Coronavirus - How Will It Impact Commercial Lending?

The Coronavirus is probably the most important topic at this moment and may be the most important topic in all of 2020 (outside of the Presidential election), and it is causing a lot of confusion, anxiousness, market stress, political turmoil, and even some panic. I have spent a significant amount of time over the past two weeks researching what is known about the Coronavirus, and at this point I have to say if anything my goal is reduce the panic level because based on what I have found, I do not think the health risk is as severe as the media is playing it out to be. However, there is real impact to the economy, interest rates, lending, and the general market, not to mention health risks, that need to be discussed. This is going to be a longer blog than our typical blog because we want to dispel some of the myths about the Coronavirus itself while also covering what we think the long-term negatives and even some positives are to this epidemic.

The Coronavirus, known as SARS-CoV-2 or COVID-19 for short, is a virus that can cause a respiratory disease in humans. The virus actually started in animals and it is believed it was spread from animals to humans via a fresh fish and meat market in Wuhan, Hubei Province in China. It has been confirmed that the virus is now spreading from human to human, much like the common cold. As of March 1st, 2020 there were a total of 88,339 confirmed cases of the virus worldwide of which 42,728 have made a full recovery, 42,610 were still confirmed to have active cases, and 3,001 deaths have occurred. Of the active cases 35,003 or 82% are considered mild while 7,607 or 18% are considered serious. China continues to see the largest number of total cases at 79,828 or roughly 90.4% of total cases, and China has also seen the most deaths at 2,870 or 3.6% of the reported cases in China.

Although the numbers are startling and make many people nervous, there are still many things to consider. I have personally spoken with several health professionals and a microbiologist who has experience with communicable diseases. I have also done some extensive research on the Coronavirus, China’s healthcare system, and on how similar viruses and flu’s spread, and there are some important things to keep in mind related to Coronavirus that I do not feel is getting fully communicated through the media, including the following:


  • Although there have been 88,339 confirmed cases of Coronavirus, there are likely many more carriers of the virus that have not been found to be sick or have any symptoms. According to the microbiologist I spoke with, just because you carry a virus often times does not mean you get sick with it. Many people’s immune systems fight viruses off without showing any symptoms or maybe very mild symptoms such as a slight cough, swollen glands, a slight cold, etc. Not everyone comes down with a true case of the Coronavirus. Do you ever wonder why your spouse or a close family member will get really sick with a virus, but somehow you do not get it? It is not because you were not exposed to it, because you are likely a carrier, but your body was able to fight it off without showing symptoms.   Although the fact more people may be carrying Coronavirus than we are aware of could be a cause for concern, it is actually a good sign because it means many people are fighting it off without getting sick, meaning it may not be as deadly as the statistics make it out to be. It also calls into question how many people of the 88,339 confirmed cases above are actually sick with the virus. Many family members get tested when someone in the family has the virus, and those family members may test positive as carriers with the virus, but that does mean that they were sick or ever showed any symptoms of the virus. This has already proven to be the case with many of the passengers of the Diamond Princess cruise ship, where many people tested positive for being carriers and were quarantined, but never got sick. The contagion rate to becoming really sick is nowhere near what it is for other health scares such as Ebola, making the long-term global risk from Coronavirus much less.


  • China has seen the largest spread of the Coronavirus and the most deaths, but China’s health system is much different than the system in the United States. Despite the fact China is a Communist Country, it does not have a completely socialist medical system. Although some common and routine treatments are covered by the Chinese government, China’s healthcare system is a two tiered system with private healthcare required as well. And even items covered by the government are not all covered without co-payments. Because of the cost of healthcare, often times patients avoid going to the doctor until they really have to, delaying essential treatment. In addition, hospitals in most major cities in China and health clinics in most rural areas see long-lines for treatment and experience over-crowding. These conditions can increase the risk of the spread of disease and further delay treatment. Lastly, there are nearly 7,000 people for every health practitioner in China. The World Health Organization’s recommendation is 1 for every 1,500 to 2,000 people. In the United States there is one medical practitioner for about every 385 people, providing for a much greater level of support in the United States. Should the disease become more widespread in the United States, the United States will be in a much better position to contain it. In addition, the United States has more equipment, facilities, and medical supplies to treat patients who come down with the Coronavirus than many other countries do, including China.


  • To date the majority of the deaths related to the Coronavirus have been reported to be elderly people, the majority of which had other health conditions. The patients that died in the United States over the weekend were also elderly and reported to have other health conditions. Although the virus is likely to have the potential to be dangerous for anyone who contracts it, the fact that the deaths are largely among those with compromised health to begin with does make it less likely that the majority of healthy Americans will die from the disease.


  • Many believe that as Spring approaches the spread of Coronavirus will slow as it does for your typical flu bugs as it is harder for the virus to survive outside of the host in warmer weather and because people will spend less time confined in tight living quarters as the weather improves.


  • Although Coronavirus has spread to additional countries and new cases continue to be reported, the measures taken by the Chinese government, the United States government and others to restrict travel, do advanced screening, and quarantine those found to be carriers of the virus, has largely worked to slow the spread of the virus. When charted out the growth of new cases has largely been linear over the past month, and it has not really seen a large spike upwards. Diseases that spread out of control largely see a constant doubling effect, and the growth rate as a percentage of infected patients seems to be consistent or slowing, which means containment efforts are largely working. In addition, on Monday China announced the closing of one of its makeshift 1,000 bed hospitals just established a month-ago, due to a decline in the spread of the virus. That is a good sign control measures even in China are working.


