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As credit liquidity evaporated, some investors pounced on a bond fire-sale with the help of electronic trading platforms. Insiders explain how a wild 2 weeks unfolded.

Thu, 04/23/2020 - 12:31pm

  • As volatility rocked credit markets in March and traditional dealers stepped away, electronic trading platforms saw record volumes.
  • All-to-all, an anonymous form of trading in which trades are sent out to the entire market — not just dealers — and can be executed by anyone, enjoyed increased activity.
  • Investment firms with cash on hand were able to buy up high-quality bonds at far cheaper prices thanks to all-to-all trading.
  • "I was getting filet at $2 a pound," Steve Chylinski, head of fixed-income trading at Eagle Asset Management, told Business Insider.
  • Executives at MarketAxess, Tradeweb, Trumid and Liquidnet explained why they believe the record volumes they saw in March in all-to-all trading will persist. 
  • "Generally speaking, these sort of events accelerate the trends that are already in place," Mike Sobel, Trumid's president, told Business Insider.
  • Click here for more BI Prime stories.

John McClain often uses metaphors and analogies to help conceptualize market events to investors. And so as the US credit markets began to melt down during the coronavirus pandemic in March, the portfolio manager at Diamond Hill Capital Management felt a fitting example was food.

A feast was indeed on hand for the $23 billion asset manager. In fact, any firm in the credit market with capital to play with had an opportunity to dig in.

Funds facing massive outflows were in dire need to cash out positions, essentially making them forced sellers. Meanwhile banks, the traditional dealers in the credit marketplace, were limiting their trading activity due to their reduced balance sheets.

The resulting environment was one filled with endless opportunities for those looking to buy. 

"Today, filet is priced like hamburger meat, caviar is priced like peanut butter, and we will even spring for a bottle of Dom Perignon if it's priced like Yellow Tail," McClain wrote in a note to investors on March 23.

Steve Chylinski, head of fixed-income trading at $30 billion Eagle Asset Management, described the experience as unlike any he faced in his 20 years in the business. Funds in desperate need of cash were selling off the debt of blue-chip companies for pennies on the dollar.  

"You have massive redemptions in all of these funds, so they're going to sell their best, high-quality, shortest-duration bonds that are going to take the less price hit to their NAV (net asset value). So they were just flooding the markets with inside of five-year, high-quality corporate bonds," Chylinski told Business Insider. "I was getting filet at $2 a pound. Waive it in. I'm going to keep on buying that."

All of this was made possible thanks to the rise of all-to-all trading, a protocol in which customers can post orders anonymously to the entire market, not just dealers. Electronic platforms MarketAxess, Tradeweb, Liquidnet, and Trumid all saw huge upticks in trading volume thanks in large part to the trading feature. 

And as electronic marketplaces fight to convert more trading off telephones and onto their platforms, the success of all-to-all could serve as a shining example of the benefits e-trading can offer a market long stuck in the past.

"These providers are going to get more people signed up and they're going to execute more of their volume this way because investors have gotten comfortable with it," McClain said. "When Amazon first came around a lot of people were hesitant to put their credit card data online. Now we just point and click. I think that's where we're at now, where it's just point and click. Execute anonymously. That is the future of a fixed income."

All-to-all trading dates back to BlackRock and the financial crisis

As is the case with many recent innovations in the financial market, the impetus for all-to-all trading dates back to the 2008 financial crisis. 

Unhappy with its inability to source liquidity during the crisis, BlackRock looked into creating a platform where trades could be executed anonymously between everyone in the market, as opposed to going directly to dealers. The behemoth asset manager eventually partnered with MarketAxess and its all-to-all offering, Open Trading, which launched in 2012.

Other platforms would soon follow with their own spin on some form of anonymous trading. While a slow build at first, the rise of electronic trading in general has led to more interest in all-to-all trading. Open Trading at MarketAxess, the largest electronic platform for US corporate bonds, accounted for roughly 27% of all trading activity in corporate bonds on the platform in the fourth quarter of 2019. 

But March brought with it volatility at levels rarely seen in the credit markets, leading to a significant boost in all-to-all trading.

At MarketAxess, Open Trading for the month was a record $96.3 billion, nearly double the amount traded during each of the previous two months, and accounted for 37% of total trading volume at MarketAxess. 

A Tradeweb spokesperson said anonymous credit trading was up a third in the first quarter compared to the same time period last year. The trading venue declined to break out numbers specifically regarding all-t0-all trading, but the $93.8 billion traded on the entire platform in US corporate bonds in March was also a record high. 

Liquidnet, which operates an anonymous trading platform specifically geared toward the buy-side, saw massive growth as well. Constantinos Antoniades, head of fixed income at Liquidnet, told Business Insider there was a 130% uptick in trading volume from February 24 to April 15 compared to the start of the year.

Newcomers even enjoyed big gains. Trumid, the startup electronic bond trading platform founded in 2014, traded a record $20.6 billion in March, 40% of which was done anonymously, Mike Sobel, Trumid's president, told Business Insider. By comparison, anonymous trading typically accounts for 25-30% of Trumid's trading activity. 

"It's a new way of trading for many people. You don't expect to see leaps of 500 to 1,000 basis points in a couple of months," Richard Schiffman, head of Open Trading at MarketAxess, told Business Insider.  "So clearly something happened in March that really opened everyone's eyes to what's available here, what opportunities they can take advantage of."

Investors used all-to-all to provide liquidity to the market

The story of the credit markets in March wasn't just about how trades were getting done, but also who was doing them. 

In the wake of the 2008 financial crisis, regulations were put in place to limit the amount of risk big banks can take. The result was dealers limiting their balance sheets, meaning they could hold less securities.

As volatility picked up in the credit market in March, funds facing outflows and needing cash fast were in a pickle. Dealers weren't always a viable option, as they were unwilling to take on risky trades, and unable to efficiently price bonds systematically, forcing spreads to widen. 

Previously in times like these, funds looking to make trades would likely be forced to call dealers they had the best relationships to beg for bids, Eagle's Chylinski said. This time around, though, all-to-all trading gave them another option: each other.

Firms were able to turn to all-to-all trading to get the liquidity they were desperately seeking at prices better than any dealer would offer directly. Meanwhile, those firms with cash on hand were able to take part in the firesale of the century. 

"If you have to go and ask someone for a price that they don't really want to make, like a dealer for example, you will get a worse price, smaller size. By the way, you disclose a lot of information, probably," Liquidnet's Antoniades said. "The value of being able to find the one opposite that cares about the bond they would like to buy or sell in an anonymous protocol. ... That is now much more precious than before."

Chylinski said his team put together a wish list of bonds they'd be interested in buying. The result was a trading frenzy, in which Chylinski estimated he traded roughly four times as much on MarketAxess' Open Trading and triple the amount typically done on Trumid and Liquidnet. 

"Normally the dealers would have gobbled this up at way better levels, but they couldn't. They were full. The algos were getting crushed. So they were either turned off or showing ridiculously wide markets," Chylinski said. "So the liquidity providers of last resort were the buy side or the insurance companies."

Diamond Hill's McClain said it was the busiest month of his career, with trading volumes in March going up six times as much as usual. 

Long-only firms accounted for nearly a quarter of the liquidity provided on Open Trading in March, a 5% uptick compared to the entire Q1. At Trumid, 35% of trades were done between investors, representing a 50% bump from the previous two months. 

Even those without deep expertise in electronic trading were able to take part.

Ryan Mitchell, a portfolio manager for investment grade credit at $230 billion Voya Investment Management, told Business Insider normally he doesn't rely too much on electronic trading platforms. However, in March he estimated he traded five times as much via platforms anonymously. 

"The liquidity goes away and we step up and try to become a big part of providing that liquidity on those electronic platforms," Mitchell said. "There's not as much price discovery, but if you have a good grasp of the credits and a good grasp of the markets, you may be the only bid on a lot of stuff or the only offer in a really hot market."

Questions remain if all-to-all trading can maintain high levels

To be sure, there is no denying the impact the Federal Reserve's announcement towards the end of March to buy up bonds had in bringing liquidity back into the market. 

However, Chylinski said things could have been a lot worse had it not been for all-to-all trading.

"It would have been really ugly," he said. "For that two-week period, that black hole, there would have been no bottom to it. It would have been really ugly for some of those firms seeking liquidity who just couldn't get it."

While there is no denying the success all-to-all trading had in March, questions still remain around whether it can maintain even some of the additional trading volumes it captured during the month. Less volatility in the markets has led to a return of dealers and normalcy.

Trading platforms maintain all-to-all trading volume is still slightly elevated. Trumid's Sobel pointed to the 1987 stock market crash, the 2000 dot-com bubble, and the 2008 financial crisis as examples of events that tested market infrastructure and led to seismic shifts in the market landscape. 

