Christopher Swann Christopher Swann's Profile Fri, 29 Aug 2014 00:06:04 +0000 en-US hourly 1 Bland Lagarde will escape the Bretton Woods curse Thu, 28 Aug 2014 06:57:20 +0000 By Christopher Swann

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Christine Lagarde may soon reap the benefits of being bland. The IMF chief is under investigation for signing off on a 403 million euro ($531 million) payout to a French tycoon when she served as the country’s finance minister. Dominique Strauss-Kahn, her predecessor at the Washington-based lender, and former World Bank President Paul Wolfowitz were both ousted for misconduct. Lagarde, though, has few enemies.

Her squeaky-clean appearance was part of her appeal when she was chosen to replace DSK in 2011. He had been accused of sexually assaulting a maid in a New York hotel. While those allegations never made it to court, the incident was a stain on the IMF’s reputation. That his successor is now embroiled in a potential scandal from six years ago is starting to make the top jobs at these supranational institutions look cursed.

It needn’t be fatal. Lagarde is accused of neglect, not active wrongdoing. The case revolves around a 403 million euro award granted in 2008 to businessman Bernard Tapie. He had alleged he had been defrauded by now-defunct state-controlled bank Crédit Lyonnais when it purchased his sports firm Adidas in 1993. Tapie was a vocal supporter of then-President Nicolas Sarkozy, so investigators are trying to determine whether the process was politically rigged.

Lagarde appears to have rubber-stamped the payment. Such relatively modest charges might be sufficient to dislodge an unpopular chief. Wolfowitz was given the boot from the World Bank for a potentially forgivable conflict of interest: approving a generous financial package for a girlfriend who worked at the lender and who had to be reassigned when he got the job. But he was already intensely disliked at the bank for his role as a leading architect of the second Iraq war when he served as George W. Bush’s Deputy Secretary of Defense. His apparent obsession with combating corruption rather than fighting poverty earned him more enemies at the bank.

By contrast, the scrupulously diplomatic Lagarde is an emollient manager – acceptable to both top brass at the fund and its biggest donor countries. Nor have Lagarde’s middle-of-the-road economic views caused offense. Unless the Tapie investigation takes an unexpected and nasty turn, these rather dull qualities ought to be her saving grace.

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Dynegy’s $6.25 bln grab marks return of ambition Fri, 22 Aug 2014 17:55:34 +0000 By Christopher Swann

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

Dynegy only got out of bankruptcy two years ago. Now two deals worth $6.25 billion, announced on Friday, mark a return of ambition for the U.S. power company. It once tried to buy Enron and eventually went bust after a spat involving activist Carl Icahn. The purchases look sensible, but the lesson from Dynegy’s past is to avoid getting carried away.

The new generation assets, acquired from Duke Energy and private equity firm Energy Capital Partners, will nearly double Dynegy’s capacity to 26,000 megawatts and, the company says, should more than double adjusted EBITDA and boost free cashflow even more. That’s despite taking on $5 billion of new debt, more than twice the current level of borrowing.

The price for the new plants, at under seven times forecast EBITDA for 2015, looks sober compared with the average 9.5 times on which unregulated peers like NRG and Calpine trade. That helps explain why, even though it’s a big bite, investors gave the news a positive reception and sent Dynegy’s shares up, adding approaching $300 million of market value to its $3 billion worth at Thursday’s close.

Increasing scale is logical, but the company’s history shows the danger of going too far. With a peak valuation of $13 billion, the old Dynegy launched an abortive bid to acquire collapsing Enron in 2001. Just a year later, Dynegy itself was worth under $200 million, near failure and in accounting trouble. It scraped by that time, but when a soft electricity market undermined the company’s fortunes again after 2008, a fractious fight for control between private equity giant Blackstone and activists including Icahn ended with a bankruptcy process that began in 2011.

Chief Executive Robert Flexon is surely attuned to Dynegy’s rollercoaster history. And he knows the unregulated electricity business in the United States remains vulnerable to sliding prices and demand. Even sound-looking deals like these need time to bed down. Shareholders may well approve, but they need to stay alert for signs of potentially worrying grander ambitions.

