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Corona Capital

23 Nov 2020 By Breakingviews columnists

Corona Capital is a column updated throughout the day by Breakingviews columnists around the world with short, sharp pandemic-related insights.


– U.S. companies’ growing cash

– Office landlords’ woes

Under the mattress. U.S. non-financial companies are hoarding cash. Those rated by Moody’s together held a record $2.1 trillion as of June 2020, up 30% from the end of 2019. Firms like Gap feared consumers would stop spending and wanted to ensure they had sufficient buffers. The $9 billion retailer halted its dividend and stopped paying rent on some of its stores.

There may be light at the end of the tunnel. Gap, for example, plans to reinstate its payout to shareholders next year. Still, spending on investment is flat while share buybacks are on the decline. While optimism about vaccines has lifted markets, Covid-19 is still raging across America. That is a good reason for companies to keep some powder dry. (By Jennifer Saba)

Double whammy. It’s not just mall landlords who are getting crushed by the retail rout. Owners of office buildings are next on the list. J.C. Penney has vacated its headquarters in Dallas, according to the Dallas Morning News, which on Sunday printed a picture of a barricaded road and described rows of cleaned-out desks with signs on them that say “Done.”

The Texas-based department store chain is in the process of working through a Chapter 11 process, having filed in May after Covid-19 lockdowns sent it over the cliff. J.Crew and Neiman Marcus filed the same month while Lord & Taylor, Stein Mart, Century 21, and Tailored Brands have since bitten the dust. While many of J.C. Penney’s rivals might maintain a centralized headquarters, they will no doubt want to scale down real-estate costs. That leaves the owners of office buildings looking for other tenants. And unlike retailers, they can’t reinvent themselves with an e-commerce strategy. (By Lauren Silva Laughlin)

Worry lines. Long queues snaking around New York’s private Covid-19 screening centers sound a new warning about the course of the pandemic. As Thanksgiving nears, U.S. demand for tests by would-be travellers is putting more pressure on a system strained by rising cases. That points to a rocky end to the year, for Americans and for markets.

From Massachusetts to Missouri, demand for tests is surging. Testing capacity has dramatically expanded too. The country has been conducting over 1.7 million tests a day, according to the Covid Tracking Project. Quest Diagnostics, one of the country’s biggest private testing labs, has said that turnaround times for its tests are back above two days, but still far less than the two weeks or more patients were waiting over the summer.

The trouble is that some new demand is effectively discretionary, from people who want a pass to spend the holidays with friends and families. That, along with the fact that a vaccine may be further away than it looks, means a post-Thanksgiving surge in cases is highly likely. New York Governor Andrew Cuomo says he expects the state’s positivity rate, which is currently 3%, could top 10% by the beginning of 2021. The vaccine rally may have been premature. (By John Foley)

Caffeine craving. Addictions make good pandemic trades. Italian premium coffee maker Illy is selling 20% of its core business to Rhone Capital, the first time the family-held group has opened up to external investors since its creation in 1933. The sale values the coffee unit at just over 1 billion euros including debt, a person familiar with the situation told Breakingviews.

It’s a rich price, equivalent to nearly 20 times last year’s EBITDA of 55 million euros, according to the person. That is a premium to the 17 times multiple than $20 billion rival JDE Peets currently enjoys. Illy’s aggressive valuation highlights the resilience of coffee drinking during the pandemic. A survey commissioned by the National Coffee Association showed last month that Americans drank as many lattes and cappuccinos as before the crisis, albeit at home. Winning the U.S. market, as Illy wishes to do, may be more about selling drinks online than in elegant cafes. (By Lisa Jucca)

Resurrection. The world’s second-largest cinema operator has secured a sequel to survive its debt horror show. Cineworld on Monday said lenders had agreed to waive bank covenants until June 2022 while extending the maturity on $111 million of credit until May 2024. The company run by Mooky Greidinger has also secured a new $450 million loan by offering equity warrants which, if converted, would hand creditors around 10% of the company. The revamp allows Cineworld, which is burning $60 million a month in cash, to limp into next year. The company’s shares jumped 18%.

It’s not the end of the drama, though. Cineworld’s gross debt of $4.9 billion is still more than 5 times expected 2021 EBITDA of $845 million, per Refinitiv data. Streaming networks like Netflix and Amazon Prime have eaten into its market, while the pandemic delayed the release of blockbusters such as James Bond’s “No Time to Die”. Even if vaccines permit a speedy reopening, Cineworld still faces a potentially gory finale. (By Karen Kwok)

Popped bubbles. Asia’s regional finance hubs will remain cut off from one another for a bit longer. A travel bubble between Hong Kong and Singapore, permitting quarantine-free visits, was postponed on Saturday, a day before it was due to start. A spike in coronavirus cases in the former was to blame and the plan will be revisited in two weeks, but shares of beleaguered carrier Cathay Pacific fell almost 7%. Deflated balloons at the local airport captured the mood.

Tourism contributed to about 4.5% of Hong Kong’s GDP in 2018, and although its 56 million visitors last year came mostly from mainland China, any boost would have been welcome. The city’s recession appears to be slowing, but the burst bubble is a reminder that nations that have managed to contain the virus relatively well continue to struggle as they set incredibly high standards as a prerequisite to unlock and reintegrate. (By Sharon Lam)

Going sour. Emmanuel Faber has made a start. Danone’s chief executive on Monday said the French yoghurt maker would cut 1 billion euros in annual costs, scale back the number of products it offers and reorganise its business to be run more locally. The announcement came after Danone’s performance disappointed investors in the most recent quarter.

Having failed to deliver on his previous profitability target, however, investors will be sceptical about Faber’s promise to return Danone’s recurring operating margin to its pre-pandemic level of more than 15% by 2022. Margins dipped to 14% this year. Moreover, the plan isn’t enough to revive the company’s top line, which has contracted 1.6% so far this year. Unlike other food groups, Danone has failed to benefit from consumers eating more at home. Faber needs a more radical recipe. (By Dasha Afanasieva)


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