Division Head: Timur Kurbanov (NYU Shanghai), Co-Head: Charlie Solnik (California Polytechnic State University); Analysts: Alex Messick (University of California ), Ory Ratoviz (California Polytechnic State), Jimmy Wang (Western University )
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Economic Overview
Federal Reserve’s Monetary Policy in Response to COVID-19
The Federal Reserve of the United States used the full extent of its power to combat the negative effects of COVID-19 on the economy. The Fed lowered interest rates to near zero, engaged in security purchases, and large-scale lending. This effort is unprecedented and had a tremendous impact on Americans. The lower interest rates have lowered the costs of mortgages, auto loans, and all other loans, making money more accessible. The Fed has committed to keeping interest rates near zero until unemployment numbers have improved drastically, which could take as long as two to three years. The Fed also increased the money supply by purchasing securities -- this means that liquidity improved, markets were able to function smoothly, and people didn’t begin to panic. North America has benefitted from the Fed’s actions, as millions of Americans benefit from more stable financial markets and lower interest rates. By streamlining aid through forgivable debt, millions of small businesses were able to benefit, and in some cases, be saved. This influx of money and guaranteed low interest rates encourages corporations to engage heavily in debt markets. It has also promoted a degree of safety which allowed so many companies to engage in M&A. The M&A industry will continue to see growth as a result of the Fed’s policies, especially in the midst of a global pandemic where the tech sector continues to thrive. However, it could be the case that in the future, companies will choose debt instruments over M&A transactions as a result of the cheap cost of debt.
The CARES Act
On March 27th, President Trump signed the CARES Act into law, a $2 trillion relief package to deliver critical assistance to businesses and Americans impacted by COVID-19. The stimulus included direct payments to taxpayers, small business forgivable loans, essential business support, aid to healthcare providers and hospitals, bonus unemployment benefits, and a myriad of tax incentives. This monumental piece of legislation was the largest economic stimulus package in history and directly helped millions of Americans survive months of financial turmoil. The CARES Act was projected to lower GDP decline by over 7% in Q2, and lowered welfare losses by over 20%. Low-income households benefited the most from this stimulus. Clearly, the influx of money from the government is beneficial to the M&A industry. By slowing the detrimental effects of COVID-19 and stimulating the struggling economy, businesses have more confidence to pursue strategic transactions. Growth in this industry will continue as the government continues to provide a stimulus for its citizens and businesses.
Biden Tax Plan
After what seemed like an endlessly long election, on December 14, 2020, the Electoral College voted in favor of Joe Biden confirming his victory. With a new office in place starting January 20, 2021 there will be an overhaul of the tax system based on Biden’s plan to “Save the Middle Class to Save America”. This economic plan has a heavy emphasis on reversing Trump’s tax cuts and taxing the wealthy. Biden plans on introducing a progressive tax code that will generate close to $4 trillion in additional revenue spanning across a decade. The highlight of his proposed tax code include:
Reverting the top income tax bracket back to 39.6%, this will affect anyone individual with a gross income of $400,000, while also applying a Social Security payroll tax of 12.4%
Closing loopholes in the tax code
Increasing the top corporate tax bracket to 28%
Profits made from foreign subsidiaries of American firms will be taxed at 21%
Raising the tax rate on capital gains to 39.6% for investment income over $1 million
The elimination of qualified income deduction for S corporations and partnerships
The Tax Policy Center states that “The highest-income 20 percent of households (who will make about $170,000 or more) would bear nearly 93 percent of the burden of Biden’s proposed tax increase, and the top 1 percent nearly three-quarters.” However, the actual execution of Biden Tax Plan and his plan to introduce for stimulus hinges on the crucial results of the Georgia runoff election. With a republican senate the prospects of the tax plan may not be as promising. The new tax plan, especially the increase in capital gains tax would have a great material impact on the U.S. M&A market. Illustrated below is an example of the impact the new tax rate will have on M&A transactions. As a result of this new tax, owners who are thinking of selling may be more inclined to do so before the new tax law takes place. It may be possible that there will be an influx in M&A transactions in the first half of 2021 before the new tax plan comes into in effect. Once the tax law is in place, we may see a decrease in the volume and size of transactions during Biden’s presidential term. Another reason why businesses may be more inclined to exit, and merge is due to the increased payroll and higher corporate tax rate that will make it more expensive to hold the business for the next few years.
