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Doubt cast on International Travel in 2020
Aside from getting in a twitter feud with Axl Rose of Guns ‘n Roses fame, Treasury Secretary Steve Mnuchin made waves a couple of days ago when he was on Maria Bartiromo of Fox Business. The breadth of the interview, which you can watch below, ranged from detailing the PPP and International Travel to Boeing’s miraculous debt issuance. If you’re unfamiliar with the PPP, it’s the Payment Protection Plan that Congress approved on a bipartisan basis to provide small business loans that were de facto grants if 75% of the loan was allocated to wages. This was the bulk of the discussion, but around the 6:03 marker the conversation pivots to International Travel and then segues into Boeing. Both are fascinating.
“Too hard to tell at this point”
This was Mnuchin’s response when Maria directly asked him “Do you think International Travel will be opened up this year.” While throwing shade on the expectation of regular international travel, he did say that travel options for business would be available on a limited basis, but he did not hint at anything positive in terms of international leisure travel being folded back onto the 2020 schedule.
He doubled down on domestic centric policy urging people “it’s a great time for people to explore America.” This certainly doesn’t bode well for hotel and airlines trying to get back to business as usual. At the end of April, air traffic dropped 95% year over year.
This doesn’t really surprise me, nor would it surprise me to see the European Union keep its borders closed through September, or even year end.
Mnuchin was also asked about Boeing’s successful $25B debt issuance. This is an interesting thing here folks, and I’ll tell you my thoughts. But…here’s a little insight into the story
Boeing had crazy problems with the 737 Max, a major scandal that, personally, I don’t think we’ve heard the last of when it comes to lawsuits, etc. I mean in Feb they were fighting another scandal regarding debris being found in their fueltanks. But that’s neither here nor there, but does to point to the fact that their problems started pre-Covid.
Cash troubles started to brew in early March when Boeing drew down its entire revolving credit facility. A whopping $13.8B – which really pointed to how bad they thought it was going to get.
Then…the virus hit hard, the market dropped, Boeing’s stock plummeted and they wanted a government bailout. Mnuchin publicly stated that the only way Boeing was getting uncle Sam’s money was via a warrant style deal that would granted the Fed the option to convert any government investment into stock. Boeing pushed back.
What did this do? It juiced the bond market and opened up the flood gates of banks willing to participate in loans/bond issuance, like the one Boeing received, because the Fed has said they would effectively be buying up those very debt instruments in the ETF/ CLO market. Mnuchin talks about this when he mentions primary and secondary bond markets.
That meant that banks could effectively front run the market. So, to a certain degree, the government could have bailed out Boeing without having to bail out Boeing because the very $25B that was issued could likely get packaged into a CLO or ETF and the government will buy it when it actually starts buying. Yeah, they haven’t bought any yet – just the announcement that they would buy was enough to get banks to lend because they knew in the worst case scenario they wouldn’t be left holding bad debt. You and I will hold that debt if it fails….Sounds like how lending should be done right?
Not only would the US taxpayer end up owning a large tranche of Boeing’s debt, but the banks all made their fees too.
Mnuchin touts this as a great Boeing success story since they didn’t need to tap any government support. Are we supposed to believe that Boeing could have tapped the debt market had the Fed not said they were basically going to backstop bonds?
All of these sleight of hand techniques are exactly how the system is designed to work. Head nod that Fed purchases are coming so banks can hurry up and grease the system because they know if all goes belly up, the Fed will be the buyer of last resort. It’s so damn complicated that the laymen has absolutely no idea how they’re getting screwed, they just know they can’t sleep well and they’re walking funny.
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