"Generally speaking, these sort of events accelerate the trends that are already in place," he added. "The electronification of workflows have been on a steepening adoption curve already. This has absolutely accelerated it."

Chris Bruner, head of US credit product at Tradeweb, said March served as a lesson for firms on the benefit of diversifying trading across multiple electronic protocols, whether that be all-to-all, portfolio trading or traditional request-for-quote trading.

"How do I electronify and make as much of my process safe and really robust in a chaotic market," Bruner said. "That's a strong theme."

Market participants remain torn on what type of lasting impact the event could have. Some say March was largely an outlier event. With the return of dealers offering more liquidity, the need to go to all-to-all venues is reduced.

Others, however, say March served as a taster for the potential that comes from trading anonymously. As a result, firms will be eager to make sure they are better prepared next time around.

"Those people who really didn't have the technology and processes built out that are going to be like, 'You know what, we need to figure it out. We need to find a way to take advantage of this on our day-to-day operation,'" Chylinski said. 

SEE ALSO: Wall Street banks have seen electronic trading chip away at their control of the corporate bond market. Now they're fighting back.

SEE ALSO: Wall Street's disaster playbook never included work-from-home trading. Insiders explain how banks rapidly adjusted during one of the most chaotic markets in history.

SEE ALSO: Point72, Renaissance Technologies, and Millennium are trying to make quant strategies work in bond markets. Here's why their nascent credit-trading teams face an uphill battle.

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'Capitalism as we know it will likely be changed forever,' billionaire investor Leon Cooperman says

Thu, 04/23/2020 - 12:14pm

  • The billionaire investor Leon Cooperman is warning of a permanent change to capitalism after the coronavirus-induced recession. 
  • He told CNBC taxes could go up and that regulation could be increased. 
  • He also threw cold water on the idea that low interest rates, which make it cheaper for companies to borrow money, are a good thing.
  • Visit Business Insider's homepage for more stories.

The coronavirus pandemic and subsequent recession will have profound repercussions for capitalism as we know it, according to the billionaire investor Leon Cooperman.

The Omega Advisers chief executive, who has a net worth of more than $3 billion, made the dramatic prediction in an interview with CNBC on Thursday.

"I believe that what we're going through has very lasting implications for the long term," he said. "No. 1: Capitalism as we know it will likely be changed forever."

Specifically, Cooperman, who has previously called the market rout "healthy" despite losing "a ton of money," said there could be tighter regulation and higher taxes as the economy recovers from record job losses and a plunge in equity values.

"When the government is called upon to protect you on the downside, they have every right to regulate the upside. So capitalism is changed," he said of the trillions of dollars in government aid that has already been doled out by US lawmakers.

Earlier in April, Business Insider reported that Cooperman sold more than 3 million shares of the newspaper conglomerate Gannett at a staggering loss.

In the CNBC interview, Cooperman also criticized the federal interest-rate cuts that President Donald Trump pushed for long before the sell-off forced the Federal Reserve to take such drastic action. 

"Consistently low interest rates are indicative of a troubled economy and should not be viewed positively," he said.

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Economists expect yet another week where millions of Americans filed for unemployment benefits

Wed, 04/22/2020 - 4:25pm

  • The median economist estimate for US jobless claims in the week ending April 11 is 4.5 million, according to Bloomberg data. The report will be released Thursday by the Labor Department. 
  • The estimate is below the 5.2 million Americans that filed for claims in the previous week, signaling a downward trend in unemployment claims. 
  • Still, another week of millions of Americans filing for benefits shows the damage that the coronavirus pandemic and lockdowns to curb the spread of the disease has had on the US economy. 
  • Visit Business Insider's homepage for more stories.

Economists are anticipating that a Thursday report from the Labor Department will once again show that millions of Americans filed for unemployment claims in the week ending April 18, as coronavirus layoffs persist. 

The median consensus estimate for weekly unemployment insurance claims is 4.5 million, according to Bloomberg data. The estimate is again below the 5.2 million Americans who filed for unemployment benefits in the previous week, marking the third report in a row to show a decline in claims. 

Even if there is a declining trend in the reports, 4.5 million filing for unemployment in one week is a staggering number that shows just how widespread the economic fallout is from the coronavirus-induced lockdown in the US. 

"It's been humbling to try to predict unemployment claims," Jason Thomas, chief economist at AssetMark, told Business Insider. Still, there is "probably no single metric you can look at" to better get a broad sense of how the economy is doing than unemployment, he said.

The consensus estimate for this week's report would bring total claims filed during the coronavirus pandemic, which started in mid-March, to about 26 billion. That means that in just five weeks, the US will have erased millions more jobs than were created from the trough of unemployment in the Great Recession through the longest-ever economic recovery. 

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Going forward, economists expect that the April unemployment rate will skyrocket when data is released in May. The jump in claims through April 11 would raise the unemployment rate to 15.7%, according to the Economic Policy Institute. 

But that figure accounts for everything else staying the same, which is not the case, said Heidi Shierholz, senior economist at EPI, in a statement. One reason for this is that not all workers who have filed for unemployment insurance benefits will be counted as unemployed — for example, furloughed workers or any others not actively seeking employment will be left out of the count.

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Dow climbs 457 points as oil rallies from historic lows

Wed, 04/22/2020 - 4:03pm

  • US stocks rose on Wednesday as the price of West Texas Intermediate crude oil rebounded after falling into negative territory on Monday.
  • Major US indexes' gains reversed two consecutive days of losses.
  • Investors are also weighing first-quarter earnings, which show how US companies fared in the early stages of the coronavirus pandemic.
  • Read more on Business Insider.

US stocks rose on Wednesday, rebounding from two consecutive days of losses as the price of oil stabilized from recent historic lows.

US West Texas Intermediate crude for June delivery jumped as much as 40%, to $16.18 a barrel. On Monday, WTI May contracts closed at a record low of negative $37.63 a barrel, the first time oil prices had ever fallen into negative territory. A supply glut amid the coronavirus pandemic cratered demand, sending prices lower.

Here's where major US indexes traded at the 4 p.m. E.T. market close on Wednesday:

Read more: Wall Street's best-performing fund this year breaks down its long-term strategy that's outsmarting 99% of peers — and shares 7 stocks to buy for a post-pandemic world

"The longer-term implications of the current oil crisis have yet to be fully realized — putting increased pressure on oil and gas earnings and the energy sector overall," Mike Loewengart, the managing director of investment strategy at E-Trade, told Business Insider. "As with many things lately, we're in uncharted territory."

Investors are also looking to first-quarter earnings results from major technology companies and more this week. Snap surged as much as 35% after reporting strong revenue and subscriber growth in its earnings release on Tuesday. Netflix shares declined about 2% in as investors looked past its earnings beat to conservative subscriber guidance for the second quarter.

Chipotle stock rallied, gaining 14% at intraday highs after the company announced on Tuesday that digital sales surged 81% in the first quarter and more than doubled in March.

First-quarter reports show only the very beginning of the coronavirus pandemic and include previous months when the economy was doing relatively well, making them "largely irrelevant," Liz Ann Sonders, a senior vice president and the chief investment strategist at Charles Schwab, told Business Insider. 

In addition, "a record percentage of companies have withdrawn guidance," she said, making it difficult for analysts to forecast estimates. 

Read more: Meet the 20-year-old day-trading phenom who says he turned $20,000 into $3 million. He details his precise strategy — and shares how he made $11,400 in 2 minutes this week.

Traders also weighed positive signs that small businesses would soon get more relief. On Tuesday, the Senate passed a $484 billion legislative package that would add $310 billion to the Paycheck Protection Program after funds were exhausted last week. Next, the bill goes to the House for a vote.

The Trump administration is also considering offering federal stimulus funds to beleaguered US energy companies in exchange for government stakes or ownership in either the firms or crude reserves, The Wall Street Journal reported Tuesday. The plan is one of many being weighed to help US energy companies amid the historic drop in oil prices.

Going forward, Sonders said it was possible that US stocks would retest recent lows, especially if news about the coronavirus pandemic gets worse before it gets better. She also said that volatility was likely to persist, regardless of whether further losses are in store.

Even if the market doesn't retest lows, "that doesn't mean the path from here, given the strength of the move and condensed period of time, is going to continue to be straight up," Sonders said.

Read more: The CIO overseeing $270 billion at Guggenheim says stocks will plunge another 27% from current levels — but lays out a series of recommendations for bargain-hungry investors

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Bank of America says the recent stock bounce is a bear-market rally similar to 2008. Here's why it sees further downside ahead.

Wed, 04/22/2020 - 3:46pm

  • Analysts at Bank of America listed a number of reasons why the recent gain in stocks is actually a bear-market rally that is about to end, and said stocks are going to re-test their March 23 lows.
  • Negative oil prices and a flood of poor earnings reports from S&P 500 companies are just a couple reasons this bear-market rally has similarities to the run-ups to previous market crashes and is about to end.
  • The swift drop in market volatility, as measured by the VIX, is indicative of the market "pricing in an optimistic recovery path compared to what economic reality holds in store," Bank of America said.
  • Visit Business Insider's homepage for more stories.