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Venezuela digs way to distressed seller status Thu, 14 Aug 2014 19:28:00 +0000 By Christopher Swann

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Venezuela is digging its way to distressed seller status. The country wants to offload Citgo, its U.S. refinery and pipelines unit. It may be worth up to $15 billion, money that’s sorely needed thanks to President Nicolas Maduro’s barmy economic policies. And the drop in value of heavy-oil assets like Citgo owns makes it a bad time to sell.

There can be advantages to getting rid of refining businesses. ConocoPhillips, for example, spun out its fuel-processing plants as a standalone company in May 2012. The two separate companies are now worth a total of 61 percent more.

Venezuela’s state-owned oil company PDVSA has a very different motive. Maduro’s administration is running out of cash. That’s the result of anti-business policies – including price controls and nationalization – that have depressed local production and increased reliance on imports. Access to dollars is rationed by a complex three-tier exchange rate that favors government projects over the private sector.

It has led to shortages of both food and medical supplies, which explains PDVSA’s timing in putting its U.S. division up for sale. In recent years demand has weakened and prices fallen for the kind of heavier oil refining that accounts for about three-quarters of Citgo’s output. American refineries now make more from processing the light crude from the shale boom.

Processing heavy crude may pick up again, especially if the Keystone pipeline between Canada and the United States is approved. The last time there was a refining boom for this oil, for example, companies like Citgo traded at earnings multiples a third higher than where they are now, according to Raymond James.

There are some valuable assets in PDVSA’s U.S. outfit – not least terminals and pipes. That should give Lazard, which has just been appointed as adviser, something to work with.

Much of the proceeds from the sale, though, will probably have to cover the goods shortages. This means little, if any, of the cash is likely to be invested to reverse the decline in PDVSA’s oil output.

With the company now supplying over 95 percent of the nation’s hard currency, more neglect will only worsen Venezuela’s plight, increasing the need to raise cash. Potential Citgo buyers may be in for a fire sale.

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Kinder Morgan’s large-number solution: get bigger Mon, 11 Aug 2014 18:47:13 +0000 By Christopher Swann

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Richard Kinder’s master class in financial engineering is back in session. The Kinder Morgan boss struck $71 billion of deals to unite his sprawling U.S. pipeline empire. Various partnerships had reached a scale that was limiting returns. Kinder somehow managed to solve this size quandary by getting bigger.

Starting with $40 million of assets he bought from Enron in 1996, Kinder has enlisted all manner of clever rearrangements to generate returns. A $22 billion leveraged buyout in 2007 was followed by a public offering three years later. Now, turning his back on the master limited partnership structure he made popular, Kinder is bringing together four separate units – Kinder Morgan, Kinder Morgan Energy Partners, El Paso Pipeline Partners and Kinder Morgan Management – under one roof to create a titan with an enterprise value of $140 billion.

For Kinder Morgan, the MLPs, which receive federal income tax exemption and distribute the bulk of cash flow to unit holders, have outlived their usefulness. As they grow and mature, a rising proportion of income goes to the general partner. At Kinder Morgan Energy Partners, for example, about half its $3.3 billion in cash last year accrued to parent company Kinder Morgan. This raises the cost of funding projects, slows growth and eats into the tax advantage.

Kinder Morgan expects allowances for depreciation from buying control of the three sister companies should save $20 billion in taxes over the coming 14 years. That makes Uncle Sam, already reeling from a proliferation of U.S. corporations shifting their tax domiciles by acquiring overseas rivals, the only real loser from Kinder’s creativity.

Owners of the various divisions are being offered premiums of up to 16 percent. That’s relatively generous for deals that won’t generate much cost savings. Existing holders of two entities also are being offered a choice of cash or stock.

Kinder Morgan expects its cost of capital to shrink after the consolidation. Partnership units also make for a lousy acquisition currency, since many institutional investors won’t accept them. The two factors combined should help the company craft a renewed M&A strategy. The unusual solution to a law of large numbers problem is already working, including for Kinder, who owns almost a quarter of Kinder Morgan. The shares gained over 10 percent, adding almost $4 billion of market value.

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REITs and MLPs make tax inversions a diversion Thu, 31 Jul 2014 18:51:07 +0000 By Christopher Swann

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

A couple of U.S. home-grown tax breaks are making M&A inversions look like a diversion. American authorities are letting Windstream designate its telecom cables as real estate, qualifying them for tax breaks. And a partnership will shield assets of energy firm Hess from the Internal Revenue Service. Politicians, though, are indignant over firms that move overseas – even when home-grown tax loopholes are costlier.

