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Please note that this session was held at a particular point in time (Wednesday May 13,2020, 4pm-5pm EDT), and in light of the rapidly evolving Covid-19 situation, it is possible these discussions are no longer accurate after that date.
WEBINAR: COVID-19 FINANCIAL POLICY RESPONSESInternational and U.S. relief programs, with a deep dive on the Main Street Lending Program (MSLP) and the Paycheck Protection Program (PPP)May 13th, 2020
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© Oliver Wyman
OLIVER WYMAN FINANCIAL SERVICES AMERICAS COVID-19 WEBINAR SCHEDULE
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M A R C H
A P R I L
M A Y
March 11 COVID-19 and Risk Managers
March 25 Impact on the US Financial System: Epidemiology, Cyber, Liquidity, Policy Responses and CECL
April 8 Impact on the US Financial System: Epidemiology, Interest Rates, Cares Act, Resilience
April 22 Impact on the US Financial System: Pandemic Modelling and Consumer Credit
April 29 Impact on Consumer Credit
May 6 Impact on the US Financial System: Cyber and Return to Workplace
May 13 [Today] COVID-19 Financial Policy Responses
Completed Today
Materials and recordings for completed webinars and registration for upcoming webinars can be found here: https://www.oliverwyman.com/our-expertise/events.html
WEBINAR AGENDA
1 Global Policy Response 15 min
2 U.S. Policy Themes 10 min
3 Main Street Lending Program (MSLP) 10 min
4 Implementing PPP: Forgive But Don’t Forget 10 min
5 Additional Q&A Remaining time
OUR PANELISTSTil SchuermannPartner & Co-Head – Risk & Public PolicyNew York
Elizabeth St-OngePartner, Financial ServicesNew York
Douglas ElliottPartner, Risk & Public PolicyNew York
Oliver WuenschSenior Advisor, Public PolicyZurich
Vivian MerkerPartner, Digital & Retail and Business Banking New York
Tammi LingPartner, Finance, Risk & Public Policy, and Co-Head of the New York Office New York
GLOBAL POLICY RESPONSEPanelist: Oliver Wuensch
1
EUROAREA COUNTRIES HAVE TAKEN MEASURES OF 19 PERCENT OF GDP, DRIVEN BY DEBT CAPACITY AND CRISIS IMPACT
140
60
20
120
0
180
10
50
30
40
100
0
160
20
40
60
80
200
220
Den-mark
Nether-lands
5
Greece
Mea
sure
s/G
DP %
Italy
26
Publ
ic D
ebt/
GDP
%
UKBelgium
12
France Germany Portugal Spain
19
USA
1512
52
Euro Area
4
19 21
14
44
Fiscal spending Deferrals Guarantees (below the line) Debt/GDP
Source: Oliver Wyman analysis, IMF, OECD, Eurostat, Bruegel
Outright fiscal spending: Provides direct fiscal stimulus, but permanently impacts the budget
Deferrals:Provide temporarily liquidity relief with temporary fiscal impact to be offset later
Guarantee schemes:Provide breathing space for businesses,with fiscal impact being deferred
• Healthcare expenses: Financing measures to address public health issues created by the crisis, including expanding healthcare capacity, purchase of equipment and infrastructure, protective measures
• Short-term worker benefits: Subsidy of wages for temporarily underemployed workers to prevent layoffs, provide relief for businesses and allow for swift restart once economic activity resumes
• Unemployment benefits: Social benefits for the unemployed, including financial injections into unemployment insurance funds
• Cancellation of taxes and social security contributions for a limited time period
• Suspension of tax and social security paymentsto provide liquidity relief
• Credit lines for businesses– Provided through the banking system (facilitated
by development banks) with and without risk sharing with banks
– Direct credit extension by existing and newly created state funds
– Increases leverage and weakens financial position of supported companies, can therefore negatively impact growth
• Equity injection by the state in private enterprises to support solvency and broader economic policy
EUROZONE RESPONSES HAVE PREDOMINANTLY BEEN TAKEN AT NATIONAL (MEMBER STATE) LEVEL, BUT SHARE COMMON THEMES
Actions were taken at member-state level as industrial and social policy is member-state, not EU-level responsibility! Size of measures varies greatly across member states
ALTHOUGH UNPRECEDENTED STEPS HAVE BEEN TAKEN AT EU-LEVEL TO FACILITATE MEMBER STATE ACTIONS, IT MIGHT NOT BE ENOUGH
The EU has substantially relaxed existing rulebook• Limits of the “Stability and Growth Pact” have been suspended (max 60 percent Debt/GDP, max 3
percent primary deficit)• State aid rules have been relaxed to allow for member-state support measures targeting businesses
… it is again on the ECB to do “whatever it takes”• Establishment of a Pandemic Emergency Purchasing Program to put up a firewall to protect weak
sovereigns and avert funding stress in corporate debt markets (overall volume EUR 750bn, can be expanded)
Still, member states’ headroom depend on their fiscal firepower• Prohibition of fiscal transfers is a key pillar of the European Monetary Union• Mobilization of European Stability Mechanism (2 percent EZ GDP)• Safety nets developed during the Euro crisis (European Stability Mechanism) address liquidity issues
onlyIn absence of a EU-level fiscal capacity …• Pre-crisis attempts to establish a small Eurozone fiscal capacity have so far failed due to lack
of agreement on fiscal governance (target: 2 percent of EZ GDP vs 22 percent in US)• Agreement on debt mutualization (“Corona bonds”) failed, but Corona-specific transfers enjoy
political consensus
… but it is to be seen whether ECB can continue to substitute lack of political action ...… also in light of the recent decision of Germany’s Constitutional Court!