Analysts at Bank of America are cautioning investors that the recent 30% rally in stocks is actually just a bear-market rally in disguise.

The bank expects that the surge is currently running into resistance and will roll over before retesting the March 23 lows, if not making new ones, it said in a note Tuesday. A return to the market lows would represent a decline of 18% from yesterday's closing price in the S&P 500.

The bank said that the market will have a difficult time sustaining valuations near their pre-coronavirus peaks given that in only the second week of US earnings season, 80 companies have withdrawn their guidance, 20 companies have cut their dividends, and 60 companies have suspended their buybacks.

Other factors contributing to the market call include oil prices turning negative for the first time in history. The bank also cited "the potential outflows in equities from Pension or other balanced fund rebalancing due to near record outperformance of stocks over bonds this month (the opposite of what happened last month)."

Read more: The CIO overseeing $270 billion at Guggenheim says stocks will plunge another 27% from current levels — but lays out a series of recommendations for bargain-hungry investors

Bank of America noted that following the path of bear-market rallies found in 1987, 2002, and 2008, implies that the S&P 500 could stall out in the 2,750 to 2,960 range. The index closed at 2,874 last Friday.

Finally, with 20% of S&P 500 companies reporting earnings this week, economic reality is about to set in and a further decline in stocks will unfold, the bank said. The swift drop in market volatility, as measured by the VIX, is indicative of the market "pricing in an optimistic recovery path compared to what economic reality holds in store."

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Delta's CEO said he would support an 'immunity passport' program or other steps to jumpstart travel as the airline reports its first quarterly loss in more than 5 years (DAL)

Wed, 04/22/2020 - 3:38pm

  • Delta Air Lines CEO Ed Bastian said the carrier would explore a wide range of options to reassure passengers and help jumpstart air travel as the coronavirus pandemic begins to subside.
  • Bastian said options could include an "immunity passport" system, or lower load factors on planes to enable social distancing among passengers — with a corresponding increase in ticket prices.
  • The comments came during a conference call with analysts discussing Q1 2020 results. The airline lost $534 million in the first quarter of the year, mostly toward the end, and expects significantly worse performance for the second quarter.
  • Visit Business Insider's homepage for more stories.

Delta CEO Ed Bastian said on Wednesday the airline would investigate and support a wide range of possible measures to help jump-start air travel during a recovery that he expects will be "choppy" and take two to three years.

Bastian's comments came during a call with analysts discussing the airline's financial results for the first three months of 2020.

Delta posted its first quarterly loss in more than five years due to the coronavirus pandemic, with a net loss of $534 million for the quarter ending March 30. Revenues of $8.6 billion were down 18% from last year.

The loss was less severe than a $2.1 billion loss announced by United Airlines in a Securities and Exchange Commission filing on Monday, but in a memo to staff, Bastian warned that the second quarter looked bleaker, with revenue projected to fall 90%.

Airlines around the world have lost massive amounts of cash as the contagion brought air travel to a virtual halt. Airlines have cancelled flights, suspended routes, and grounded planes, and the aircraft that are still flying are often nearly empty. Bastian previously said that the airline is losing as much as $60 million each day, increasing to $100 million by the end of the quarter. He said on Wednesday that the airline is flying 95% fewer passengers with 85% less capacity.

The airline has about $6 billion in liquidity, according to chief financial officer Paul Jacobson, who delayed his planned retirement to help the airline through the crisis. The airline raised $5.4 billion in capital in March through several measures including loans and aircraft leasebacks, and drew from an existing credit facility.

"The decade of work we put into the balance sheet to lower debt and build unencumbered assets has been critical to our success in raising capital and we expect to end the June quarter with approximately $10 billion in liquidity," Jacobson said in a release.

Delta also expects to receive about $5.4 billion in payroll aid from the federal government, $1.6 billion of which would take the form of an unsecured low-interest loan. It received the first $2.7 billion of that on Monday.

It also plans to apply for up to $4.6 billion in secured loans under the federal CARES Act, but would not immediately draw down the loans. Airlines have until September to access credit granted under the loan program.

Jacobson said the airline's daily cash burn would fall to about $50 million by June as it explores further cost-cutting measures, including offering voluntary leaves to employees and delaying capital expenditures.

Bastian said that it could take two to three years for the airline's business and revenue to return to pre-pandemic levels, as the outbreak is contained and consumer confidence returns.

He said that the airline would support various measures to try and encourage travel to resume as quickly as possible, including supporting an immunity passport program.

"When you ask people what the most important thing is to get them to start traveling, it's confidence in their safety," Bastian said. "We have medical advisors that we work with, and we'll continue to work with to help them translate the return of business to where people feel safe."

"We'll make whatever changes to the business model that will be necessary," he added.

One option that has been discussed among public health professionals is an "immunity passport" or certificate, certifying that a person has developed antibodies to the virus and can no longer transmit it to others or develop symptoms.

Widespread antibody testing would be required for such a system to work, and it is unclear whether this would be feasible in practice. It would also require a significant workforce to administer.

Bastian suggested that virtually all options were on the table as well, including selling fewer tickets for each flight once travel begins to return to enable social distancing on planes. The remaining tickets would likely be priced higher to make up for the fewer seats sold.

"We're going to spend the time in these next few months to build the company we want for the future," he said, "and we'll be asking consumers those questions."

"We'll have opportunities to test all these theses to see what it takes to inspire confidence in air travel and the safety," he added. "Maybe it's waiting for a vaccine in two years, I don't know. But there's a host of ideas and options that we're exploring, and we'll do whatever it takes to make sure that we get our business model not just back to where it was, but improved.

SEE ALSO: Coronavirus demolished air travel around the globe. These 14 charts show how empty the skies are right now.

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From helping retailers take on Amazon to battling fraud, 4 VCs explain which payments startups will soar as the coronavirus transforms how we buy

Wed, 04/22/2020 - 3:22pm

  • The coronavirus pandemic has shifted the way consumers shop and pay, both online and in-store.
  • Payments companies make money through fees from each transaction processed at a merchant, so with retail sales down by record amounts, payments revenues will also take a hit.
  • Business Insider asked investors at Activant Capital, Andreessen Horowitz, Bain Capital Ventures, and Citi Ventures what it will take for payments companies to stand out. 
  • From being able to work with governments to investing in not-so-glamorous tech like fraud monitoring, here's a look at what it'll take for payments startups to thrive.
  • Click here for more BI Prime stories.

The coronavirus pandemic has changed the way we shop and pay. 

With widespread shelter-in-place orders keeping consumers home, spending has shifted toward digital. And in-store at essential businesses like grocery stores and pharmacies, consumers are rethinking whether they should be using cash.

Even before the coronavirus pandemic, payments fintechs like PayPal, Square, and Stripe benefited from these trends toward digital. They've been enabling retailers online and in-store to get paid with plug-and-play tech. But the impact of the pandemic has brought some challenges.

Retail sales, which includes apparel, bars and restaurants, furniture, and motor vehicles, plummeted a record 8.7% in March. And since payments companies make money through fees on each transaction, their revenues will be impacted, too.

But as economies start to recover, some payments players are well positioned to thrive.

We asked investors to share who they think is best positioned to come out strong, and who's not. Some are betting on B2B players that enable small businesses to compete with the likes of Amazon, while others think that companies with strong point-of-sale tech will see a wave of new customers as merchants shift digital.

Here's a look at what it will take for payment players to survive, both during and after the coronavirus pandemic.

SEE ALSO: Digital-only banks like Chime are seeing record signups amid the coronavirus pandemic. Here's how they drive revenue without lending or charging overdraft fees.

SEE ALSO: McKinsey says payments companies could see a $210 billion hit from the coronavirus pandemic. Here are the 10 most important things execs need to know about managing the crisis.

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Steve Sarracino, founder and partner at Activant Capital

Notable Investments: Better, Bolt, Finix

As small non-essential businesses are shutting down amid the coronavirus pandemic, big-box retailers like Amazon and Walmart are seeing a surge in demand. 

But Steve Sarracino, founder and partner at Activant Capital, thinks that startups enabling small businesses to compete with the likes of Amazon are well-positioned to grow as the economy recovers.

"The biggest beneficiaries of what's happening right now, not only with the way the market's shifting because of the shutdown, but a lot of these government programs end up benefiting big companies. If you look at the biggest beneficiaries, it's going to be Amazon, Walmart, et cetera," said Sarracino.

He added that as these big corporations gain power, they also tend to hollow out American small businesses which are the primary engine growth for jobs.

"At least they're hiring, but when it gets back to normal, it's going to be up to the small businesses. And we need to empower them with the same tools that the big guys have," Sarracino said.

