December 18 – December 24, 2015

2015 sets the global Mergers and Acquisition record. How much will the financing for these mega deals cost? The economic blue print for China in 2016.

Happy Holidays everyone and as this will be my last post of 2015, I wish you a happy and meaningful 2016.

I recognize that this post is coming to you early this week, but frankly I am being honest with myself that the likelihood of me writing this post either on Christmas Eve or Day is slim.  Rest assured that in my next submission I will post any article that I come across through the remainder of the year that is of particular merit.  Fortunately for this post I already have ample material from the past few days.

Before I get to that, if you enjoy my postings, please share my posts with others that you think would gain value from the posts and consider signing up for the email distribution.

Now on to it.

This week three themes that stood out were 1) that global deal making attained an all-time record in 2015 as highlighted by James Fontanella-Khan and Arash Massoudi in The Financial Times (“Global dealmaking breaks 2007 record”), 2) which of course requires lots and lots of financing, hence Henny Sender’s article “Mega deal financing will test bond market in 2016” also in The Financial Times, and 3) was Lingling Wei’s “China Unveils Economic Blueprint for 2016” in The Wall Street Journal discussing the steps that China intends to implement as it shifts from an investment-led economy to a consumption-led economy.  Additionally, I want to bring attention to Josh Barbanel’s “Luxury Condo in Manhattan Resells at Loss of More Than $1 Million” in The Wall Street Journal that serves as a reminder that buying real estate (or in this case a condominium) on spec is not a guarantee of profits.

*Note: bold emphasis is mine, italic sections are from the articles.

Global dealmaking breaks 2007 record. James Fontanella-Khan and Arash Massoudi. The Financial Times. 21 Dec. 2015.

“This year, global mergers and acquisition volumes have surged to a new record level, with the total value of announced transactions climbing to $4.6tn, compared with $4.3tn eight years ago, according to Thomson Reuters data.”

Why… because,

“Hunger for growth in a weak economic environment, cheap financing and continued pressure from activist shareholders to boost returns drove many companies to combine.”

See this graphic provided by Thomson Reuters in the article:

Note the Median value to ebitda multiple on the left axis.  Prices are high, but the sentiment is that there is still room to run.

“It doesn’t feel like we are in bubble territory yet because the transactions you’re seeing have industrial logic,” said Scott Barshay, a Cravath, Swaine & Moore lawyer, who has worked on more than $250bn worth of deals this year. “Momentum on strategic deals is strong… it feels like 2016 is going to look a lot like 2015.”

Mega deal financing will test bond market in 2016. Henny Sender. The Financial Times. 17 Dec. 2015.

Basically, all this M&A activity requires a LOT of capital and much of it in debt.  The thing is that financing is cheap and there are numerous incentives to use debt in the capital structure, but costs of debt have been climbing since some of these deals were penned both as a result of the Fed and the commodities slump which is pushing up delinquencies and hence yield expectations.

For example,

“Sometime in early 2016 Dell will seek almost $50bn from the debt market to finance its $67bn acquisition of EMC, just one of many mega deals looming in the coming months.”

“Most of the money, or $40bn, will be borderline investment grade, while the underwriters are targeting a 13% yield for the junk rated remainder.”

It doesn’t help that

“With spreads at their widest level in four years, Triple C rated debt rose above a yield of 18% this week, up from less than half that level not so long ago.”

“We are seeing a shadow tightening of financial conditions…”

“There is a disconnect between the central bank, which is programmed to worry about inflation and the markets, and business people who see many more signs of deflation.”

“The Oil & Gas and Metals & Mining sectors have pushed the US distress ratio to its highest level in six years, according to S&P US high yield corporate bond index.”

“Central banks have pumped a lot of money into financial markets and among the biggest beneficiaries were private equity firms, whose fortunes are directly tied to the high yield market. Now that they have sold almost everything that could be sold, they have little left to harvest, and their shares have dropped to the point that some investors are wondering whether they might cut their dividends.

