Jefferies’ Investment Banking clients are primarily mid-sized public and private companies in all industries, generally worth $500 million to $10 billion. They employ many tens of millions of people and represent a true cross-section of the economy. We are on the front line and may see things through a different lens than do others.
Let us state the obvious — the gravest issue facing us today is to stop the spread of the coronavirus and protect the health of all citizens.
First, let us state the obvious — the gravest issue facing us today is to stop the spread of the coronavirus and protect the health of all citizens. The second vital issue and fundamental to our economy and way of life is that too many businesses do not have customers right now, because the customers, whether consumer or commercial, are rightfully staying home, are afraid to touch anything, are concerned about their livelihoods or liquidity, or otherwise withdrawing from commerce and society. We are not so slowly grinding to what could become a dead stop.
As a result, real businesses, small and large, will have absolutely no choice but to severely (perhaps more than ever in history) reduce their payroll costs, one way or another — pay cuts, terminations and furloughs. A very small handful of companies in the world can survive significant (and, in some cases, complete) reductions in revenue. The math just doesn’t work for the vast majority of businesses and the time span for survival is shorter than most people realize.
If what we fear is happening in fact gains more momentum (and we are pretty far along this road), not only will unemployment skyrocket, but we will see huge numbers of businesses shut down, liquidated or file for bankruptcy. In our view, this must and can be avoided.
In 2008, we all agreed that the epicenter of the financial crisis was the large financial institutions and that by assuring their survival and ultimate health, we would assure that the wheels of commerce broadly would continue to turn. Now, the epicenter of this economic crisis is almost the entire business community where we are freezing up the same way the banks were seizing up.
What our economy needs is funding to buy time to breathe, keep paying employees, maintain capacity and capabilities, and simply get to the other side.
It may be helpful to give each person some cash directly in their pocket. This is what the Senate is proposing right now. However, it is much more permanently impactful to make sure each individual will have a job and livelihood once the crisis passes. This must be a top priority for the future of our world and our way of life. This is the confidence that the markets and society need to get through the economic portion of this crisis.
We don’t have all the answers — and understand what we are about to describe isn’t easily actionable — but it is a straightforward method of keeping businesses alive and people employed, with the cost ultimately borne by the private sector, but financed for a time by government.
The government could set up a program that would refinance first lien and, if necessary, some second lien loans and bonds, plus provide incremental credit to support employment. The employment loan would be equal to up to 50 percent of the compensation deduction that the company took on its 2018 tax return. That way, we know what the real payrolls for the companies were historically. Eligibility for this loan and program would be conditioned on the company keeping all its employees and paying out compensation in the next six months at least equal to the amount of the incremental loan. This would assure a version of full employment for the next six months for all companies and their people.
By using the companies to distribute the payroll to their employees, this can be accomplished quickly and efficiently. The government has all the tax records and can make clear that using any funds improperly would be a punishable crime. The money goes to the workers, and the company is merely the conduit which allows the money to get quickly distributed and ultimately the guarantor of its repayment.
The government could set up a program that would refinance first lien and, if necessary, some second lien loans and bonds.
Governments borrow at super low rates today, so the size of this job protection package, while potentially trillions of dollars, should be relatively easy to implement and service. The loans that the government will be injecting will carry a modest and acceptable interest rate, pay in kind for up to two years and have a maturity of 5-7 years, with no early prepayment penalty. This would be reasonable for businesses and, by virtue of the interest rate and the maturity, would provide them the breathing room to get to the other side.
While the loans would be a lot of money, the actual long term cost of the program probably would be nothing, because effectively, you are lending money at the top of the balance sheet that would be funded by super low-cost government debt. The positive spread from loans to companies that will be healthy in a matter of months should more than cover any losses (similar to the Term Asset-Backed Securities Loan Facility program in 2008). A similar program could be undertaken by the Small Business Administration for smaller companies and perhaps with an even lower-interest rates and some other more favorable terms.
Mass bankruptcies and massive layoffs at otherwise innocent and healthy companies make no sense. The government will have to pay unemployment to the people and, in three months, there won’t be companies to go back to so they will stay unemployed. If no aid is forthcoming, the wave of carnage will sweep through the economy, from companies feeling pain now to companies further back from the line of fire. Mass bankruptcies beget more mass bankruptcies.
This is not a “bail out” of businesses. This is enabling healthy companies who did absolutely nothing wrong to continue to keep their businesses intact while the world is shut down. Their people will get paid and have the same jobs waiting for them when the virus has passed.
Again, this is merely a template and we are sure there are many wrinkles, nuances and improvements that the government and others in the private sector can suggest. We are confident that this disease will run its course and the world will rally together with proper social distancing and improved hygiene. We also believe eventually therapeutics and hopefully a vaccine will come. And if we also deal with protecting our companies by helping to keep all employees safe and paid during this painful period, our economy will be ready, willing and able to return to its glory.
This essay was adapted from an open letter written to Jefferies’ Investment Banking clients and colleagues.