Good morning. After last night’s failed Senate vote, we noted suggesting that failure likely needed to happen to move the process forward and that a deal could be announced this morning. Negotiators are not there yet. Following a series of meetings late last night, Senator Schumer remarked at 12:30am that there still was no agreement, negotiators were getting closer, staff would work through the night, and the principals will reconvene in the morning at 9am.
The legislation is already weeks behind and the failure to reach agreement over the weekend only further delays the assistance needed. But politics is a process and they are getting there.
The Senate is officially out of session until noon today and we would not expect the first votes to happen until 1pm at the earliest. But the key data point for investors is announcement of an agreement, which can happen at any time.
Below we outline what is in the current version of the legislation, which was unveiled yesterday morning. This is the legislation that failed to move ahead, so the final product is likely to change with new initiatives added and more restrictions attached to some of the provisions currently in it. But below serves as a baseline, as some critical provisions were added over the weekend.
As a recap of our Friday note, the legislation is broken into four mechanisms to use the federal government and Federal Reserve’s balance sheets to minimize the impact of unemployment: 1) Cover the payroll and overhead of small businesses to prevent future layoffs; 2) Shore up household balance sheets through tax refunds and replacing lost individual income from coronavirus-related economic dislocations; 3) Provide corporate liquidity for businesses; and 4) Provide the necessary funds for a proper health care response to the crisis. A number of new provisions were added in these four categories since Friday:
Fed Liquidity Facility for Corporate & Municipal Bonds and Asset-Backed Securities: $425bn will be allocated to a lending facility established by the Fed to purchase corporate and municipal bonds. The legislation further allows the Fed to purchase obligations in other interests in secondary markets. This provision was critical, given that credit markets had been freezing up in recent days, and the US government will be the backstop. Secretary Mnuchin noted yesterday that the equity of the US government could be levered up to roughly $4 trillion in liquidity. Some clients remarked that the liquidity boost could be even higher.
Collateralized Loans and Guarantees: The legislation specifies $50bn of direct lending for passenger airlines, $8bn for air cargo, and a new category of $17bn for businesses critical to “maintaining national security.” We read the latter as a reference to Boeing. The loans cannot be forgiven and no direct aid can be part of this program. Buybacks are disallowed while the loan is in place. And companies need to do their best to maintain employment. Democrats are trying to strengthen the oversight and restrictions on this money as part of the final deal.
It is important to note that the airlines want direct aid, not loans. We believe this is an important distinction because Democrats were referring to the loan facility as a “corporate bailout,” but were also pushing for direct aid for airlines separately. We are keeping a close eye on this today given the importance of direct aid to the airlines. The legislation also suspends the airline ticket tax as a way to help airlines through the backdoor.
Legislation Includes $3BN for Strategic Petroleum Reserve Purchases: We are not sure if this provision will make it in the final package, as Democrats push for renewable energy tax incentives in exchange. But if the SPR purchases make the final cut, they should help energy and possibly the high yield market.
Corporate Tax Changes Could Help Companies Impacted by the Economic Effects of COVID-19: The legislation allows businesses to carry back losses from 2018, 2019, and 2020 to the previous 5 years, which will allow businesses access to immediate tax refunds. The net interest deduction is also loosened from 30 percent of EBITDA to 50 percent, thereby allowing companies to deduct more of the interest cost.
Payroll Tax Payments for Employers are Delayed: Cash flow will get boosted by a delay on the employer side of the payroll tax. Employers can delay their 2020 payroll taxes until 2021 and 2022. This could add $300bn of liquidity for small and large businesses.
Federal Government Paying for Small Business Payrolls and Overhead: $350bn is provided to small businesses to provide 8 weeks of cash flow assistance to small businesses through 100 percent federally guaranteed loans. Employers that maintain their payrolls will be eligible for loan forgiveness for their payrolls, rent, and utilities. This proposal is retroactive to February 15, 2020. Additionally, another provision allows for SBA to pay all principal, interest, and fees on all existing SBA loan products including 7(a), Community Advantage, 504, and Microloan programs for 6 months.
Tax Rebates: The legislation provides a one-time tax rebate of $1,200 per individual and $500 per child. Instead of two rebates for $500bn, the program was cut to one rebate for $250bn, with the remaining funds moved to boost unemployment insurance. A change was made to the program design to ensure lower-income Americans do not get a lower tax refund. Refunds start to phase out for higher income earners, starting at $75,000 for individuals, $112,500 for head of household, and $150,000 for married couples.
$250BN For Unemployment Insurance Benefits: The US is bracing for a surge in unemployment claims. The legislation will cover gig economy workers and self-employed workers while boosting the benefit by $600 per week, with an additional 13 weeks of benefits on top of the normal 26-week benefit.
Retirement Account Minimum Distributions Halted: Minimum required distributions from 401(k)s and IRAs will be halted to ensure retired Americans are not forced to draw down their capital in 2020. The legislation also waives a 10% penalty on coronavirus-related early distributions from 401(k)s and IRAs.
More Money for Hospitals: This seems likely to us and the disagreement is over the dollar amount.
Money for State and Local Governments: This looks possible to us. Again, there are disagreements over funding levels, but we expect some money for state and local governments.
An Employee Retention Tax Credit: This is somewhat controversial because we did this in late 2009 and did not find it to be an effective tax credit. Still, Democrats are demanding its inclusion.
More Oversight over the Corporate Loan Facility: Democrats want a series of restrictions on Treasury’s authority to dole out loans. As a starting point, we expect the same restrictions that were placed on Paulson during TARP, better transparency of where the loans are going, and buyback protections to be included. One major sticking point is the language about maintaining payroll as a condition of that loans, as many companies believe it is inflexible.
Democrats Are Also Pushing For:
Forbearance Protections: Democrats want provisions that specifically protect individuals from evictions, foreclosure, and forbearance.
Student Loan Issues: Student loan borrowers would have a full 6 months of interest free relief from paying federal student loans. The bill would also include both federal Direct Loans and federally guaranteed student loans. Democrats were pushing for a $10k debt cancellation.
SNAP Funding: McConnell’s bill does not increase SNAP funding, although the Phase 2 legislation that was signed last week did. Democrats want this bill to also increase funding.
Catalysts For A Deal:
Schumer: The Senate Democratic Leader is from NY, which is currently at the center of the COVID-19 storm. The current package is massive enough for him to sign off on it. He needs more items to help Pelosi. Leftover items are on the margin and he needs to cut a deal, soon.
Pelosi: The House is not in session. Most House members do not want to come back. We found it hard to believe Pelosi would have gotten a bill drafted overnight. We see Pelosi saying that as a negotiation tactic to get her final priorities in the Senate package and to then go back to her Caucus to say she got a better deal in order to get the deal approved by the House.
McConnell: The Republican Senate Majority Leader needs to deliver a package. News of Rand Paul testing positive for the coronavirus has accelerated the urgency. We also see the conservative base getting restless over the contents of the bill, and leaving this piñata out there is risky.
Stocks: Today is the first day of electronic trading. There will be extreme pressure on Congress if there is not a deal reached in principle before the open this morning.
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