Windstream set off a mini-boom in telecom industry stocks on Tuesday after the company revealed it had secured permission from the Internal Revenue Service to organize some of its assets into a real estate investment trust. These companies avoid paying corporate tax as long as they distribute at least 90 percent of their earnings as dividends. The S&P Telecom Select Index added 3 percent as investors wagered others might follow suit. Windstream’s own shares jumped as much as 26 percent at one point.

REITs are big business already, but the IRS seems to be widening its definition of what constitutes real estate. And the telecoms industry is not the only one benefiting. The energy sector has been making a lot more use of the master limited partnership structure of late, with Hess the latest to do so on Wednesday. MLPs are exempt from federal income tax. There are now 117 of them worth $570 billion, double their total value three years ago. A record 19 went public last year.

As with REITs, the assets that qualify for MLP status have expanded over the years. Originally intended as a break for those producing or transporting fuel, the IRS has extended the tax exemption to service providers – such as fracking sands miner Hi Crush Partners.

MLPs are now expected to cost the country some $7 billion in lost tax revenue between 2012 and 2016, according to the U.S. Congress’ Joint Committee on Taxation, calculated in 2013. That was four times the previous year’s estimate. Expanding the definition of REITs potentially adds to that figure, suggesting these structures cost more than the lost revenue from firms moving overseas in search of lower tax rates, which the White House recently pegged at $17 billion over a decade.

It may be politically easier for politicians to tolerate tax breaks that benefit domestic constituents rather than to surrender federal revenue. But narrowing the rules for MLPs and REITs could make for a much simpler fix.

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Soros takes sub-quantum leap into activism Fri, 27 Jun 2014 19:29:16 +0000 By Christopher Swann

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Is George Soros turning activist? His $29 billion hedge fund has famously confronted governments. But facing off with a $1 billion U.S. oil and gas company is novel. The move gives underperforming corporate bosses another scourge to fear.

A bellicose letter from Soros Fund Management to Penn Virginia on Wednesday could easily have come from an established activist like Carl Icahn. Scott Bessent, the chief investment officer at Soros’ firm, wrote that Chief Executive Edward Cloues has presided over “investor relations disasters” and is responsible for “egregious” strategic choices.

Along with Bessent, George Soros and his son Robert seem to have chosen a fairly easy target. Penn Virginia’s modest size made it relatively cheap to accumulate a nearly 10 percent stake. And despite recent gains, Penn Virginia shares are worth no more than five years ago, against a more than 40 percent rise in Exxon Mobil stock and a doubling of the S&P 500 Index. That makes questions over strategy legitimate.

But shareholder activism isn’t Soros senior’s usual modus operandi. His Quantum fund is best known for big macroeconomic battles, including the 1992 bet against the pound that helped force Britain to devalue its currency. Only last year, Soros scored big gains by shorting the Japanese yen after monetary easing encouraged by Prime Minister Shinzo Abe.

As a family-only fund since 2011, the Soros vehicle no longer needs to attract outside investors. Even so, activism has been among the most lucrative hedge-fund strategies in recent years, returning 21 percent in 2012 and 16 percent in 2013, according to Hedge Fund Research. That could be one reason to try it – although the easiest pickings may already have gone to the likes of Icahn, Bill Ackman at Pershing Square Capital Management and Dan Loeb at Third Point.

Another factor could be a changing of the guard. George Soros is 83, his son is involved in the business, and Bessent – who rejoined the firm in 2011 – has a background investing in companies, including a stint with short-selling hedge fund boss Jim Chanos. It’s only a sub-quantum leap into activism so far. But the prospect of scrutiny from the Soros fund is another reason for subpar corporate boards to raise their game.

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Elon Musk applies his magic touch to M&A Wed, 18 Jun 2014 18:06:13 +0000 By Christopher Swann

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Elon Musk is applying his magic touch to M&A. A $350 million acquisition of solar panel maker Silevo added $900 million to the market value of SolarCity, where the inventor and entrepreneur is chairman and biggest shareholder. It’s an investment in an efficient technology and a hedge against rising import tariffs. Manufacturing, however, is the riskiest part of solar, and Musk is a more proven builder than buyer.

