May 19, 2017

If you were to read only one thing…

FT – Chinese insurer warns of defaults as ban on new products bites – Gabriel Wildau and Nan Ma 5/17

  • “One of China’s largest insurers has warned of mass defaults and social unrest unless the regulator lifts a ban on its issuance of new products, the latest sign of stress in the industry caused by a crackdown on financial risk.”
  • “In a letter to China’s insurance regulator seen by the Financial Times, Foresea Life Insurance warns that the company expects Rmb60bn ($8.7bn) in redemptions this year and might be unable to meet payouts unless it is able to sell new products.” 
  • “In December, the China Insurance Regulatory Commission banned Foresea for three months from applying to sell new products. In February, the agency banned Foresea chairman Yao Zhenhua, China’s fourth-richest man, from the industry for 10 years.”
  • “Foresea is a unit of Baoneng Group, a property and financial conglomerate that Mr Yao also chairs. Baoneng made headlines last year by attempting a hostile takeover of China Vanke, one of China’s largest residential developers.” 
  • “Baoneng has used the sale of so-called ‘universal insurance’ products to finance its stake in Vanke and other listed companies. Such policies are, essentially, investment vehicles offering high yields and guaranteed payouts on maturities. Distributed through banks, they bear little resemblance to traditional insurance, which pays out only in the event of a risk incident such as death, illness, or accident.”
  • “Deregulation of the insurance industry in recent years has led to the sharp rise of universal insurance sales, which has helped groups such as Foresea and Anbang Insurance Group to grow.”
  • “Foresea’s premiums soared from Rmb32bn in 2014 to Rmb100bn last year but tumbled 61% in the first quarter this year. The date of Foresea’s letter indicates that, by late April, the regulator had not yet approved new Foresea products, despite the expiration of the three-month ban.”
  • “Beyond Foresea, the CIRC has moved to contain universal insurance in recent months, amid President Xi Jinping’s call to curb financial risk. Analysts warn that the high yields offered by universal insurance force issuers to take risks in order to earn the returns necessary to meet promised payouts.” 
  • “Many universal insurance products ostensibly carry long durations of five or even 10 years but the policies often include generous redemption terms, enabling investors to cash out of the products with minimal penalties.” 
  • “Foresea’s warning that mass redemptions could leave the group unable to meet payouts highlights the liquidity risk created by taking on short-term liabilities to purchase long-term, illiquid assets.”
  • “This month, the CIRC imposed a similar three-month ban on Anbang and accused the group of ‘wreaking havoc’ in the market with aggressive sales tactics. The agency specifically criticized Anbang for selling products with short maturities.”

Worthy Insights / Opinion Pieces / Advice

FT – Murder case highlights property money trail from China to US – Leslie Hook and Lucy Hornby 5/17

  • “A record bail posted in a California court for one of the accused in a murder case has thrown the spotlight on a property fortune that traces its roots to the Chinese military, in a graphic illustration of how money made in China has flooded overseas real estate markets.” 
  • “Tiffany Li is a Chinese-American heiress accused of ordering a hit on her ex-boyfriend in San Mateo county, a leafy suburb of San Francisco where Teslas are more common than violent crime. In April she posted $4m in cash and $62m in California property as bail — among the highest ever posted in the US.”

Real Estate

Bloomberg – Real Estate Deals Vanish in New York – Sarah Mulholland 5/18

  • “In New York City, first-quarter property sales plummeted 58%, to $4.3 billion, compared with a year earlier, according to data from brokerage Cushman & Wakefield Inc. It marked the lowest quarterly sales volume in six years. Nationwide, the picture wasn’t much better. Sales dropped 18%, research firm Real Capital Analytic Inc. found.”

WSJ – Mall Owners Flex Hidden Muscles Over Lenders – Esther Fung 5/16

  • “At a time when retailers are closing thousands of stores across the U.S., some lenders are deciding to renegotiate loans backing malls—and suffer guaranteed losses—rather than run the risk of being stuck owning or operating the malls themselves.”
  • “Shopping mall owner Washington Prime Group last June defaulted on an $87.3 million loan backing Mesa Mall in Grand Junction, Colo., and turned the keys over to creditors.”
  • “Rather than operate the mall, the creditors quickly sold the property—right back to Washington Prime—at a lower price. Late last month, Washington Prime told investors it had repurchased the mall and secured a discounted payoff of the original loan for $63 million.”
  • “The Mesa Mall deal is among the first known instances of mall landlords securing discounted payoffs rather than walking away entirely, but more such deals could be in the offing. In the past 12 months, 318 loans backing retail real estate suffered losses totaling $1.85 billion, with the percentage of lost principal reaching 43.3%, according to data from Trepp LLC, a real-estate data provider.”
  • “Discounted payoffs are warranted in some situations, analysts said. Many malls with otherwise viable business operations are still carrying debts made during the boom years of 2006 and 2007, often at inflated valuations.”

