First because I
really enjoyed this mock
interchange by Matt Levine of Bloomberg representing the initial investment
conversation between Adam Neumann (WeWork) and Masayoshi Son (Softbank). Just
to repeat, this is most likely not what was said.
Neumann: We lease office buildings,
spruce up the space and sublet it in small chunks.
Son: Hmm I invest in visionary tech stuff, this
doesn’t really sound like my thing.
Neumann: Did I
mention we are a state of consciousness. A generation of interconnected
emotionally intelligent entrepreneurs.
Son: Okay yeah that’s more like—
Neumann: The world’s
first physical
social network. We encompass all aspects of people’s lives, in both physical and digital
worlds.
Son: You’re crazy! I love it! But could you be,
say, ten times crazier?
Neumann: You’re going to invest $10
billion in my company, which I will use as kindling to light the whole edifice
on fire, and then when we are both standing in the ashes you will pay me
another billion dollars to walk away while I laugh at you.
Son: All my life I have dreamed of meeting someone
as crazy as you, but I never really believed this day would come.
Neumann: I’m gonna use
your money to buy a mansion with a room shaped like a guitar, where I will play the world’s
tiniest violin after all your money is gone.
Son: YES PUNCH ME IN THE FACE.
Neumann: Also I’ll
rename the company “We” and charge it $6 million for the name.
…An unpleasant truth for many Americans, even at a
time of abundant global oil supplies: Regional differences in taxes,
environmental rules and access to energy infrastructure can translate into
large seasonal swings in gasoline prices.
Prices have surged this fall in California and other
West Coast states following outages at several refineries in the region.
Analysts said the coast is generally vulnerable because of its limited
pipelines and refineries that turn oil into fuel products such as
gasoline. Higher gas taxes in some states aiming to fund local
infrastructure projects and varying pricing strategies by energy companies also
drive gaps.
The volatility isn’t an isolated event. The standard
deviation of gas prices—a measure of how much each state’s price varies from
the national average—has hit its highest level this year in data going back to
2005, according to price tracker GasBuddy. The figure has risen in each of the
past three years.
Insurance companies are uniquely exposed to these
sorts (climate) of changes. Tens of millions of businesses buy policies every
year to protect themselves from risks. As a result the industry is vast—last
year the premiums paid for property and casualty insurance worldwide reached
$2.4trn, according to Swiss Re, one of the big reinsurance firms on to which
consumer-facing insurers pass the risk of mega-losses. Insurance companies
spent $180bn on reinsurance premiums. Extreme events becoming the norm could
force insurers to fork out ever greater payouts to policyholders, as well as
lower the value of the assets they hold. The best case is that insurers
reinvent themselves, helping the world cope—risk is, after all, how they make
their money. The worst is that some fail and, more worryingly, that swathes of
the global economy become uninsurable.
Already, insurers are seeing disasters of
unprecedented scale. Earlier this month Hurricane Dorian, one of the two
largest storms ever known to have made landfall in the Atlantic, battered the
Bahamas and then the Carolinas. In July Hurricane Barry brought the heaviest
rainfall ever measured to Arkansas. The Indian Ocean basin has seen three huge
cyclones so far this year, one of which caused Mozambique’s severest flooding
since 2000. Last November California saw wildfires over the largest area ever
recorded.
Very costly disasters are becoming more frequent.
Between 1980 and 2015 America saw an average of five events causing over $1bn
in damage (in current prices) each year. Between 2016 and 2018 the yearly
average was 15. In the 20th century, according to AIR Worldwide, a
climate-modelling firm, a hurricane on the scale of Harvey, America’s costliest
ever, would have been regarded as a one-in-2,000-year event. By 2017, when
Harvey blew in, that frequency was estimated at one in 300 years. By 2100, says
Peter Sousounis of AIR, it will be once a century, and tidal surges that used
to be classed as once-a-millennium events will be expected to strike every 30
years.
Catastrophes are also getting harder to predict.
Though newer models are starting to take account of climate change, most still
rely on crunching numbers from the previous few decades, which are already
obsolete. And insurers struggle to handle “compounding effects”—the mutually
reinforcing impact on each other of events associated with global warming.
Adding to the losses is the growing number of
properties being built in harm’s way, such as on flood plains and coasts.
Average annual insured losses from catastrophic events have grown 20 times,
adjusted for inflation, since the 1970s, to an average of $65bn this decade,
with a peak of $143bn in 2017. That excludes knock-on effects such as business
disruption. Last year the global figure totaled $85bn, the fourth-highest on
record, even though it was a year without a mega-disaster.