China Unveils Economic Blueprint for 2016. Lingling Wei. The Wall Street Journal. 21 Dec. 2015.

“The plan, laid out at a closed-door conclave of senior party officials led by President Xi Jinping, comes as the country’s massive buildup of debt and legions of factories pumping out unwanted goods astride towers of empty apartments have become severe drags on economic output.”

The gist of it is:

“The economy will follow an L-shaped path, and it won’t be a V-shaped path going forward,” the official said, while ruling out any chances of China launching another round of aggressive stimulus measures like the one initiated in late 2008 to combat the global financial crisis.”

“The plan calls for reducing industrial overcapacity, slashing its stockpile of unsold homes, lowering costs for businesses and mitigating financial risks, according to a communique released by China’s official Xinhua News Agency after the conclusion of the meeting Monday.”

“Corporate debt now amounts to 160% of China’s gross domestic product, according to ratings firm Standard & Poor’s Ratings Services. That’s up from 98% in 2008 and compares with a current U.S. level of 70%.”

“It also said the government will encourage developers to lower prices.”

As my partners often like to say, ‘I hear the words.’  Stating and achieving are two different things.  However, China is no democracy and the government’s power over its citizens reaches far and wide.  But the ‘market’ is not an easily tamed beast.

Luxury Condo in Manhattan Resells at Loss of More Than $1 Million. Josh Barbanel. The Wall Street Journal. 21 Dec. 2015.

“At One57, the first of the new slender towers to open with picture-window views of Central Park, a four-bedroom condo bought by a European investor for $20.3 million in April is about to sell for a loss of more than $1 million.”

For some background on One57 or about the towers along “Billionaire’s Row” in Manhattan, Paul Goldberger did a great piece (Too Rich, Too Thin, Too Tall?) in Vanity Fair in April 2014.

“”For sure we weren’t able to sell it for what he bought it for,” said James C. Cox Jr., a broker with Compass who along with colleague Frank Giordano had listed the sprawling condo, which features a 43-foot-long glass-walled grand salon.”

“Mr. Cox said the apartment attracted little interest when it was listed at $21.9 million in May by another brokerage firm”

The owner seeking a closing before year-end accepted a deal below the current asking price of $18.995 million.  Often to attain liquidity when there is a lack of it, price is hurt.

One57 at 1,004 feet tall has raised its prices 11 times since it started sales resulting in total asking prices of $2.39 billion a 19% increase from its original pricing.

“Now, Extell is still listing its final units available, along with nine listings by other purchasers ranging in price from just under $5 million to $32.5 million.”

“Most sellers are asking for millions of dollars more than they paid, but a condo on the 62nd floor that cost $31.7 million is now listed at just under $30 million after being offered for as much as $38.9 million last year.”

As a developer, it’s never fun to sell against your buyers.

Other Interesting Articles

Bloomberg Businessweek


Bloomberg: Westfield Sells Five U.S. Malls for $1.1 Billion to Cut Gearing 12/20

FT: Emerging market economies downgraded across the board 12/17

FT: Discovering the destructive force of excess capital 12/17

FT: America’s reading problem 12/18

FT: Tumbling commodities prices shake index 12/20

FT: Azerbaijani manat collapses after government abandons dollar peg 12/21

FT: Crude oil sinks to 11-year low as oversupply fears intensify 12/21

Investment News: Raising the bar for nontraded REITs 12/20

NYT: As a New High Society Climbs in Manhattan, It’s a Race to the Top 12/21

WSJ: Hong Kong Retailers Lost in Currency Translation 12/17

WSJ: Congress Eases Curbs on Foreign Real-Estate Investors 12/20

WSJ – Rising in the Mideast: The World’s New Landlord 12/20

WSJ: Why Markets Aren’t in the Holiday Spirit 12/21

WSJ: In China’s Property Takeover Tussle, the Best Move Is to Wait 12/22

WSJ: The Trouble With Sovereign Wealth Funds 12/22

WSJ: U.S. Existing Home Sales Plunge in November 12/22


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