Activant is a growth equity firm, meaning it invests in mature companies looking to scale. And most of its portfolio companies are commerce infrastructure players, including one-click checkout startup Bolt and payments-as-a-service fintech Finix

Sarracino thinks that these B2B players that enable small businesses to compete with big-box retailers both in-store and online will be in demand as the economy recovers.

"The assets we've invested in empower the small brands to be able to compete with Amazon,' said Sarracino, meaning they recreate the Amazon experience for small businesses, facilitating one-click checkouts, managing accounts, and payments in a seamless way.

"It's empowering the average person that starts a shoe brand to be able to compete head-to-head with Amazon. I think that's going to be super important…

"I think that the world will shine more of a spotlight on the tools that these smaller businesses need to succeed," Sarracino said.



Anish Acharya, general partner at Andreessen Horowitz

Notable Investments: Affirm, Instacart, Stripe

Anish Acharya, general partner at Andreessen Horowitz, thinks the ongoing trend toward digital payments will benefit players like Stripe and Finix, which enable a business to process payments online.

"COVID-19 has accelerated the shifts in technology adoption and consumer behavior that we predicted would hit 10 years from now, to today. There's no going back to the 'old way.' And as the world shifts to 'internet by default' from 'real world by default,'" Acharya said in emailed comments.

And as consumers and businesses embrace a digital-first new normal, payments players that enable businesses to sell online be well-positioned.

"Stripe, Braintree, Ayden, and Finix are some of the most obvious payment players that may benefit in my view. They have a stronghold on internet native spend so I expect the companies will continue to benefit from growth in gaming, grocery delivery, live video, and more," Acharya said.

Looking toward recovery, Acharya sees players like Square and Toast coming out strong. Both these fintechs provide online and in-store points-of-sale for businesses to process payments.

"Post-Covid, I believe companies that have reinvented the cash register will be in a strong position to succeed as well, such as Square and Toast. A whole generation of small businesses will, unfortunately, need to be rebuilt or replaced by new incumbents; new players will be using new technologies like Square and Toast," said Acharya.

Acharya also has his eyes on consumer-facing fintechs like Square's Cash App and challenger bank Chime. And as banking shifts online during the coronavirus pandemic, Acharya expects that consumers will seek digital banking options.

"Finally, it's worth considering the future of household financial brands. This is the nail in the coffin of bank branches, as consumers who haven't yet adopted digital banking are now forced to do so. 

More importantly, as incumbent banks pull back on lending when consumers need it most, I expect we'll see an acceleration in the adoption of products like Cash App, Credit Karma, Digit, and Chime who are still largely open for business and finding ways to be a part of the recovery story (i.e. Cash App distributing PPP funds)," Acharya said.



Merritt Hummer, partner at Bain Capital Ventures

Notable Investments: Finix, Ribbon, SmartRent

For payments players, some early beneficiaries include payments automation startups and companies that support e-commerce, said Merritt Hummer, partner at Bain Capital Ventures.

"So far, we are seeing COVID-19 beneficiaries emerge in areas including online brokerage, accounts payable and accounts receivable automation, and platforms supporting e-commerce payments," said Hummer in emailed comments.

But payments platforms' success could largely depend on the industries they support.

"Payments companies that are likely to face headwinds in this environment include pay day advance apps, POS systems (Square, Toast), and vertical software companies that monetize through payments in highly exposed verticals like hospitality and retail," Hummer said.

Square, a popular point-of-sale option among small businesses, and Toast, which provides payments and other business services to restaurants, could take a hit while the non-essential businesses they support remain closed.

Alternative lenders, meaning non-bank players like LendingClub or Affirm, may also face challenges, Hummer said.

"While vertical will still play a role in alternative lending, this is a category we believe will suffer dramatically coming out of the pandemic. Several players will go out of business, and others will be pressured to enter various forms of consolidation," said Hummer.

LendingClub, a marketplace alternative lender, just laid off about a third of its workforce, including its president Steve Allocca, according to a regulatory filing.

Given the impact of the coronavirus pandemic, Bain Capital Ventures is keeping a close eye on its portfolio and the startup ecosystem, looking at both the direct impacts of the pandemic on a startup's business, but also the longer-term implications of the current market environment.

"In light of COVID-19, our team has primarily been looking at companies along two dimensions. The first dimension is the direct impact of COVID-19 on the company itself," said Hummer.

"The second dimension is the vulnerability of the company more broadly, accounting for factors like burn rate, balance sheet strength, and predictability of revenue," Hummer said.

Hummer is advising startups to stress test their runways, and plan to operate with existing cash on hand for a minimum of 18 months.



Ramneek Gupta, managing director & co-head of venture investing at Citi Ventures

Notable Investments: FastPay, Jet.com, Square

Startups that have more than one revenue stream are best positioned to succeed, said Ramneek Gupta, managing director and co-head of venture investing at Citi Ventures.

"It's the multiplicity of revenue streams and the diversity of verticals. People who have either by accident or by design ended up in that format are performing better," said Gupta.

Offering multiple products within one platform, like payments and lending, for example, can help businesses stay afloat when there's pressure on one revenue stream.

"By definition, people who can manage multi-line solutions and products and revenue streams are closer to being platform companies. Those companies tend to perform better in both downturns and in good times," Gupta said.

Gupta also expects that the winners in payments will be the ones who can demonstrate their ability to handle things like anti-money laundering and fraud, which is on the rise amid the coronavirus pandemic.

"The other thing that is happening dramatically at this point is the professionals are getting rapidly separated from the amateurs. Fraud and fraudsters that are out in force right now...

"Unfortunately, they tend to take advantage of this situation and people who do not have the right infrastructure, the right investment in their middle office and back office in preventing and protecting against these sort of things, you'll start to see them lose their shirt at a rapid clip," Gupta said.

In addition to investment in not-so-glamorous tech like fraud monitoring, winners will also be those who can work with governments effectively during recovery efforts.

Historically, startups and the venture community tend to shy away from anything involving government, Gupta said. When governments are involved, things tend to take longer and don't always seem worth it, he added.

"However, given the scale and size of the programs that the government is running in terms of the stimulus, etcetera, all of those will work through financial services, both incumbents and the fintech ecosystem. So the ability to work with the government is going to be quite a differentiator and a value creator in the next several quarters or years," said Gupta.

PayPal and Square, for example are some of the non-bank fintechs that are working with the Small Business Administration to issue paycheck protection loans.



Elon Musk says possible oil industry bailouts would be 'not the greatest use of money'

Wed, 04/22/2020 - 3:18pm

  • Allowing oil and gas companies to tap credit facilities created by the CARES Act is "not the greatest use of money," Elon Musk tweeted Wednesday.
  • The Tesla CEO later said "much of the stimulus money is questionable, but this much to oil & gas seems especially so."
  • The comments arrive one day after the Trump administration hinted it would help the oil industry avoid outsized job loss and default amid recent commodity market chaos.
  • Visit the Business Insider homepage for more stories

Elon Musk isn't convinced that saving the US oil industry is the best way to employ government stimulus amid the commodity market rout.

The Tesla CEO tweeted Wednesday against the idea, deeming the option "not the greatest use of money." The comment arrives one day after the White House suggested it would work to lift ailing firms and avoid job losses. The Trump administration is looking to allow oil and gas companies to tap from the government's $2 trillion coronavirus relief legislation. 

"Frankly, much of the stimulus money is questionable, but this much to oil & gas seems especially so," Musk said in response to a follower asking about the possible plans.

Read more: The CIO overseeing $270 billion at Guggenheim says stocks will plunge another 27% from current levels — but lays out a series of recommendations for bargain-hungry investors

Oil producers fell further into a historic downturn this week after contracts for May delivery slid into negative prices. The coronavirus pandemic has long weighed on the sector, pushing demand to record lows as travel activity suddenly stopped.

An OPEC+ production cut made earlier in April alleviated some fears of a market slump before a storage deficit turned prices negative.

The world's most-traded commodity staged a moderate recovery through Wednesday's session. May West Texas Intermediate contracts expired on Tuesday, and June contracts traded roughly 21% higher to $13.96 per barrel at 2:50 p.m. ET Wednesday. 

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'All bear markets include false rallies': Citi says stocks have further to fall during the coronavirus pandemic

Wed, 04/22/2020 - 3:03pm

  • The stock market is likely to find a new bottom in the coming months, analysts at Citi said.
  • A Citi team led by Robert Buckland said that "all bear markets include false rallies, often associated with supportive monetary policy."
  • The top Goldman Sachs strategist Peter Oppenheimer also said last week that equities had rallied too quickly and predicted a fresh plunge.
  • Visit Business Insider's homepage for more stories.

Markets have faced a roller-coaster of highs and lows in the past few weeks, but analysts at Citi think they have yet to find their true bottom.

