Charts of the Month: Cruises, Climate Change, and Credit Servicers

February 2021

Capstone’s Charts of the Month highlight regulatory, legislative, and policy-driven developments that investors should be paying attention to. All graphics were recently published in Capstone research.

For more information on any issue, contact sales@capstonedc.com.

In this edition:

1. Cruises: Winter 21/22 Caribbean Restart a Best-Case Scenario Due to COVID Challenges, New CDC
2. Dow Inc., LyondellBasell to Face Headwinds from EU Plastics Restrictions
3. Climate Change Executive Order Has Limited Implications for Oil & Gas, Signals New Priorities
4. GrubHub, DoorDash, Uber to Face State Regulatory Scrutiny
5. Biden’s $350B Request for State & Local Governments Would Provide Windfall for Most States
6. doValue, European Credit Servicers to Benefit from Supportive Regulatory Framework for NPL Cleanups in Italy and Greece

1. Cruises: Winter 2021/22 Caribbean Restart a Best-Case Scenario Due to COVID Challenges, New CDC

Based on our analysis of Centers for Disease Control and Prevention (CDC) requirements for COVID-19, we expect that the US cruise industry can resume sailing operations with paying customers no earlier than July 2021, with predictable and frequent itineraries beginning in the winter at the earliest, as illustrated in the timeline below.

Source: CDC, Capstone analysis

Our take: Capstone believes the US cruise industry’s first sailings with paying customers will not be before July 2021—at the earliest. Previously, we predicted “restricted passenger operations” (revenue sailing) due to the COVID-19 pandemic from the US could begin by late-March at the earliest. We base our revised call on our assessment of the timing constraints baked into the process of obtaining a conditional sailing certificate from the CDC, along with the continued delays in specific technical guidance from the agency for cruise companies to move through the multistep process. Given this, as well as normal seasonality in the cruise industry, we believe the winter 2021–2022 Caribbean season is the earliest time frame for when investors can expect most major cruise lines to have their ships sailing with frequency and predictability. Furthermore, we predicted Transport Canada would extend its cruise ban, effectively canceling the Alaska season. On February 4th, Transport Canada extended its cruise ban through February 2022, making this a reality.

2. Dow Inc., LyondellBasell to Face Headwinds from EU Plastics Restrictions

Our peer group analysis indicates that portfolios for Dow Inc. (DOW) and LyondellBasell Industries (LYB) are geared toward European polypropylene (PP) and polyethylene (PE) production. As a result, we expect both companies to be more susceptible to a reduction in PP and PE demand due to regulatory action by the European Commission and its Member States.

Source: Company reports, Capstone analysis
Note: Polyethylene and polypropylene are two types of polyolefins.

Our take: Capstone believes the European Commission’s Single-Use Plastic (SUP) Directive, effective July 2021, signals a growing trend toward stricter packaging regulations that will lower demand for single-use plastics in the European Union—developments we believe the market is underappreciating. We also believe this will lead to a reduction in polymers used in the manufacturing of plastics such as polyethylene and polypropylene. Capstone believes the SUP directive and the likely risk that EU Member States such as France will implement more stringent regulations than the directive requires will negatively impact the stock performance of European-exposed manufacturers Dow, trading at $53/share (-10% since our note was first published), and LyondellBasell, trading at $87/share (-10% since our note was first published) at the time of publication.

3. Climate Change Executive Order Has Limited Implications for Oil & Gas, Signals New Priorities

We expect that the Biden administration intends to reexamine tax treatment across the oil and gas industry, but this would have to be compelled via legislation—a tall order. See the current tax benefits for the industry below.

Source: “The Tax Break-Down: Intangible Drilling Costs,” Committee for a Responsible Federal Budget

Our take: Capstone believes the most notable actions in President Joe Biden’s January 27th executive order on “tackling the climate crisis at home and abroad” are the pause on oil and gas leasing on federal lands and the directive that federal agencies eliminate any fossil fuel subsidies. However, we believe their impact on the oil and gas industry is limited. While a leasing moratorium prevents the oil and gas industry from obtaining leases on federal land, it does not prevent those that already hold leases from obtaining the permits necessary to develop them (outside of the 60-day pause for processing)—as a permitting moratorium would. Any leasing moratorium by the administration is very unlikely to be permanent. Additionally, many operators have built up inventories of leases in preparation for this moratorium and demand for federal leases is at a low.

