Daily Update: July 10, 2020

Kanye West—the rapper, fashion designer, and erstwhile presidential candidate—received one for his clothing company, Yeezy. The Ayn Rand Institute, which is vocal in its opposition of federal funding, took one. So did Jeff Koons, the artist whose most recent sculpture sold for more than $91 million last year.

Data released on June 6 by the Small Business Association showing the names and some identifying details of the companies that received at least $150,000 in Paycheck Protection Program, or PPP, funding, prompted scrutiny over whether many of the businesses actually needed the relief. Nearly 90% of all distributed loans were for less than that amount, and the average loan size was $107,000, according to the SBA, which has $149 billion in funding remaining in the program. Approximately $30 billion in loans was returned to the Treasury Department by large firms. Some of the companies that participated in the program—totaling 90,000 in number—received aid, but didn’t promise to stimulate job creation in their loan applications.

Approximately 5 million businesses across the U.S. have received portions of the $520 billion in federal loans allocated through the PPP. The SBA’s program is designed to provide enterprises with fewer than 500 employees funding to incentivize maintaining employees on payrolls. The PPP loans are forgivable if companies use at least 60% of funding for payroll and if employees are paid for eight weeks without layoffs or furloughs. Economists agree that the program, implemented under Congress’s Coronavirus Aid, Relief, and Economic Security (CARES) Act, has kept small businesses afloat even as the program got off to a rocky start due to unclear guidance from the government, community lenders having difficulty accessing the program, and early maxing out of funds.

PPP loans appear to have prevented unemployment insurance claims from skyrocketing in some of the U.S. states that are benefiting most from the program, according to a S&P Global Market Intelligence analysis of SBA data.

“High PPP funding is correlated with states that have been able to keep unemployment numbers low relative to other states. Six of the top 10 states in terms of total loan approvals as a percentage of small business payroll across that state — South Dakota (93%), Utah (93%), Nebraska (92%), Idaho (91%), Kansas (90%), and North Dakota (90%) — were also among the 10 states with the lowest insured unemployment rates for the week ended June 13,” according to S&P Global Market Intelligence. “Through the first two rounds of funding ended June 30, Florida and Hawaii, two tourism and hospitality/leisure-heavy states, led the way with a 96% PPP approval rate as a percentage of small business payroll, according to the SBA. Virginia (72%) and Massachusetts (73%), meanwhile, had the lowest approval over that span. Massachusetts (15.9%) ranked sixth-highest among states in terms of insured unemployment rate.”

S&P Global Ratings found in May that nearly 60% of first-round PPP loans, with an average size of $206,000, were distributed to industries less affected by social distancing and were concentrated in states with lower levels of downturn-induced unemployment.

More than 30 U.S. banks may earn as much from the PPP loans as they reported in net revenue for all of last year, according to S&P Global Market Intelligence. Financial, legal, and reputational risks remain.

“The PPP is providing much-needed relief to millions of American small businesses, supporting more than 51 million jobs and over 80% of all small business employees, who are the drivers of economic growth in our country,” U.S. Treasury Secretary Steven T. Mnuchin said in a statement. “We are particularly pleased that 27% of the program’s reach in low- and moderate-income communities, which is in proportion to percentage of population in these areas.”

Today is Friday, July 10, 2020, and here is today’s essential intelligence.

The Future of Credit

Federal loan program helped stem tide of unemployment in some states

The U.S. labor market is showing signs of recovering with new claims falling last week to 1.31 million. Has the U.S.'s $600 billion Paycheck Protection Program for small businesses helped rein in unemployment? S&P Global Market Intelligence analyzed the Small Business Administration data and found that high PPP funding is correlated with states that have been able to keep unemployment numbers low relative to other states.

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

Local media PPP recipients say loans helped, but many urge Congress to do more

More than 100 small businesses in the information sector received large federal relief loans amid the coronavirus pandemic, even as various industry groups ask the government to expand aid efforts in a future stimulus bill. All told, 114 companies in the information sector received loans ranging from $5 million to $10 million under the Paycheck Protection Program, according to recent data released by the U.S. Small Business Administration. The roughly $650 billion loan program — established by the Coronavirus Aid, Relief and Economic Security Act, or CARES Act — is designed to help small businesses keep their workers on the payroll amid the outbreak.