MARKETS WATCH POLITICAL DISCUSSIONS CLOSELY, WITH SPECIFIC EMPHASIS ON ITALYSpread Italian BTP / German Bunds (10yr)
-80
-60
-40
-20
0
20
40
60
800
50
100
150
200
250
300
05/13/202004/15/202003/17/202002/18/202001/21/2020
Spre
ad B
TP/B
und
(10y
r)
Announcement ECB PEPP
Political discussion re: EU-level support
LATIN AMERICAN COUNTRIES ENTERED THE CRISIS IN A VULNERABLE FISCAL POSITION
-7
-3
-2
-4
-1-2
92
5451
-6
60
-4
-3
-7
-8
-5
-2
-1
0
0
30
10
20
90
40
50
70
80
100
Prim
ary
fisca
l bal
ance
/ %
GDP
27
93
Debt
/ %
GDP
Brazil Mexico
28
Chile Argentina Peru Colombia
Fiscal balance / GDP % Debt / GDP %
Data as per end-2019; Source: Oliver Wyman analysis, IMF, Worldbank, Bloomberg
… BUT STILL HAVE TAKEN SUBSTANTIAL MEASURES FOCUSING ON PROVIDING IMMEDIATE SUPPORT TO HOUSEHOLDS AND BUSINESSES
10 2 5 43
39
3
37 6
10
92
54
28
93
27
51
84
107
40
15
0
5
160
10
35
30
20
0
180
25
60
45
50
55 200
140
20
220
40
60
80
100
120
3
Mea
sure
s / %
GDP
Chile Euro Area
2
1
Debt
/ %
GDP
Brazil Mexico Colombia
2 1
Peru
3
USAArgentina
810
7
19
1413
Debt / GDP %Fiscal spending Deferrals Guarantees
Source: Oliver Wyman analysis, IMF, IADB, Bloomberg
… WHILE BEING CONFRONTED WITH CAPITAL OUTFLOWS AND FUNDING STRESS, WHICH WILL IMPEDE ECONOMIC RECOVERY IN ABSENCE OF EXTERNAL SUPPORT.
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n 20
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n 20
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n 20
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n 20
20
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eb 2
020
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eb 2
020
19 F
eb 2
020
26 F
eb 2
020
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ar 2
020
11 M
ar 2
020
18 M
ar 2
020
25 M
ar 2
020
01 A
pr 2
020
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pr 2
020
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pr 2
020
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pr 2
020
29 A
pr 2
020
06 M
ay 2
020
USD
/BRL
USD
/MXN
USD/MXN USD/BRL
Source: Oliver Wyman analysis, Thomson Reuters
U.S. POLICY THEMESPanelist: Douglas Elliott
2
POLITICIANS AND THE FED HAVE RESPONDED WITH MASSIVE SUPPORT FOR THE ECONOMY
Huge fiscal stimulus Largest emergency government credit programs in U.S. history
Massive monetary stimulus Modest regulatory shifts to encourage lending
Pervasive support for credit markets
WE ARE LIKELY TO SEE SUBSTANTIALLY MORE STIMULUS
I believe officials are still underestimating the probable
economic impacts of the pandemic, in part due to the
likelihood of further lockdowns
• There is already considerable pressure for further stimulus– More aid for states– Infrastructure programs
• In an election year, politicians are likely to outbid each other on stimulus
• The Fed will step up its actions as well if the worst case economic reality occurs
• There do not appear to be any big short-term constraints to block fiscal or monetary stimulus, especially as inflation is not a short-term threat
THERE ARE STILL AREAS WHERE LIQUIDITY IS A MAJOR ISSUE…
Small businesses with proportionally smaller
employee bases (sometimes single proprietorships)
Commercial real estate Mortgage servicers
… and others
…BUT THE POLICY FOCUS NEEDS TO SHIFT FROM LIQUIDITY TO SOLVENCY• There was too much financial leverage in the corporate sector to start with
• Credit was the only fast way to respond to pandemic-related liquidity issues
• But, many businesses now have very fragile balance sheets and are at risk of bankruptcy
• Any new credit programs should be more discriminating, so we don’t encourage “zombie” companies that drag down our economy
• The government should encourage equity infusions
• We need to optimize our response to the necessary wave of balance sheet restructurings that could swamp our bankruptcy courts
MAIN STREET LENDING PROGRAMPanelist: Elizabeth St-Onge
3
MAIN STREET LENDING PROGRAM – OVERVIEWAS OF APRIL 30, 2020
SPV purchases
85–95%of eligible loans
$525 BN Recourse loan
EXPANDED Loan facility (95%)Increases existing term loans; min. of $10 MN; max. lesser of $200 MN or 35% of existing debt or Debt-to-EBITDA < 6
$75 BN Equity investment
NEW Loan facility (95%)New term loan; min. of $500 K; max. lesser of $25 MN or Debt-to-EBITDA < 4
PRIORITY Loan facility (85%)New term loan; min. of $500 K; max. lesser of $25 MN or Debt-to-EBITDA < 6
LOAN TERMS
• 4 year maturity• 1 year deferred amortization• Floating rate of LIBOR + 300 bps• 75–100 bps origination fee
SPV TERMS
• Lender pays 75–100 bps facility fee on amount purchased by SPV
• SPV pays 25 bps per annum servicing fee
BORROWERS TERMS
• Must have less than 15,000 employees or $5 BN in 2019 revenue
• Should not use loan to pay other debt except under Priority facility
• Should follow compensation, stock repurchase, and capital restrictions of CARES act
• Should have significant operations in the U.S.
