Lest we overlook the Tarp/EESA’s impact on individual industries (not least those wooden arrow-makers) here’s a nice summary of what one might expect from Bank of America:
Aerospace/Defense – Minimal impact to sector from passage of EESA; Department of Defense budget will have the greatest effect.
Autos – EESA should directly benefit GMAC given its ownership of mortgage originator ResCap. While auto finance companies are not specifically included in EESA, its passage could have a second order positive impact in freeing up the ABS markets, which these companies have been largely shut out of in recent months. If EESA is effective in easing homeowners’ mortgage load, then auto manufacturers could benefit through a stabilization of auto sales, which have plummeted this year.
Building Materials – For companies with significant revenues generated in the public infrastructure sphere, EESA could serve to mitigate the current slowing in funding for transportation and other public work programs should lending availability improve for state and local governments. However, the health of the sector is inexorably linked to that of the broader housing market and homebuilding sector. Until we see substantial reduction in housing inventories, we would not anticipate a notable upswing in new homebuilding and remodeling activity-the likely timeframe being late into 2009.
Chemicals – We believe that enactment of EESA will have a limited positive impact on the chemical sector. On the one hand, we see EESA as a positive for credit markets, as it will provide liquidity and renew investor confidence. We believe EESA will increase market liquidity and consequently lower borrowing costs for chemical companies. Added liquidity will also increase available funds to finance operations in an economic downturn. Additionally, customers will have credit availability to purchase products.
Electric Utilities – Assuming that EESA has the desired effect of ‘un-sticking’ the credit markets, we expect that this would be a relatively negative event for electric utility bonds. Assuming that EESA would initiate a restoration of confidence in the credit markets and stimulate new lending, that should lead toward increased appetite for risk-taking by investors, which will likely lead to a general rotation out of defensive sectors-especially electric utilities-and into higher-yielding sectors which are in reasonable position to recover from the ills of the credit crisis. However, the much greater challenge is estimating the timeframe over which that expected rotation occurs-given the severity, depth and duration of this credit crisis, we expect that it will take a long time to restore broad investor confidence.
Energy, Pipelines, MLPs – In addition to the macro effects that this bill should have on the overall high grade market, EESA also contains the Energy Improvement and Extension Act of 2008, which includes several provisions specific to the energy sector. We discuss these in our Energy sector write-up of this report.
Healthcare – While EESA should improve liquidity for our markets and credits, we believe this liquidity enhancement should not impact any of our names in a meaningful way. Our work on the sector’s liquidity leads us to believe the companies we follow have sufficient liquid resources for the remainder of 2008. In total, the sector holds over $100 billion in cash and has over $40 billion of credit lines while producing $2 billion of free cash flow a month.
Industrials – EESA is not expected to impact the industrials sector to a great degree, other than offering stability to the captive finance companies such as Deere and Caterpillar. While neither company should receive assistance through the Act, the expected overall improvement of the credit markets as a result of this Act could provide some upside.
Leisure – We do not believe EESA will have a significant impact in the leisure sector, but as it is a capital intensive industry, anything that improves the availability is a positive for the sector.
Media & Telecommunications – We believe that the passage of EESA likely will facilitate new issuance from companies with significant short-term debt maturities. Furthermore, the challenging credit environment likely will alter the way that companies manage their funding needs going forward. In the past, some of the companies within our coverage universe funded primarily with short-term debt, including bank revolvers and commercial paper.
Retail/Consumer – EESA is targeted primarily at easing the credit crisis and improving lending availability to companies and consumers. We believe the current credit crisis increases the value of solid commercial paper ratings and financial policy clarity. At the same time, the crisis could lead to a shift away from reliance on CP to heavier reliance on long-term debt-potentially leading to increased debt issuance in the intermediate term-cash, and less aggressive financial policies.
Related links:
Not impressed with the Tarp, BNP Paribas edition – FT Alphaville