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Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Scotiabank analyst Jason Bouvier analyzed the balance sheets of Canadian oil producers to uncover those that are struggling most with debt,

“We have undertaken a stress test analysis of balance sheets for our coverage universes by examining debt covenant metrics and credit capacity availability under both current strip pricing and a flat US$25/bbl WTI case for 2020 and 2021 … Our figures suggest the companies most at risk of tripping covenants in 2020E (based on current capex estimates and [futures curve] pricing) are: BTE, BNP, DEE, PEY, POU, and SGY … the companies we see as best positioned to maintain solid balance sheets in a strip / low oil price environment include AAV, ARX, BIR, CNE, FRU, PSK, PXT, TOU, and VII.”

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“@SBarlow_ROB Scotia: Cdn energy companies most, and least, like to trigger debt covenants” – (research excerpt) Twitter

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BofA Securities quantitative strategist Savita Subramanian now projects a year-over-year decline in earnings per share of 15 per cent for the S&P 500 in 2020, and this has very important implications for the high yield bond market (my emphasis),

“We expect S&P 500 earnings and EPS to decline 15% YoY in 2020, assuming some resumption of “business as usual” in the 2H. We believe Energy is likely to see the biggest earnings and dividend hits. Health Care earnings are likely to hold up best (but keep in mind that Health Care is one of the few sectors where leverage is higher than in 2008.) …

"Needless to say that access to capital for the HY and leveraged loan issuers remains completely shut for the time being … We have never seen a 15% drop in earnings without the credit cycle turning … Turning the page to HY-specific indicators of credit stress we are watching closely Figure 15 shows the proportion of distressed bonds in our index (spreads over 1,000bps). At 30% here, this indicator is at levels we have previously seen in Nov 2000 and Mar 2008 … our default rate model has moved materially higher and reached 9% estimate for overall HY issuer-weighted default rate over the next 12mo. The model also indicates potential energy defaults at 25-30%, leaving us with 6% in ex-energy HY default rate estimate.”

“@SBarlow_ROB BoA: "leveraged credit issuers are, without an exaggeration, fighting for their survival" – (research excerpt) Twitter

See Also: “From coronavirus crisis to sovereign debt crisis” – FT Alphaville (free with registration)

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BMO economist Doug Porter notes an indicator of domestic small business conditions with pessimistic implications for overall GDP growth,

“Canada doesn’t have the wealth of up-to-date economic stats that the U.S. boasts, but there are some gems. The CFIB, which represents small businesses, reported their monthly Business Barometer for March and it saw a record low in the month. The sentiment index was essentially carved in half from 60 to 30.8 (where anything above 50 says things will improve in the next year). This index has a pretty decent track record of lining up with y/y GDP growth. And, the latest reading is suggesting that measure could drop to around a 5% y/y decline. Sorry to say, but it could be worse in Q2, before bouncing in Q3’

“@SBarlow_ROB BMO: "Another Real-Time Sign of Economic Stress"” – (research excerpt, chart) Twitter

***

The Wall Street Journal is reporting that Royal Bank is attempting to sell US$600-million in commercial mortgage debt seized from debtors,

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“RBC, Canada’s largest bank by assets, was seeking bids Wednesday for more than $600 million of debt tied to commercial mortgages, according to people familiar with the matter… Mortgage bonds of all kinds have tumbled in value in recent weeks, even those that had top ratings from credit agencies. Investors are worried borrowers will default en masse as the economy slows to a halt. That has prompted margin calls from banks that lend against these bonds. Borrowers can either try to sell the debt themselves at fire-sale prices or post more collateral to buy time—or the lender can seize the bonds and try to sell them itself.”

“RBC Seeks Fire-Sale Buyers for Seized Mortgage Debt” - Wall Street Journal (paywall)

***

Newsletter: “Three investment strategies to avoid in crisis conditions” – Globe Investor

Diversion: “The Best Sci-Fi Binges You Can Watch in a Single Day (or Weekend)” – i09

Tweet of the Day:

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