SPV
$600 BN
Lenders fund remaining 5–15%
• What is the objective of the program overall?
• What are our objectives as an institution?
• Which Clients / borrowers should we target?
• Should we be proactive or reactive?
• Will there be demand?
• What are the risks? • What underwriting
guidelines should we use?
• What non-financial risks should we consider?
• What are the benefits?
• Are the economics viable?
• How do we streamline our processes for speed and scale?
• What are the on-going monitoring and operational requirements?
KEY CONSIDERATIONS & IMPLICATIONS FOR LENDERS
Objectives Clients (Borrowers) Risks Benefits Operations
1 2 3 4 5
IMMEDIATE ACTIONS FOR LENDERS
Understand the economic impact
Shore up operations and processes
Proactively manage client communications
Build a dynamic credit decisioning framework
Mobilize a “credit war room”
MSLP-specific
Relevant to broad COVID response and MSLP
FORGIVE BUT DON’T FORGETHow to Mitigate Risk and Promote Fairness while Implementing the Paycheck Protection Program (PPP)Panelists: Vivian Merker, Tammi Ling
4
Small businesses account for a significant fraction of the workforce
The PPP created forgivable loans to prop up small business employment
• 2-year, 1% interest loans• Fully forgivable if used for allowable
expenses in the first 8 weeks• Fully guaranteed by the Small
Business Administration
Controversy and operational issues plagued the rapid rollout
Borrower eligibility and fraud$669 BNTotal funding
$342 BNFirst tranche
$191 BNSecond tranche
Lender risks and challenges
CARES Act interpretation and implementation
164 MMTotal US labor force
60 MMin 6 MM companies with < 500 paid employees 26 MM
single proprietorships
Main focus of the Paycheck Protection Program
Source: Approximate data, sourcing include IRS, Statistics of US Businesses, Bureau of Labor Statistics, and SBA
PAYCHECK PROTECTION PROGRAM OVERVIEWThis key component of the CARES Act is intended to help small businesses with their payroll and other key expenses
• Customer attrition and loss of trust • Reputational risk, especially from critical media coverage• Operational errors, particularly due to high volume and compressed timelines• Loss of loan guarantees• Scrutiny and investigations from regulatory and lawmakers• Fines and other enforcement actions
Origination
Forgiveness (approximate)
Regular servicing
Delinquent servicing and guarantee redemption
2020 2021Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecApr May Jun Jul Aug Sep Oct Nov Dec
2022Jan Feb Mar Apr May Jun Jul
KEY SOURCES OF RISK THROUGHOUT THE LOAN LIFECYCLEWhile initial focus has been on the origination period, lenders should prepare for other challenges ahead
April 3, 2020Start of program
June 30, 2022End of term forlast loans
RECOMMENDATIONS TO SUCCESSFULLY IMPLEMENT THE PPP
Provide clear communication
Run well-defined and documented processes
Maintain existing (high) KYC/AML standards
Strengthen quality assurance and controls
Leverage technologyto promote operational
consistency
Establish a “control tower” response team
READ OUR LATEST INSIGHTS ABOUT COVID-19 AND ITS GLOBAL IMPACT ONLINEOliver Wyman and our parent company Marsh & McLennan (MMC) have been monitoring the latest events and are putting forth our perspectives to support our clients and the industries they serve around the world. Our dedicated COVID-19 digital destination will be updated daily as the situation evolves
Visit our dedicated COVID-19 website:https://www.oliverwyman.com/coronavirus
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