Morning Cents: June 29, 2020

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June 29, 2020 – Banks can’t tell who’s creditworthy, remdesivir’s hefty price tag and BP’s big sale.

Today’s newsletter 1,216 words, an 8-minute read. Let’s get to it:

‘Flying Blind Into a Credit Storm’: Widespread Deferrals Mean Banks Can’t Tell Who’s Creditworthy

In the economic fallout of the Covid-19 pandemic, banks are unable to tell who’s creditworthy anymore. Millions of Americans are unemployed and behind on their bills, but thanks to a provision in the government’s stimulus package, lenders can’t tell credit-reporting companies about deferred payments.

“Without accurate information, their only option is to pull back on credit,” Michael Abbott, head of banking for North America at consulting firm Accenture PLC, told The Wall Street Journal. “Banks don’t know who is going to pay and who isn’t. It’s like flying blind into a credit storm.”

Why It Matters

Before the pandemic, deferrals were rarely a problem for lenders. Banks rode the wave of strong consumer spending to record profits for years. Now, lenders are scrambling as the Federal Reserve said last week the biggest U.S. banks could face up to $700 billion in loan losses in a prolonged downturn. In the last few months, banks have severely tightened their underwriting standards and are now trying to figure out ways to adapt.

In some cases, lenders have asked credit reporting companies to remove borrowers in deferral from solicitation lists for credit cards and other loans. Less than a fourth of the usual number of credit-card solicitations were mailed in May. Lenders are also taking other actions – considering the use of employment data, reviewing cash flow in deposit accounts, developing new loan scores and asking consumers directly for more information.

Numbers to Consider

  • 100 Million – A rough estimate of the number of accounts Americans have deferred debt payments on since the pandemic started.
  • 483,000 – The number of general-purpose credit-cards issued from late-March to early-May. In 2019, weekly card originations rarely fell below 1.2 million.
  • 74 Million – The number of credit-card solicitations mailed in May, down from 316 million in February, according to Mintel Comperemedia.

Full Story: (WALL STREET JOURNAL)

Covid-19 Drug Remdesivir to Cost $3,120 for Typical Patient on Private Insurance

As remdesivir, an antiviral drug proven to hasten Covid-19 recoveries, becomes more ubiquitous in hospitals, Gilead Sciences Inc. announced it’s going to charge hospitals $3,120 for a typical patient with commercial insurance. So far, Gilead had donated a limited supply of the drug since it was authorized for emergency use in May. It plans to start charging for it in July, and the pricing scale will vary between the length of treatment courses and private versus government insurance.

Why It Matters

Remdesivir is the first effective antiviral treatment we have in the fight against Covid-19, reducing patients’ recovery times by four days. It’s easy to balk at its price point, but on average, the drug should help hospitals reduce costs by $12,000 per patient. However, effectiveness aside, the most significant implications of remdesivir’s use could be as a starting point for other drugs that could eventually safely treat coronavirus. Studying this drug offers an opportunity for modern medicine to learn more about how Covid-19 behaves, questioning whether the U.S. Government should play a role in funding its further development.

Numbers to Consider

  • 90 to 95 percent – The percentage of patients receiving the shorter, less expensive five-day treatment of remdesivir.
  • $3000 – The estimated daily cost of hospitalizations per day, according to Gilead Chief Executive Daniel O’Day.
  • $30 Million – How much the National Institute of Allergy and Infectious Diseases expects to spend on Covid-19-related remdesivir studies by the end of the fiscal year.

Full Story: (WALL STREET JOURNAL)

BP Exits Petrochemical Business in $5 Billion Deal

BP is exiting the petrochemicals space after agreeing to a $5 billion deal with British chemicals company Ineos Ltd. It’s a significant departure from its peers – Exxon Mobil Corp. and Royal Dutch Shell PLC have been growing their petrochemical businesses. But BP said it “would have taken considerable investment to grow the division,” which is smaller than its competitors.

Why It Matters

Among major oil companies, BP has one of the highest debt levels relative to its size – it racked up $6 billion in new debt during the pandemic alone. As a result, the company set a divestment target of $15 billion in assets by mid-2021. The Ineos deal covers a notable chunk of that.

BP also announced its ambitions to become net-zero on carbon emissions by 250. A report by The Guardian named the oil giant as the sixth-highest carbon producer in the space since 1965. Offloading its petrochemicals business aligns with its mission to “reshape its business for the global transition to lower-carbon energy.”

“This is another significant step as we steadily work to reinvent BP,” BP Chief Executive Bernard Looney told The Wall Street Journal.

Numbers to Consider

  • 34.02 – The number of tonnes in billions in carbon dioxide equivalent BP has contributed since 1965.
  • $400 Million – The deposit Ineos is putting down on the deal.
  • 14 Percent – The share of its global workforce BP announced it was cutting as a result of its future plans to reshape the company and the pandemic’s impact on oil prices.

Full Story: (WALL STREET JOURNAL)

A Quick Look

U.S. Coronavirus Cases Surge Amid Strains on Hospitals

  1. The U.S. recorded roughly 39,000 new coronavirus cases Sunday, according to data from John Hopkins University. It was the second straight decrease after Friday’s record-high 45,255 new infections but still surpassed April highs.
  2. Covid-19 has now infected more than 10.1 million people around the world and claimed approximately half-a-million lives. The U.S. accounts for nearly a quarter of each figure.
  3. Texas alone reported more than 5,000 cases for the sixth straight day and has closed down bars across the state as hospitals near capacity.

Full Story: (WALL STREET JOURNAL)

Worth Your Time

A Shift in the Car Business: The coronavirus has boosted online car sales as dealers have shut down during the pandemic. Online used-car company Shift Technologies Inc. plans to go public by way of a reverse merger later this year to ride the rising valuations of its rivals Carvana Co. and Vroom Inc. Shift is being valued at $415 million. (WALL STREET JOURNAL)

First Come First Serve: This week, New York City Council approved a bill paving the way for a pilot program of shared electric scooters. Just about every e-scooter company is applying to get in on the early stages of Manhattan’s scooter market. (TECH CRUNCH)

So Soon We Change: Just weeks after leaving the Reddit board of directors, Alexis Ohanian is stepping away from Initialized Capital. Ohanian could be moving on to focus on his pre-seed efforts, but as Tech Crunch writes, “partner departures in venture capital are rarely crystal-clear break-ups.” (TECH CRUNCH)

The End of the Line: The pandemic seemingly dealt Chesapeake Energy Corp. its final blow. The shale drilling pioneer filed for bankruptcy Sunday. It’s just one of many as more than 200 shale companies could file for bankruptcy over the next two years if oil and gas prices stay around the current levels. (WALL STREET JOURNAL)

A Couple Cents Content

In case you missed it, Justin Oh’s advises us not to get overly emotional about stocks in his bi-weekly live show (YOUTUBE)

Justin Oh explains the best metrics to look at when evaluating a company (TIK TOK) and how much the average person should pay for college (TIK TOK)

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See you tomorrow!

— Justin Birnbaum

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