"All bear markets include false rallies, often associated with supportive monetary policy," a Citi team led by Robert Buckland said in a client note, MarketWatch reported on Wednesday.

The S&P 500 has rallied roughly 25% from its lowest level in 2020 in recent weeks, but Citi thinks the danger is far from over.

"Markets only find a sustainable base when there are signs that cheap money is feeding through into the real economy, rather than temporarily supporting asset prices," the team said.

It could be a while before that happens, the team added.

The top Goldman Sachs strategist Peter Oppenheimer also said last week that equities had rallied too quickly and predicted a fresh plunge.

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Citi's comments came days after earnings season kicked off. Citi, JPMorgan, Bank of America, and Morgan Stanley are just a few of the big players who have recently reported first-quarter earnings.

Citi last week posted a 46% drop in net income compared with the previous year.

Key economic data, including US weekly jobless claims and IHS Markit's purchasing managers' index data, is due to be released on Thursday.

The Citi analysts said they were expecting a V-shaped market rally after stocks eventually find a bottom and advised investors to buy the dip.

But not everybody is convinced that the US will recover rapidly from the economic fallout of the coronavirus pandemic.

The emerging-markets investor Mark Mobius said this week that the US faced a double-dip recession, with two dips and two periods of recovery.

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Dow climbs 500 points as oil prices stabilize

Wed, 04/22/2020 - 2:55pm

  • US stocks rose on Wednesday as the price of West Texas Intermediate crude oil rebounded after falling into negative territory on Monday.
  • Major US indexes gains reversed two consecutive days of losses.
  • Investors are also weighing first-quarter earnings, which show how US companies fared in the early stages of the coronavirus pandemic.
  • Read more on Business Insider.

US stocks rose on Wednesday, rebounding from two consecutive days of losses, as the price of oil stabilized from recent historic lows.

US West Texas Intermediate crude for June delivery jumped as much as 40%, to $16.18 a barrel. On Monday, WTI May contracts closed at a record low of negative $37.63 a barrel, the first time oil prices had ever fallen into negative territory. A supply glut amid the coronavirus pandemic cratered demand, sending prices lower.

"The longer-term implications of the current oil crisis have yet to be fully realized—putting increased pressure on oil and gas earnings and the energy sector overall," Mike Loewengart, managing director of investment strategy at E*TRADE told Business Insider. "As with many things lately, we're in uncharted territory."

Here's where major US indexes traded at 2:55 p.m. E.T. on Wednesday:

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Investors are also looking to first-quarter earnings results from major technology companies and more this week. Snap surged as much as 33% after reporting strong revenue and subscriber growth in its earnings release on Tuesday. Netflix shares declined roughly 2% in as investors looked past its earnings beat to conservative subscriber guidance for the second quarter.

Chipotle stock rallied, gaining 13% at intraday highs after the company announced on Tuesday that digital sales surged 81% in the first quarter and more than doubled in March.

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Traders also weighed positive signs that small businesses will soon get more relief. On Tuesday, the Senate passed a $484 billion legislative package that would add $310 billion to the Paycheck Protection Program after funds were exhausted last week. Next, the bill goes to the House for a vote.

The Trump administration is also considering offering federal stimulus funds to beleaguered US energy companies in exchange for government stakes or ownership in either the firms or crude reserves, The Wall Street Journal reported Tuesday. The plan is one of many being weighed to help US energy companies amid the historic drop in oil prices.

Read more: 'I've gone to cash': Mark Cuban outlines his coronavirus investing strategy ahead of another 'leg down' in markets — and says now is the time to buy real estate

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Fannie and Freddie will start buying riskier mortgage loans to ease rising housing-market stress

Wed, 04/22/2020 - 2:50pm

  • Fannie Mae and Freddie Mac will begin buying home loans in forbearance to ease lending stresses in the mortgage market, the Federal Housing Finance Agency announced Wednesday.
  • The government-sponsored enterprises previously avoided the loans, but eased forbearance criteria set out in the CARES Act are set to increase requests for payment deferrals.
  • The waiting period between a mortgage closing and the loan being sold to either enterprise can last weeks, leaving lenders with little help in offloading the debt.
  • Visit the Business Insider homepage for more stories.

The Federal Housing Finance Agency announced Wednesday that Fannie Mae and Freddie Mac will ease rules for mortgage servicers and buy up loans that slipped into forbearance.

Firms that create mortgages sell the loans to government enterprises including Fannie and Freddie. The waiting period between a mortgage closing and the loan being sold to Fannie or Freddie can last weeks, leaving some loans entering forbearance as borrowers requested late payments.

Fannie and Freddie previously avoided such loans, but the coronavirus' broad economic impact and hit to the US housing sector placed a considerable strain on the key lending market. The policy change will allow Fannie and Freddie to alleviate some credit stresses and temporarily buy the mortgages, according to FHFA.

"We are focused on keeping the mortgage market working for current and future homeowners during these challenging times," Mark Calabria, FHFA's director, said in a statement. "Purchases of these previously ineligible loans will help provide liquidity to mortgage markets and allow originators to keep lending."

Read more: The CIO overseeing $270 billion at Guggenheim says stocks will plunge another 27% from current levels — but lays out a series of recommendations for bargain-hungry investors

The government's $2 trillion relief package allowed all homeowners with federally backed mortgages to be eligible for up to one year of forbearance. The FHFA rule change will lift lending limits for firms as more Americans are likely to request deferred payments.

More than 3 million loans already sit in the government's forbearance program, leading the firms to buy only mortgages meeting strict criteria. A loan has to have closed between February 1 and May 31, and must either be a mortgage purchase transaction or a no-cash-out refinance. Loans more than 30 days delinquent won't be eligible.

Fannie and Freddie will also change loan prices for participating borrowers to counteract heightened risk taken on by the enterprises. First-time homebuyers will see a 5% loan-level adjustment, while non-first-time buyers take on a 7% shift.

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Popular oil ETF USO will reduce its share count in an effort to boost its price after plunge

Wed, 04/22/2020 - 2:35pm

Following a sharp decline as oil plunged into negative territory on Monday, the United States Oil Fund, ticker USO, will reduce its shares in an effort to boost its price. 

The ETF will do what is called a reverse split, according to a Wednesday announcement from USCF, the manager of the fund. Shareholders of the ETF will get one share for every eight that they hold in the fund, significantly lowering the number of shares outstanding. 

In theory, reducing the number of shares will boost the price by increasing the net asset value per share. The split will take place after the close of trading on April 28, and will be reflected the next day. 

Read more: Wall Street's best-performing fund this year breaks down its long-term strategy that's outsmarting 99% of peers — and shares 7 stocks to buy for a post-pandemic world

"The reverse share split will affect all of USO's shareholders," USCF wrote in a statement. "The reverse share split will not affect any shareholder's percentage interest in USO, except to the extent that the reverse share split results in a shareholder receiving cash in the transaction." 

The move to reduce the number of shares of the exchange traded fund comes after steep losses — the retail-investor fund is down 77% this year. The popular ETF's decline is tied to the price of oil, which on Monday closed around negative $37 per barrel. 

Reverse split does not change the underlying assets in the fund, and doesn't boost its market value. Instead, it combines shares to make the new price higher. On Wednesday, USO opened higher but then fell more than 10% to about $2.50 per share before trading was halted. 

The USCF on Tuesday said that it would change its portfolio following oil's drop.

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Oil could hit negative $100 per barrel next month, according to one analyst

Wed, 04/22/2020 - 2:23pm

  • US West Texas Intermediate crude oil could plunge to negative $100 per barrel next month, Paul Sankey of Mizuho Securities wrote in a Tuesday note.
  • WTI closed at a record low of about negative $37 per barrel on Monday. It was the first time the price of oil fell below zero.
  • "We have clearly gone to full scale day-to-day market management crisis, and as we said when we first called for negative prices, the physical reality of oil is that it is difficult to handle, volatile, potentially polluting, and actually useless without a refinery," Sankey wrote.
  • Watch oil trade live on Markets Insider.
  • Read more on Business Insider.

There could be further pain ahead for the oil industry, according to one analyst.

The price of US West Texas Intermediate crude oil could fall to negative $100 per barrel next month, Paul Sankey, a managing director at Mizuho Securities, wrote in a Tuesday note.

"Will we hit -$100/bbl next month? Quite possibly," Sankey wrote. "We have clearly gone to full scale day-to-day market management crisis, and as we said when we first called for negative prices, the physical reality of oil is that it is difficult to handle, volatile, potentially polluting, and actually useless without a refinery."

On Monday, the price of WTI plunged to record lows, closing in negative territory for the first time, at about negative $37 per barrel, as traders worried about scare storage capacity for a supply glut of the commodity. The coronavirus pandemic has cratered global demand, weighing down prices despite historic production cuts from OPEC. Futures contracts for May delivery expired on Tuesday, adding pressure to WTI.