A global glut and tumbling prices have sent most investors running from solar modules. The world’s largest supplier, Suntech Power, liquidated last year with more than $2 billion in debt. Much of the appeal of SolarCity, which combines clever financing with an installation business, was precisely that it could exploit the panel-making competition. SolarCity’s shares have rocketed up 450 percent in the 18 months since its initial public offering.

That suggests the 18 percent jump in SolarCity’s shares on Tuesday after the decision to get into the panel business can be partly attributed to a certain Musk halo effect. He has generated a similar amount of giddy enthusiasm for his Tesla Motors, SpaceX and Hyperloop ventures. Even so, the Silevo deal could prove a useful hedge.

Punitive tariffs slapped on Chinese-produced panels, which account for more than half the U.S. market, threaten to increase prices by 10 percent, according to estimates by boutique investment bank Roth Capital Partners. SolarCity’s will be made in upstate New York.

What’s more, the global oversupply is in bog-standard panels. Silevo’s, by contrast, are already about 15 percent more efficient at converting sunlight into energy. With fewer modules needed for each rooftop, SolarCity will spend less on mounting, labor and wiring. And Musk foresees a scarcity of such high-efficiency devices.

Despite the market fervor for the deal, SolarCity and Musk have much yet to prove. A $400 million plant is to be built, along with unquantifiable research and development spending to go with it. Including the performance milestone component of the price, Silevo is twice the size of SolarCity’s biggest acquisition. It also will be three years before it contributes to earnings. The Musk mystique is becoming dangerously spellbinding.

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What Lagarde should’ve told Smith College’s grads Wed, 14 May 2014 20:30:00 +0000 By Christopher Swann and Rob Cox
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

International Monetary Fund boss Christine Lagarde wimped out of speaking at Smith College’s commencement after a student petition accused the fund of supporting “patriarchal systems.” The fund has made many mistakes over the years. But that critique is mostly old hat. The IMF, particularly under Lagarde, has fostered social spending and championed female rights. Here’s what she ought to have told the 672 women graduating from the university in Northampton, Massachusetts on May 18.

Women of Smith

Congratulations on graduating from one of the world’s greatest women’s colleges. I understand that many of you had reservations about having me as your speaker. Student opposition also recently caused former Secretary of State Condoleezza Rice to cancel a similar address to the students at Rutgers.

But throughout my career, whether as an international lawyer or a French politician, I have always believed in engaging people with whom I most disagree. I am sure this is precisely the sort of approach the extraordinary faculty here at Smith has fostered in all of you, too.

The institution I lead, not unlike this amazing university founded by the brave and fiercely independent Sophia Smith 143 years ago, can rightly claim a proud record of promoting the economic well-being and careers of women.

One criticism made of the International Monetary Fund is that we force borrowing countries to slash social spending – which takes a heavy toll on underprivileged women. This may have been a reasonable charge to make a decade or two ago. But in recent years the IMF has urged countries not to curb government programs that help women or the very poor.

A study we undertook in 2011, for example, showed that education and health spending was on average 20 percent higher and 40 percent higher per capita, respectively, five years after governments adopted one of our programs. We only want countries to cut subsidies that provide assistance to those who don’t need it.

What’s more, the IMF is constantly urging governments to take action to get more women into the workplace. Our research shows that if the number of female workers rose to the same level as men in the United Arab Emirates, over time its economy would expand by 12 percent. In Japan it would grow 9 percent. Even here in the United States, balancing male-female workforce participation would add 5 percent to economic growth. Such calculations are one of the best ways to win over skeptics.

Smith College can claim so many alumnae who have enriched our world, from Julia Child to Gloria Steinem, Nancy Reagan to Sylvia Plath. I am proud to say the IMF has also helped launch careers for top women in the fields of finance and government, besides becoming the first major multinational organization to choose a female boss – c’est moi. I also think of my former IMF colleague Caroline Atkinson, who now has a senior position in the Obama administration, or Nemat Shafik, who will soon be the deputy governor at the Bank of England.

Of course, I understand the IMF is not always loveable. Let’s face it, governments only seek our help when something has gone badly wrong. But we care about more than financial stability. We understand that promoting female education and career success is both fair and economically rational. It is in this spirit that I have come to you today, despite many of your protestations.

