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S&P Global — 6 May, 2020

COVID-19 Daily Update: May 6, 2020

The coronavirus crisis continues as countries take concrete steps to lift containment measures and reignite their economic engines. More than 3.7 million cases have been confirmed worldwide, and more than 260,500 people have died, according to Johns Hopkins University data. The U.S., has suffered the highest death toll, of more than 73,000. The U.K.’s deaths now surpass Italy’s, previously Europe’s hardest-hit country, and all other European nations, with more than 30,000. Cases in India are spiking as the country lifts its strict lockdown that 1.4 billion civilians adhered to for approximately six weeks. Mexico’s healthcare system is overwhelmed by the pandemic, and yesterday the country reported its deadliest day.

In every region, corporates are facing credit pressures, banks are struggling under the changing landscape, and equity, energy, and commodity markets are experiencing volatility. Investing in infrastructure has emerged as a beacon of hope to potentially guide beleaguered nations out of crisis-caused recessions and into recovery.

While the pandemic abruptly ended the U.S.’s longest economic expansion in history, investing in infrastructure may kickstart the world’s largest economy. S&P Global Ratings’ Chief U.S. Economist Beth Ann Bovino models that a $2.1 trillion boost of public infrastructure spending over 10 years, to the levels (relative to GDP) of the mid-20th century, could add as much as $5.7 trillion to the U.S. economy in the next decade. This could create 2.3 million jobs by 2024 as the work is being completed. The additional 0.3% boost to productivity per year would lead to 713,000 additional jobs by 2029. Per capita personal incomes would be $2,400 larger than without infrastructure investment.

“Many of those jobs are middle-class jobs, and if it was done prudently, that public capital boost would enhance the productivity of private capital, raising its rate of return and encouraging more investment,” Ms. Bovino told S&P Global’s The Essential Podcast. “If we want to create the jobs that are necessary to bring many of those workers back to the workforce, I think one opportunity that's out there is infrastructure … looking at where the U.S. economy is and looking at how many jobs have been lost and how many millions will be lost, I think the time is now.”

As the pandemic has increased the importance of environmental, social, and governance (ESG) factors, sustainable infrastructure investment could be a foundation for national recovery plans. In its spring 2020 Economic Forecast released yesterday, the European Commission said the region will “experience a recession of historic proportions this year,” forecasting the bloc to contract 7.4% this year and the eurozone to contract 7.7%. EC President Ursula von der Leyen said last month that as European Green Deal investments will be key to the region’s economic recovery, investing in large scale renovations, renewables, clean transport, and infrastructure "will be even more important than before."

According to the World Economic Forum, “technologically advanced, sustainable and resilient infrastructure can pave the way for an inclusive post-COVID economic recovery. Low- and middle-income countries could see $4 return for every $1 spent on building infrastructure that focuses on long-term resilience.”

To be sure, global infrastructure assets and projects face a bigger economic and financial test from the coronavirus pandemic than during the 2008-2009 financial crisis, when they proved to be fairly resilient, according to Karl Nietvelt, S&P Global Ratings’ Head of Global Infrastructure Research. The effects of unprecedented lockdown measures, uncertainty about when containment measures will end, and what a social-distancing future will actualize as will likely impact credit quality.

Today is Wednesday, May 6, 2020, and here is today’s essential intelligence.

Insights on Infrastructure

Infrastructure: What Once Was Lost Can Now Be Found — The Productivity Boost

Because of the coronavirus pandemic, the longest U.S. economic expansion in U.S. history has abruptly ended: We forecast that U.S. economic activity will shrink by 11.8% ($566 billion) in real terms, peak to trough. The well over 30 million jobs lost at the trough will wipe out all the jobs created in 23 or more years. Economic damage will be three times greater than the Great Recession, in one-third the time. A $2.1 trillion boost of public infrastructure spending over a 10-year period, to the levels (relative to GDP) of the mid-20th century, could add as much as $5.7 trillion to the U.S. over the next decade, creating 2.3 million jobs by 2024 as the work is being completed. The additional 0.3% boost to productivity per year that it generates will lead to a net 713,000 more jobs on the books by 2029.

GDP growth in the past 10 years floundered at around 2.25%--one-third the rate of 1959 when the Eisenhower Interstate Highway System was built. The opportunity to build infrastructure (and create jobs) during the Great Recession in 2009 was missed. Right now, the U.S. may have a second chance. COVID-19 has created an urgency to invest in much-needed public health infrastructure. Six months from now, we may look back on the pandemic as an event like Super Storm Sandy, which called attention to the need for investing in infrastructure to prevent damage from climate change. Either way, it all comes back to infrastructure investment, which we need to tackle now.