Read more: Wall Street's best-performing fund this year breaks down its long-term strategy that's outsmarting 99% of peers — and shares 7 stocks to buy for a post-pandemic world

WTI for June delivery has rebounded and was trading in positive territory on Wednesday. Still, according to Sankey, the US oil market gets fundamentally worse over the next month.

"If you had a stinking barrel of oil in your backyard, would you pay someone $100/bbl to take it away? Yes, and you would probably be relieved you were not charged $300/bbl," Sankey wrote.

He continued: "That is the situation we are in, of producers having nowhere to go with the inexorable production that takes weeks and months to reduce to zero. Of course, you now need someone to handle it for you. And they are sold out of capacity to do so."

Mizuho said in mid-March that oil prices could fall into negative territory.

"As I noted, of all the big calls, this was one you would rather not have come true," Sankey said on Tuesday. "But equally, one of the old lines is 'if you don't make a call, you can't be right.'"

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Treasury Secretary Mnuchin sees most of the economy reopening by the end of August

Wed, 04/22/2020 - 1:19pm

  • The Trump administration sees "most of, if not all of, the economy" reopening by the end of summer, Treasury Secretary Steven Mnuchin told Fox Business Network on Wednesday.
  • The White House's plan leaves governors in charge of when and how states reboot their economies, but Mnuchin is "operating under the environment" of a step-by-step reopening taking place in upcoming months.
  • Referring to the Senate's passage of a $484 billion relief package, the Treasury Secretary said the White House will "spend what it takes to win the war" while still weighing the impact of a massive deficit.
  • Visit Business Insider's homepage for more stories.

The White House expects most of the US economy to reopen by the end of the summer, Treasury Secretary Steven Mnuchin said Wednesday.

Nationwide business closures and stay-at-home orders pushed the economy into a deep recession through March and into April, and experts are now looking to what a rebound could entail.

The Trump administration's plan calls for reopening in stages, with less densely packed areas resuming regular activity before cities. Governors will have the final say in scheduling their states' reopenings, but the White House sees most of the nation returning to past behavior by August, Mnuchin said in a Fox Business Network interview.

"We're operating under the environment that we are going to open up parts of the economy," he said. "We're looking forward to, by the time we get later to the summer, having most of, if not all of, the economy open."

Read more: The CIO overseeing $270 billion at Guggenheim says stocks will plunge another 27% from current levels — but lays out a series of recommendations for bargain-hungry investors

Where some see a rapid return to normalcy as the best way to avoid a prolonged economic meltdown, others view a near-term reopening as threatening a coronavirus resurgence. The government has already issued trillions of dollars in fiscal relief, and new legislation is poised to further pad against a downturn until the virus threat subsides.

The Senate passed a $484 billion aid package Tuesday afternoon, teeing the bill up for a Thursday vote in the House and signature from President Donald Trump. The measure boosts lending capacity for small businesses slammed by the outbreak and issues additional funding for hospitals and virus testing.

Financial stimulus for state and local governments is also planned to be revealed in the coming weeks to ensure an economic rebound isn't halted by budget deficits. The Committee for a Responsible Federal Budget said on April 13 it expects the US budget shortfall to nearly quadruple to $3.8 trillion in 2020, a forecast that doesn't yet include the Senate's latest measure.

Unprecedented spending is necessary to avoid a deep recession, the Treasury Secretary said, but the White House isn't ignoring the long-term consequences of a ballooning deficit.

"We need to spend what it takes to win the war," Mnuchin said. "On the other hand, we are sensitive to the economic impact of putting on debt and that's something that the president is reviewing with us very carefully."

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Victoria's Secret parent L Brands plummets 27% after Sycamore tries to back out of acquiring majority stake

Wed, 04/22/2020 - 1:03pm

  • Shares of Victoria's Secret parent company L Brands plummeted 27% in Wednesday's trading session after private equity firm Sycamore Partners signaled that it is looking to abandon its previously announced acquisition of Victoria's Secret.
  • L Brands announced in late February that it would sell a 55% stake in the troubled lingerie maker to Sycamore Partners, valuing the company at $1.1 billion. L Brands planned to refocus the company on its Bath and Body Works brand.
  • Now, Sycamore is arguing that L Brands breached its deal terms by closing stores, furloughing employees, and not paying April rent in response to the coronavirus pandemic.
  • Visit Business Insider's homepage for more stories.

Shares of Victoria's Secret parent company L Brands cratered 27% in Wednesday's trading session after Bloomberg reported that private equity firm Sycamore Partners was looking to abandon its planned acquisition of a majority stake in Victoria's Secret. 

In February, the two firms announced that Sycamore would spend $525 million to acquire a 55% stake in the company, valuing the lingerie maker at $1.1 billion. L Brands planned to refocus the company on its Bath and Body Works brand. 

Now, Sycamore is seeking to terminate the proposed deal on grounds that L Brands breached deal terms amid the coronavirus pandemic, according to court filings. Sycamore argued that when L Brand's closed all Victoria's Secret stores in mid-March, furloughed its employees, and didn't pay April rent, L Brands breached its promise "to conduct the Business in the ordinary course consistent with past practice."

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Sycamore also argued that these "voluntary actions" caused "severe damage" to the Victoria's Secret brand that cannot be repaired.

"That these actions were taken as a result of or in response to the Covid-19 pandemic is no defense," Sycamore added in the filing.

In late March, Women's Wear Daily reported that the deal was at risk due to the coronavirus. 

Shares of L Brands were halted for nearly an hour Wednesday afternoon. Priced around $9.42, the stock is down 48% year-to-date.

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A Neiman Marcus bankruptcy could mark a major blow to NYC's glitzy Hudson Yards, one of the most expensive mega-malls in US history. Here's why.

Wed, 04/22/2020 - 1:02pm

  • Neiman Marcus is preparing to file for bankruptcy protection as soon as this week, according to media reports. 
  • A bankruptcy filing by Neiman Marcus could allow the debt-laden upscale department store chain to renegotiate the terms of its store leases, including its glitzy new space at the Hudson Yards.
  • Hudson Yards developers Related and Oxford Properties lavished tens of millions of dollars on Neiman's store on the West Side and allowed the retailer to put off paying rent for years.
  • If Neiman was to exit the Hudson Yards project, other stores in the one-million-square-foot mall space have the option to cut their rent payments or even exit leases, creating the potential for a cascade of vacancies. 
  • Even the prospect of its departure from the Hudson Yards puts Neiman in the drivers seat to renegotiate terms with Related and Oxford, giving it leverage to potentially put off ever having to pay fixed rent for its store. 
  • Click here for more BI Prime stories.

To persuade Neiman Marcus to anchor the 1-million-square-foot mega-mall at the heart of the $25 billion Hudson Yards development on Manhattan's West Side, the project's builders lavished tens of millions of dollars on the upscale department store and postponed reaping profits on the space for years.

Now it's uncertain whether that payday will ever arrive for developers Related and Oxford Properties.

According to media reports, Neiman Marcus Group, the parent company of the eponymous department store chain, is preparing to seek bankruptcy protection as early as this week. It missed payments last week on nearly $5 billion of corporate debt that has become untenable as the coronavirus crisis has ravaged the country's retail sector.

That means Related and Oxford, two of the city's most ambitious developers, are facing the prospect of a potential renegotiation where they may have little choice but to offer Neiman Marcus even more favorable terms to remain as the centerpiece of the glitzy mall.

The situation shows how the coronavirus crisis has filtered to the highest levels of the city's real estate and retail markets, ensnaring prominent players. It also threatens to deliver a rare blemish to Related's otherwise blockbuster success at the $25 billion West Side mega-project, the country's largest ongoing real-estate development. 

The developer has attracted a long list of corporate names, including Time Warner, BlackRock, and Coach to the development. It raised a world-famous vessel-shaped sculpture in a public plaza designed by Thomas Heatherwick that had become a tourist destination before the crisis emptied the city's once-teeming public spaces.      

"Losing Neiman would be a major setback for the Hudson Yards project," said Matthew Seigel, the cofounder of the retail real-estate brokerage and advisory group Lantern Real Estate. "Right now, Neiman has the leverage and the landlords are in the less enviable position."

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To convince Neiman Marcus to open its first outpost in the city and plant its flag in the emerging West Side neighborhood, Related and Oxford largely covered the extensive cost of building out the store's interior spaces and allowed Neiman Marcus to skip rent in exchange for just a modest share of its sales at the location.

The developers shelled out as much as $80 million for the buildout of the 190,000 square foot store, according to a source who viewed the terms of the deal.

That's "almost certainly" one of the most exorbitant incentive packages ever awarded to a tenant in Manhattan's retail market, Seigel said.

Related and Oxford also agreed to accept 5% of the store's sales in exchange for rent for the first three years of Neiman Marcus's occupancy and 8% of the store's sales in years four and five, according to the person with knowledge of the terms of the lease. The details of Neiman Marcus's lease at the Hudson Yards have not previously been publicly disclosed.

