March 25 – March 31, 2016

Bank exposure to the oil patch. Dalian Wanda cuts contracted sales target. Anbang’s source of funds. Alibaba and Tencent, those numbers seem suspicious.

I’m going to break trend this week and cover four topics/articles (it’s just been one of those weeks) 1) is Bradley Olson’s, Emily Glazer’s, and Matt Jarzemsky’s “Coming to the Oil Patch: Bad Loans to Outnumber the Good” in the Wall Street Journal, 2) is Yuan Yang’s “Wanda cuts sales target amid cooling China property market” in the Financial Times, 3) is Gabriel Wildau’s “Anbang global shopping spree fueled by leverage” in the Financial Times, and 4) is Charles Clover’s “Big numbers behind Chinese internet leave some unconvinced” in the Financial Times.

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

  • It is looking like the oil industry has reached its ‘Minsky moment.’
    • “The history of the oil industry over the past decade fits very closely the model for speculative booms set out by Hyman Minsky, the great American economist.  A period of stability leads to rising investment, financed by borrowing, which drives up asset prices until cash flows generated by those assets can no longer support the debt taken on to buy them. Eventually there is what has been dubbed the “Minsky moment”: a dash for the exits as asset prices plunge. After the bubble bursts, the debt burden remains and can depress activity for a long time.”
    • “The job cuts – equal to more than 30% of the staff the banks currently employ – come on top of the 730,000 jobs that Citi says US and European banks have already shed from their peak staffing levels.”
  • Related to Wildau’s article on Anbang is Sebastian Mallaby’s piece in the FT on the hidden costs of the insurance company’s spending spree.  Mallaby draws an interesting parallel with the current acquisition spree of the Chinese to the experience of Japanese in the late-1980s into the mid-1990s acquiring trophy assets with little discretion, i.e. Rockefeller Center in New York and the Hotel Bel-Air in Los Angeles, ultimately offloading these assets “…for less than 60 cents on the dollar. In all, Japan is thought to have lost $400bn on US property during this period.
    • “Inevitably, copious bidding is foolish bidding: the median Chinese bid last year valued the target company at 33 times earnings, implying a yield of 3%. Given that investors could secure a higher yield with less risk by buying investment-grade corporate bonds, the Chinese were offering what fee-happy dealmakers call strategic acquisition premiums or, mockingly, ‘saps’.”
    • Further it should be noted that Anbang raised its offer to $14bn for Starwood after Marriott upped its offer last week only to walk away from the offer on Thursday.  Most likely due to capital controls and the reasons raised below in Wildau’s article.
  • It looks like Brazilian president Dilma Rousseff is going to have a tough time of it at an upcoming impeachment vote in Congress now that the biggest political party (Brazilian Democratic Movement Party) has withdrawn their support.
  • Thought real estate prices were crazy in your neighborhood…not so compared to many of the ultra-luxury condos being developed in NYC.  Yet demand has softened and rather than condo developers hitting the brakes or dropping prices (like Related in Miami – the city is facing another condo bust), developers in Manhattan are continuing to build and they’re going to wait on selling until they have sunk more dollars in the ground.
  • The U.S. economy has gained 10,628,000 jobs between 2010 and 2015.  Nice. However, upon a closer look 10,058,540 of those jobs (94.6%) have been in the unsecure ‘gig’ economy. This jives with what we’ve being seeing in regard to the strategic acquisitions of the last few years that are often accompanied with downsizing and general cost cuts.
  • An update on the Malaysian prime minister investigations.  Turns out that investigation documents have provided a more complete picture of the money flows relating to 1MDB and Prime Minister Razak, including $15 million spent on clothing, jewelry, and a car.
    • “Swiss authorities, who along with the U.S., Hong Kong, Abu Dhabi and Singapore are probing the fund, say 1MDB-related losses from misappropriations could reach $4 billion.”
  • Lastly, see the Special Reports below for some rather interesting stories.

Interesting graphics:

From the Economist’s “Asset managers: The tide turns.”

Economist_Asset managers tide turns_3-24-16

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

Coming to the Oil Patch: Bad Loans to Outnumber the Good. Bradley Olson, Emily Glazer, and Matt Jarzemsky. Wall Street Journal. 24 Mar. 2016.

Knock on effects…not only are the energy companies having difficulties, think about the exposure to the banks that lent them the money.

“The number of energy loans labeled as “classified,” or in danger of default, is on course to extend above 50% this year at several major banks, including Wells Fargo & Co. and Comerica Inc., according to bankers and others in the industry.”

“Fifty-one North American oil-and-gas producers have already filed for bankruptcy since the start of 2015, cases totaling $17.4 billion in cumulative debt, according to law firm Haynes and Boone LLP.”