Energy

FT – The Big Green Bang: how renewable energy became unstoppable – Pilita Clark 5/18

  • “These advances have become too significant for the oil and gas industry to ignore. In the first three months of this year, the heads of some of the world’s largest oil companies have spoken of a ‘global transformation’ (Saudi Aramco) that is ‘unstoppable’ (Royal Dutch Shell) and ‘reshaping the energy industry” (Statoil). Isabelle Kocher, chief executive of French power and gas group Engie, calls it a new ‘industrial revolution’ that will ‘bring about a profound change in the way we behave’.”
  • “None of this means the problem of climate change has been solved, or that fossil fuels will vanish in the near future. Oil, gas and coal still account for about 86% of the energy keeping the world’s lights on, cars running and homes warm — a share that has barely changed in 25 years. Coal and gas-fired power plants are still being built, especially in the developing world where 1.2bn people lack electricity.”
  • “Modern renewables, in contrast, are growing from a tiny base and are often less dependable than dirtier power generators that do not rely on the weather. Wind and solar power accounted for a puny 4.4% of global electricity in 2015, and big battery systems can only store enough power to satisfy a few seconds of global electricity demand, says the International Energy Agency. Electric vehicle sales last year were just 0.9% of all vehicles sold, according to the EV-Volumes consultancy.”
  • “But the emerging energy transition is already causing trouble for companies around the world, from write downs and shrinking sales to sliding share prices and wholesale break-ups:”
    • “In sunny Nevada, casino companies are unplugging from the state utility. NV Energy lost nearly 6% of its customer base virtually overnight in October after MGM Resorts International and Wynn Resorts agreed to pay a combined $103m to defect and buy their power elsewhere. MGM cited “the sharp decline in the cost of renewable energy” as a primary driver of its decision. Caesars later did a $47.5m deal to quit.”
  • “When the definitive history of the energy transition is written, the taxpayers of Germany will deserve their own chapter. They bankrolled the green energy revolution known as the Energiewende, pioneering generous subsidies nearly 20 years ago that helped drive renewables up from 9% of Germany’s electricity mix in 2004 to 32% last year.”
  • “As other European nations — and some US states — boarded the green power wagon, it kindled a wave of demand for wind turbines and solar panels that helped drive costs down worldwide. Solar’s price fall was especially steep after a Chinese manufacturing boom spurred global over-supply.”
  • “The result was doubly miserable for conventional fossil fuel generating companies: renewables crowded them out while simultaneously driving down wholesale power prices, causing billions of euros in losses.”
  • “’Renewables have reached a tipping point globally,’ says Simon Virley, head of power and utilities at KPMG. ‘A subsidy-free future is now in reach for a number of technologies and geographies.'”
  • “None of this means the future of clean energy will be entirely smooth. Indeed, its very success poses a raft of questions for governments that some have barely contemplated.”
  • “Chief among them: what to do with power markets that were never designed for millions of people turning their rooftops into mini power stations?”
  • “How to pay for upgrading grids to cope with the influx of all this renewable power? What to do about incumbent companies calling for the brakes to be slammed on to protect them from green power incursions? Then there is Mr. Trump, who is seeking to unwind the clean power policies of his predecessor.”
  • “In the rest of the world, however, the future of green power appears assured. So much so that an industry that has spent years on the defensive is beginning to show a rising sense of confidence.”
  • “’Fossil fuels have lost,’ says Eddie O’Connor, chief executive of Ireland’s Mainstream Renewable Power. ‘The rest of the world just doesn’t know it yet.’”

Asia – excluding China and Japan

FT- Thai junta nears third year and settles in for longer stay – Michael Peel 5/18

  • “Thailand’s ruling generals were supposed to quit within barely 18 months but they seem more firmly entrenched than ever as they prepare to celebrate the third anniversary of their May 2014 coup.”
  • “A country once among the more democratic in a mostly authoritarian region is now in its longest spell under hardline military rule for decades – and, as the junta flaunts a 20-year ‘reform’ plan, it seems more and more like the new normal.”

Canada

Economist – The end of Canada’s housing boom? 5/18

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