March 18 – March 24, 2016

Chinese companies looking for cash flow. The knock on effects of low oil prices. U.S. Commercial Real Estate starting to get that sinking feeling.

Happy Easter! This week the three major themes/articles are 1) James Kynge, Gabriel Wildau and Don Weinland’s “China Inc: The quest for cash flow” in the Financial Times, followed by a three separate articles in the Financial Times discussing the impact of low energy prices 2a) Eric Platt and Laura Noonan’s “Bondholders suffer $150bn oil price hit”, 2b) Simeon Kerr’s “Gulf states will be forced to tap debt markets, warn Moody’s” and 2c) Henny Sender’s “Lower oil tests sovereign wealth funds” all in the Financial Times, and 3) is Peter Grant’s “Turning Point? U.S. Commercial-Property Sales Plunge in February” in the Wall Street Journal.

Other items that are worth a mention (a way for me to highlight a few more articles – with less content):

  • Following up on the coverage on Anbang from last week, Marriott has since upped its offer ($13.6bn up from $11bn in November 2015) for Starwood and has ‘won’ the bid.  While I’m sure Marriott isn’t too happy with the higher price, the shareholders of Starwood are gleeful.  As an aside, it is also looking like Anbang may not have been able to consummate the deal and may have difficulties closing the Strategic Hotels deal.  Have to be mindful of that capital flight…
  • Foreign media sources in China are on edge.
    • “New Chinese regulations aimed at dramatically restricting the publication of foreign content have introduced a new chill into an already frigid press environment in China.”
    • “The directives, which entered force last week, give China’s government draconian powers to stop foreign companies or partly foreign-owned companies from publishing online material unless they have approval from the broadcast regulator – the State Administration of Press, Publication, Radio, Film and Television.”
    • Industry analysts say the rules fit a new pattern: whereas formerly the government’s press censorship was widely denied and hidden from view, today the government is making its powers and the limits of dissent more explicit and public.
  • Entertaining read in the FT, “Every cycle is defined by a hubris trade.”  I.E. Julian Robertson’s position in US Airways in the dotcom era and now Bill Ackman’s Valeant position.
  • Think it’s expensive where you live?  In Hong Kong median home prices are around 19 times gross income levels.  As a result it’s not uncommon for married couples to live separately with their respective parents.
  • Transamerica is being sued for cost increases on universal life insurance contracts.  Basically high annuities are hard to cover in a zero to negative interest rate world, so life insurance companies are having to increase fees for certain products, even on existing contracts.
  • And I would recommend each of the Special Reports below.

Interesting graphics:

From the Financial Times’s “Oil and gas: Debt fears flare up.

FT_American Energy Junk Bond Issuers_3-21-16

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

China Inc: The quest for cash flow. James Kynge, Gabriel Wildau and Don Weinland. Financial Times. 18 Mar. 2016.

This article followed Anbang’s flurry of activity last week and serves up something of an explanation of why Anbang and other Chinese companies have been aggressive in pursuing foreign acquisitions of late.

In 18 months Anbang, the Chinese Insurance company, “has signed $32bn in overseas acquisitions deals.”  To give you a sense, “Since 2014, Anbang has outbid competitors to snap up the Waldorf Astoria hotel, a US landmark, for $1.95bn; paid $1.6bn for US insurer Fidelity and Guaranty Life; $1bn for a controlling stake in Korean insurer Tongyang Life; and scooped up trophy properties in London and companies in Europe.”

“Within this surge of Chinese deals – which have totaled $102bn since January compared with the record $106bn for all of last year, according to Dealogic – lies a paradox for target companies. While the cash offers can seem too big to refuse, they may also appear to come from the corporate equivalent of deep space, so sparse is the information available on the bidder.”

“Anbang, which is just 12 years old, astounded the Chinese insurance world in 2014 with successive fundraising rounds that expanded registered capital from Rmb12bn ($1.8bn) to Rmb62bn in less than a year, introducing 31 new investors. This propelled it to first place among insurers, outstripping the likes of China Life and the People’s Insurance Co of China, even though they far eclipse it in terms of premiums.”

