Coronavirus puts clutch of countries in junk rating danger zone

Public buses parked at a bus station in Bogota. S&P Global’s mass scalping of oil producers last week has left Colombia just one notch from junk status. (AFP)
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Updated 04 April 2020

Coronavirus puts clutch of countries in junk rating danger zone

LONDON: Being stripped of one’s investment grade credit rating is a chastening moment for any government, but the crushing economic impact of the coronavirus, and for some the oil market crash, are putting at least half a dozen countries at risk.

South Africa, long a likely victim, was demoted to “junk” by Moody’s on Friday, and now that the virus has tipped it over the edge, the focus is on who might be next.

There is no shortage of candidates.

Deep recessions and the cost of bolstering health care systems and bailing out firms is sending debt levels soaring from Italy to India, where ratings are already on the low rungs of investment grade.

S&P Global’s mass scalping of oil producers last week has left Colombia just one notch from junk and Mexico, with its $130 billion bond market, just two cuts away.

“This a very expensive fiscal exercise,” fund manager Eaton Vance’s head of country research Marshall Stocker, said of the epidemic. “In every way it is going to challenge debt ratings.”

Becoming a ‘fallen angel’ — as a downgrade to junk is known in rating agency parlance — can set off a wave of problems.

It automatically excludes the country’s bonds from certain high-profile investment indexes which means conservative funds — active managers as well as passive “trackers” — are no longer able to buy and sell them. It can cut the bonds’ value as collateral in central bank funding operations too.

Credit default swaps (CDS), which can be used to insure against debt problems, currently foresee Mexico, India, Indonesia and Colombia all being demoted to junk, according to an S&P Capital model called the Market Derived Signal Score.

The model also has Italy showing as one cut away, rather than the two that its BBB S&P rating actually represents, and A- grade Saudi Arabia too as being only one step away rather than four.

Morgan Stanley doesn’t expect any more moves into junk this year, but its strategist Simon Waever points to cuts to junk being priced into bond markets for both Colombia and Mexico, noting that the anticipation of a move to non-investment grade tends to do more damage than the actual cut.

Brazil was estimated to have seen over $20 billion yanked out of its markets when it lost investment grade in 2015.

“The majority of the (bond yield) spread widening happens before the downgrade. Then when the downgrade comes there is a bit more but then it stops and starts to recover.

“For Mexico and Colombia they (bond spreads) are already pricing these downgrades coming,” Waever said.

Morgan Stanley’s European analysts have also pinpointed Italy as another potential downgrade risk if rating agencies turn more cautious.

S&P and Fitch both have negative outlooks on their BBB Italy ratings. S&P has warned of a 10 percent euro zone economic contraction if lockdowns last, though it has also stressed the importance to Italy of the European Central Bank’s bond buying support.

S&P’s former head of sovereign ratings, Moritz Kraemer, who led the firm’s mass downgrades during the euro zone debt crisis, has come up with some stark calculations.

Aggregate government debt in the euro zone shot up from 65 percent to 90 percent of GDP between 2007 and 2012, and sovereign ratings fell around three notches on average.

Kraemer sees euro zone debt topping 100 percent this year and Italy, which has been hit the hardest by COVID-19 and is also Europe’s largest debtor, faring worse.

A “10/10” scenario in which an economy contracts 10 percent this year and its budget deficit worsens by 10 percentage points of GDP, would see Italy’s debt spike from 130 percent to 158 percent this year and to 167 percent by the end of 2022.

If the same happened in France, its debt rate would be 135 percent, Portugal’s 144 percent and Spain’s 129 percent.

“The deterioration of public finances is likely to turn out worse now than during the euro area crisis,” Kraemer said.

“With the backdrop of the devastating scale of the human tragedy and the outsized economic repercussions threatening Italy, the scenario of the sovereign slipping into speculative grade can no longer be easily dismissed.”


INTERVIEW: Humanity is not handling coronavirus pandemic very well, says health care investment chief Helmut Schuehsler

Updated 07 June 2020

INTERVIEW: Humanity is not handling coronavirus pandemic very well, says health care investment chief Helmut Schuehsler

  • Head of TVM Capital on the challenges and opportunities, successes and failures, of the COVID-19 crisis

Helmut Schuehsler has had what you might call a pretty challenging time of late — and it is by no means over.

He runs the health-care investment firm TVM Capital Healthcare from Dubai, at a time when the reputation of the medical business is being called into question due to the scandal over NMC Healthcare. The UAE’s biggest provider has gone bust with more than $4 billion in unaccounted debt.

Schuehsler operates in the private equity investment sphere, which itself is facing bigger issues than ever before, especially in health care and more so in Dubai, after the 2018 collapse of Abraaj Group, once the private equity flagship in emerging markets.

And there is the small issue of the most significant health challenge humanity has faced in over a century — the coronavirus pandemic, which has changed the economic fundamentals of the medical industry beyond recognition in the space of a few months.

“Things are coming apart,” Schuehsler told Arab News on a Zoom call from his house on the Palm, Jumeirah, where he has been self-isolating for the past three months, apart from a couple of visits to the doctor.

He was referring to the global medical infrastructure and specifically to the problems with the World Health Organization (WHO), rather than the TVM business, for which he still sees big opportunities in South East Asia and the Middle East, especially Saudi Arabia.

As a professional investor with more than 30 years’ experience in health care, he holds firm views on the way the international community has responded to the pandemic crisis.