Capital Markets
Sotera Health Goes Public
Overview
Sotera Health (SHC), a global leader of mission-critical end-to-end sterilization solutions and lab testing and advisory services for the healthcare industry, made its stock market debut in late November. The company raised approximately $1.1 billion (before deducting underwriting discounts, commissions, and offering expenses) through the sale of 46.6 million shares priced at $23 each. The IPO was priced towards the high end of the range with an initial proposal to sell shares between $20-$23. Furthermore, the company sold seven million additional shares as underwriters exercised their option to purchase additional shares bringing the total count to 53.6 million shares sold.
Macroeconomic Analysis - What Triggered this Event?
Despite a lag in IPO activity during the second quarter, the third and fourth quarters of 2020 saw a resurgence of IPOs, breaking multiple records for deal numbers and proceeds. In the Americas, an 18% increase in IPOs activity and a 33% percent increase in proceeds over the previous YTD levels were observed. In regard to Covid-induced healthcare growth, the rise and need for sanitization of PPE is highlighted through, as cited in a report by Allied Market Research, the high revenue growth rate of 14.0% expected in the respiratory protection segment. Additionally, growth is driven by stringent health regulations pertaining to the adequate availability, allocation, usage, and disposal of PPEs. With both public and private groups continuously investing in new hospitals, in-home healthcare services, and primary healthcare centers, the potential to further increase demand for these PPE materials remains high moving into 2021.
Short- and Long-term Implications
Even before COVID-19, the US Bureau of Labor Statistics stated that the healthcare industry was projected to add more jobs than any of the other occupational groups, growing about 15% from 2019 to 2029. This growth puts Sotera Health in a comfortable long-term position as they continue to solidify their place within their market. Now more than ever, Biopharmaceutical companies working to advance Covid trials and now manufacture the vaccine need to keep their labs clean and ensure a safe product reaches the market. Thus, Sotera and other key life sciences firms will continue to play an increasingly significant role in the medical supply chain and services industry.
Snowflake Goes Public with Largest US Software IPO Ever
Overview
Cloud-based data-warehousing company Snowflake made its stock market debut mid-September by raising a larger than planned $3.4 billion by selling 28 million shares for $120 apiece, exceeding its targeted range of $100 to $110. Snowflake's stock jumped more than 160% above the IPO price to touch $315, sending the company’s market value to almost $90 billion, seven times the $12.4 billion valuations from its most recent round of funding in February, based on the number of shares outstanding, before easing to $253.93 at the close.
Asana
Management software company Asana acquired a market value of circa $3.4 billion after its September 2020 direct listing. The establishment of a $21 reference price per share by the New York Stock Exchange was well exceeded, originally opening at $27 per share trading over a third over the reference price within their first 10 hours on the market. A direct listing is a less popular method of publicly raising capital through transforming private to public shares rather than the distribution of new shares that occurs in an IPO. Asana was therefore able to enter the market and share its stock quicker than through an IPO with the ability to bypass the IPO underwriting stage.
Macroeconomic Analysis - What Triggered this Event?
Despite a lag in IPO activity during the second quarter, the third and fourth quarters of 2020 saw a resurgence of IPOs, breaking multiple records for deal numbers and proceeds. In the Americas, an 18% increase in IPOs activity and a 33% percent increase in proceeds over the previous YTD levels were observed. In regard to Covid-induced healthcare growth, the rise and need for sanitization of PPE is highlighted through, as cited in a report by Allied Market Research, the high revenue growth rate of 14.0% expected in the respiratory protection segment. Additionally, growth is driven by stringent health regulations pertaining to the adequate availability, allocation, usage, and disposal of PPEs. With both public and private groups continuously investing in new hospitals, in-home healthcare services, and primary healthcare centers, the potential to further increase demand for these PPE materials remains high moving into 2021.
Short- and Long-term Implications
Even before COVID-19, the US Bureau of Labor Statistics stated that the healthcare industry was projected to add more jobs than any of the other occupational groups, growing about 15% from 2019 to 2029. This growth puts Sotera Health in a comfortable long-term position as they continue to solidify their place within their market. Now more than ever, Biopharmaceutical companies working to advance Covid trials and now manufacture the vaccine need to keep their labs clean and ensure a safe product reaches the market. Thus, Sotera and other key life sciences firms will continue to play an increasingly significant role in the medical supply chain and services industry.
Delta Raises $1.25 Billion After Returning to Bond Market
Overview
Having previously raised $3.5 billion in April through a sale of five-year secured bonds, Delta, once again, turned to the capital markets in June to raise $1.25 billion in unsecured, five-year bonds. This issuance, yielding 7.38%, means Delta has raised an accumulative $10+ billion since the pandemic began. Credit rating agencies remain speculative over Delta’s future, with Fitch assigning a BB+ rating to the issuance, signifying its non-investment grade classification and inline with Delta’s corporate rating. However, such classification was expected given the unsecured bond's yield is about 23 times higher than the current interest on a five-year U.S. Treasury note, portraying their risk and potential future junk-rating.