“The lack of transparency, analysts say, may be linked to the preference among many Chinese bidders for all-cash offers.”

“The serious flaws in Chinese corporate disclosure are why all-cash offers are often required.  The cash is less to make the bid more attractive than to compensate for the fact that these companies either don’t have a desirable level of assets or can’t properly document the assets.” – Derek Scissors, China analyst at the American Enterprise Institute.

“To a significant degree, analysts say, the exodus of Chinese investment capital is in fact a ‘quest for cash flow.'”

“Data from 1,627 domestically listed companies, or 58% of the total, that have reported their 2015 earnings show a clear deterioration in fortunes. Average operating revenues per share fell to their lowest level so far this decade, sliding to Rmb5.4 from Rmb6.55 in 2014, according to Wind Information, a data provider.”

“In addition, just over one-fifth of listed Chinese companies reported negative cash flows during 2015 and about one-third owed at least three times as much in debts as they owned in assets, according to Wind.”

“Nevertheless, it would be wrong to assume that Chinese corporate investments overseas are driven solely by a dash for cash, or by capital flight because of fears that the value of the renminbi may slump. Distinct strategic thinking also underlies the moves.”


Bondholders suffer $150bn oil price hit. Eric Platt and Laura Noonan. Financial Times. 21 Mar. 2016.

While I try not to bog you down with too much to read, these three interrelated articles pertaining to the energy sector are well worth the read (if you want more, see the Special Report below “Oil and gas: Debt fears flare up.

First the investors…

Investors have suffered losses of at least $150bn in the value of oil and gas company bonds, as the slump in crude prices since the summer of 2014 has fueled fears of a wave of defaults in the US and emerging markets.”

The 300 largest global oil and gas companies have also seen $2.3tn sliced from their stock market value over the same period, a 39% slide since oil began its decline, an analysis by the Financial Times has found.”

“Borrowing by oil and gas companies has soared over the past decade. Their total debt, including loans, almost tripled from $1.1tn in 2006 to $3tn in 2014, according to the Bank for International Settlements.”

“Low oil prices fuel a reduction in risk-taking, and when there is less risk-taking, asset prices will fall. It can lead to a downward asset price spiral.” – Hyun Song Shin, chief economist of the BIS

“Twenty of Europe’s biggest banks have energy loans totaling almost $200bn between them – enough to wipe out a quarter of their common equity. In the US, twenty of the leading banks have loans totaling $115bn, or 11% of their common equity.”

Gulf states will be forced to tap debt markets, warn Moody’s. Simeon Kerr. Financial Times. 21 Mar. 2016.

Next the resource rich countries…

“Oil-rich Gulf governments will be forced to rely on debt markets as their fiscal deficits rise to $270bn amid an extended period of low oil prices over the next two years, Moody’s has said.”

“Last year, the Gulf states largely used reserves and local banks to finance the deficits that are the largest in their history, widening from 9% of GDP last year to 12.5% this year.”

“Saudi Arabia, for example, faces a forecast deficit of $88bn this year and $65.3bn in 2017, according to Moody’s. In 2009, the deficit was $23bn and the previous oil slump of the late 1990s saw the deficit peak at $13bn in 1998.”

“Moody’s forecasts that the kingdom, which has had negligible debt levels for years, is expected to see government debt rise to around 20% of GDP by next year.”

According to Mathias Angonin, a Dubai-based senior sovereign analyst with Moody’s, “proposed subsidy reforms, capital expenditure cuts and the introduction of sales tax from 2018 would not be enough to balance the deep GCC budget deficits.”

Lower oil tests sovereign wealth funds. Henny Senders. Financial Times. 21 Mar. 2016.

And lastly, the sovereign wealth funds that derive their capital from the resource rich countries…

“Circumstances have changed in the Gulf, bringing in their wake a host of ripple effects. A while ago, the biggest headache for the sovereign wealth funds of the Middle East was finding safe but profitable homes for their portion of swelling oil revenues.”

“That will mean both downward pressure on the prices of some assets that has little to do with fundamentals, and more attractive valuations for new money coming in.”