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

European CLOs: The True Impact Of ‘CCC’ Assets On Overcollateralization Ratios

Average senior and junior European CLO OC cushions declined between February and May by 1% to remain healthy at over 8% and 3%, respectively. However, S&P Global Ratings is seeing a wider dispersion of OC cushions across transactions, with one transaction breaching its junior OC test and an increasing proportion of transactions with a junior OC cushion of less than 1%. 'CCC' haircuts explained 39% of the average OC numerator decline and, together with par changes, were the main reasons behind the evolution in OC cushions in the European CLOs that S&P Global Ratings reviewed. S&P Global Ratings’ analysis shows that an increase in 'CCC' holdings by 5% would lead to 13% of our rated European CLO universe breaching their most junior OC tests. Whether junior notes start to defer following an OC test breach depends on the amount of available excess spread. Not all OC tests are the same and the lack of breach does not necessarily mean that a transaction is outperforming one that has breached its OC test. The level of the OC trigger is key when comparing transactions under this angle.

—Read the full report from S&P Global Ratings

Coronavirus effects to spur restructurings, create opportunity in UK, Europe

Credit market participants expect to see a wave of restructuring in the wake of the coronavirus pandemic, particularly as government support programs wane amid a recessionary environment. Prior to the crisis, signs of recession in the U.K. and Europe were already appearing. On top of that, many companies were also highly levered. "In January I was already predicting 40% of [dealflow would be] distressed situations," one London-based lawyer said. "Now with COVID [that proportion] is more 70%."

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

Banking Sector Under Pressure

The $2 Trillion Question: What’s On The Horizon For Bank Credit Losses

For banks across the globe, S&P Global Ratings forecasts credit losses of about $2.1 trillion for 2020 and 2021 spurred by the pandemic, with $1.3 trillion this year—more than double the 2019 level. S&P Global Ratings expects preprovision earnings over the period will be able to absorb these increases, though further upticks would weigh on banks' ratings; inevitably, some banks will incur net operating losses. While around 60% of the forecast credit losses will arise in Asia-Pacific, the highest relative increases—more than double on average compared with 2019—will occur in North America and Western Europe. The duration and severity of the global downturn and the strength of the recovery will shape bank asset quality, and key drivers and differentiators will be effective fiscal support from governments to their economies, as well as banks' forbearance measures and financial reporting transparency.

—Read the full report from S&P Global Ratings

US bank deal activity at slowest pace since 2009

Bank deals slowed to a crawl in the first half of the year, reaching levels not seen since the Great Recession. At the same time, several deals were announced in June, and analysts report that some banks have reengaged in M&A discussions. As potential buyers and sellers reconvene, deal volume could increase in the coming months, but activity will not get back to the levels seen before COVID-19 until there is more clarity around credit quality, experts said.

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

Bank profits benefit little from Peru's massive loan guarantee program

A Peruvian government loan guarantee fund has reignited private credit growth in the country, though banks' bottom lines are set to see little-to-no benefit from the measure. Reactiva Perú, as the guarantee scheme is known, saw nearly three-quarters of its initial 30 billion-sol budget taken up in the first month after its launch in May. The government subsequently raised the size of the program to 60 billion soles, equal to about 11% of Peru's GDP. The fund, created in an effort to combat the effects of the coronavirus pandemic, provides banks with a 98% guarantee on loans of up to 30,000 soles, and an 80% guarantee on larger loans ranging from 7.5 million to 10 million soles.

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

Australia's loan deferral move to help borrowers but may drag bank earnings

The Australian regulator's decision to allow borrowers to defer repayments by another four months will help cushion the blow of the COVID-19 pandemic on them, though its impact on banks' earnings will be known only later, analysts said. The Australian Prudential Regulatory Authority on July 8 extended its temporary capital treatment for bank loans with repayment deferrals and adjusted the capital treatment for loans with modified or renegotiated terms to a maximum period of 10 months. Customers who can restart paying their loans will be required to do so at the end of the initial six-month deferral period on Sept. 30. But borrowers with reduced incomes and ongoing financial difficulty due to the novel coronavirus outbreak can seek a four-month extension.