Thank you and I look forward to following the great work you will all no doubt bring not just to womankind – but all of humankind.

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Stanford’s snub to coal typical of Silicon Valley Thu, 08 May 2014 20:27:35 +0000 By Christopher Swann

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Stanford’s snub to coal is typical of Silicon Valley. The black rock is an easy target for the university’s $18.7 billion endowment, which is bigger than the top five U.S. coal firms combined. But shouldn’t the principle behind it, reversing global warming, also apply to oil companies, including Stanford donor Chevron? Like Valley tech tycoons, the Palo Alto school seems to shun some evils only so far.

There are plenty of reasons to dislike coal. The fossil fuel is dangerous to extract – killing about 300,000 miners through accidents and black lung disease since 1900, according to a 2011 Harvard University study. It generates 130 million tons of waste annually and is estimated to cause 11,000 premature deaths a year from lung cancer and other maladies. Yet Stanford entered morally fuzzy territory by pinning its coal boycott on “the availability of alternate energy sources with lower greenhouse gas emissions.”

In theory, such logic should mean ditching oil and natural gas too. While coal accounted for 32 percent of America’s carbon dioxide emissions from fossil fuels in 2013, that was trumped by oil on 42 percent.

Coal is a far easier target. The value of the nation’s five most valuable coal firms comes to a mere $18.6 billion. And the largest, Consol Energy, at $10.2 billion, gets around 40 percent of its earnings from natural gas. Even those without ecological concerns have good reason to abandon coal. As seams of Appalachian lignite are exhausted, costs are climbing. Meanwhile margins on Powder River Basin coal are thin due to high transport costs.

If Stanford really wanted to show its green bona fides, ditching Big Oil would have been the way to do it. The top five U.S. oil and gas companies alone are worth $900 billion. But that would have made the decision difficult for the university endowment’s stock pickers. Stanford would also have had to contend with any fallout from Chevron, whose headquarters are 40 miles away from campus. The company has funded faculty positions and contributed to new laboratories at the University’s School of Earth Sciences.

Easy moralizing is something of a Silicon Valley habit. Tech bosses have often failed to live up to their statements about helping humankind. Some have engaged in exploitative manufacturing practices, shown a disregard for customers’ privacy, and trampled on shareholders’ rights. In this context, Stanford’s cost-free swipe at coal feels right at home.

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World Bank boss Kim tested by Honduran loan fracas Thu, 16 Jan 2014 14:53:42 +0000 By Christopher Swann
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Newish World Bank President Jim Kim’s goal of cutting $400 million from the multilateral lender’s budget just got harder. With the Washington-based institution under fire for lending to a Honduran company accused of thuggish behavior, the temptation will be to add to red tape. That would slow the already sluggish loan process and impede efforts to cut poverty.

The $15 million credit in question, to Honduran agribusiness Dinant, emphasizes a key dilemma for the World Bank. Shareholders like the United States and Germany hold the financier to the highest ethical standards. All loans are meticulously vetted to ensure they don’t involve graft or harm the environment and local citizens.

Yet the bank is also expected to operate in some of the world’s most corrupt and unstable nations – where, by no coincidence, live many of the world’s poorest. This tension helps explain why securing World Bank loans has become agonizingly time-consuming and why many countries prefer to borrow from rivals that attach fewer strings, notably China or local development banks like Brazil’s BNDES.

Expecting perfection from the bank, as many governments and charities seem to, makes it less effective. It also hands market share to lenders with far lower standards. So the World Bank’s supporters must hope that Kim is not diverted from his efforts to streamline bureaucracy – starting with an 8 percent cut in the $5 billion annual budget over the next three years.

Developing a thicker skin for criticism may be the remedy. If anything, the World Bank will be doing more business in trouble spots. Around a third of those surviving on less than $1.25 a day live in countries blighted by conflict and fragile political systems, according to a recent Brookings Institution study. That is on track to rise to half by 2018. Such forecasts also vindicate Kim’s goal of boosting lending to private businesses in these countries by 50 percent over the next three years – another target that could be put at risk by the Honduran loan.

Kim has said the World Bank needs to take “smart risks” when lending. Not all of these will work out, some borrowers will behave badly and a few deals will look downright stupid. The test for Kim will be ensuring such slips are extremely rare, and don’t derail his broader mission.

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