—Read the full report from S&P Global Ratings

The Essential Podcast, Episode 8: The Road Forward – Infrastructure and Recovery

In this episode, host Nathan Hunt interviews Beth Ann Bovino, S&P Global Ratings' Chief U.S. Economist, the current state of the U.S. economy during the coronavirus pandemic and the role that infrastructure spending may play in an eventual recovery.

Listen and subscribe to this podcast on Spotify, Apple Podcasts, Google Podcasts, Deezer, and our podcast page.

—Listen to the latest episode of The Essential Podcast from S&P Global

Infrastructure Finance Outlook - Issue 1 2020

In this first 2020 edition of the Infrastructure Outlook, S&P Global Ratings focuses on the coronavirus and infrastructure credit quality, while not ignoring the energy transition and ESG. Infrastructure assets and projects face a bigger economic and financial test from the coronavirus pandemic than during the financial crisis of 2008-2009, when they proved to be fairly resilient. The effects of unprecedented lockdown measures around the world, uncertainty about when they will end, and what a social-distancing future would look like is bound to have an impact on credit quality.

—Read the full report from S&P Global Ratings

Banking Sector Under Pressure

Lacking government support, Mexico's banks face 'a more complex' crisis

Years of capital buffering will help Mexican banks navigate rocky waters ahead, experts say, as a perceived lack of fiscal support from the government aggravates conditions in an economy already battered by the coronavirus pandemic. Throughout the crisis, Mexico has stood out in its unwillingness to deploy the same kind of large fiscal stimulus packages seen elsewhere in the region and around the world. President Andrés Manuel López Obrador held fast to his want for fiscal austerity and sought to limit the scope of any rescue plans, even as Mexico's central bank has steadily easing interest rates and introduced new measures to help boost system liquidity. "In a crisis, both [the central bank and the federal state] must have countercyclical policies," said Jose Sanchez Tello, a director at financial think tank Fundef. "And so far, the government is the one that has fallen short."

—Read the full article from S&P Global Market Intelligence

For Large U.S. Banks, Loan Loss Expectations Will Be Key To Ratings

Large U.S. banks reported weak earnings in the first quarter, weighed down by substantial provisions for loan losses, though other earnings measures held up reasonably well. The banks entered the current crisis in a position of strength, but their ability to withstand stress is not limitless, and negative outlooks and downgrades could ensue if economic conditions worsen more than S&P Global Ratings currently expects. In S&P Global Ratings' view, by how much the banks are required to build up their allowances for projected loan losses will be a major indicator of potential rating actions.

—Read the full report from S&P Global Ratings

US banks detail exposure to hard-hit retail, restaurant segments

CenterState Bank Corp., People's United Financial Inc. and Pinnacle Financial Partners Inc. are among the U.S. banks with significant exposure to commercial retail borrowers as the group continued to report lending activity in first-quarter filings. CenterState's $1.6 billion in outstanding loans to retail commercial real estate represented 13.4% of its gross loans, according to S&P Global Market Intelligence data. People's United and Pinnacle Financial both reported exposure representing more than 10% of their total loan portfolios. Among reporting lenders, Bank of America Corp., Wells Fargo & Co. and U.S. Bancorp had high retail exposure by total loan balance.

—Read the full article from S&P Global Market Intelligence

Bank-stress indicator returns to pre-COVID-19 crisis levels – Risk monitor

The Libor-OIS spread, a closely watched metric showing stress in the interbank lending market, has returned to pre-crisis levels as financial markets' coronavirus-related anxiety dissipates. The spread measures the difference between the three-month dollar London interbank offered rate, the average cost for banks to borrow from each other, and the overnight indexed swap rate, or OIS. It was 38.53 basis points as of May 6, the lowest level since March 10 before widespread social distancing measures began to be imposed across the U.S. The measure touched this year's low of 12.75 basis points Feb. 20 and averaged 24.90 in the 12 months through the end of February.

—Read the full article from S&P Global Market Intelligence

From hygiene to aid, COVID-19 strengthens case for central bank digital money

The coronavirus outbreak has given a new urgency to central banks' quest to develop their own digital currencies, which experts say could help governments distribute stimulus money directly to businesses and individuals in a future crisis — potentially circumventing commercial banks altogether. Central bank digital currencies, or CBDCs, which could be ready for use in as little as three years, could also help with hygiene concerns by limiting the use of contaminated cash. And while they may not be ready in time to help the financial system during the current pandemic, CBDCs could mean central banks and governments are better prepared for the next crisis, whatever form that may take, according to industry insiders.

