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Markets underestimate Covid-19's destruction, US investor warns

By Sean Farrell

Date: Monday 23 Mar 2020

Markets underestimate Covid-19's destruction, US investor warns

(Sharecast News) - Markets underestimate Covid-19's destructive potential to cause a credit crisis that damages even the strongest companies, a prominent US investor has warned.
In a grim letter to investors Alan Waxman, who heads the credit division of buyout firm TPG, said markets were still complacent about the virus's likely effects, the Financial Times reported. He said investors should prepare for "unprecedented revenue destruction".

"While this is a public health crisis first, there is a real and looming potential for it to spill over into a full-on credit and liquidity crisis," Waxman wrote. "There is a growing risk that the Covid-19 crisis may lead to a more systemic event catalysing a widespread downward spiral."

Waxman, whose Sixth Street Partners manages $34bn of assets, said investors typically test their portfolios for revenue declines of 20-40% but that some companies were reporting drops of 50-100%.

In little over a month the Covid-19 outbreak has gone from being an emerging risk on investors' minds to devastating financial markets. As recently as 18 February Bank of America reported the virus had replaced the US-China trade dispute as third-biggest risk reported by investors.

Fears about the virus's impact on companies has caused shares to plunge and has also hit credit markets from junk bonds to investment grade corporate securities. Waxman said the virus's impact was likely to be intensified by high levels of corporate debt and "the most irresponsible credit discipline in our liftetimes".

Waxman wrote: "A wide swath of the credit markets is underappreciating the revenue destruction taking place and the . . . ripple effects that it will cause for even some of the world's soundest companies and assets," the FT reported.


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