Macroeconomic Analysis - What Triggered this Event?
Covid-19 rocked nearly every industry to its core, but the travel industry was brought to its knees as airlines faced a near 90% reduction in use by the middle of 2020. However, central banks and governments took a proactive role in creating a low-interest-rate environment for hard-hit businesses to pool credit from. Looking to avoid a second bankruptcy, Delta was one of many firms to take full advantage of the stimulating treasury markets. Since the pandemic, airlines have been struggling for liquidity. International border closures originating in March to varying degrees remain in place today, as non-essential cross-border travel between the U.S., Canada, and Mexico has remained limited throughout 2020.
Short- and Long-term Implications
Delta offered voluntary redundancies, buyouts and even planned on furloughing some staff in November, much like American Airlines and United Airlines, to reduce labour costs in a bid to try and weather the effects of a depleted top line. Fortunately, they were able to cut costs by the year’s end, thus retracting the potential furlough of 1,700 pilotes. However, while other industries are ready to return to business as usual, Delta will likely see both business and leisure air travel adversely impacted for many years to come. Moving forward, Delta adopted a similar ‘recovery path’ as Southwest and several industry peers in which they planned a reduction of their aircraft numbers and gradual retirement of their older, less efficient aircraft.
Delta’s issuance of unsecured bonds rather than secured notes signifies a root towards their long recovery, and this combined with the fact the bonds were initially marketed with a yield of 8% suggest the general credit market has been improving in recent months. However, still experiencing a relatively large daily cash burn, from both COVID-induced costs and their wider economic impact, revenues are recovering, but nowhere near pre-COVID levels as Delta will likely see losses for the remainder of the year, much like other US airlines.
Visa Goes Green with 500 Million Bond Issuance
Overview
Visa is the latest company to join the expanding list of firms issuing green bonds. On August 11, Visa announced its total green offering of $500 million. The bond will pay a semi-annual coupon of 0.75% with a maturity date of August 15, 2027 and is in line with Visa’s commitment to drive sustainability. The proceeds will be used to upgrade existing infrastructure projects to green buildings which are generally certified by organizations such as LEED (Leadership in Energy and Environmental Design). The funds will also be used for improved energy and water efficiency projects. This bond offering comes at a time when investors are seeking low risk investments over more risky ones such as those in industries like Oil and Gas, allowing Visa to take on a corporate socially responsible initiative at a low cost.
Macroeconomic Analysis - What Triggered this Event?
2020 saw dramatic shifts across debt and equity capital markets, the rapid acceleration of sustainability within the bond markets was arguably the most pronounced trend. Green bond issuance was up 31% over the previous quarter by the end of Q3 and total issuance to date surpassed $1 Trillion globally back in September. Notably, issuance extends beyond the energy industry, as numerous blue-chip stocks across various verticals are increasingly incorporating sustainability within their core activities. One of the reasons behind Visa’s issuance is many industries such as retail, oil, and gas have taken hard hits, so risk levels on commercial papers from companies in these areas increasingly pushed investors towards safer industries and companies with good credit ratings such as Visa. Consequently, blue chip companies like Google, Amazon, J&J as well as Visa have been able to source funding at low rates.
Additionally, the rise of impact investing serves as an additional catalyst for the firm’s bond issuance. Private equity firms are starting to emphasize investments in companies that contribute towards environmental sustainability. Thus, in attempts to attract investors, companies are increasing sustainability attempts. In fact, as of October, over 350 green bonds have been issued since the start of 2020. Increasing investor demand and peer pressure from proactive competitors have further incentivized businesses to increase sustainability practices.
Short- and Long-term Implications
At the start of the COVID-19 pandemic, Visa was hit particularly hard by a decline in transaction volume with credit transactions declining by slightly over 30%. Travel spending, which comprises a material portion of their overall revenue, saw a decline of $17.7Bn back in March. However, since the initial decline of overall spending, transaction volume is now steadily recovering at about 5% a month. In fact, Visa’s Q4 earnings are expected to demonstrate a material trend towards recovery due largely to the shift toward touchless payment methods.
Consumers are increasingly using digital payment options and looking for major corporations to emphasize environmental issues. Visa addresses all of these trends with their low-cost green bond issuance, thus setting the firm up in the long run while building solid goodwill with consumers. The company is also continuing to expand partnerships (most recently with PayPal) and is building a more secure way to purchase goods and services. In a time of uncertainty, Visa’s debt issuances are one of the safer and more reliable options for investors who are looking for value-driven securities.
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