Climate losses can also come from the other side of
insurers’ balance-sheets: the investments they hold in order to cover potential
payouts and park any spare funds. Insurers (including life as well as property
and casualty) are the world’s second-largest institutional investors, with
$25trn under management. They often place chunky bets on multinational firms,
infrastructure and property—which are becoming riskier propositions as the
climate changes. Moreover, structural changes in the economy, such as the move
away from fossil fuels, could leave insurers’ portfolios exposed.
In the face of these threats, insurers are seeking to
future-proof their businesses models. Part of this is about financial
resilience. Most general policies are renewed annually, meaning firms can raise
premiums promptly. And since a spate of mega-disasters caught them off-guard in
the 1990s they have fortified their capital reserves. According to McKinsey,
the policy holder surplus (crudely, the excess of assets over liabilities)
available to pay claims in America’s property and casualty sector doubled in
real terms over the last 20 years. In 1992 Hurricane Andrew sent 11 insurers to
the wall. All survived the record hurricane season of 2017-18.
Regulators are doing more to prod insurers to hold
sufficient capital—typically they aim to ensure they can withstand losses
caused by the worst imaginable year in 200. But putting a figure on this is
hard, because nobody has thousands of years of data. And the worst possible
year is getting worse every year. The risks will keep rising long into the
future, says Paul Fisher, a former supervisor at the Bank of England. A
cataclysmic year could also hit markets, hurting insurers’ investments just
when they need them most. Some could be forced to sell assets to cover giant
payouts, pushing asset prices down further.
Most probably, payouts will continue to rise without
capsizing insurers. But that still creates a problem. To absorb bigger losses,
they must charge higher premiums. According to Marsh, a broker, global
commercial-insurance prices rose by 6% in the second quarter of this year,
compared with the previous quarter. That was the largest increase since records
began. In America property rates jumped 10%; in the Pacific region they soared
by nearly 18%. The rise is to meet the demands of reinsurers, which insure the
insurers. Average reinsurance rates are set to rise by 5% next year, according
to S&P Global, a rating agency—and in California, after the huge recent
wildfires, by 30-70%.
A few calm quarters would probably see some of those
increases unwound. But there is no doubt about the trend. And it cannot
continue forever without causing at least some customers to rethink whether to
buy insurance at all.
The global “protection gap” between total losses and
insured losses is already wide and growing. The research arm of Swiss Re
estimates that it more than doubled in real terms between 2000 and 2018, to
$1.2trn. Half of last year’s losses from natural disasters were uninsured. Nine
out of ten American homeowners have no flood insurance despite half of the
population living near water, says Erwann Michel-Kerjan of McKinsey. The share
of uninsured damage is especially high in developing countries, where infrastructure
and risk-mitigation measures are not keeping pace with economic growth.
Where risks become uninsurable, states and firms may
work hand-in-hand. In Britain, where a sixth of homes are at risk of flooding,
government and insurers have set up Flood Re, a reinsurer of last resort that
enables insurers to offer affordable premiums on 350,000 homes in flood plains.
Every firm selling home insurance in the country pays into the scheme,
spreading the costs across hundreds of thousands of policies. To avoid perverse
incentives, houses built in high-risk areas after 2009 are excluded.
Developing countries are underinsured partly because
the risks they face are poorly understood. And many are urbanizing fast, which
means cities change from year to year, making the value at risk hard to track.
More research would help deepen insurance markets, and making models publicly
accessible would also enable officials and development financiers to evaluate
mitigation measures. Above all, insurers need to take the lead in publicizing
the growing risks posed by climate change, and the need for cover. According to
Alison Martin of Zurich Insurance, often people do not take out insurance
because they think the worst will not happen. Talking of one-in-2,000-year
events is not very helpful, she says, “because many people would think we’re
safe for another 1,999”.
“China’s savers are rushing to pull money from peer-to-peer lending platforms, accelerating a contraction of the $195 billion industry and testing the government’s ability to maintain calm as it cracks down on risky shadow-banking activities.”
“In some cases, savers are turning up at the offices of P2P operators to demand repayment, spooked by reports of defaults, sudden closures and frozen funds. At least 57 platforms have failed in the past two weeks, adding to 80 cases in June, the biggest monthly tally in two years, according to Shanghai-based Yingcan Group. The researcher defines failed platforms as those that have halted operations, come under police investigation, missed investor payments, moved into other businesses, or had operators flee with client money.”
