B2 | RE P O RT O N BUS I N ES S
Italy is pushing the
Nicole Amirault, a social worker at Sunnybrook Health Sciences Centre in Toronto, holds an iPad on Thursday.
About 47 iPads have been donated to the hospital’s coronavirus patients. FRED LUM/THE GLOBE AND MAIL
Donated iPads allow
coronavirus patients
to connect with family
JOSH O’KANE
SMALL BUSINESS REPORTER
PITCHING IN
This is the first instalment in a regu-
lar series looking at how businesses,
individuals and community groups
are helping in the fight against the
coronavirus pandemic.
The donor: Wildeboer Dellelce
LLP and the WD Group of Compa-
nies, with staff, clients and
friends
The gift: $100,000 for iPads
The cause: Helping patients at
Sunnybrook Health Sciences
Centre communicate with loved
ones
S
hortly after Sunnybrook
Health Sciences Centre dras-
tically restricted visitors to
A horde of corporate zombies may soon
be revealed by stress in the bond market
IAN
McGUGAN
OPINION
S
tock markets are growing
confident the worst of the
pandemic is behind us. The
debt market, though, will need
more convincing.
In a report this week, the Insti-
tute for International Finance es-
timated that global debt now tops
US$255-trillion. That works out to
a staggering US$87-trillion more
than at the onset of the financial
crisis in 2008.
Yet the enormous borrowing
binge that has taken place over
the past 12 years shows no signs of
slowing down. Just the opposite,
in fact. The world’s mountain of
outstanding debt is set to soar
this year as countries and busi-
nesses alike raise money to help
offset the damage from the novel
coronavirus.
The IIF figures the onslaught of
new borrowing this year will pro-
pel the global debt burden to
more than 342 per cent of the
world’s economic output, a
mighty jump from the 322-per-
cent level at the end of 2019.
What is not clear is how the
bond market – especially the
market for corporate debt – will
react to this galloping demand for
cash. The tug-of-war between
nervous lenders and money-hun-
gry borrowers could send bor-
rowing costs for many companies
spiralling higher.
Rising interest rates would be
bad news for businesses that have
piled on debt willy-nilly over the
past decade, but are now being
downgraded by credit raters over
virus-related concerns. In a worst
case, these borrowers will be con-
fronted with higher borrowing
costs at the same time as lock-
downs due to the pandemic eat
away at their sales and profits.
Signs of stress are already evi-
dent. Consider the striking num-
ber of well-known companies
that have lost their investment-
grade ratings on their bonds in re-
control the spread of the novel
coronavirus, its leadership began
brainstorming how they could
keep patients connected with
families.
Many patients had their own
phones or other devices to make
video calls, but a large chunk ei-
ther didn’t have such a device or
didn’t know how to connect with
friends and family virtually. Hos-
pital staff realized they could
bridge this gap by providing the
technology themselves.
Early on March 22, hospital
chief executive Andy Smith e-
mailed board member Perry Del-
lelce sharing the idea. Mr. Del-
lelce, a founder of the corporate-
finance law firm Wildeboer Del-
lelce LLP, began contacting part-
ners, colleagues and others.
“A big part of healing is being
comfortable and having support
from loved ones,” Mr. Dellelce
says. “If you’re alone, it’s harder
to heal.”
cent weeks, a sign that lenders no
longer regard them as sure things.
The biggest of these “fallen an-
gels” is Ford Motor Co., while oth-
er examples include Occidental
Petroleum Corp., Kraft Heinz Co.
and Macy’s Inc.
The bonds of these big-name
U.S.-based companies are now
high yield, or “junk,” in bond
market jargon, meaning they
must pay significantly more to
borrow than investment-grade
businesses.
Many Canadian companies
should be concerned that they
too may soon face higher borrow-
ing costs. This country’s business-
es are among the most highly lev-
eraged borrowers in the world,
according to a recent analysis by
Aswath Damodaran of New York
University.
Signs of stress are
already evident.
Consider the striking
number of well-known
companies that have
lost their
investment-grade
ratings on their bonds in
recent weeks, a sign
that lenders no longer
regard them as sure
things.
