February 28, 2018

Perspective

WSJ – Chinese Regulator Seizes Anbang Insurance, Owner of Waldorf Astoria – James T. Areddy 2/23

  • “China’s insurance regulatory agency Friday took control of hard-charging, acquisitive Anbang Insurance Group Co., saying the action is needed to avoid a collapse of the firm following suspected illegal activity and the downfall of its once-highflying chairman.”
  • “The China Insurance Regulatory Commission published a letter to Anbang management saying duties of the board and management will now be overseen by a working group of regulators from various agencies for one year. ‘All transactions of your company, asset trading, information dissemination, contract signing other than traditional insurance business are subject to the consent of the working group,’ said the statement dated Feb. 12.”
  • “Separately, ​Wu Xiaohui, who led Anbang until he was detained eight months ago, has been indicted on charges of fraudulent fundraising and abusing his position, according to a one-sentence notice by prosecutors in Shanghai on Friday. The insurance regulator’s statement refers to Mr. Wu as Anbang’s former chairman.”

NYT – Beijing Takes Over Anbang, Insurer That Owns Waldorf Astoria – Keith Bradsher and Alexandra Stevenson 2/22

  • “The Waldorf Astoria purchase ushered in the rise of a new breed of Chinese deal makers. The companies, which also included Dalian Wanda Group, HNA Group and Fosun International, bought up everything from hotels to banks to movie production companies. Though the companies are privately owned, their leaders often benefited from their political connections, and they were often backed by cheap debt provided by China’s state-run banks.”
  • “The deals made the companies truly global players. For example, in a financial disclosure last spring, shortly before the police detention of its chairman, Anbang said that nearly three-fifths of the assets of its main business, life insurance, were overseas.”
  • “Property was a big focus for Anbang. In 2016, it spent more than $6 billion for a group of hotels in the United States, buying it from Blackstone Group, a private equity giant. That gave it marquee properties including the Westin St. Francis hotel in San Francisco, the Loews Santa Monica hotel in California and the Fairmont Chicago hotel.”
  • “Anbang also offered more than $13 billion for Starwood Hotels and Resorts before abandoning its bid in 2016, without explanation. By then, the Chinese deal makers had hit a wall.”
  • “China was shaken three years ago by a surge of money out of the country and concerns that its economy had been layering on too much debt. Anbang and the other Chinese deal makers, which had borrowed heavily to fund their shopping sprees, soon drew attention from officials. State media labeled them ‘gray rhinoceroses‘ — big problems that are ignored until they start moving fast.”

FT – China conglomerates suffer different fates in Beijing crackdown – Tom Hancock and Lucy Hornby 2/23

  • “The Chinese government’s takeover of Anbang Insurance and criminal prosecution of founder Wu Xiaohui marks the biggest step yet in an official crackdown on risky financing by ambitious conglomerates that has prompted a severe decline in China’s overseas dealmaking.”
  • “But on the same day as the Anbang seizure was announced, Chinese company Fosun said it would buy a controlling stake in Lanvin, France’s oldest couturier. The move underlines the diverging fates of the four largest private conglomerates — the others are HNA and Dalian Wanda — that Beijing identified last year as borrowing too aggressively to fund offshore deals.”
  • “All have captured headlines over the past few years with a series of audacious foreign acquisitions. These include Anbang’s $2bn purchase of New York’s Waldorf Astoria, Dalian Wanda’s takeover of Hollywood studio Legendary Entertainment for $3.5bn, and HNA’s $40bn splurge on stakes in companies including Deutsche Bank and Hilton Worldwide.”
  • “Beijing stepped in last year to curb the spree, worried that companies were overpaying for foreign assets and draining China’s foreign currency reserves, while relying on risky financing methods to fund acquisitions.”
  • Analysts say the government’s treatment of the groups differs depending on their sources of financing, and whether they have co-operated in the government’s campaign to slow capital outflows and cut leverage.
  • “Wanda has co-operated with official directives by unloading more than $4bn in overseas assets over the past nine months and promising to “refocus” on the domestic economy. Last week it sold its 17% stake in Spanish football club Atlético Madrid.”
  • “HNA, meanwhile, has appeared to win back support as it regroups amid a liquidity crunch. Last week, the debt-laden company announced the HK$15.8bn ($2bn) sale of two plots of land in Hong Kong to local developer Henderson Land.”
  • “It was Anbang’s financing model that caused the Chinese authorities most concern. Unlike other groups that relied on bank loans or bond issuances to fund acquisitions, Anbang relied on sales of investment-like products it sold to wealthy Chinese retail investors labelled as life insurance, a part of China’s sprawling shadow-banking system.”
  • “Anbang’s finances were also in a more precarious state than other companies due to the mismatch between the short-term nature of its assets and the longer-term nature of its liabilities.”