“About 175 companies are at high risk of not being able to meet loan covenants, according to Deloitte LLP.”

WSJ_Energy Reckoning_3-24-16

“The situation is particularly acute in the U.S., where many small and midsize companies borrowed heavily to expand during the shale boom and are now weighed down with debt as low oil and gas prices have made their assets unprofitable to produce.”

“Regional banks that lent heavily to energy companies have the most concentrated exposure….the lending shakeout could be significant for U.S. oil-and-gas producers, which face a biannual review by banks of their reserves that is widely expected to curtail their revolving credit lines. That credit, which has been critical for capital flexibility in the downturn, may be cut 20% to 30%, analysts said.”


Wanda cuts sales target amid cooling China property market. Yuan Yang. Financial Times. 24 Mar. 2016.

“Dalian Wanda Commercial Properties cut its 2016 contracted sales target almost 40% year-on-year, as China’s biggest commercial property group said it would stop developing and selling some properties in lower tier cities.”

“The developer on Thursday said it expected a 39% year-on-year drop in contracted sales in 2016 to Rmb100bn ($15.3bn), as it increasingly moves into property management.”

“Because of this, the company was restricting its activity in such cities to “asset-light investment properties” – it will not own the land or real-estate assets, but merely develop and manage the properties on behalf of third-party investors.”

“The group’s “asset-light” strategy includes last year’s launch of 99Bill – an internet-finance subsidiary of Wanda Group – which manages funds for investors buying into Wanda Commercial Properties’ shopping malls.”

How is that which is bad for the Goose good for the gander?

“Local housing bureau data collected by Wigram Capital, an economic advisory firm, shows that China’s third-tier cities have piled up a stock of residential property that will take an average of 3.5 years to sell off at current sales rates.

An aside, but related point, Wang Jianlin (founder and China’s richest man) is considering taking Dalian Wanda Group private.  The company is currently listed in Hong Kong (it was listed 15 months ago), the shares are down since the listing and Wang is offering to make shareholders whole (23% premium to close on Wednesday) and would then likely list the company on the Chinese mainland where shares trade at an average premium of 33% to their Hong Kong counterparts.  Note that Wanda Cinema was listed on the Chinese mainland in January of 2015 and the shares are up 656%.


Anbang global shopping spree fueled by leverage. Gabriel Wildau. Financial Times. 29 Mar. 2016.

For Anbang Insurance Group, “costly borrowing has played a significant role in its global shopping spree.”

“Anbang collects 44% of its insurance premiums from the sale of so-called universal life policies, high-yielding wealth management products (WMPs) that combine a death benefit with an investment component that guarantees a payout during the policyholder’s lifetime.”

“Anbang’s premiums from universal insurance products grew by 306% in 2015 to Rmb49bn ($7.5bn), compared with industry-wide growth of 95%, according to regulatory data. Such growth helped Anbang climb the Chinese premium ranks among life insurers from 40th in 2012 to 4th place last year.”

“Sam Radwan, partner at Enhance, a consultancy that advises several midsized Chinese insurers, says his clients fear the entry of Anbang to markets where they are active.” 

“They basically told me, ‘once Anbang comes to town, we know we’re not going to be able to compete.’ They tend to offer higher returns.” – Radwan

“Higher yields enable Anbang to grab market share but also force the group to chase higher returns – and take on greater risk – to meet promises to investors.”

“Anbang more closely resembles a private equity fund, where capital is expensive and investment returns drive profits.”

“There are also worries about liquidity risk… Universal insurance policies from Anbang and other insurers carry a headline maturity of 5 or 10 years but carry an option to cash out after 1 or 2, sometimes with no penalty.”

“Bank WMPs with guaranteed payouts currently offer yields of about 3-4%, while those from insurers reach 5-6%. Yet the true cost of WMP funding to insurers is even higher than the product yield. When sales commissions to banks or online platforms such as Alibaba’s Taobao are included, the cost to insurer may reach 7-8%.”

“(Mr Wu) is building an atomic bomb. It may work out fine, or it may explode in a big way.” – Radwan

“China’s insurance regulatory agency has already stated concerns about the usage of funds raised from insurance products to support these bids.” – Vincent Chan, head of China research at Credit Suisse

Reminds me of the rapid rise (and subsequent fall) of American Realty Capital and Nick Schorsch.


Big numbers behind Chinese internet leave some unconvinced. Charles Clover. Financial Times. 28 Mar. 2016.

“Last Monday, ecommerce group Alibaba announced that it had hit a target of Rmb3tn ($462bn) in annual sales, a number that is more than the entire US’s ecommerce market for 2015, estimated last month by the census bureau at $341bn.”

