Tag: China Evergrande

June 12, 2017

Worthy Insights / Opinion Pieces / Advice

WSJ – The Cushion That Saved Taxpayers From Banco Popular’s Failure – Paul Davies 6/7

  • “Regulators can make a determination that a bank is failing or likely to fail with information that investors don’t have. Regulators shouldn’t act too early, but it is right that they should act when waiting threatens the integrity of the financial system or a drawdown of public money. Any investor who doesn’t understand that should steer clear of bank equity and debt. Period.”

The Big Picture: Bloomberg – Jim Chanos on Tesla, China 6/7

  • Interview

Real Estate

WSJ – Daily Shot: Green Street Commercial Property Index 6/9

FT – Real estate: The global luxury condo glut – Anna Dedhar 6/8

  • Podcast

Energy

WSJ – Daily Shot: EIA – Total US Effective Rig Count 6/9

China

FT – LeEco’s listed arm cancels bond fundraising – Emily Feng 6/8

  • “A bond sale (meant to raise Rmb2bn – $300m) by the Shenzhen-listed arm of embattled company LeEco has been cancelled, after the group was asked to address regulators’ concerns about the health of its financials.”

WSJ – Beijing Lands in Another Debt Mess – Anjani Trivedi 6/9

WSJ – Perpetual Doesn’t Mean Forever in China – Jacky Wong 6/8

  • “Chinese companies growing appetite tapping an unconventional source of financing might not be a source of eternal bliss.”
  • “Perpetual securities, bondlike instruments that pay interest but have no maturity dates, have become popular in China in recent years: Issuance jumped to $55 billion in 2016 from less than $1 billion in 2012, according to Dealogic. This year, Chinese companies have been keener to issue them in offshore markets, raising some $4.4 billion, more than their dollar-denominated issuance in all of 2016.”
  • “A big reason Chinese companies like perpetuals is that they are classified as equity on their balance sheets. The accounting logic is that perpetual issuers don’t ever have to repay the bond’s principal and can choose to defer annual coupon payments—making them similar to dividends.”
  • “Treating perpetuals as equity means companies can report lower gearing ratios, a measure investors commonly use to assess a company’s indebtedness. China Evergrande, the country’s biggest property developer by assets, had a net debt-to-equity ratio of 120% as of December. That ratio would have jumped to 432% if its perpetual bonds had been counted as debt. Investors are happy to play along as the perpetuals usually pay higher yields. Evergrande effectively paid an 11% coupon on its perpetuals last year.”
  • “But whatever the accounting rules say, perpetual securities still work much more like debt than equity in China. To start with, companies can defer coupon payments on perpetuals only if they aren’t paying dividends to their shareholders. Given that Chinese companies often have a majority shareholder, and therefore nearly always pay a dividend, that clause rarely applies.”
  • “Moreover, perpetuals in China often include a clause that automatically steps up the coupon rate, usually after three to five years. Since the step-up is usually quite steep, issuers have a strong incentive to redeem their perpetuals early—making them not so perpetual, after all. The coupon on a recent $500 million perpetual bond issue from state-owned Power Construction Corp. of China will jump by 5 percentage points, more than double its initial yield, after five years.”
  • “Investors hoping to live happily ever after with perpetuals ought to scrutinize why companies are issuing such disguised debt in the first place—and whether it is really in their interests.”

FT – Chinese regulators target staff shareholding plans – Gabriel Wildau and Nan Ma 6/9

  • “The Shenzhen Stock Exchange is querying listed companies about a series of unusual plans to sell shares to employees while insuring them against losses if stock prices fall.”
  • “At least 21 Shenzhen-listed companies announced employee shareholding plans in the first week of June that include guarantees by the chairman or senior executives to protect workers against downside risk, according to exchange filings compiled from Wind Information.” 
  • “While it is not yet clear whether such plans will enable large shareholders to sell directly to employees, market observers still view them as a response to the tighter rules. With stake sales more difficult to execute, large shareholders are looking for ways to boost their share prices, at least until they can find ways to offload their shares.”

NYT – China’s New Bridges: Rising High, but Buried in Debt – Chris Buckley 6/10

Middle East

FT – Crisis in the Gulf: Qatar faces a stress test – Simeon Kerr 6/9

South America

WSJ – Daily Shot: Caracas Stock Exchange 6/9

  • “Venezuela’s stock market has gone ‘vertical’ as it becomes the only legal ‘safe-haven’ to escape the currency collapse.”

FT – Venezuela woes on paying Russia debt raise prospect of default – Jonathan Wheatley and Robin Wigglesworth 6/9

  • “Reports of a failure to pay a debt to Russia and a requested ruling on whether such a failure constitutes a ‘credit event’ that could trigger insurance contracts on billions of dollars of international bonds have brought Venezuela closer than ever to the brink of financial collapse.”
  • “Matters may soon come to a head. On Wednesday, the International Swaps and Derivatives Association, an umbrella organization of the finance industry’s biggest banks and money managers, was asked by an anonymous member whether the reported default to Russia should be classified as a ‘credit event’ and trigger insurance-like contracts on Venezuela’s roughly $36bn in sovereign bonds.”
  • “The ISDA ruling may take some time. And even if it decides a credit event has occurred, there would be no automatic default on Venezuela’s sovereign bonds.”
  • “But it is clear from the terms of those bonds that should the government fail to meet any other debt obligations, bondholders can demand immediate payment.”
  • “Should the sovereign bonds then go into default, the roughly $35bn of outstanding PDVSA bonds would not be affected, and may even be left intact. The government in Caracas almost certainly would not.”