WSJ – Who Will Be Called On to Clean Up the Anbang Mess? – Jacky Wong 2/26

WSJ – Anbang and the Financialization of China’s Economy – Nathaniel Taplin 2/23

  • “China’s Anbang Insurance went from zero to too-big-to-fail in the blink of an eye. It is a lesson in how quickly China’s financial problems grow—and how much is left to clean up.”
  • “A capital raising, including a possible government capital injection seems likely. The total cost of cleaning up the mess, including whatever losses sit on Anbang’s gargantuan balance sheet—put at close to 2 trillion yuan ($300 billion) in April by financial magazine Caixin—is an unknown.”
  • “This yearlong ‘management’ of Anbang announced by regulators could be misinterpreted as a positive for China: financial shares rose. But investors celebrating China’s apparent success at containing financial risks without damaging the broader economy shouldn’t be so sanguine.”
  • “Anbang fueled its international shopping spree, including a top-dollar price for the Waldorf Astoria Hotel in New York, on the back of high-yielding, often highly leveraged investment products sold to retail investors. Some of these, known as wealth-management products, or WMPs, became the target in 2017 of government efforts to clean up China’s highly leveraged financial system. That essentially cut off one the biggest sources of Anbang’s funding.”
  • “Anbang and WMPs are not, however, the end of China’s debt crackdown story. While WMPs and the bonds they invested in withered, companies have returned to previously popular forms of non-bank finance including trust loans, off-balance sheet company-to-company loans and bankers’ acceptances.”
  • “These grew 15% last year after just 4% growth in both 2015 and 2016. Overall debt and equity issuance stayed robust despite the crackdown.”
  • “Anbang may be wrapped up. But the cost of letting finance take such a big chunk of China’s economy is far from being resolved.”

Worthy Insights / Opinion Pieces / Advice

A Teachable Moment – Where Everybody Doesn’t Know Your Name – Anthony Isola 2/26

  • A comparison of financial markets and roads.

Economist – China’s leader, Xi Jinping, will be allowed to reign forever 2/26

Economist – Money stolen by Bernie Madoff is still being found – 2/26

  • “Almost a decade after the Ponzi scheme collapsed, trustees are still returning money to the victims.”

FT – Xi Jinping’s bid to stay in power more of a gamble than it seems – Tom Mitchell 2/27

  • “President’s move risks backlash from China’s urban elites if not the masses.”

FT – Why Donald Trump will never escape Russia – Edward Luce 2/21

FT – Three questions for Federal Reserve chairman Jay Powell – Rana Foroohar 2/25

WSJ – Stocks Are Probably Overpriced, but Don’t Be Too Sure – Jason Zweig 2/23

WSJ – A Reality Check for Wayfair – Elizabeth Winkler 2/26

  • “The game of growing revenue by burning cash can’t go on forever and investors don’t want to be there at the end.”

