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Corona Capital

5 May 2020 By Breakingviews columnists

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


– Apple raises cheap debt

– DuPont hunkers down

Apple’s cash begets yet more. The iPhone maker had nearly $200 billion in its war chest at the end of March. On Monday, the company led by Tim Cook raised another $8.5 billion, issuing bonds at some of the lowest interest rates it has paid in years, including three-year paper with a miserly 0.75% coupon. That’s thanks to the willingness of the Federal Reserve to backstop debt markets.

The Fed’s programs are designed to help companies struggling with the impact of the coronavirus top up their cash coffers, something beleaguered aircraft producer Boeing did with a massive $25 billion bond issue last week – enough to eschew government aid. Apple, though bruised by the economic and supply-chain damage wrought by the coronavirus, has no need to borrow more. But if funds are cheap enough, it’s a rational way to continue funding its hefty dividends and stock buybacks. (By Richard Beales)

DuPont’s PPE blip. The U.S. specialty materials and chemicals outfit run by Ed Breen is battening down the hatches for a tough second quarter, particularly in its automotive segment. The $30 billion-odd company, one of the three listed groups that were part of DowDuPont until last year, has bolstered its balance sheet and liquidity and increased its cost-cutting target.

One brighter spot is in disposable gear for health workers – the personal protective equipment or PPE that’s in demand around the world. DuPont sold 55% more Tyvek gowns and the like in the first quarter than a year earlier, upping output by more than 9 million per month – more than double production in any previous crisis, the company said. It won’t make up for the losses elsewhere, though. The grand value-creating vision behind the merger that created DowDuPont and its three-way split is looking very fuzzy. (By Richard Beales)

No more drama. The U.S. Treasury Department said on Monday that it will borrow an unprecedented $3 trillion this quarter, mostly to fund virus-related aid. That’s a good excuse to close the curtain on the archaic debt ceiling, which allows Congress to set the borrowing limit for money the U.S. government has already spent.

It has become a political cudgel, raising the specter of a U.S. default and a government shutdown every few years unless it has increased or, as it currently is until next year, suspended.

Some deficit hawks have tried to use the limit to impose fiscal discipline. But that charade largely ended even before the pandemic: Federal debt held by the public hit almost 80% of GDP at the end of the last fiscal year. That could jump to 101% by the end of this one. It’s time to end the act.  (By Gina Chon)

M&A lifeline. Fiat Chrysler Automobiles’ plan to merge with Peugeot is throwing both carmakers a lifeline. The Italian-American maker of Jeep said on Tuesday that its adjusted operating profit fell 95% in the first quarter from a year earlier because of the collapse in car demand caused by the coronavirus. While Fiat declined to give guidance for the full year, it expects a significant loss in the second quarter.

Car production is gradually restarting in Italy and the United States. Consumers are, however, unlikely to snap up expensive items such as autos when their employment prospects are grim. The imperative to cut costs, which pre-dates the pandemic, is now crucial to survival. Fiat and Peugeot have promised to deliver 3.7 billion euros in annual savings through their tie-up. The sooner these are realised, the better. (By Lisa Jucca)

Long-term greedy. Macquarie’s boss is trying to see past the Covid-19 devastation. Shemara Wikramanayake opened the bank’s annual conference for Australian companies on Tuesday arguing that trends such as urbanisation, climate change and digitisation will drive demand for infrastructure, renewable energy and technology. And on the same day the government estimated that containment efforts are costing the economy $2.4 billion a week, she said the country can emerge from the crisis in good shape, partly thanks to many successful corporate capital calls.

Funnily enough, Macquarie gets paid to help issue equity and its business model hinges on financing roads, ports, wind farms and such. With the bank’s shares down by a third from their peak in February, it’s no wonder Wikramanayake wants to keep the focus beyond the virus horizon. Of course, just because she’s talking her book doesn’t mean she’s wrong. (By Jeffrey Goldfarb)

Pandemic thrift. EssilorLuxottica has rediscovered the value of saving in a crisis. Faced with a 10% revenue contraction in the first quarter, the world’s biggest maker of frames and optical lenses has cancelled dividends, buybacks and non-crucial investments. That’s smart if it wants to carry out a planned cash acquisition of optical retailer GrandVision while also coping with severe Covid-19 disruptions.

The 7 billion euro price tag, agreed in July last year, does not look cheap given the collapse in stock markets since then. And EssilorLuxottica said on Tuesday that it expects the second quarter to be even worse than the first. Its net debt of 4.8 billion euros, now comfortably just above 1 times EBITDA, could be pushed up to 3 times that measure by year end, says Morningstar. Luckily, the French-Italian group is sitting on a 4.9 billion euro liquidity pot and has pre-funded most of the GrandVision acquisition cost. Continuing to keep a lean profile in the crisis is the right approach. (By Lisa Jucca)

Livin’ on a Prairie. Beiersdorf’s investors are down on their luck. The maker of Nivea posted a 3.6% decline in first-quarter revenue to 1.9 billion euros, stripping out the impact of currency changes and mergers and acquisitions. Chief Executive Stefan De Loecker said he will stick with the company’s one-year-old investment programme but said little on its progress, suggesting he’s less than even halfway there.

The multi-year scheme was supposed to help Beiersdorf access new markets, and boost innovation, digitalisation and workforce training. But so far it’s failing to protect its brands. Sales of luxury skincare line La Prairie fell 36% because it couldn’t be sold in airports, lagging behind L’Oreal brands for which e-commerce strategies softened the blow. De Loecker is hoping to acquire some bargains in the crisis, but until he can show his investments are paying off, he’s better off just holding on to what he’s got. (By Dasha Afanasieva)

Total’s halfway house. After BP held its dividend and Royal Dutch Shell slashed its by two-thirds, the $87 billion French crude producer is giving investors the option to receive its fourth-quarter dividend for 2019 in shares. Assuming 60% go for it – as happened the last time so-called “scrip” was offered – it will add $1 billion to the group’s under-fire free cash flow.

While this may look like fence-sitting, it could make sense. Total is less leveraged than Shell and BP and has a big liquidity buffer. More importantly, oil prices have rallied from the start of May as analysts start to get slightly less pessimistic about a recovery in demand. Retaining the scope to extend the “scrip” further, or wind it down, might prove to have been a better strategy than BP’s inaction and Shell’s doom and gloom. (By George Hay)


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