Commentaries

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Debt on autopilot

At first glance this week’s budget projections paint President Obama as a spendthrift. The White House itself offered a grim glimpse of a future in which U.S. debt more than doubles to $17.5 trillion in a decade — an increase of nearly $10 trillion.

Merely servicing the U.S. debt will cost more than America currently spends on either defense or social security.

But the yawning deficit can’t be blamed on Obama — or for that matter, on Bush or on the financial crisis. Instead the government’s finances are locked on autopilot, with entitlement programs driving the country towards a fiscal crisis.

Spending on three giant programs — Social Security, Medicare and Medicaid — will account for three quarters of the extra borrowing over the coming decade. By 2019, it will more than double to $2.5 trillion — more than the U.S. government expects in total tax revenues for next year.

Leveraged loans making a comeback?

The $4 billion financing for Warner-Chilcott’s acquisition for P&G’s drug business is another sign of credit markets coming back to an even keel, but it’s not clear how much juice the banks have to keep the momentum going if they don’t find investors for the debt.

The Wall Street Journal reports that six banks, including JP Morgan and Bank of America, will provide the financing, $3 billion going to the acquisition and $1 billion to refinance existing Warner-Chilcott debt.

British (fantasy) Land for shares

Shares in British Land, a big UK property company, have rocketed by almost two thirds from their March lows. After Tuesday’s results, they stand at a one-third premium to net asset value (NAV) of 361 pence per share. Fuelled by takeover speculation, the shares seem to be orbiting far above bricks-and-mortar reality.

Further fuel has been provided by the cost of much of Land’s outstanding debt. This is so far below the market rate as to be worth a further 119 pence a share on the company’s estimate. Together with associates, Land has 4.8 billion pounds of net debt fixed at 5.3 percent with an average maturity of 12.6 years.

A Blessing for Conti?

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FRANCE-PROTESTS/Three things stand out about the “compromise” reached between German auto parts and tyre maker Continental and its biggest shareholder Schaeffler to oust Conti’s CEO Karl-Thomas Neumann in favour of Schaeffler’s own man Elmar Degenhart.

This is – by the way – far from a good deal as far as the Conti minorities are concerned. It thrusts the company ever more firmly into Schaeffler’s pocket. Many Conti shareholders are probably wishing they had sold when 75 euros a share was on the table.

Anglo American clears more clutter

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CHILE-CODELCO/ANGLOAMERICANJohn Parker’s appointment as chairman of Anglo American seems to be having the desired catalytic effect – even though the British businessman is barely through the door.

Last month, the mining group disposed of its stake in Africa’s largest aluminium processor, Hulamin for a total of $150 million.

Back to the future for debt panel proposal

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MALAYSIAAnything that saves time and money in the restructuring of debt sounds like a good idea — particularly given there are likely to be a lot more bad loans that will need sorting out in the coming months and years. 

London bankers working in this area have begun pushing an idea to by-pass the courts in the restructuring of billions of pounds worth of debts.

from Rolfe Winkler:

Fed: Stop the presses

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On Thursday, the Bank of England said that it would run its printing press a bit faster while the European Central Bank hinted that theirs might slow down sooner than expected.

In the United States, the Federal Reserve's printing press is running low on ink, and Ben Bernanke has his own choice to make: Buy a new cartridge or shut the thing down. He should shut it down.

Best performers reads like a who’s who of risky assets

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It’s hard not to get a little nervous when you see a chart like the one Bank of America-Merrill Lynch strategists put out on the top asset performers in July. Sure, it kinda sorta makes sense that the most beaten down assets would outperform, but it makes you wonder if all the stimulus pumped into the system is setting up the financial markets, at least the most vulnerable, for another fall.

july-returns

The high-yield CCC sector is a stand out.  This is the debt from the riskiest companies, whose chance of default is well above those with higher credit ratings.

Debt leaves Reed a lot of digging to do

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CHINA-COAL/    Crispin Davis wanted to bolster Reed Elsevier’s risk management business when as chief executive he spent $4.1 billion on ChoicePoint.
    Last year’s acquisition was not a bad one — it’s a ray of light in Thursday’s otherwise largely depressing results for his successor Ian Smith — but the debt taken on to fund the deal is looming over him after the failure to sell the RBI magazines business.
    Instead, he has been forced to raise around $1.65 billion in a large, unpopular share placing to keep on top of the $8.4 billion debt pile. A failure of risk management, then. It suddenly seems a long time since Reed handed some $4 billion from the sale of its education business back to shareholders at the beginning of 2008.
    Reed is not alone in having to take such drastic action — drinks can maker Rexam needed a rights issue to keep the credit markets onside — but the 15 percent fall in Reed’s shares reflects the nasty surprise.
    Reed and its advisers can expect some flak from the Association of British Insurers (ABI) which hates these big share placings because they threaten the first-refusal rights of existing shareholders.
    Reed has stretched the 10 percent new share concession to the limit, adding 9.9 percent to its existing issued capital.
    It protests that debt repayments are comfortably far into the future, but the move still smacks of “needs must” and Reed admits that its credit metrics are “too stretched” given the economy and its business cycle.
    Add that to a retreat from its profit guidance for the year, and it’s no wonder shareholders are spooked.

Wiedeking makes millions betting the ranch

It isn’t only the investment bankers who have pay packages that offer perverse incentives.

Take Wendelin Wiedeking, for instance. The chief executive of Porsche <PSHG_p.DE> enjoys a package that most bankers could only dream of. And boy does it offer a perverse incentive. Indeed, arguably, it’s one of the reasons that Porsche has got itself in such a big financial hole that it may have to be rescued by Volkswagen <VOWG.DE>, a rival carmaker in which it has built a majority stake.
 
Wiedeking is one of Germany’s best paid bosses. He is entitled to receive a performance-related bonus equivalent to 0.9 percent of Porsche’s pre-tax profits. He apparently secured this right when he took over as chief executive in 1993. At the time the company was losing money and almost bankrupt.
 
The incentive has certainly worked. Wiedeking has turned Porsche into the most profitable car company in the world. The snag is that a large chunk of these juicy profits have come from financial sources rather than boring old car-making — initially from unspecified hedging activities and more recently from trading in VW shares.

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