High debt levels do not bode
well at a time when lenders are
pulling back from anything that
smacks of danger.
Two deals concluded this
month demonstrate that lenders
are demanding punishing payoffs
from companies they regard as at
risk. In the first case, Airbnb Inc.
arranged to raise US$1-billion in
new financing from a couple of
private investment firms. The
home-sharing service, which is
reeling from the collapse of tou-
rism, is paying an interest rate of
10 per cent, according to the Wall
Street Journal. In the other exam-
ple, Carnival Corp., the world’s
largest cruise operator, borrowed
Staff had 11 iPads ready two
days later. Now they’re up to 47,
each with protective, cleanable
covers. Lisa Di Prospero, Sunny-
brook’s director of practice-based
research, has spearheaded the
roll-out with colleagues Laura Vi-
ola and Genny Ng. Various teams,
including social workers, spiritu-
al and religious care providers,
recreational therapists and oth-
ers are making the iPads available
to patients.
Patients are eagerly using the
iPads. Ms. Di Prospero says a cou-
ple has been able to virtually cele-
brate their wedding anniversary;
a pair of married, isolated social
workers in separate units were
able to connect with their family;
and a grandmother was able to
hear her grandchildren sing
songs for her.
Another 30 iPads are on their
way. “The impact has been so
great, in terms of the stories we’ve
heard,” Ms. Di Prospero says.
US$4-billion from a group of in-
vestors. Carnival, which has also
been hammered by the tourism
shutdown, is paying close to 12-
per-cent interest.
Many companies would go out
of business if they had to pay any-
where close to such rates. To help
forestall that possibility, the U.S.
Federal Reserve took dramatic ac-
tion on Thursday.
It announced it would buy up a
broad swathe of riskier bonds, in-
cluding many of the newly fallen
angels. By acting as a buyer of last
resort for these corporate bonds,
the Fed will help push up prices
and push down interest rates.
But whether the new program
will be enough to restore order to
debt markets will depend on how
severely the pandemic punishes
corporate revenues.
As things now stand, Bank of
America warns that as much as
US$200-billion in investment-
grade debt could be downgraded
to junk status this year.
The new program also raises
concerns about whether the cen-
tral bank is, in effect, bailing out
the private equity firms that hold
stakes in many junk-rated com-
panies. In time, this could prove
to be a politically explosive issue.
For now, though, the Fed and
other central banks have little
choice but to help out fat cats as
well as everybody else. The alter-
native would be to risk a wave of
bankruptcies and lost jobs.
The Bank for International Set-
tlements, an international orga-
nization of central banks, has
warned for years about the grow-
ing number of “zombie” firms –
companies that are consistently
unable to cover the cost of their
debt payments from operating
profits.
In a report last year the BIS es-
timated that somewhere around
6 per cent of all non-financial
companies listed on major stock
exchanges are zombies.
If interest rates on corporate
debt spike as a result of the
world’s new borrowing binge, we
will soon find out just how large
the zombie horde really is.
G THE GLOBE AND M AIL | SATUR DAY, AP R IL 11, 2020
euro zone to the brink
again and needs help.
But how to rescue it?
ERIC
REGULY
OPINION
ROME
W
hen Europe goes into crisis, it always seems to be
about Italy. It is the euro zone’s third-largest
economy and if Italy fails, the rest of the eternal-
ly fragile European project would go down too.
Italy is in severe crisis for the third time in a dozen years.
The first came in 2008, when the financial meltdown nearly
destroyed Italy’s banks; the second in 2011 and 2012, when
the country’s deep recession and soaring sovereign borrow-
ing costs pushed it close to default; the most recent is under
way and was triggered by the country’s lockdown early last
month to prevent surging COVID-19 cases from overwhelm-
ing the health care system.
How will Italy save itself – or get saved – this time? We
know that Italy will go to the cliff edge one more time, with its
GDP expected to fall by 10 per cent or more this year. The
question is whether it will keep going and take down the rest
of the euro zone with it.