Related and Oxford both declined to comment for this article. Spokesmen for Neiman Marcus and Ares Management, the investment firm that co-owns the department store, also declined to comment.

Neiman Marcus's deal at the Hudson Yards was arranged to then shift to a traditional rent structure beginning in the sixth year, with the store agreeing to pay around $50 per square foot for the space, the source said.

Having a headline name helped Related sell the project's remaining spaces to a long list of other stores. Tenants at the mall include Brooks Brothers, Coach, Madewell, Uniqlo, and the Spanish cuisine inspired food emporium Mercado, operated by star chef José Andrés.

Read More: Major tenants are delaying big leases in NYC as they re-think their office space needs for the post-coronavirus world

A name-brand anchor tenant was viewed by many stores as so essential that several negotiated rent discounts or exit clauses if Neiman Marcus were to leave and Related was unable to replace it with a commensurate marquee name, according to two sources who negotiated deals at the mall and are familiar with leasing terms there.

Neiman Marcus could use a Chapter 11 bankruptcy proceeding to pare down debts and relieve itself of other obligations, including underperforming stores. To be sure, while the company might have leverage in negotiations, few observers of the company's situation predict that it will attempt to use the process to sever ties with the Hudson Yards space.

"It's the only Neiman in the city they have to believe that business will come back," said Joanne Podell, a vice chairman at Cushman & Wakefield who focuses on retail leasing. "We have a problematic situation now but we have a future and stores understand that being online only is not as strong as also having a physical component."

Yet just the specter of such an exit, and the cascade of vacancy and lost revenue it could inflict on the mall could give Neiman Marcus the bargaining position to restructure its lease to do away with the upcoming $50 per square foot fixed rent and remain in an entirely profit-sharing agreement - a structure that could protect it from having to bear onerous expenses at the location if the retail market's decline is prolonged.

"I don't see how Related has too many choices right now," said Dena Cohen, a partner in the law firm Herrick Feinstein's real estate practice. "If you have a tenant in place right now, you have to be out of your mind to try and change anything because the market is so uncertain and volatile."

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Trump's top economic adviser Larry Kudlow says oil prices should rebound as the economy opens

Wed, 04/22/2020 - 12:15pm

Larry Kudlow said that oil prices should recover from recent historic lows as the US economy reopens following lockdowns to curb the spread of the new coronavirus. 

"I'm hoping that this oil slump will prove to be temporary," Kudlow told CNBC in an interview Wednesday. "Not many people are driving right now, as you know, and there's a glut of oil."

He continued: "It will, I hope, take care of itself. Markets will take care of themselves over time."

The comments from President Trump's top economic adviser come after oil prices slumped to a record low on Monday, when US West Texas Intermediate crude closed at negative $37 per barrel, the first time the commodity has ever traded below zero. Prices have rebounded slightly, but remain low — oil has slumped roughly 65% year-to-date as the coronavirus pandemic craters global demand. 

"The coronavirus worldwide caused the collapse in demand. Through no fault of anybody, this virus has pushed us into a big economic contraction," said Kudlow. 

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In the US, "the rig count is way down, demand is way down, production is falling. There's not much we can do about that," Kudlow said, adding that the White House is considering options for relief to the industry, though nothing has been decided yet. 

"There's a lot of deflation out there as we go through this contraction," he said. "We will propose regulatory and tax and investment policies to help out as best we can." 

Still, Kudlow's hope is that strict lockdowns due to the pandemic will soon be over. "We'll come out of this soon, the economy will reopen, the economy will restart," he said.

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Digital-only banks like Chime are seeing record signups amid the coronavirus pandemic. Here's how they drive revenue without lending or charging overdraft fees.

Wed, 04/22/2020 - 12:15pm

  • Digital-only banks, or 'neobanks,' like Chime are seeing record signups for their online banking products amid the coronavirus pandemic.
  • In the traditional business model for banks, they take in deposits, then lend that money out and charge interest.
  • They make money on the 'spread,' or, the difference between the deposit and loan rates, as well as non-interest income like overdraft fees. 
  • Instead of earning interest rate spreads, neobanks like Chime, Monzo, and N26 rely on interchange fees earned from debit card transactions.
  • Amid the coronavirus pandemic, Chime piloted a way to get consumers' government stimulus checks early using its overdraft protection product, SpotMe.
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As brick and mortar banks close amid the coronavirus pandemic, neobanks like Chime are seeing record signups for their digital-only banking products.

In February, Chime surpassed the 8 million customer milestone. And as more users sign up for the branchless bank, Chime has been experimenting with a way to for its customers to get part of government stimulus payments, which are part of the CARES Act, early.

Chime began testing the stimulus payments with its SpotMe feature, a product that lets users overdraft their accounts for free, in early April. It found that its users wanted some, not all, of the stimulus checks early, so it doubled its SpotMe limit to $200 for select users.

By the time most banks posted the stimulus checks last week, Chime had already distributed more than $1 billion in stimulus payments to over 600,000 users

And last Monday, Chime saw the highest number of account openings since it was founded in 2013, Business Insider has reported.

But still, Chime and its fellow neobanks like Monzo, N26, and Varo, have not launched full blown lending products.

Traditionally, banks make money on interest rate spreads, or, the difference between the rates they pay costumes for their deposits and rates they charge borrowers.

But neobanks currently only play on the deposit side of the balance sheet, offering checking and savings accounts.

And these neobanks are attracting waves of VC cash. In 2019, neobanks raised more than $3.7 billion in VC cash, a new record following 2018's $2.3 billion, according to CB Insights.

In December last year, Chime's valuation quadrupled to $5.8 billion following its massive $500 million Series F. The round was the largest single equity investment in the neobanking space, a record previously held by Brazil's Nu Bank, according to CB Insights. 

Chime's investors include Dragoneer Investment Group (Compass, Klarna, Nubank), DST Global (Nubank, Robinhood, Root Insurance), and Menlo Ventures (Betterment, Carta, Roku).

And Chime isn't profitable, but its CEO Chris Britt told Forbes in November last year that it could be if it reduced its marketing spend.

Fees for card swipes and membership

Since many digital-only banks are not lending in the US (some of them, like Monzo and N26, offer credit products in the UK and Europe), they need other sources of revenue.

For example, every time a customer uses their debit card, the banks earn transaction processing fees —  sometimes called interchange fees — from merchants.

Beyond interchange, digital-only banks are also experimenting with membership models. Germany's N26, for one, offers tiered freemium membership to its European customers, and now it's thinking about rolling that model out in the US.

N26 offers a free standard membership and tiered levels for a monthly subscription fee. 

Each tier comes with its own perks, like dedicated customer service, discounts at merchant partners, and insurance on car rentals and cell phones.

The UK's Monzo, which had rolled out, then shut down its premium membership offering in September last year, just announced its plans relaunch the product in the first quarter this year.

Both Monzo and N26 are also neobank unicorns. Monzo was last valued at $2 billion, following its $113 million Series F last June. N26 was last valued at $3.5 billion valuation after its $470 million Series D last July.

Chasing customer stickiness

To grow both membership and interchange fee revenue, neobanks are prioritizing customer acquisition, then customer stickiness.

And in banking, stickiness is often pegged to establishing what's called a primary banking relationship. 

To be sure, the nature of a primary banking relationship has evolved. Over the past several years, fintechs have been riding a wave of unbundling — meaning they offer consumers pieces of the suite of products typically offered by a bank, like a high-yield savings account or passively managed investment accounts.

But for digital-only banks, there's a key piece of a consumer's banking habits that could increase stickiness: payroll direct deposit. The neobanks have deployed products like access to wages two days early and no-fee overdrafts, specifically for customers who use the accounts for direct deposits.

And their customer bases are growing. N26 just announced it has 5 million customers globally (including 250,000 in the US), and Monzo says it has 3.8 million customers.

That said, the number of open accounts is not necessarily the same as the number of active deposit customers, so pinning down exact customer numbers is tricky. In some cases, one customer who opens both a checking and savings account could be counted with two open FDIC-insured accounts.

Since the neobanks are private companies, they are not subject to the same disclosures as public retail banks. Ten-year-old Ally, one of the US's largest digital-only banks which went public in 2014, reported 1.97 million retail deposit customers in fourth-quarter earnings last year.

Chime makes the majority of revenue via interchange

Chime earns the vast majority of its revenue from interchange paid to Chime by Visa, a Chime spokesperson told Business Insider in emailed comments in December last year. 

Every time one of Chime's customers makes a purchase with their debit card, the bank earns a fee. 

Chime also earns a "modest percent of revenue" from referring customers to other fintechs like SoftBank-backed renters insurance startup Lemonade and fellow DST Global portfolio company Root Insurance, the spokesperson said.

