, electricity and gas utilities may soon see their balance sheets hit by measures allowing customers to defer bill payments.

The Office of Gas and Electricity Markets, or Ofgem, is steadfast on avoiding any supply interruptions. "It is critical that customers remain on supply," a spokesperson told S&P Global Market Intelligence on March 16. The watchdog has written to all utilities, requesting them to plan for leniency policies early. "Suppliers should continue to identify vulnerable customers and work to ensure their needs are met. This includes taking a proportionate approach to debt recovery and late payments where appropriate," the spokesperson said.

—Read more from S&P Global Market Intelligence

International Chamber of Shipping to discuss coronavirus' effect on crew changes, shipping

The International Chamber of Shipping is holding a conference call Thursday to discuss the effect of coronavirus-induced restrictions on crew changes and international shipping, ICS Secretary General Guy Patten said in a statement Wednesday.

—Read more from S&P Global Platts

Malaysian palm oil industry allowed to continue operations: sources

The Malaysian government, which met the Malaysian Palm Oil Association Wednesday, said the industry can continue operations, sources said, clearing up confusion surrounding a partial lockdown of the country.

Market participants had resigned themselves to complying with the government's Movement Control Order, aimed at slowing the spread of COVID-19. The confusion arose because it was not clear whether palm oil and its derivatives were included in the 'essentials' list of activities that could continue.

—Read more from S&P Global Platts

OIL

US sanctions nine entities for Iranian petrochemical deals

The US State Department named nine entities Wednesday under new sanctions for continuing to trade petrochemicals with Iran. The State Department said the companies knowingly engaged in a "significant transaction for the purchase, acquisition, sale, transport or marketing of petrochemical products from Iran."

The companies include SPI International Proprietary of South Africa and its owners South African company Main Street 1095 and Iranian entity Armed Forces Social Security Investment Co. The others are Hong Kong-based companies McFly Plastic HK, Saturn Oasis and Sea Charming Shipping; and Chinese companies Dalian Golden Sun Import & Export, Tianyi International (Dalian) and Aoxing Ship Management (Shanghai).

State also imposed sanctions on Mohammad Hassan Toulai, managing director of Armed Forces Social Security Investment; Hossein Tavakkoli, director of SPI International; and Reza Ebadzadeh Semnani, director of Main Street 1095.

—Read more from S&P Global Platts

Saudi energy ministry instructs Aramco to supply 12.3 mil b/d crude in coming months

Saudi Arabia's Ministry of Energy has instructed Aramco to continue to supply 12.3 million b/d of crude to the market "during the coming months," according to an announcement on the official SPA news agency.

This is an expansion on its directive earlier this month for the company to supply 12.3 million b/d of crude to the market in April, once its OPEC production quota expires -- some 25% above current levels, as the kingdom shows no signs of backing down in its price war with Russia.

—Read more from S&P Global Platts

Saudi Arabia dips into crude stockpiles as exports decline

Saudi Arabia, the world's largest crude exporter, further dipped into crude stockpiles in January as exports declined for the first time in four months, data released Wednesday by the Joint Organisations Data Initiative showed.

—Read more from S&P Global Platts

Brent crude futures hit 16-year low below $27.00/b

ICE Brent crude futures dropped Tuesday to the lowest level in over 16 years as global markets continued to respond to OPEC output concerns and the global coronavirus pandemic. May ICE Brent crude futures slumped to $26.75/b during London afternoon trading, the front-month contract's lowest level since September 26, 2003.

As of 1335 GMT, ICE May Brent was down $1.76/b from Monday's settle at $26.97/b, while the NYMEX April light sweet crude contract was down $2.68/b to $24.66/b.

—Read more from S&P Global Platts

China to become key gasoline supplier to Japan as term contract starts

China will emerge as a new term gasoline supplier to Japan in April when a Japanese refiner starts lifting Chinese barrels under a six-month supply deal -- which may pressure imports from South Korea, Japan's top oil product supplier.

Cosmo Oil, which recently inked the six month gasoline supply deal with a Chinese state-owned oil company, will lift two MR-sized cargoes from China in April, marking the first import from its East Asian neighbor this year, a company source told S&P Global Platts.

—Read more from S&P Global Platts

Written and compiled by Molly Mintz.