The week’s news included; TfL secures £1.6bn bailout, Saudi Arabia snaps up cheap US stock incl. Facebook & Disney, record number of UK firms join S&P junk pile, Boohoo raises £200m for M&A activity
Below are our top 10 stories that you need to know about. Be sure to check our twitter page and Facebook page for regular posts of important headlines. Get all the important stories and insights straight into your inbox by subscribing to our mailing list here.
Opinion articles of the week:
- Forbes – Why The $380 Million Deal For Newcastle United Football Club No Longer Makes Sense For Anyone.
- Legal Cheek – Lawyers are ‘biggest threat to reopening the economy’, claims financial journalist.
- BBC News – Coronavirus: Lloyd’s of London says claims to be biggest since 9/11
1. UK FURLOUGH SCHEME EXTENDED
The UK government has announced that the furlough scheme will be extended by four months. Employers will, however, must begin sharing the costs of the scheme and start bringing workers back part-time once lockdown restrictions ease. The furlough scheme costs the UK government £14 billion every month and now covers 25% of the total UK workforce. Employees on the scheme will continue to receive 80% of their salary up to £2500 until October. The extension was to avoid a cliff edge where firms would be forced to sack workers once the scheme was due to end in June. Lockdown restrictions largely remain in place so most businesses will not have any income for some time. Any end to the furlough scheme would need to coincide with the full reopening of the economy in order for companies to have the funds to retain staff.
Chancellor Rishi Sunak also give a stark warning of large impending recession. The UK economy shrank by 2% in the first quarter of 2020 despite lockdown measures only starting at end of the quarter. Some analysts have predicted double-digit economic decline for quarter two. This would dwarf the economic decline seen in the 2008 financial crisis. The true economic impact of the coronavirus outbreak remains to be seen.
Check out our insight article exploring the economic impact of previous pandemics.
2. TFL FINANCIAL WOES
Transport for London (TfL) was on the brink of insolvency but has secured a £1.6 billion bailout with some major conditions. London Mayor Sadiq Khan warned that TfL would run out of cash without a bailout due to a 90% fall in income since the lockdown. This created a huge £3 billion funding gap. The government provided a bailout of £1.1 billion in cash and a £500 million loan but issued some conditions. Here are the key changes that will now take place:
- Suspension of free travel for under 18s
- Suspension of free travel for those with disabilities and those over 60 during peak hours
- Congestion charge will increase 30% to £15 and will apply for the whole week with longer hours
Even with the bailout, there will still likely be a funding gap due to the collapse of the passenger journeys. Many companies such as Google have said staff can work from home until the end of the year so total volume of journeys will likely remain low. There was also a recognition that fares would need to rise in order to help finance the service.
3. SAUDI SNAPS UP CHEAP US STOCK
Saudi Arabia’s sovereign wealth fund has bought billions worth of shares in US giants such as Facebook, Bank of America and Disney. These purchases put the kingdom’s holdings in US listed firms at $10 billion. Latest SEC filings show the sovereign wealth fund bought $713 million of Boeing shares, $522 million in Facebook, nearly $500 million in Disney, and $487 million in Bank of America. All stock prices have declined due to the coronavirus outbreak so the fund went on a shopping spree.
Saudi Arabia has been keen to diversify its economy and reduce its dependence on oil. Saudi Arabia is however, the only oil producing nation that can produce a barrel of oil for under $10. Despite this, as oil prices hit historic lows the kingdom is seeking new streams. The sovereign wealth fund currently owns a $2 billion stake in Uber and invested heavily in SoftBank’s $100 billion Vision fund.
4. RECORD NUMBER OF BRITISH FIRMS JOIN JUNK PILE
Credit rating agency S&P has placed the bonds of a record number of UK companies into “junk” status. S&P has now stripped 111 UK companies of their investment grade status including British Airways, Next, ITV. The most recent big-name addition is Marks & Spencer. The rating pertains to creditworthiness and is a guide for investors on how likely they are to recover their money. A company with junk status is high risk for investors and for the company, borrowing money becomes pricier. Investment grade bonds at S&P are given a rating between AAA and BBB-. Beneath this, down to D-, these are considered junk and are applied where firms have or are at high risk of defaulting on their debt. These fresh additions to the junk list are primarily due to the coronavirus lockdown which has slashed revenues and put many companies in distressed positions.