“Moreover, most governments in the region will probably prefer to run down their reserves than to see their currencies lose value, analysts say. That is another reason these giant pools of money will have less to put to work globally going forward.”

“Global liquidity will shrink because global liquidity basically means dollar liquidity and all the GCC and Saudis need dollars.” – Mohamad Al Hajii, a macro strategist for EFG Hermes UAE in Dubai.

“Already Qatar has been quietly selling commitments to private equity funds and public shares, according to people familiar with the matter.”

“The reduced presence of the regional sovereign wealth funds will be felt more strongly in asset classes that have an especially long-time horizon, such as private equity and infrastructure.”

“Weak exports and slowing domestic economies mean that sovereign funds and other deep pools of money in Asia also have less money to invest globally. That means pension funds in countries from Canada to Korea will have more opportunity. But managers at some of these funds say they are still waiting, convinced that if they are patient, there will be even more bargains in coming months.”


Turning Point? U.S. Commercial-Property Sales Plunge in February. Peter Grant. Wall Street Journal. 22 Mar. 2016.

“Sales of U.S. commercial real estate plummeted in February, sending the clearest signal yet that a six-year bull market might be coming to an end.”

“Just $25.1 billion worth of office buildings, stores, apartment complexes and other commercial property changed hands last month, compared with $47.3 billion in the same month a year earlier, according to deal tracker Real Capital Analytics Inc. In January, sales were $46.2 billion.”

“Overall, commercial-property values are leveling off. Green Street’s broad valuation index in February was 8.7% higher from one year earlier, but in the previous year the index rose 11%.”

“The market has slowed primarily because of forces at work in the global capital markets rather than problems stemming from real estate itself. These forces, which also caused global markets to plummet in the first two months of this year, have made debt – the lifeblood of real estate – more expensive and more difficult to obtain.”

“The most dramatic sign has been the sharp decline in bonds backed by commercial mortgages. In 2015, about $100 billion of commercial mortgage-backed securities were issued. This year experts believe volume will fall to $60 billion to $75 billion.”

“As yields of junk bonds soared, real estate became a less attractive investment. At the same time, the spreads between real-estate borrowing rates and Treasury bonds widened greatly.”

“Today loans that would have been made with interest rates in the 4.5% to 5% range are now being made above 5%, market participants say. Borrowers who would have lent up to 75% of a property’s value have reduced their so-called loan-to-value ratios to between 65% and 70%.”

“Buyers have been hearing ‘no’ from lenders for the first time in a while,” said Jim Costello, senior vice president at Real Capital Analytics.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Fidelity Calls U.S. Fairly Attractive as Yield Premium Climbs 3/20
Bloomberg – How Satisfying Millennials Could Save PwC $850 Million 3/23

Civil Beat – Can We Grow Our Economy, Not Our Population (Luke Evslin) 3/18

Daily Commercial News – Twenty major upcoming Hotel/Motel and Retail/Shopping Center construction projects – U.S. 3/23

FT – Emerging market debt: A trawl for yield 3/17

FT – China’s rising exports: less about growth, more about exporting deflation 3/17

FT – Every cycle is defined by a hubris trade 3/18

FT – Hong Kong cost of living forces married couples into separate beds 3/20

FT – China bank governor warns over corporate debt 3/20

FT – CBI chief says Brexit would leave economy weaker 15 years on 3/20

FT – China plays ball with its development lending 3/22

FT – Beijing scrambles to contain vaccine scandal 3/22

FT – Anbang’s bids for US hotel chains thrown into doubt 3/22

InvestmentNews – Transamerica sued for cost increases on universal life insurance contracts 3/23

NYT – Cities to Untangle Traffic Snarls, With Help From Alphabet Unit 3/17

NYT – Scientists Warn of Perilous Climate Shift Within Decades, Not Centuries 3/22

WSJ – Starwood Says Boosted Anbang Bid Tops Marriott Agreement 3/18

WSJ – Lessons in Chinese Debt Restructuring: The Debtor Always Wins 3/18

WSJ – Japanese Land Prices Rise for First Time Since Global Financial Crisis 3/22

WSJ – Big Oil’s Next Big Energy Problem 3/23

Special Reports


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