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Corona Capital

3 September 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. borrowing

– High-yield returns

– Trump’s vaccine deadline

Covid, 100%. The pandemic is pushing U.S. government debt to levels not seen since World War Two. Federal debt held by the public will exceed 100% of GDP sometime in the fiscal year starting on Oct. 1, the Congressional Budget Office projected on Wednesday. By the end of this month, borrowing will already equate to 98% of economic output.

The last time debt as a percentage of GDP hit this level was 1946. It’s perhaps fair to argue that battling the pandemic with wide-ranging shutdowns of activity has been as expensive for the United States as a major war. With Washington’s fiscal hawks missing in action since Donald Trump took office in 2017, though, the CBO doesn’t see the burden coming down at least until after 2030 – unlike 70-odd years ago when the ratio was back under 80% by 1949. It could be a chance to test deficit-tolerant “Modern Monetary Theory” in real life. (By Richard Beales)

Cognitive dissonance. The U.S. Federal Reserve’s interventions in financial markets are causing funhouse mirror distortions. With a pandemic-induced recession under way, the number of U.S. corporate defaults in 2020 has already breached a four-year high, S&P Global Ratings reported last month. Yet the year-to-date total return on a major U.S. high yield bond index has moved into positive territory for the first time since January, according to Lehmann Livian Fridson Advisors. And the extra yield investors receive on junk-rated debt compared to treasuries has collapsed since March 23 – the day the Fed said it would buy corporate debt.

This backdrop has caused U.S. corporate bond issuance to hit a record-breaking $1.9 trillion in the first eight months of 2020, according to Refinitiv, despite the second-quarter experience of the sharpest annualized economic contraction since official GDP reporting began. Excessive private-sector leverage can be more dangerous to the real economy than frothy equity prices. The Fed’s short-term fixes may generate future instability. (By Anna Szymanski)

Quantity and quality. An effective vaccine is the best hope for ending the Covid-19 pandemic, but only if enough people get it. News that the U.S. Centers for Disease Control and Prevention is asking states to prepare for vaccine distribution by late October – days before voters decide between re-electing President Donald Trump and installing Democrat Joe Biden in the White House – will feed fears that the approval process is being driven by politics instead of safety and efficacy.

If enough people are vaccinated, transmission slows and diseases die out. It’s not clear what percentage of the population would have to be vaccinated to kill off Covid-19. But only about two-thirds of Americans would get a vaccine, even if it’s approved and free, according to a Gallup poll in August. That’s below the rate needed for other diseases – and politicization fears could add to anti-vaccine paranoia and drive inoculation rates down further. If so, Covid-19’s economic damage may continue to mount. (By Robert Cyran)

Chart-topper. Online concerts are now a big thing, or so much so that Big Hit Entertainment, the South Korean management label behind popular K-pop boy-band BTS, is pushing on with its initial public offering, setting a price range aiming to raise as much as 962.6 billion won, or about $811 million. Earnings have been encouraging too: Big Hit last month managed to eke out a half-year operating profit supported by online events and merchandise sales.

Although the seven-member BTS were forced to cancel a tour because of the Covid-19 pandemic, they managed to draw some 756,000 people globally to a paid online concert in June, according to Reuters. Their newest release “Dynamite”, the first all-English language single from the group, has smashed Guinness World Records titles, becoming the first Korean act to debut at No. 1 on the U.S. Billboard Hot 100 singles chart. The music, it seems, will go on. (By Sharon Lam)

Continental catch-up. France’s Capgemini, the 20 billion euro IT consultancy, is having a better pandemic than investors feared. Chief Executive Aiman Ezzat on Thursday reinstated 2020 financial targets, having dropped them earlier this year. Free cash flow should surpass 900 million euros – less than previously hoped, but hardly a disaster. A 3% share-price bump means Ezzat’s company is now up 29% since early June, beating the CAC 40 index and U.S. peer Accenture. As companies shift towards flexible working, Capgemini’s services should be in demand.

In valuation terms, however, there’s work to be done. Capgemini is worth 19 times 2020 earnings, using Refinitiv Smart Estimates, a 43% discount to Accenture. For much of 2018 and 2019, the two traded in lockstep. Ezzat can close the gap by wringing synergies from his recent acquisition of peer Altran Technologies. At least he finally has a little momentum. (By Liam Proud)

Cool heads. Melrose Industries had set the bar reasonably low. The UK industrial buyout specialist’s newly announced 90% collapse in operating profits in the six months ending June had already prompted CEO Simon Peckham to pledge job and cost cuts in July. Throw in a few encouraging words about trading at the “higher end” of expectations in its automotive and air conditioning business, and the company’s shares jumped 10% in early trading.

Still, ideally Melrose’s net debt would be a little lower than its end-June level of 3.4 times EBITDA. Selling air conditioning unit Nortek, which has had a reasonable crisis amid an expansion of its online unit and demand from data centres for its cooling systems, would help. Nortek has previously been valued at 2 billion pounds, or over a third of the company’s market value, according to Investec analysts. If Peckham’s optimism pans out, it should be easier to flog. (By Aimee Donnellan)



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