Italy is begging for help. It doesn’t have the financial re-
serves to fight the pandemic, keep businesses from going
bankrupt and revive the economy once the coronavirus
monster is slain. But it’s not getting anywhere near the sup-
port it wants. The warnings of Italian Prime Minister Giu-
seppe Conte should not be dismissed as mere blackmail at-
tempts to shake down the EU for free money. In several in-
terviews in the past week, he said the COVID-19 crisis had put
European Union’s and the euro zone’s future at stake. He’s
right. “If we do not seize the opportunity to put new life in the
European project, the risk of failure is real,” he told the BBC
on Thursday.
Italy’s problem is that the EU countries that could afford to
help it, including Germany and Netherlands, are the ones
least sympathetic to its plight.
Those countries have a point. Italy’s dire financial state
was not the result of the coronavirus crisis. It entered the
pandemic with a crushing debt load – its debt to GDP is 135
per cent – along with feeble productivity growth and a funda-
mentally uncompetitive economy mired in permanent high
unemployment. Italy has always had an allergic reaction to
reform and its revolving-door governments never have the
credibility, drive or imagination to clean up the country’s
cumbersome judicial and tax-collection system or dismantle
the obscene bureaucracy that sti-
fled efficient business develop-
ment and job creation.
In short, Italy has been its own Italy is begging for
worst enemy for decades. This is
probably why Mr. Conte’s plea for help. It doesn’t have
mutualized debt in the form of the financial reserves
“coronabonds” has gone no- to fight the
where. The bonds would spread pandemic, keep
the risk among all 19 euro zone
countries, in effect taking advan- businesses from
tage of the stellar credit ratings of going bankrupt and
Germany and the other fiscally revive the economy
prudent northern European
economies. The sovereign fund-
once the coronavirus
ing costs of Italy, Spain, Greece monster is slain.
and the other struggling econo-
mies would fall. But Germany and Netherlands consider mu-
tualized debt as a reward for bad behaviour.
Italy will not go bankrupt tomorrow because the ECB re-
launched it quantitative easing program – the mass buying of
government bonds – when most of Europe was entering lock-
down. The massive QE effort means that Italy will be able to
raise debt fairly easily for some time, though it will pay the
highest price among the large EU economies to do so.
In a deal announced by the euro zone’s finance ministers
this week, Italy and any other hard-hit countries will be able
to borrow money from the European Stability Mechanism
(ESM), the euro zone’s bailout fund, to fight the coronavirus.
But that money will have to be repaid and Italy’s ability to
fund an ever expanding debt pile becomes more tenuous by
the day.
Italy’s new crisis leaves it with few options. The ECB’s
bond-buying program cannot last forever and the ESM loans,
if taken in big amounts, would bind the country to potential-
ly long term, Greek-style austerity program. No surprise,
then, that leaving the euro is not out of the questions. A poll
done this month suggested that 53 per cent of Italians are
ready to pull the plug on the euro.
There is one possible solution that could buy Italy some
time – direct monetary financing by the ECB. It’s an idea be-
ing raised by some economists and market strategists, in-
cluding Marshall Auerback of the Levy Institute.
The process would see the ECB distribute a mass amount
of euros on a per capita basis to all euro zone governments.
They would, in turn, use the money to reduce their nominal
debt loads, creating more room to borrow in order to finance
income support, boost their health-care systems and pay for
infrastructure programs. Think of it as helicopter money for
national treasuries, not citizens. The Bank of England has
just announced a similar initiative; it will directly fund the
government over the short-term, allowing the U.K.treasury
to bypass the bond market until the COVID-19 crisis is over.
The beauty of direct monetary financing is that it is non-
discriminatory, meaning all euro zone countries would bene-
fit, and it is unlikely to be inflationary “given the current de-
pression-like conditions,” as Mr. Auerback points out.
If Britain can do it, why not the euro zone? Look at the
damage little Greece inflicted on the euro zone in the past
decade. Italy would be Greece times 10 were it to fail. The
COVID-19 crisis is not Italy’s fault. Allowing it to go bankrupt
would punish all of Europe.
An ad reads ‘Coronavirus. Let's stop it together’ in Milan. The
EU countries that could afford to help Italy are the ones least
sympathetic to its plight. LUCA BRUNO/ASSOCIATED PRESS