  • Many people do not realize how deadly the common cold is. In the United States in the 2017 to 2018 flu season there were 45 million reported cases, 810,000 hospitalizations, and 61,000 deaths. In the 2018 to 2019 flu season there were 35 million reported cases, 491,000 hospitalizations, and 34,200 deaths. These statistics only take into account individuals who reported being sick and does not take into account the many others that were likely carriers or only showed mild symptoms. Although it does appear the percentage of patients with Coronavirus who die is higher, deaths related to viruses such as Coronavirus are more common than many people realize.


  • There has already been substantial progress made on new treatments including potentially a vaccine for Coronavirus, which due to advances in technology will likely be available sooner than in past viral outbreaks.


Although I would never recommend taking undue risks and I am not saying that the Coronavirus is not dangerous, because it certainly is, but the overall risks of getting it in the United States are still very low and the risk of dying from it also appears low, especially if you are someone in good health. If you get ill with any influenza type of virus, you still need to take precautions to reduce your exposure to others. But at this point there is nothing to suggest that healthy people need to change how they go about their day to day lives because of Coronavirus.


Despite what we believe is a relatively low risk here in the United States, the presence of the Coronavirus is still causing the potential for some large economic risks. Things we are already seeing that could impact business are as follows:


  • Certain companies, especially retailers and manufacturers, that rely on imported products from China are already seeing a decline in sales due to the drop in Chinese exports with the shutdown of many factories in China. This could disrupt supply chains, and some major corporations have already revised projected sales and production numbers for 2020 due to these shutdowns.


  • The stock market is likely to continue to take a hit due to declining forecasts from publicly traded companies and general concern of global effects related to Coronavirus. Although the market losses the week of February 24th were severe, at the end of the week the market still sat where it was at in October of 2019, so the market was still near all-time highs. On Monday March 2nd the stock market saw the largest one day increase in history and is likely to continue to move up and down as the news changes each day related to Coronavirus. But if panic continues to set in, the market could drop further, which could negatively impact consumer sentiment and spending going forward.


  • Certain industries such as travel and leisure internationally are already beginning to feel an impact as people cut back or cancel planned trips due to concerns over exposure. If the outbreak continues to spread in the United States you could see this fear reduce activities and attendance at sporting events, hotels, restaurants, etc.


  • Bank’s already worried about the risk of a recession due to a historically long recovery might continue to tighten credit and become less likely to support companies negatively impacted by the Coronavirus by restricting capital to those companies, making the impact worse.


Although we continue to be very bullish on the U.S. and global economy as a whole, and believe the consumer is strong and the U.S. economy is poised for continued growth, and the global economy was already in recovery, the risk the Coronavirus plays if it continues to spread is quite real and there are a number of industries that could be dramatically impacted and the economy as a whole could be shaken.


With that said, there are some positives that might come out of the impact felt from the Coronavirus that could benefit both consumers and businesses, as well as the U.S. economy as a whole, including the following:


  • Interest rates have gone lower and may continue to go lower. The Federal Reserve announced on March 3rd a 50-basis point (0.50%) rate drop in the Fed Funds rate two weeks ahead of their next regularly scheduled meeting. This drop in the Fed Funds rate will lead to a decline in the Prime rate of 0.50%. The Prime rate is the daily borrowing rate for most commercial borrowers. The Federal Reserve may continue to lower interest rates if it appears an economic slowdown is likely due to the Coronavirus. In addition, on February 28th, 2020, long-term interest rates hit their lowest point since 2013 with the 5-year Treasury Rate at 0.89% and the 10-year Treasury Rate at 1.13%. The 5-year treasury rate is usually used for pricing fixed rate commercial debt and the 10-year treasury rate is usually used for residential mortgage debt and some commercial loan debt. This decline in both short and long-term interest rates will help reduce borrowing costs for businesses feeling pressure from the Coronavirus and will open up the doors for other businesses as well as consumers to refinance existing debt and take advantage of lower interest rates.


  • The Coronavirus has made obvious a major weakness in the United States economy, and that is an overreliance by some corporations on imports from China. The slowdown of production in China due to the Coronavirus and the realization of the risk posed on the U.S. economy and U.S. sales due to this reliance, is likely over time going to bring some production back stateside from China. This will provide many existing U.S. based manufacturers the opportunity to earn back business that was lost to China, may allow new manufacturers to emerge in the U.S. to replace Chinese production, and could help boost U.S. manufacturing for anything from raw materials to finished products.


  • Travel including airlines, hotel stays, event tickets, etc. is likely to become cheaper if the Coronavirus spreads, as the airlines, hotel operators, amusement parks, theaters and others seek to attract patrons to use their services despite the “risks” associated with potential exposure to the Coronavirus. 2020 may become a good time to take that dream vacation.


  • If the Coronavirus expands in the United States, there will be a substantial amount of money spent on healthcare and medical treatments, which will help to boost certain aspects of the U.S. economy including drug manufacturers, healthcare providers and systems, medical device manufacturers, medical supply companies, and cleaning supply companies.


The Coronavirus has already had a substantial impact globally and on the U.S., and that impact is likely to continue at least in the short-term. Until China can get production back up to pre-coronavirus levels and the amount of new cases of Coronavirus starts to taper off, fear and panic are likely going to lead markets. Our hope is that individuals will continue to learn the facts, new treatments will emerge, and the actions already taken will slow the spread of the virus, allowing the global and U.S. economies to get back on the path of growth they were on prior to this outbreak.


In the interim, there continue to be plenty of resources available, including many non-bank and non-conventional lending solutions, that are available to help your business or your clients through any disruptions in their businesses due to changing economic conditions caused by the Coronavirus. As always, we are here to assist you and your clients in any way that we can.