5. BREXIT TALKS FALTER
The UK and the EU have resumed free trade deal talks but no progress has been made. Negotiators from both sides held a video conference to discuss the future relationship between the UK and the EU after the Brexit transition period. In this latest round, both sides admitted very little progress had been made towards reaching a viable deal. Both sides, however, blamed each other for the stalling talks. In order to accept a free trade deal, the EU wants the UK to abide by certain EU rules & standards. For the UK however, abiding by such rules undermines the hallmark of Brexit which was the freedom to set its own rules. Whether this fundamental difference can be overcome remains to be seen.
The UK is set to detach itself from all EU regulations once the transition period ends at the end of 2020. Despite the coronavirus-altered landscape, the UK remains committed to this deadline and will not extend it. If no deal is reached in the next 6 months the UK will leave and trade with the EU on WTO terms.
6. FACEBOOK LAUNCHES ZOOM COMPETITOR
Zoom Video has been one of the few benefactors of the coronavirus lockdown but Facebook is seeking to steal their thunder. Facebook has launched “Messenger Rooms” which allows video calls of up to 50 participants without time limits. The service can be used by those without Facebook accounts and will soon be accessible from Instagram, WhatsApp and Portal.
Zoom has proven itself to be the video conference system of choice for almost every lockdown group activity from pub quizzes to business meetings. By April, Zoom secured roughly 300 million daily meeting participants, up from 10 million participants in December 2019. Facebook’s new tool will certainly not affect Zoom’s dominance with regards to business usage. For social usage however, Facebook’s new application could easily take a slice the lockdown video call pie.
7. BOOHOO RAISES CASH
Fashion retailer Boohoo has raised £200 million from investors as it eyes expansion. The firm will list 5% of its share capital on the Alternative Investment Market (AIM) this month. Boohoo undertook a bookbuild to obtain bids for its shares prior to listing and secured £197 million. Boohoo stated this cash raise was in anticipation of potential M&A opportunities arising over the next few months. With coronavirus lockdowns battering balance sheets across the retail sector, we are likely to see a wave of consolidation. Boohoo Group posted pre-tax profit of £92.2 million last year and turned over £1.23 billion.
8. J.C. PENNEY BANKRUPTCY
US department store J.C. Penney has filed for Chapter 11 bankruptcy protection as the coronavirus lockdown wiped out income. The retailer will put itself up for sale and restructure the business. It is not clear how many stores will close. Like many retailers JC Penney was struggling long before coronavirus. It failed to attract enough footfall and didn’t adapt to online marketing quickly enough. The company has posted losses practically every year since 2012. The steepest loss was in 2014 where it suffered over $1 billion in losses for the year. Founded in 1902, J.C. Penney operates in 49 US states and is one of the oldest US department stores.
9. BRANSON TO SELL VIRGIN GALACTIC STOCK
Sir Richard Branson is to sell 25 million shares in Virgin Galactic to help his ailing business empire. His airline, Virgin Atlantic, is struggling severely due to the coronavirus outbreak and has filed for bankruptcy in Australia. Branson will now sell 22% of his holding, seeking to raise around $500 million. This cash will primarily go towards a fund to support his travel business. The company had sought to obtain a £500 million loan from the UK government, but this was rejected. Over 3000 job cuts and a reduction in its fleet size had already been announced but this will not be enough to keep it afloat. Virgin Galactic is listed on the New York Stock Exchange and was the first publicly listed space tourism company after floating in 2019.
10. ASTON MARTIN SHARE PRICE COLLAPSE
Aston Martin’s share price has tanked 98% since its IPO less than 2 years ago. The luxury car maker has been beleaguered by issues and coronavirus has further compounded them. Aston Martin’s IPO in October 2018 fell well short of expectations, but shares started at £19 a share. Last week, shares traded at 35.4p after the company reported a huge Q1 huge loss of £118.9 million. This was driven by sales falling by over 50% due the coronavirus outbreak shutting dealerships and weakening consumer demand.