—Read the full article from S&P Global Market Intelligence

The Future of Credit

How COVID-19 Changed The European CLO Market In 60 Days

The 12-month trailing speculative-grade default rate for European corporates increased to 2.4% in March 2020 from 2.3% at the end of 2019. Market challenges that existed before COVID-19, including high leverage ratios, EBITDA add-backs, and cov-lite loans, are causing speculation that this may be the perfect storm for CLOs. So far, S&P Global Ratings believes European CLOs are showing strength when comparing the negative corporate rating actions that have affected them to the total number.

—Read the full report from S&P Global Ratings

In grim sign, US leveraged loan defaults set record in April

The U.S. leveraged loan market, which over the long-running, just-ended credit cycle managed to skirt wide-scale defaults thanks to borrower-friendly deal structures and strong corporate earnings, is proving no match for today's coronavirus environment. There were 11 defaults from loan issuers in April, the most ever during a month, exceeding the previous record of 10 in October 2009, in the wake of the last major financial crisis, according to the S&P/LSTA Index. While perhaps not unexpected, the relative flood of defaults was dramatic. April's tally was more than during the entirety of 2020's first quarter, and with grim forward economic indicators thanks to the COVID-19 pandemic, market sources expect more defaults ahead.

—Read the full article from S&P Global Market Intelligence

A guide to the Fed's 9 emergency lending facilities

The Federal Reserve has taken several emergency steps in response to the coronavirus pandemic, including slashing interest rates to near-zero levels and using its emergency lending authorities to help prevent a freeze-up in credit conditions. The Fed's actions have come at a much quicker pace than its response to the 2007-09 financial crisis, and they are taking the Fed into territory the central bank has traditionally steered clear of. A few of the Fed's nine lending facilities are similar to ones the central bank used during the last crisis and are focused on assisting some critical corners of the financial system that came under stress in March. Other Fed facilities are much broader, with goals that include helping corporate bond markets stay liquid, helping state and local governments manage their cash flows and working with banks to provide loans to small and medium-sized businesses.

—Read the full article from S&P Global Market Intelligence

Street Talk Episode 59 - Coronavirus bailout already towers over TARP, with more to come

The U.S. government responded to the potential economic fallout from the coronavirus with a historic $2 trillion stimulus package, with nearly $350 billion focused on small businesses through the Paycheck Protection Program, or PPP. While the PPP kicked off with a rocky start, Isaac Boltansky, policy analyst at Compass Point, believes the Federal Reserve and U.S. Congress are committed to making it work, including through additional funding. In the episode, Boltansky, a former member of the TARP Congressional Oversight Panel, discussed the mechanics of the PPP and criticisms to date as well as his expectation for more financial support to come since "deficit hawks are on the endangered species list" in Washington D.C.

—Listen to the latest episode of Street Talk, a podcast from S&P Global Market Intelligence

ESG in the Time of COVID-19

Coronavirus impact dents wind, solar revenues

Usually considered a safe haven from market turbulence, several U.K.-based investment funds focused on operating wind and solar parks have lowered their asset valuations in recent weeks, illustrating how even largely regulated renewable energy portfolios are not spared by the coronavirus pandemic. London-listed funds including The Renewables Infrastructure Group Ltd., or TRIG, and Foresight Solar Fund Ltd., both constituents of the FTSE 250 stock market index, have lowered their net asset value in recent weeks to reflect forecasts of depressed power prices for the rest of the year and beyond. That is shining a spotlight on a slice of the stock market that has so far been relatively safe from the coronavirus pandemic. Lower energy demand and a global gas glut have caused electricity prices to plummet, hammering thermal power producers in particular. By contrast, the renewables funds have bounced back strongly from a wider equity slump because their assets are mostly supported by fixed long-term subsidies. Although some of the funds lost as much as a quarter of their precrisis value at the depths of the slump in mid-March, they are now back to single-digit losses on a six-month comparison.

—Read the full article from S&P Global Market Intelligence

So far, COVID-19 fallout not altering plans to retire US coal-fired plants

While U.S. power generators continue to assess what the total implications could be of a decline in electricity demand caused by the economic impacts of the COVID-19 pandemic, those forecasting a shift to less carbon-intensive assets have not yet changed near-term plans to retire coal plants. In 2019, U.S. power generators retired 13,863 MW of coal-fired generation, the highest amount of coal capacity retired since 2015 when new mercury regulations drove the retirement of 15,124 MW of coal-fired capacity, an S&P Global Market Intelligence analysis shows. As of April 17, generators had 9,038 MW worth of capacity slated for retirement in 2020 and another 23,010 MW of coal capacity set to retire between 2021 and the end of 2025.

