Daily Update: November 20, 2020

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Special purpose acquisition companies (SPACs)—which allow for hedge funds, private equity firms, and other market participants to raise capital for shell organizations to ultimately target and acquire private companies, which then replace the SPACs’ listings on equity exchanges—are booming.

SPACs are dominating U.S. markets this year. In the third quarter alone, entities classified as blank-check companies accounted for 56.3% of initial public offerings (IPOs) in U.S. markets, up 26% from the same period a year earlier, according to S&P Global Market Intelligence. From January- November, S&P Global Market Intelligence data showed 76 SPACs raised $56.9 billion in aggregate gross proceeds on U.S. exchanges, an increase from the 52 that went public in all of 2019, to raise a cumulative $13.31 billion.

Since the start of this year, 188 SPACs worldwide had IPOs, totaling $66.8 billion in gross proceeds, according to data and analysis firm SPACInsider.

"It's not a four-letter word anymore. It's a useful, flexible corporate finance tool," Jeff Mortara, UBS Group’s head of equity capital markets origination, told S&P Global Market Intelligence in September. "You're going to see SPACs become a mainstay."

The surge of SPACs as Wall Street’s favored capital source is linked to the active market conditions during the pandemic, according to Jeremy Swan, the national director of the professional services firm CohnReznick LLP's financial sponsors and financial services industry practice. In a Nov. 19 interview with S&P Global Market Intelligence, he said that blank-check companies’ have a propensity to thrive in heated public markets with strong valuations and that “as soon as that starts to fall away, the attractiveness of SPACs will also fall away.”

However, markets have yet to cool—reinforcing expectations that the craze for the shell companies will continue as this unprecedented year nears its end. The S&P 500 index has gained 10% this year, according to S&P Dow Jones Indices, and the CBOE Volatility Index, nicknamed Wall Street’s fear gauge, fell to its lowest level this week since Aug. 25, to 22.7 on Nov. 17.

"With the melt-up just starting, we expect the U.S. and other markets to reach record highs over the coming weeks and months, as investors can finally look ahead into next year and beyond with more certainty than they have had for months," Christopher Rossbach, who manages the J. Stern & Co. World Stars Global Equity Fund, wrote in a recent market outlook.

Because coronavirus containment measures have eliminated in-person meetings, putting together the series of presentations needed for an IPO has become difficult. Some market participants see SPACs serving as a solution to that particular problem.

“From a SPAC perspective, the roadshow doesn't happen. The financial backers are there, they're launching the process, you have the typical institutional buyers, you have the opportunity for co-investment alongside, and it provides a faster time to market, maybe more certain valuation, and potentially greater liquidity in a shorter period of time,” Mr. Swan told S&P Global Market Intelligence.

Not all market participants have the same enthusiasm for the blank-check model. On Nov. 19, Tesla CEO Elon Musk tweeted in response to a Forbes article on the subject that “caution strongly advised with SPACs.” The day before, British electric vehicle startup Arrival announced its plans to go public on the Nasdaq through a SPAC formed with former Marvel Comics CEO Peter Cuneo.

Today is Friday, November 20, 2020, and here is today’s essential intelligence.

Uncertainty in the Global Economy

Economic Research: Next Steps For President-Elect Biden: Containing Coronavirus And Stabilizing The U.S. Economy

S&P Global Economics believes President-elect Biden, in his first year (and certainly his first 100 days), will focus on containing coronavirus and getting better treatment or a vaccine to American households. The next important task will be to help the industries struggling from lost economic activity and workers displaced by the virus—in particular, create jobs as an investment in the U.S.’s future.

—Read the full report from S&P Global Ratings

Goodwill from COVID-19 Successes is Drugmakers' New Bulwark in Pricing Battles

As President Donald Trump tries in his final days in the White House to push through his drug pricing proposals and Democrats gear up for a new fight on Capitol Hill to lower costs, manufacturers have a new bulwark to defend themselves: the goodwill they have built up in developing therapies and vaccines to combat the COVID-19 pandemic.

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

INTERVIEW: Robust Economic Growth May Cap Gold: Nordgold

Robust economic growth in the developed world may cap gold's rally, Russian gold producer Nordgold's CEO told S&P Global Platts.

—Read the full article from S&P Global Platts

The Future of Credit

Economic Research: China's Tight Financial Conditions Start To Bite

China's recovery trundles on and infrastructure investment, property, and exports remain in the driving seat. Consumers are still hesitant to spend.

—Read the full report from S&P Global Ratings

The Path to Recovery for European Health Care: The Growing Role of Capital Allocation for Credit Quality

The European health care industry will continue to recover—but on an uneven path—as the sector grapples with a second wave of the pandemic, uncertainty about the extent of government support, and a likely prolonged rollout of COVID-19 vaccines.

—Read the full report from S&P Global Ratings

As Biden Preps For Presidency, Senate Sway May Mean More For Credit

As President-elect Joe Biden prepares to take office in January, much of what he can accomplish depends heavily on the partisan makeup in Washington. Ultimate Senate control, to be set by two run-off elections in Georgia, could significantly influence the new administration’s policy agenda.

—Read the full report from S&P Global Ratings

COVID-19 response drives surge in global debt toward record 365% of GDP

Driven by the borrowing of governments and businesses, global debt rose by $19.3 trillion — or 7.1% — in the first nine months of 2020 to a record high of $272 trillion, according to the Institute of International Finance Inc., or IIF.

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

Banking Sector Under Pressure

Japan Megabanks' Credit Costs May not Return to Pre-COVID Levels in Medium Term

Loan-loss provisions at the Japanese megabanks may not decline to pre-pandemic levels in the medium term, as the economic outlook remains clouded and it is uncertain how long and how much government support will last, bank executives and analysts say.

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

Swiss Banks Relaunch Dividend Payouts as EU Peers Wait for ECB Green Light

Swiss banks have become the first European institutions to resume dividend payouts after their national regulator agreed that domestic conditions suggest that they have weathered the worst of the COVID-19 storm, perhaps in contrast to other economies in Europe.

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

Some Progress and Some Resistance as Gulf Banks Eye Open Banking Opportunity

Banks in the Gulf must be willing to work with fintechs or else miss out on an opportunity to diversify and boost revenues, experts warn.

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

ESG in the Time of COVID-19

The ESG Pulse: COVID-19 Vaccine Hope As Second Wave Sets In

From April to September, S&P Global Ratings took close to 2,100 ESG-related rating, CreditWatch, and outlook actions. Of these, 775 were downgrades, the bulk (96%) of which stemmed from the COVID-19 pandemic, while governance concerns contributed to downgrades on 23 entities and environmental factors to six.

—Read the full report from S&P Global Ratings

Storms, Social Inflation Continue to Pressure Fla. Homeowners Insurance Rates

Steeper underwriting losses and ongoing high levels of claims-related litigation have led to double-digit increases in multiple rate filings for insurers within the Florida homeowners market.

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

The Future of Energy & Commodities

Infographic: Oil Majors Rethink Upstream Spending Amid Face-Off for Cheapest Barrels

Global oil majors are being forced to reevaluate the resilience and cost of new oil and gas projects to accommodate weaker demand outlooks and lower long-term prices in the wake of the COVID-19 pandemic.

—Read the full article from S&P Global Platts

Listen: Aviation Looks to Vaccine for Boost In Demand

Jet fuel took center stage at the recent International Air Transport Association Fuel Forum, as the industry grapples with the demand destruction due to air travel restrictions, but also paves the way for a clear decarbonisation agenda.

—Listen and subscribe to Oil Markets, a podcast from S&P Global Platts

Written and compiled by Molly Mintz.