4. GrubHub, DoorDash, Uber to Face State Regulatory Scrutiny

As statehouses increasingly consider caps on commission fees that third-party delivery apps charge restaurants, a policy solution many municipalities across the US have adopted during the past year, we believe they also will look to impose additional, more permanent restaurant protection measures in 2021, such as prohibiting listing restaurants without their permission as non-partners. The major food delivery platforms rely on this strategy to bolster restaurant selection to maintain consumer loyalty and to grow market share.

Source: Capstone analysis
* includes retailers

Our take: Restaurants and hospitality trade associations have found success in lobbying state and local lawmakers (e.g., California and New York) to pass measures that assistance struggling restaurants. In addition to placing a ceiling on what food delivery apps—such as DoorDash Inc. (DASH), GrubHub Inc. (GRUB), and Uber Technologies Inc. (UBER)— can charge restaurants, another potential policy proposal includes prohibiting the apps from listing restaurants on their apps without consent. These measures will likely present headwinds to the delivery platforms. Caps on commission fees, most of which remain in place only for the duration of the pandemic, directly hurt the per-unit economics for orders placed on a platform, while restrictions to listing non-partnered merchants slow consumer acquisition and market share. The latter regulation will likely disproportionately hurt newer or smaller entrants, such as DoorDash in some markets or Uber’s Postmates, increasing the needed spending to establish partnerships.

5. Biden’s $350B Request for State &Local Governments Would Provide Windfall for Most States

The “doom-and-gloom” scenarios state and local governments warned of early in the pandemic proved overly pessimistic, as modest y/y decline in tax collections make those early estimates impossible.

Source: US Census Bureau

Our take: Capstone’s analysis of state and local government tax collections suggests that most states are in better-than-expected shape and need far less in federal aid than the originally dire early-2020 predictions indicated due to the impact of COVID-19–related business closures on the economy and tax collections. Still, we expect Congress will pass one or more stimulus bills during the next few months, providing state and local municipalities with as much as $350 billion dollars in aid. This aid will go to states, cities, counties, and potentially even airports—all of which are major issuers of municipal bonds. Capstone believes if the $350 billion request for aid is granted and the allocations are laid out akin to the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, the funds will exceed the revenue losses most states will experience in the current and upcoming fiscal year.

6. doValue, European Credit Servicers to Benefit from Supportive Regulatory Framework for NPL Clean-Ups in Italy and Greece

We believe the portfolio composition of doValue provides the business with an edge over the competition in the Italian credit servicing sector. Its exposure to Italy and Greece is beneficial, as we believe the countries will incentivize NPL disposals in 2021.

Source: Company reports, Capstone analysis
Note: Rounded numbers may total more than 100

Our take: Capstone believes doValue SpA (DOV on the Milan exchange) is well-positioned to benefit from the supportive regulatory environment for NPL disposals in Italy and Greece. We expect the COVID-19 related asset quality deterioration to accelerate in 2021 as moratoria expire. The Italian government is aiming to improve the efficiency of the judicial system with the introduction of the Code of Business Crisis and Insolvency in September 2021 and we expect further measures (e.g. tax incentives) for the disposal of impaired loans. The introduction of debtor-friendly regulations across Europe remains a tail risk. However, we believe a technocratic government led by Mario Draghi would somewhat reduce the risks of overly punitive consumer protection laws in Italy, as the former central banker understands the importance of legislation that facilitates the cleanup of NPLs from banks’ balance sheets. In Greece, the asset protection scheme will help banks offload NPLs and we expect strong deal flow for credit servicers in a less crowded market. We forecast doValue’s total assets under management (AuM) to increase from €163 billion in September 2020 to €190 billion to €200 billion in 2021.