In February, Chime announced it would offer a high-yield savings account with rates starting at 1.6%, well above the national average savings rate of 0.07%, according to the FDIC. Other digital-only banks unburdened by the cost of brick-and-mortar footprints, like Goldman Sachs' Marcus and Ally Financial, also both offer high-yield savings.

While Chime doesn't currently offer direct lending products, it's been vocal about its ambitions to enter the credit side of the balance sheet. But the timelines are unclear.

In March of 2018, Chime's CEO Chris Britt told Bankrate that it would launch lending products within the year.

"Our initial efforts in the area have been focused on the short term lending segment, and more specifically, the overdraft fee epidemic facing our country," the Chime spokesperson said.

Chime launched SpotMe in September last year. Customers who direct deposit at least $500 per month are typically able to overdraft their accounts up to $100. 

There is no interest applied to the overdrafts, which are repaid to Chime from the next payroll direct deposit. Users are offered the option to leave a tip to "pay it forward."

"While we've publicly announced our intention to launch other credit and lending products, we'll focus next on helping our members improve their credit scores and will announce a new service in this area in the first half of 2020," the Chime spokesperson said.

Neobanks are challenging legacy players' fee structures

In addition to free overdrafts and getting your paycheck a couple days early, there are other features of these digital-only neobanks attracting customers. 

Across the board, they have leaned into fee transparency, and largely moved toward eliminating things like minimum balance and account maintenance fees. 

Incumbent retail players like JPMorgan and Bank of America both charge $35 for every overdraft, and $12 in monthly maintenance fees. 

According to Chime's website, the only fee it charges is $2.50 for out-of-network ATM withdrawals. N26 doesn't charge overdraft, maintenance, nor foreign transaction fees.

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Star fund manager closes short Treasurys bet after losing billions in assets

Wed, 04/22/2020 - 11:51am

  • Franklin Templeton fund manager Michael Hasenstab has been betting on rising Treasury yields since 2017. In that same time period, Treasury yields have fallen to their lowest levels ever. 
  • After being on the wrong side of the trade for years, Hasenstab has finally thrown in the towel and exited the trade, Bloomberg reported.
  • The flagship fixed-income fund that Hasenstab manages has seen its assets under management nearly cut in half, falling from $40 billion in 2017 to $22 billion today, according to Bloomberg. 
  • Visit Business Insider's homepage for more stories.

Fund manager Michael Hasenstab, who manages Franklin Templeton's flagship fixed-income mutual fund, has finally thrown in the towel on his money-losing short bet against Treasurys, Bloomberg reported.

Hasenstab was betting that Treasury yields would rise, and initiated the short position back in 2017. Since then, Treasury yields have fallen to historic lows as the Fed launched a number of monetary stimulus policies to combat the economic damage inflicted by the coronavirus pandemic.

A look at the Templeton Global Bond Fund fact sheet shows average duration, which measures the sensitivity of a fixed-income portfolio's price to changes in interest rates, turned positive to 2.06 years as of March 31. This is a dramatic change from the average duration reported as of December 31, 2019, of negative 1.01 years.

Additionally, Bloomberg reported that the fund has tactically unwound its short position, citing a person familiar with the situation.

Assets under management in the mutual fund that is often utilized by financial advisers fell $4.4 billion over the past three months to $22.55 billion today. Since the start of Hasenstab's short Treasurys bet in 2017, assets in the fund have fallen by $18 billion. The fund had nearly $70 billion in assets in 2015.

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Performance for the adviser share class of the fund has suffered over the past five years, returning just 0.49% relative to its benchmark return of 2.96% as of March 31. Meanwhile, 10-year performance for the fund has outperformed its benchmark by 40 basis points.

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President of UBS Americas Tom Naratil says the US desperately needs a new infrastructure program to ease the pandemic's devastating effects — and banks need to help finance it

Wed, 04/22/2020 - 11:08am

  • Tom Naratil is president of UBS Americas and copresident of UBS Global Wealth Management.
  • In this op-ed, he says banks must step in and help finance new infrastructure programs to cope with the current pandemic.
  • One way this can be done is through the sale of taxable municipal bonds, as munis are mostly exempt from federal and (in some cases) state and local taxes.
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In the war against the coronavirus, America's financial system has partnered with policymakers to unleash an unprecedented arsenal, including shock-and-awe monetary and fiscal measures, innovative lending mechanisms, and remote access to financial advice for clients. Yet more remains to be done. To mitigate the pandemic's devastating effects, America will need a new infrastructure program as well. And banks will have to play a critical role in helping to finance it.

Such a program must focus on two priorities. The first is nontraditional "infrastructure 2.0" — updating healthcare facilities, providing the equipment necessary for the medical community to fight this and future diseases, and enhancing internet access to furnish critical connectivity for remote workers, students, and patients. Developing these areas will also supply the economy with critically needed jobs and make it more resilient to future pandemics.

The second priority is creating even more employment by upgrading America's flagging traditional infrastructure, primarily transportation and utilities. Since these sectors do not relate directly to combating the virus, the emphasis must be on time-sensitive projects that would have to happen even in the absence of COVID-19, such as repairs to and replacements for obsolete infrastructure.

Some of the healthcare requirements are obvious. America needs more virus and antibody testing, personal protective equipment, intensive-care unit capacity, vaccine research, and medical stockpiles. Healthcare workers are the heroes on the front lines of the pandemic and deserve our unwavering support. However, organizations must also supply the right health protocols and equipment to ensure the entire country can return to work and school safely.

For those working and studying remotely, internet access is another increasingly urgent issue, especially in depressed rural, urban, and tribal areas. More than 20 million Americans lack broadband, according to Federal Communications Commission estimates, with at least one private study indicating the number could be twice as large. Bridging the gap is achievable but requires tens of billions of dollars in funding, plus short-term solutions like Wi-Fi to help users in the interim.

As suitable projects in traditional and nontraditional categories are identified, funding for them is likely to bifurcate. The first source will be state and government borrowing and private sector investment, in cases where they are able to handle the projects independently. The second will be the federal government, as the funder of last resort. In an environment where federal budgets are already stretched, we should leverage the first source wherever possible.

Existing financing mechanisms will play a critical role. States and local governments can continue to tap the municipal bond market, as can other key borrowers such as not-for-profit hospitals and educational institutions. Private companies and infrastructure funds can invest in projects today with a higher prospective return over the longer term than if they had invested a year ago. Banks have an important role to play in arranging and financing these transactions.

Further, banks can work with the government to expand these mechanisms and fit them to the scale of the task at hand. Tax incentives and streamlining red tape should encourage private investment by companies and funds. The municipal bond – or muni – market could also boost its potential through a few swift, simple reforms.

First, borrowers already use certain types of munis such as private activity bonds to fund infrastructure. Nevertheless, in some cases, their scope does not extend to broader categories of infrastructure, including investments in digital technology.

As munis are mostly exempt from federal and in some cases state and local taxes, widening the scope of private activity bonds and other such instruments would provide a broader funding base with a tax incentive built in. Public-private partnerships and other projects should also be able to take advantage of private activity bonds without being subject to caps on volumes or to the alternative minimum tax.

Second, the muni industry should do more to attract foreign investors, who hold just 2.7% of the market. Tax-exempt munis have always appealed to individual US investors because of their higher credit quality and the shelter they can provide from federal or state taxation. However, in their hunt for yield, global investors are also more likely to turn their attention to this homegrown US market.

Working with the government, the industry should establish a new regime to fund both traditional infrastructure and infrastructure 2.0 through the sale of taxable munis. The regime should offer appealing features for overseas institutions, including direct federal support but also the ability to aggregate projects into larger deals. At first glance, such a regime might resemble the Build America Bond program established after the financial crisis. But it would cover a broader range of infrastructure and benefit more from growing appreciation for munis among overseas investors.

Some infrastructure projects will not find funding among municipalities and private investors. They will have to turn to the federal government for help. Yet, even there, investors can engender a multiplier effect. For instance, if the federal government injects more funding into a financially distressed municipality, that can provide an incentive for banks and economic development partners to add their expertise and value and get involved. In consultation with private financial institutions, the Treasury could also adapt its opportunity zones framework to encourage investment in the worst-hit areas.

Ultimately, whatever the next phase in Washington's coronavirus response, banks should not be left standing on the sidelines. They should help America fund the new infrastructure that it needs to cope with the current pandemic and future public-health threats. They should propose new financing avenues for lawmakers to consider. More broadly, they should continue to fight the effects of the virus, standing shoulder to shoulder with their clients, their employees, and other stakeholders. Anything less, and the federal government's response to the virus thus far may not translate into a commensurate and sustainable benefit for America and its economy.

Tom Naratil is president of UBS Americas and copresident of UBS Global Wealth management.

READ MORE: A former Department of Defense official says one particular piece of legislation could help America rebuild its supply chains and rely less on China, calling this a national imperative — here's how it would work

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