The decision to close large parts of the UK economy in response to COVID-19 is having a huge impact.
PMI releases have shown dismal performance across all Western economies. The UK services sector recorded a fall from 53.2 to 34.5 in March and across the EU PMI data all fell about 20 points.
The effects of the shutdown on jobs was laid bare last week with unemployment figures released from Europe and the US. In Europe, France has seen nearly four million workers, roughly a fifth of the private sector, temporarily laid off in the past two weeks. Spain, which already suffers from an unemployment rate of 14%, shed jobs at a record pace with nearly 900,000 workers losing their jobs since mid-March. In the UK, applications for Universal Credit have rocketed with nearly 1 million people applying for the benefit scheme.
However, these figures are dwarfed by those released in the US last week. The unemployment rate in early March increased to 4.4%, the highest seen in over two years, from February’s low of 3.5%. The US unemployment rate is set to deteriorate further from here as initial jobless claims continued to increase. The week to 28 March showed 6.6 million workers filed for unemployment insurance more than double seen in the previous week, taking the total for the past fortnight to ten million. Forecasts from the Federal Reserve of St Louis show an unemployment rate of 30% in Q2.
Corporate financing schemes
One way governments are trying to protect businesses is through state-backed loans for corporates. Across Europe and the US, companies have been given the opportunity to borrow from the central bank and government as a means not only to help pay their running costs but also to refinance any debt that has come to maturity.
State-backed loans are proving to be beneficial as debt markets have been very volatile over the past month. There have been few new issuances in the sterling market as investors are increasingly worried about the impact of a prolonged shutdown on corporates. As a result, the market is demanding larger new issue premiums on new debt in both the public and private markets to compensate. This has increased the attraction of the financing facilities announced by the Chancellor, which give corporates the opportunity to borrow at low all-in costs.
The Coronavirus Business Interruption Loan Scheme (CBILS) is aimed at smaller entities with revenues under £25m and provides up to £5m of loans. The Coronavirus Large Business Interruption Loan Scheme (CLBILS) is targeted at larger entities with a turnover up to £500m and offers up to £25m of funding. Both schemes are delivered through commercial lenders and are backed by the British Business Bank, although some details on CLBILS are still to be confirmed since the facility was launched only last week.
Another scheme, aimed at larger non-financial corporates, is the COVID Corporate Financing Facility (CCFF). This facility operates via the purchase of short-term debt in the form of commercial paper. Companies looking to apply need to demonstrate that they make a material contribution to the UK economy and were in sound financial health prior to the COVID-19 shock. This is measured as having an investment grade short-term or long-term credit rating, although it does not preclude unrated entities from applying. Pricing on the facilities will depend on rating but will be priced at spreads of 20-40bps over the OIS curve. Overall, for those looking for additional funding this could be an extremely attractive offering.
Banks have seen overwhelming demand for all the facilities offered by HM Treasury and from our conversation with corporates, response times from lenders and the Bank of England have been slow. The hope is that the government is able to get the funding in place to companies before any further damage is done to the economy.
For more information, please contact Sohail Singal, Associate Director at Chatham, at email@example.com.