“The next day, Didi Kuaidi, China’s largest internet ride-hailing platform, announced it had hit a milestone of 10m rides per day, with the company saying this made it “the largest mobile-based transportation platform in the world.”

“Shaun Rein, founder of the Shanghai-based China Market Research Group, says China’s internet is “undeniably huge,” but adds that there is a persistent perception the numbers may be over-egged.”

“For example, many merchants on Alibaba’s virtual market place fake sales in order to boost their rankings.  ‘The merchants all want five stars, and the way to do that is to fake orders,’ – Rein.”

“He estimates the amount of faked orders on Alibaba at 20-30% of gross merchandise value (GMV). Anne Stevenson Yang, head of Beijing-based J Capital Research, goes even further, charging that Alibaba’s GMV is up to 50% overstated.”

Alibaba dismisses these estimates.

According to government data of the 668m internet users in China, 86% have incomes less than Rmb5,000 ($769) per month and yet according to Credit Suisse research they managed to spend Rmb12tn ($1.9tn) in transactions on Alipay (Alibaba’s payment affiliate) in 2015.

“That $1.9tn compares to $282bn total transaction volume for PayPal in 2015, and equivalent to 2/3 of the global total, according to Juniper Research. The Alipay totals ‘seem very high,’ according to Windsor Holden, the author of the Juniper Research report.”

“While companies like Alibaba and Facebook report “active users” for their services, social media and gaming giant Tencent reports monthly “active user accounts” for its social media sites QQ and WeChat. The company reported 850m QQ monthly active user accounts in September, or 127% of China’s internet users as measured by the governmental China Internet Network Information Centre.”

When Joe Tsai, Alibaba’s executive vice-chairman, announced the GMV milestone last week, he indicated “Our focus on quality and sustainable growth means how we measure success is no longer dependent on a simplistic view of GMV growth.” This to Duncan Clark, chairman of BDA, a Beijing-based consultancy and author of a book on Alibaba, “…was an odd thing. They seemed to be announcing a number that they didn’t want us to focus on in the future.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Starwood Gets Higher $14 Billion Offer From Anbang-Led Group 3/28

Bloomberg – Brazil’s Biggest Party Abandons Rousseff Ahead of Impeachment (vote) 3/29

Bloomberg – How to Sell a $60 Million Penthouse: Don’t Try 3/30

Bloomberg – The U.S. Is a Big Oil Importer Again 3/31

Civil Beat – A New Way To Detect Tsunamis: Cargo Ships 3/28

Contra Corner – Gig Economy Take II: Nearly Entire Increase in Employment Since 2010 is in Gigs! 3/28

FT – IMF: ‘puzzled’ at lack of silver lining in oil drop 3/24

FT – Norway’s oil fund increases bet on property markets 3/26

FT – China industrial profits grow fastest since 2014 3/26

FT – Energy shortage dims outlook in Colombia and Venezuela 3/27

FT – Accuracy of Theranos’s blood tests fall short 3/28

FT – The challenge posed by oil’s ‘Minsky moment’ 3/28

FT – Japan’s negative rate bounty sparks calls for fresh spending 3/28

FT – Saudi Arabia loses oil market share to rivals in key nations 3/28

FT – World watches Britain’s ‘living wage’ experiment 3/28

FT – China’s future challenge for the world economy 3/29

FT – Fidelity Investments cuts valuations on start-ups 3/30

FT – Wang Jianlin’s Wanda Group weighs taking property arm private 3/30

NYT – Climate Model Predicts West Antarctic Ice Sheet Could Melt Rapidly 3/30

WSJ – Investing Red Flag: Pro Forma Results and Share-Price Performance 3/24

WSJ – Rates Down, Risk Up at China Life 3/24

WSJ – Can Stocks Cope With a Profits Pinch? 3/25

WSJ – U.S. Immigration Program for Foreign Investors Sees Demand Surge 3/26

WSJ – Oil Firms Slow Exploration to Weather Low-Price Era 3/28

WSJ – Starwood’s Chinese Bidder Remains Opaque Both at Home and Abroad 3/28

WSJ – Another Condo Bust Looms in Miami 3/29

WSJ – Venture-Capital Firms Draw a Rush of New Money 3/29

WSJ – 1MDB Probe Shows Malaysian Leader Najib Spent Millions on Luxury Goods 3/30

WSJ – Distorted Markets: Why Banks Are Better Off Than You Think, And Real Estate Isn’t 3/30

WSJ – China’s Anbang Tells Starwood It Is Walking Away 3/31

Special Reports


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