—Read the full article from S&P Global Market Intelligence

Who’s In? Who’s Out? Walmart & Twitter Dropped from the S&P 500 ESG Index, among Other Major Changes

After markets closed on April 30, 2020, the S&P 500® ESG Index underwent its second annual rebalance since it launched in January 2019. Last year, the rebalance resulted in some changes that hit the headlines—most notably, the removal of Facebook from the sustainable version of the iconic S&P 500. With markets currently in turmoil due to the outbreak of COVID-19, interest in ESG is at an all-time high. Thus, the big question, “Who made the cut?” is perhaps more relevant now than ever before. As of the 2020 rebalance, 311 constituents made it into the S&P 500 ESG Index, with 56 companies classified as ineligible and 138 as eligible but not selected.

—Read the full article from S&P Dow Jones Indices

Energy & Commodity Markets in Crisis

Hin Leong collapse sends shockwaves through oil trading industry

Hin Leong Trading, founded by Singaporean oil tycoon Lim Oon Kuin, was one of Asia's largest petroleum traders with assets spanning oil tankers and tank farms. In April, lenders froze credit lines to the trader and a bankruptcy protection filing revealed nearly $3.85 billion in bank debt. Hin Leong's collapse is one of the world's largest in oil and commodities trading, and the most significant in this sector since this year's oil price crash. The full extent of its market impact is yet to play out.

—Read the full article from S&P Global Platts

OPEC has much cutting to do after April crude output surge: Platts survey

OPEC turned up the taps in April, adding more glut to a reeling oil market, and now needs to greatly throttle back its crude production to comply with a global deal aimed at bolstering prices against the coronavirus crisis. OPEC's battle for market share last month pushed the 13-country bloc's output to 30.79 million b/d, an increase of 1.82 million b/d from March and the most since February 2019, according to the latest S&P Global Platts survey. Freed from quotas that had been in place for more than three years, core Gulf OPEC members Saudi Arabia, the UAE and Kuwait hit record highs in crude production, more than offsetting losses by Iraq, Angola and Iran, the survey found. But with the OPEC+ coalition of OPEC, Russia and nine other allies agreeing to implement the biggest coordinated production cut in the market's history starting in May, members will have to tighten up their discipline.

—Read the full article from S&P Global Platts

Feature: Nigeria awaits sharp downturn from oil price crash, production cuts to intensify

Nigeria's economy is bracing for a dramatic slump as the fallout from the oil price crash and the coronavirus pandemic will be devastating on its oil and natural gas industry. Africa's largest oil producer has already had to cut back its oil production as it faced up to the double whammy of a lack of buyers and storage facilities even as oil prices briefly recovered over $30/b after they hit 21-year lows in April. But the West African country has learned some lessons from the 2014/15 price rout, making it slightly better equipped to deal with the current crisis compared with previous occasions, according to industry figures and analysts. The worry is also that economic instability in Nigeria could lead more to social unrest, especially in the oil-rich Niger Delta, which is home to many militants.

—Read the full article from S&P Global Platts

Hydrous ethanol follows price rally in international energy markets

Hydrous ethanol prices in the Center-South Brazil have increased 7.5% or 120 Real/cu m ex-mill Ribeirao Preto since the most recent low price of Real 1,595/cu m ex-mill Ribeirao Preto on April 27. S&P Global Platts assessed hydrous ethanol ex-mill Ribeirao Preto at Real 1,720/cu m Tuesday. Hydrous ethanol prices in the Center-South have experienced a fraction of the much larger positive price move experienced in international energy markets during the previous two weeks. NYMEX RBOB June futures have increased more than 63%, and ICE Brent Crude July futures have increased more than 45% from their lows set on April 22.

—Read the full article from S&P Global Platts

Feature: US corn planting continues apace despite unprecedented market challenges

US corn farmers are already halfway through planting what could be the highest US corn acreage in eight years amid unprecedented market challenges and a pandemic, and analysts say planting will continue to strengthen. US corn futures hit a multi-year low of $3.01/bu last month, and demand destruction for the coarse grain from ethanol and feed industries has become clear in times of COVID-19. Furthermore, the possibility of a record US corn crop is blocking any recovery from weak prices even in the long term. With these factors, expectations of a smaller corn acreage, or a switch to soybean have started to emerge.

—Read the full article from S&P Global Platts

Written and compiled by Molly Mintz.