March 25, 2020 / 9:00 PM / 14 days ago

Breakingviews - Corona Capital: Bailout fees, Distressed junk

MILAN/LONDON/DALLAS/NEW YORK (Reuters Breakingviews) - Breakingviews has launched a daily column covering pandemic-related insights that you might have missed. Throughout the day, we’ll bring you shorter-than-usual views from columnists around the world with the same financial savvy on companies, economies and capital markets during this important unfolding story.

A street sign for Wall Street is seen outside the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S. December 28, 2016. REUTERS/Andrew Kelly


- Bailout pitchbooks

- Distressing junk

WALL STREET DUSTS OFF GOVERNMENT PITCHBOOKS. BlackRock has won the first major financial mandates of the Covid-19 crisis. Larry Fink’s $7 trillion money manager will run some of the Federal Reserve’s bond-buying programs. There’s a playbook for this. It managed some Washington bailout money from the 2008-09 meltdown.

Lazard advised the U.S. Treasury on the taxpayer-funded rescue of Chrysler and General Motors, as well, while Morgan Stanley was consigliere on propping up Fannie Mae and Freddie Mac.

With some of the $2 trillion-odd stimulus Congress is likely to set aside destined for airlines and other firms, the Trump administration will probably need more Wall Street help. It’s not the most lucrative work: The banks, led by Morgan Stanley, that took a restructured GM public received only a fraction of the usual fees. Wall Street has received its fair share of bailouts, though. It should consider giving Uncle Sam some freebies. (By Antony Currie)

HIGH-YIELD DEBT SUGGESTS A DELUGE OF DEFAULTS. Restructuring experts will soon be flooded with calls for help, judging by at least one key metric in the junk-bond market. The option-adjusted spread of the ICE Bank of America U.S. High Yield Index went above 1,000 basis points recently. That’s where high-yield guru Marty Fridson starts considering debt to be in distressed territory.

The pain isn’t shared equally across all industries, at least: Energy companies account for a large portion of the index so have an outsized impact. Fridson’s metric implies that 93% of them are distressed and forecasts a 16% default rate.

Exclude them and the default rate drops below 10%, Fridson says. Though better, it’s still well above the Moody’s 1983 to 2019 average one-year default rate of 4%. The combination of lower yields and higher defaults is bringing risk mismatches to the forefront. (By Lauren Silva Laughlin)

MOODY BLUES. SoftBank Group Chief Executive Masayoshi Son channelled Donald Trump after the Japanese tech giant suffered a double downgrade by Moody’s Investors Service on Wednesday. Rather than grumble in private, like most companies, Son’s $80 billion conglomerate published a two-page rebuke, saying the agency “made its ratings determination based on its biased and mistaken views.” Only the “fake news” tagline was missing.

Son has a point: Moody’s seems to assume that SoftBank’s plan to offload assets will incur significant discounts given the market rout. Ratings agencies usually wait to see what happens. Still, Moody’s is hardly alone in worrying about SoftBank’s debt: a $4 billion bond maturing in 2022 now trades at 97 cents on the dollar, down from 102 at the start of March. For highly leveraged companies in a crisis, as for American presidents, there’s little to be gained from blaming the messenger. (By Liam Proud)

SOVEREIGN STOCKPILING. Governments are doing the thing they’re telling households not to: hoarding food. Vietnam on Wednesday said it was halting rice exports, a day after Kazakhstan announced it was holding on to buckwheat and other foodstuffs. Both countries are trying to protect domestic supplies in case of shortages caused by Covid-19. The pandemic is also interfering with production. Malaysia’s largest palm oil producing state closed some plantations after workers tested positive for the disease.

It’s too soon to see an impact on prices. Russia, for example, is likely to see a bumper wheat harvest due to warmer weather. But a 2008 shutdown by Vietnam, the world’s third-largest rice exporter, sent world prices through the roof. Like Western shoppers who panic-buy pasta, protectionist policies could prompt others to follow suit. (By Dasha Afanasieva)

PIRELLI CALENDAR CATCHES COLD. The Italian $4 billion tyre maker is ditching its 2021 annual picture collection, blaming the Covid-19 emergency and donating part of the budget to find a cure for coronavirus. It’s an opportunity to axe it for good. The calendar is chiefly remembered for the soft-porn edge of past editions, even when shot by artsy photographers like Richard Avedon. More sober snaps in recent times haven’t made the project feel less outdated. While some old editions sell for three-figure sums online, investors want to see cash that’s not going to dividends used for sustainability or other altruistic purposes. Pirelli already does some of that and has donated to the health-crisis fight in Italy. Covid-19 gives Pirelli cover to make the calendar suspension permanent. (By Lisa Jucca)

SOUTH AFRICA FINALLY GETS “QUANTITY EASING”. Coronavirus has helped leftists in the ruling African National Congress party realise their monetary dreams. With bond yields soaring due to the headlong exodus of foreign investors, the fusty guardians of South Africa’s currency threw caution to the wind on Wednesday and turned on the printing presses to buy government bonds.

It’s an unprecedented step for one of the most reserved emerging-market central banks. Developing countries, with higher inflation and a reliance on flighty foreign capital, have tended to steer clear of quantitative easing. But with yields on the 2026 domestic benchmark shooting to 12% this week from 8.1% on March 11, market ructions threatened the cash-strapped government’s ability to finance itself. For ANC Secretary-General Ace Magashule, a former provincial governor not known for his economic nous, it’s a moment of triumph. A year ago, his call for “quantity easing” to help the economy was met with guffaws. Who’s laughing now? (By Ed Cropley)

ITALIAN WIPEOUT. The euro zone’s third-largest economy risks cratering because of coronavirus. According to Goldman Sachs, Italian gross domestic product could contract by a staggering 11.6% in 2020, worse than other European peers and below an expected 9% decline in the single currency area. If this turns out to be true, Italy will wipe out in just one year its cumulative real GDP growth since joining the euro in 1999, which has been less than 10%. Italian growth was already stagnating. And it never fully recovered from the twin blow of the global financial crisis and the sovereign debt crisis. This new emergency, which has claimed more lives in Italy than anywhere else, will unfortunately push it further behind its euro peers. (By Lisa Jucca)


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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