While this might pose for a challenging outlook for many producers, the midstream and storage sector would benefit from this in the short-to-medium term, as markets are expected to remain in contango for the foreseeable future, until bigger production cuts by the OPEC and/or the COVID-19 crisis stabilises.
With COVID-19 markets now entering into the eighth week (counting from early March), the provision of liquidity by government programmes have started to take off and as late as this afternoon, Friday 24 April, EU leaders agreed a rescue package of €1 trillion. In the UK, banks have now lent over £2.8 billion, with 16,600 loans to SMEs under CBILS, according to UK Finance as at yesterday. This is an increase by £1.45 billion, doubling the balance in just a week’s time, and with more to come as applications total 36,000.
In addition to these healthy signs of liquidity support, the UK Chancellor announced a widening of the CBIL scope this Monday, allowing firms with over £500 million turnover and with private equity ownership to also benefit from the scheme, and as late as this morning to consider increasing the government guarantee to 100% for micro-SMEs. In Germany, the equivalent KfW programme saw some initial teething problems, but now experiences a significant spur in activity. According to KfW’s website, 15,150 emergency loan applications were made (as of 21 April), where the vast majority were for less than €3 million, and, according to employees of the bank, there is currently no official requirement for additional shareholder support, despite most sponsors having accommodated for the agency’s credit process by pledging to support their businesses. We expect issuers to err on the side of caution, raising more debt from both government programmes and lenders compared to what may be needed in a normal scenario.
As time passes under social distancing, glimpses of data concerning infrastructure borrowers emerge. This week saw Fitch and S&P presenting their outlook and actions on the assessed impact for Europe on the toll road and transport sector, respectively. The agencies’ outlook for the transport sector varies, with traffic reduction estimates for rating cases ranging 15-40% for 2020, and recovery to 2019 levels over one to three years, subject to sector and asset-specific dynamics. In total S&P and Fitch dished out 10 one-notch downgrades and over 20 downward outlook revisions. Whilst it is clear from their commentary and actions that they expect a broad impact from the virus, our main take away is, rather, by looking on their actions taken, which are limited to one-notch downgrades for now, with a vast majority of issuers remaining in the investment-grade spectrum – indicating a view that the sector is still well-geared up to withstand the outbreak.
It seems, however, that we now are seeing lights in the COVID-19 tunnel, with FT reporting that death-toll statistics in many European countries seem to be emerging from the peak. In the UK, the health secretary confirmed yesterday morning that experts have “high confidence” that we have reached the coronavirus peak – although simultaneously signalling that easing social distancing is still some way off. There have also been various rumours on vaccines circulating, with clinical trials on humans supposedly starting soon.
On this note, equity markets remained mixed this week, ending up relatively flat versus last Friday. Credit spreads behaved similarly mixed, and the Euro BBB iBoxx index has now come down c.40 basis points since its peak in late March. When looking at primary debt market behaviour, mixed signals prevail as well. Where some borrowers are seemingly hesitant in entering the fray, others want to (re)start refinancing processes and push ahead with issuance sooner rather than later, to avoid the potential of hitting the market if there is a second outbreak and hence protracted crisis environment, or, indeed to avoid a deal congestion if markets do come back.
Having now seen a number of infrastructure issuers, particularly in the transport sector, successfully undertake waiver talks with banks and PP note-holders in private or club structures, we now turn our gaze to more high profile issuers with listed debt to do the same, issuing consent solicitation proposals in the public eye. The associated market reaction will be interesting to observe, in particular given recent rating agency activity. A successful outcome would, in theory, allow these assets to withstand the COVID-19 outbreak in the medium term. We deem this bondholder reaction realistic, as it would align with the sentiment in the public and across sectors and industries, (and indeed the financial sector regulator) during the lock-down – to forgive, forget and look forward.
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