“Humanity is not handling this very well. We should have had a strengthening of the WHO. It is irrational to destroy international cooperation in the face of an international challenge. We’re doing things in a very myopic way,” he said.

He uses the term “titration” to describe the policy response of lockdown followed by reopening and, sometimes, reimposition of curfews and travel bans. Titration is a chemical process in which two compounds are mixed together in varying quantities until they neutralize each other.

“It is a case of titrating openness against social distancing. In the beginning, it was all about not overwhelming the capacity of intensive care units to ensure people had access to beds. Now, we are managing better. The public and private sector have made room for that. The first phase of the response — providing critical health care and devices — is coming together,” Schuehsler said.

“Now you’ll see a gradual reopening and closing, again and again. The danger of an exponential growth in infection rates does not go away. If people stop social distancing and we have demonstrations and concerts with thousands of people, it will go exponential tomorrow,” he explained.

He sees some cause for optimism in the work of the pharmaceutical industry — in which TVM has been a big investor over decades — to first develop effective therapeutics and, finally, a vaccine.


BIO

BORN: Vienna, 1959

EDUCATION: PhD in social and economic sciences, business administration, Vienna University of Economic and Business

CAREER

  • Investment manager, Horizonte Venture Management, Vienna
  • Managing partner, TVM Capital, Munich, Germany

  • Chairman and CEO, TVM Capital Healthcare, Dubai


“I think that by the end of this year there will be between two and five drugs that will gain emergency approvals for marketing in Western Europe. That does not mean they will be available worldwide, but availability will be just around the corner, depending on manufacturing times and how long it takes to set up distribution systems. These will prevent people from becoming so sick that they have to go to hospital,” he said.

On the possibility of a vaccine, Schuehsler believes there could be something available by the end of next year. He does not like talk of a “silver bullet” to take out the virus, however, partly due to the long development and processes of testing and approval necessary for vaccines, and partly because of a growing sentiment worldwide against vaccines.

“It’s only a silver bullet if people are actually using it, and we all know there is a growing resistance movement against vaccines, which is unfounded and which endangers people, especially children. If we want to see our children dying again from polio or measles or chicken pox, we should stop vaccinating them,” he said.

The overall response by regional authorities in UAE and Saudi Arabia has been “OK,” he said, especially considering the distraction caused by the volatility in global oil markets.

“The confluence of those two elements — oil and the virus — has caused a difficult situation for governments. They have to spend a tremendous amount in terms of getting their pandemic response up and running,” he said.

Schuehsler was a pioneer of the biotech investment business in Germany, with a network of investors in Europe and the US, before looking at the growing health-care market in the Middle East in 2009.

Now, TVM is also expanding in South East Asia, a region Schuehsler sees as having great potential in the post-pandemic world.

The pandemic will change the way he does business. In the UAE, with its sizeable expatriate populations, some medical services will change as people leave; others have already gone through a period of contraction during the most intense phase of the COVID-19 crisis.

Fertility treatment, for example, via the Bourn Hall clinic in Dubai, saw a sharp decline in business in April, Schuehsler said, though that has recovered “a bit” last month.

About four years ago, he began to look at Saudi Arabia, the biggest health market in the Middle East. The growth there has been patient and deliberate.

“Saudi Arabia is a much larger market, with different economics and setups, but we consider it to be a very attractive area. The country is the focus point of the Middle East.

“You need to believe certain things when it comes to Saudi Arabia. For example, that the Vision 2030, the opening up and diversification of the economy, will still happen even despite the COVID-19 and oil crises. You have to believe that they will stay the course and that things have been simply delayed and not indefinitely postponed. But we are making that assumption,” he added.

TVM does not invest in hospital chains, but rather in more specialist medical businesses: Long-term acute care, home care and disease management, ventilated care, fertility and reproductive treatment, and the manufacture of medical devices via an Egyptian subsidiary.

Schuehsler has expanded from the UAE to the Kingdom via the Manzil Healthcare Services brand in Riyadh and the Cambridge Medical business in Dhahran. The medical devices business recently signed a partnership deal with the well-known Olayan Group to expand distribution in the Kingdom.

He believes there are still opportunities to invest despite the crisis but warns that the investment outlook has changed.

“Deal making is less clear to me. For an investor, this is not a particularly great time because none of us can predict the future. If you look at a company that has lost half its business and you think you can do great deal, then maybe,” he said.

Timing of investment decisions takes on critical importance, he added.

There is also potential in introducing investors from the US and Germany to Saudi partners. 

“There are a lot of German companies that have good connections in Saudi Arabia, and Saudis appreciate German technology and products. There have been many contacts made with the Saudi government and health-care industry. We can help investors from Germany because we have excellent relationships in the Kingdom,” he said.

During his career, Schuehsler has raised more than $1 billion in committed capital from global investors, overseen 120 investments in the health industry, and been involved in more than 80 major transactions over the years, including the lucrative sale of his ProVita International business to NMC in 2015.

He understands the concerns of investors, employees and patients in the health business and how to avoid the pitfalls that have bedeviled health care and private equity recently in the Middle East.

“TVM has all the transparency and governance you could want. We run our business in the Middle East in the exactly same way we would have run it if we’d been in Boston or Munich,” he said.

“I think people look at private equity and health care with suspicion because so many bad things have happened. We get caught in this, but we are the most internationally minded player in the way we build partnerships, the way we compensate people, the way we run our board meetings in portfolio companies.

“That’s what I’m trying to put in place: Openness, transparency and compliance in the markets we invest in. That’s our contribution to broader society,” he added.