April 24, 2017

Worthy Insights / Opinion Pieces / Advice

FT – Venezuela’s broken system cannot fix itself – Daniel Lansberg-Rodriguez 4/23

FT – Silicon Valley ‘superstars’ risk a populist backlash – Rana Foroohar 4/23

  • “…a spate of research shows that it is not trade or rapacious bankers but technology that is the primary economic driver of the most important political trend of our time – populism.”
  • “What is perhaps most fascinating about this is that Silicon Valley has largely escaped the populist anger that Wall Street or cheap Chinese labor has attracted. As University of Chicago professor Raghuram Rajan has pointed out, this may be because the job-disrupting effects of technology are harder to see than those of trade. Of the nearly 6m manufacturing jobs lost in the US between 1999 and 2011, only about 10% can be directly traced to Chinese imports – yet those losses are concentrated in just a few rust belt communities. The more subtle, dispersed nature of the changes driven by Silicon Valley makes it a less obvious target for voter rage. And of course, we all love our gadgets: remember Democratic Senator Carl Levin mooning over his iPhone even as he led Senate hearings into Apple’s use of offshore tax havens in 2013?”

Markets / Economy

WSJ – The Economy’s Confidence Game – Justin Lahart 4/23

  • “The bullish case is that newly optimistic consumers and business owners will soon start spending, boosting economic data. This is generally what happens when the economy is coming out of recession, with the hard data following the soft data higher.”
  • “But the economy isn’t coming out of a recession-the last one ended nearly eight years ago. Instead, the country has experienced a long period of rising employment and disappointing but steady growth. The pent-up demand that exists in the aftermath of a downturn isn’t there. And the mere possibility of lower taxes and faster growth hasn’t changed the caution that consumers and businesses learned since the financial crisis.”
  • “The clock is ticking says Bank of the West economist Scott Anderson. Historically, when the hard data doesn’t pick up within a month or two of the move higher in the soft data, the soft data tends to tumble.”

Real Estate

ULI – Trepp Talk: Nontraded REITs Raise Lowest Volume of Capital in 14 Years – Orest Mandzy 4/24

  • “The departure of AR Global Investments from the nontraded real estate investment trust (REIT) world, coupled with uncertainty surrounding substantial pending regulations, has put a sizable damper on the ability of the nontraded REIT sector to raise capital. According to Summit Investment Research, $4.8 billion of equity was raised by sponsors of 35 entities last year. That was the lowest volume in 14 years, and pales in comparison to the $10.2 billion of equity that was raised in 2015.”
  • At its height, the sector raised over $20 billion in 2013. “American Realty-by then known as AR Capital-was responsible for more than one-third of that total.”

WSJ – Brick-and-Mortar Stores Are Shuttering at a Record Pace – Suzanne Kapner 4/21

Energy

BloombergGadfly – Oil Drillers’ Vanishing Safety Net – Lisa Abramowicz 4/18

  • “A lot of companies view revolving credit lines the way some rock climbers view harnesses and ropes: They would rather not use them, but they’re glad to have them when trouble strikes.” 
  • “So it’s worth paying attention when a corporation starts withdrawing a substantial amount of money under these prearranged agreements with banks. This can signal a significant problem.”
  • “For example, consider last fall, when more than 20 energy companies had borrowed more than two-thirds of their limit on their credit lines, according to Spencer Cutter, a senior credit analyst with Bloomberg Intelligence. More than four of those have since filed for bankruptcy. The degree of distress last year wasn’t surprising given the sharp plunge in oil prices that started in 2014. A mounting number of energy companies were forced to sell assets, restructure or file for bankruptcy.”
  • Well things have gotten better since then right? Yes, but… there are “at least 11 oil and gas producers are using 70 percent or more of their borrowing-base credit lines, according to Cutter. That includes smaller companies such as Trinity River Energy, Yuma Energy and Mid-Con Energy, and some larger ones such as Sanchez Production Partners and California Resources.”
  • “Over the next few weeks, companies will start announcing their new revolving credit agreements. Investors shouldn’t be surprised at some bad news for smaller energy companies that still haven’t fortified their balance sheets. Just because oil prices have stabilized and even marginally increased doesn’t mean that there won’t be additional rounds of energy-related bankruptcies and restructurings in the near future.”

WSJ – Daily Shot: Baker Hughes US Oil Rig Count 4/23

WSJ – Daily Shot: US Rig Count Recovery Index – Historical Reference 4/23

Finance

FT – China’s fight with Visa and MasterCard goes global – Don Weinland and Gabriel Wildau 4/23

WSJ – Daily Shot: FRED – Commercial and Industrial Loans, All Commercial Banks 4/23

WSJ – Daily Shot: FRED – Consumer Loans, Auto Loans 4/23

China

WSJ – A Chinese Property Stock Surge That Is Set to Crumble – Jacky Wong 4/24

  • “China’s bubble-prone property sector isn’t known for its stability. Even so, a 42% rise in the Hong Kong-listed shares of the country’s biggest property developer, China Evergrande Group, over the past month, is striking. Sadly for investors, it’s built on very shaky foundations.”