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

ESG in the Time of COVID-19

Wirecard’s Chronically Low ESG Scores Reflected Governance Challenges

On June 25, 2020, the German digital payment company Wirecard AG filed for insolvency following reports that over USD 2 billion in cash assets went missing. Wirecard’s stock has gone down 90% since the initial announcement, and the company’s lenders now face deep losses. While the S&P ESG Index Series does not include Wirecard, the case sheds light on how governance factors are incorporated and controversies are monitored in screening companies included in many ESG indices and benchmarks.

—Read the full article from S&P Dow Jones Indices

What Does Pharma’s Quest For A COVID-19 Vaccine Mean For Its Credit Quality And ESG Profile?

S&P Global Ratings believes the market for a COVID-19 vaccine will involve multiple players, rather than a winner-takes-all scenario, given the high level of pent-up demand and differing profiles across potential vaccine offerings and patient groups. The pharmaceutical companies we rate that are seeking to commercialize a vaccine will likely set reasonable pricing on a vaccine and therefore, the associated profits will be limited. S&P Global Ratings believe the reputational benefits to the industry will result in a more balanced debate about U.S. drug price reform, reducing the risk that legislative changes will severely curtail industry profitability.

—Read the full report from S&P Global Ratings

ESG and mining: sustainability after coronavirus

As the world battles the coronavirus pandemic and resulting economic fallout, industries of all types face the urgent challenge of securing their short-term financial future. But the debate about environmental, social and governance concerns has been far from drowned out by the global health crisis, even taking on new meaning as companies’ responsibilities toward worker and community health came to the fore. For the mining sector, ESG was undoubtedly a business buzzword in 2019, but its main thrust was the environmental pillar. The spread of coronavirus and the impact on societies across the world appears to have refocused the interpretation of ESG on all three components, pointing to a more holistic approach than that taken previously.

—Read the full article from S&P Global Platts

A New ESG Index for Mexico Sets the Stage for Investment

Where can environmental, social, and governance (ESG) benchmarks help investors and markets most? The answer may be in emerging markets, where it is crucially important to identify and navigate ESG concerns. The transparency that ESG benchmarks provide can help investors distinguish companies that prioritize the needs of not just their shareholders, but also their many additional stakeholders, including their employees, the communities they operate in, and the environment around them. However, to truly drive change, an ESG index must be more than a flag to wave—it must set the foundation for investment. The S&P/BMV Total Mexico ESG Index, launched on June 22, 2020, is one such benchmark, built for investors looking for a tool to help them act.

—Read the full article from S&P Dow Jones Indices

The Future of Energy and Commodities

S Korea shifts focus to North Sea from US for light sweet crude imports

South Korean refiners look set to increase North Sea crude purchases at the expense of light sweet US crude imports as the narrow Brent-Dubai price spread lowers the procurement cost of Forties crude, while the North American benchmark WTI remains relatively expensive. South Korea received 2.057 million barrels of light sweet Forties crude from the UK in May, marking the first North Sea crude shipment since August 2019 when it took 2.024 million barrels, according to the latest data from state-run Korea National Oil Corp.

—Read the full article from S&P Global Platts

China allocates 26.79 mil mt of crude import quotas to 16 refineries

China's Ministry of Commerce has allocated the third batch of crude import quotas, totaling 26.79 million mt, to 16 qualified refineries, sources told S&P Global Platts on July 9. he Ministry of Commerce, MOFCOM, issued 26.79 million mt (196.37 million barrels) of crude import quotas on July 9 to 15 qualified independent refineries and the non-major state-owned ChemChina, in the third batch for 2020. The allocation significantly helps the 16 refineries to ease their quota shortage, sources said. "With the newly issued quotas, we are now able to carry on with our plan to bring in imported crudes," said one source with a Dongying-based independent refinery.

—Read the full article from S&P Global Platts

Listen: Downside risk if gas supply rebounds, demand recovery falters

S&P Global Platts journalists discuss European gas, power and carbon market trends going into the third quarter of 2020. The markets saw price support in June as economies began to emerge from coronavirus lockdowns – but any faltering in demand or rebound in gas flows could undermine these trends, as could a modest uptick in French nuclear availability.

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

Written and compiled by Molly Mintz.