Finance

FT – Rush to buy frontier debt brings higher risks and yields – Kate Allen 2/26

  • “For three decades Tajikistan has wanted to build the world’s tallest hydroelectric dam but struggled to pay for it.”
  • “That changed last September when the mountainous central Asian country tapped international debt markets for the first time, was inundated with $4bn of orders and eventually sold $500m of debt at a yield of 7.125% — a landmark moment for an economy with an annual GDP of just $7bn.”
  • “Investors’ search for yield, brightening global economic conditions and structural reforms in many countries have resulted in benign conditions for what debt bankers refer to as ‘frontier’ economies.”
  • “The world’s riskiest countries are selling debt at a record rate, research published late last year found, with junk-rated borrowers comprising nearly half of all borrowing from emerging markets in 2017; one adviser called it a ‘gold rush’.”
  • “’The markets are so good at the moment that clients can literally ask for whatever they want,’ said an experienced deals banker. ‘People will buy anything so long as it offers them yield and diversification. They get bored of only being able to buy the same names and have also hit their limits for some of the more frequent names’.”
  • “’Ultimately this is people’s pensions we’re talking about,’ said one investor. ‘If you explained to the man on the street that their pension fund is being invested in Nigeria at 7%, they would be incredulous. If you threw that decision out to ordinary people, would they buy it? Probably not’.”

Cryptocurrency / ICOs

WSJ – What Bitcoin Rout? Sales of New Digital Tokens Are Still Soaring – Paul Vigna 2/22

  • “Bitcoin and many of its peers have crashed in recent months from all-time highs reached in December. But that hasn’t dented the popularity of one crypto-fundraising method: so-called initial coin offerings.”
  • “Sales of those digital tokens have already raised about $1.66 billion this year, according to research and data firm Token Report. About 480 have launched in 2018 and only 126 of those have closed to new funds. That puts the market on pace to top last year’s total of $6.5 billion raised in coin offerings, according to the firm.”
  • “Whatever their motive, coin-offering investors have created some of the best-capitalized startups in incredibly short periods. The $1.5 billion raised by block.one in less than a year is equal to the amount raised by Twitter Inc. between 2007 and 2011 across nine separate funding rounds. And only four initial public offerings in 2017 and 2018 raised more than the amount block.one has attracted, according to data from Dealogic.”
  • “The continued success of coin offerings is even more remarkable given heightened regulatory scrutiny globally of cryptocurrencies and on the sales of digital tokens.”
  • “In the U.S., the SEC and Commodity Futures Trading Commission have heightened their oversight of the coin-offering market. The CFTC recently issued a customer advisory in which it advised people to avoid ‘pump-and-dump’ schemes, and offered whistleblowers a monetary reward in the case of successful enforcement actions.”
  • “The SEC has brought enforcement actions against several ICOs, most recently a Texas-based outfit called AriseBank, which had claimed to have raised more than $600 million in an ICO.”
  • “That pressure may have led to something of a bifurcation in the market for coin offerings. While large, widely publicized projects like block.one and Telegram have no problem raising money, others have had trouble meeting their fundraising goals.”
  • Researchers at Ernst & Young found that less than 25% of the ICOs in November 2017 hit their goals, down from 93% in June. Token Report said the median amount raised by ICOs this year is about $12 million.”

Africa

FT – Gupta empire crumbles in wake of Zuma’s departure – Joseph Cotterill and Simeon Kerr 2/26

  • “Indian-born brothers flee South Africa as businesses go into administration.”

China

WSJ – What Will Keep the Chinese Consumer Strong? – Jacky Wong 2/22

  • “Beijing’s nationwide anticorruption drive, which drove luxury spending to a halt just three years ago, has faded. That coincided with a rebound in property prices, Chinese consumers’ main source of wealth. According to Deutsche Bank, the housing boom has added 86 trillion yuan ($13.5 trillion) to the total value of residential properties in the past two years. And unlike previous cycles, the gains aren’t concentrated in the biggest cities such as Shanghai and Beijing but have spread to smaller cities. People in these so-called tier-two and tier-three cities have made more money from their houses on paper last year than from their wages, according to Deutsche.”

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