ArkMalibu Update: Assessing the Impact of COVID-19

Please read on for a brief summary of the M&A market, the economic outlook, and reasons to be optimistic. It has been three weeks since our last market update.

Reasons for Optimism in M&A and Capital Markets

• 199 deals closed in the U.S. & Canada over the past 7 days (last week 214 deals closed – COVID bottom was ~100 deals per week)
• Fannie Mae & Freddie Mac post improved earnings in the second quarter, continuing evidence of a rebound in U.S. housing market
• “We are committed to using our full range of tools to support the economy in this challenging time…We have held our policy rate near zero since mid-March and have stated that we will keep it there until we are confident the economy has weathered recent events and is on track to achieve our maximum employment and price stability goals.” – Federal Reserve Chairman Jerome Powell (Jul 29^th, 2020)

July 30^th Stock Market Update

• As of July 30th, the S&P 500 bounced back 45.1% off its March low, bringing YTD performance into positive territory (+0.5%)
  • Procter & Gamble shares rose 2.4% after fiscal fourth-quarter profit & revenue exceeded expectations, driven by demand for cleaning and personal health products
  • UPS shares rose 14.4% after reporting second-quarter profit and revenue exceeded targets, driven by demand for healthcare shipments
    • Marks UPS’ stock’s biggest one-day percentage gain since going public in 1999
  • Despite recent anti-trust hearing, four of the largest tech companies added nearly $200 billion to their market values in after-hours trading, pushing their cumulative market cap to ~$5 trillion
    • Additions include $74 billion by Apple, $74 billion by Amazon, $43 billion by Facebook, and $8 billion by Alphabet
  • As of yesterday’s close, the Nasdaq has rallied 54.3% since March 23rd, bringing YTD performance to 18.0%

Bond Market Update

• High yield new issuances recover from March lows as spreads begin to stabilize, reaching $60B in June and totaling $238 billion YTD, up 48% from the same period in 2019
• As of July 27^th, municipal bond new issue supply totaled $7.6 billion, and fund flows were positive for the eleventh consecutive week at $2.1 billion
  • High yield municipal bond prices have risen for weeks, with most maturities up to 10 years offering their lowest yields in history
    • 10-year muni bonds yielded a record low of 0.71%, and the 30-year muni bonds yielded 1.43% (only 5 bps cheaper than the historic low of 1.38%)
  • State of Maryland sold four general obligation deals totaling +$1 billion, one of the strongest trading credits in the market
• New revolver borrowings by U.S. companies reached nearly $300 billion from March to May, and have stabilized with an additional $17 billion added through mid-July
• Leveraged loan new issuance volume reached $41 billion in June, up from a March low of $13 billion and nearly double April & May levels

Good News We’ve Been Reading

Economic Recovery Continues Across Globe

United States:

• As of July 27^th, coronavirus cases in the U.S. rose at the slowest daily pace since July 7^th
• Nation’s steepest-ever recession is expected to be the shortest, with job growth, consumer spending, and other key measures bouncing back sharply in May and June after bottoming in April
• Consumer spending on big ticket items such as homes, automobiles, and other long-lasting purchases increased in June
• Many schools devise strategies to implement safety requirements and meet educational guidelines in order for students to return to schools in the fall

Around the Globe

• EU agrees on 750 billion Euro stimulus plan to support economic recovery in member states, earmarking money for general recovery, research, and health
  • Marks the biggest unified fiscal action historically undertaken by the EU
  • PMIs for July suggest EU economies are roaring back, with PMI for services increasing from 48.3 in June to 55.1 in July, and the composite index increasing from 47.4 in June to 54.8 in July
• United Kingdom expands visa processing services and eases travel restrictions from 60+ countries
  • British services PMI has increased from 47.1 in June to 56.6 in July, a five-year high, while manufacturing PMI has increased from 50.1 in June to 53.6 in July
• Germany’s economy expected to surpass it’s pre-pandemic size by the end of 2021
  • Early recovery in China has helped German auto manufacturers and high-tech engineering businesses to offset weaknesses in other countries
  • Incentives to discourage employers from laying off workers have contributed to higher consumption levels
  • Manufacturing & capital goods sectors implement rapid technological change amidst rising competition
  • Volkswagen AG expects to report positive operating profit for 2020
• Africa begins to reopen airports, remove curfew, and slowly resume international tourism
  • Egypt, Ethiopia, Kenya, Liberia, Rwanda, and Tanzania open to travelers visiting and staying in safely designated high-tourist areas
  • Cape Verde, Cameroon, Ghana, Morocco, and Nigeria to open by August
• Bermuda & Barbados opened borders to international travelers on July 1^st and July 12^th, respectively
• Thailand reopens beach resorts to domestic travelers to infuse cash into tourism industry
• Japan provides small & medium sized companies with financial incentives to invest in equipment for home working
• China’s economy grew strongly in the second quarter, with real GDP up 11.5% from the first quarter and up 3.2% from just a year earlier

Vaccine Development Update

• Moderna receives additional commitment of $472 million from federal government to support start of Phase 3 clinical trial, to be conducted at 90 sites throughout the U.S.
• Pfizer’s Phase 3 clinical trial will begin in the U.S. and expand overseas to include 120 sites total
  • U.S. agrees to pay Pfizer nearly $2 billion to secure 100 million doses to provide for U.S. patients free of charge
• Combined, Moderna & Pfizer will inject 30,000 adult volunteers, with Moderna’s injections 28 days apart and Pfizer’s injections 21 days apart
• University of Oxford & AstraZeneca’s co-development targets Phase 3 clinical trials in August, while Johnson & Johnson’s Phase 3 clinical trial targets September launch
• Texas A&M University System Center for Innovation in Advanced Development & Manufacturing selected to mass-manufacture Novavax vaccine
  • Novavax received the largest-yet vaccine contract for $1.6 billion in early July
• Kodak receives $765 million loan to launch Kodak Pharmaceuticals, with goal of producing generic active pharmaceutical ingredients in the U.S. to reduce dependency on foreign drug makers

Innovations Bloom, Habits Change as Society Adjusts to COVID-19

• Microsoft launches digital skills initiative to make educational content available to those hit by COVID
• E-commerce platform Grab partners with delivery company AtYourGate to provide contactless in-airport services
• IKEA launches platform to imagine home designs post-COVID
• Japanese Donut Robotics designs smart masks that connect to phones via Bluetooth
• Mumbai retail décor firm Surreal Design Studio creates sanitizing tunnels and booths

Positive Encouragement

• “Nothing in life is to be feared, it is only to be understood. Now is the time to understand more, so that we may fear less.” – Marie Curie
• “Start by doing what’s necessary; then do what’s possible; and suddenly you are doing the impossible.” -Francis of Assisi
• “You may encounter many defeats, but you must not be defeated. In fact, it may be necessary to encounter the defeats, so you can know who you are, what you can rise from, how you can still come out of it.” – Maya Angelou
• “Success is not final, failure is not fatal: It is the courage to continue that counts.” – Winston Churchill

ArkMalibu is happy to answer any questions you may have and to offer guidance during this challenging time. Until our next update, we send best wishes to you and yours for safety and health.