“’Investors have lost confidence in the smaller platforms, because they have no idea if those companies will survive,’ said Dexter Hsu, a Taipei-based analyst at Macquarie Capital. Only a handful of the 2,000 or so remaining firms are likely to endure, he said.”
“China’s P2P industry, the world’s largest, is one of the riskiest and least-regulated slices of the nation’s sprawling shadow-banking system. A government clampdown has weighed on P2P platforms for two years, but the pressure intensified in recent months after China’s credit markets tightened and the banking regulator issued an unusual warning to savers that they should be prepared to lose all their money in high-yield products.“
“The shakeout has cast doubt on the listing plans of several P2P lenders and underscores the delicate balancing act faced by China’s government as it tries to reduce moral hazard in the financial system without triggering a crisis. While there’s little sign that the P2P turmoil has spread to systemically important wealth-management products issued by banks, much of China’s $10 trillion shadow-lending system faces the same headwinds of rising defaults, slowing economic growth and official calls to end to implicit guarantees on risky investments.”
“China’s P2P platforms have about 50 million registered users and 1.3 trillion yuan ($195 billion) of outstanding loans, most of which have short maturities. Normally, savers have to wait for loans facilitated by the platforms to mature before getting their money back. But some are now trying to exit early by selling their rights to others at a discount, or by going to the platform’s offices to demand repayment.”
“The turmoil is also hurting companies and individuals who have relied on P2P platforms for financing. They include cash-strapped small businesses seeking working capital, individuals without a credit history, and, more recently, leveraged stock market investors and home buyers in need of down-payments.”
“Some P2P platforms were also raising funds illegally for their own use, while others were running Ponzi schemes that collapsed when the flow of new money halted, regulators have said. That helps explain why authorities have so far been steadfast in cracking down.”
“Last month, China Banking and Insurance Regulatory Commission Chairman Guo Shuqing warned that any savings or investment product with promised returns of more than 8% is likely to be ‘very dangerous’ and that investors should be prepared to lose all their money if advertised returns exceed 10%. The average yield on P2P loans was 10.2% in the first half, official figures show. Reported default rates vary from zero on the best platforms to 35% on the worst, according to National Internet Finance Association of China.”
“Online retailers typically benefit from lower overhead than their store-based counterparts, but in the U.K. that advantage is bigger than just about anywhere. The country has the developed world’s highest commercial property taxes, and in many areas those levies have jumped even as store sales decline, because land values have risen since the financial crisis. Last year, Tesco paid £700 million in property taxes, and J Sainsbury Plc, the No. 2 chain, paid £550 million. Amazon’s bill: £14 million.”
“Research suggests that employees are happier in co-working environments like those run by WeWork. But the firm’s real genius is that it is also far cheaper for their employers. Property experts estimate that firms typically spend anywhere between $16,000 and $25,000 per employee on rent, security, technology and related office expenses. Mr Neumann insists they can get all of that from WeWork starting at $8,000 per worker. Efficient use of space is one reason. Ron Zappile of Colliers, a property-services firm, reckons that typical corporate offices use some 185 square feet (17 square meters) per employee. WeWork members get by on 50 square feet per head.”
“WeWork has more than 250,000 members from a range of industries (see chart) and expects to double revenues this year for the ninth straight year. Last year it made $886m in revenue, 93% of which came from memberships.”
But…”WeWork’s net losses also roughly doubled, however, from $430m in 2016 to $884m last year. As with many fast-moving startups, it explains its lack of profitability by pointing to big investments. It will open 15 new offices a month worldwide for the foreseeable future. Its bonds issued in April were rated as junk.”
“…the most important source of stability may well be a shift in its customers, from startups to big firms. A few years ago, WeWork’s business was comprised almost entirely of small fry. In the year to September the enterprise segment (firms with over 1,000 staff) grew by around 370%. As of June, big firms accounted for about a quarter of its membership and revenues. More than 1,000 companies now take anything from one to 12,000 desks. In June, Facebook asked WeWork for an entire building for several thousand workers.”
“The average enterprise lease is close to two years and many new ones are three to five years long. Whereas big firms, used to conventional office leases of 10-20 years, see WeWork’s contracts as flexible, the firm itself sees them as commitments that will help it weather a downturn.”
“Investors have warned of growing systemic risks in China’s $1.09tn money market fund industry, as funds buy up bank credit despite a surge in bad debt this year.”
“Comparably high yields and low risk at Chinese money market funds in recent years have made the industry a favorite among retail investors in the country. Assets under management have grown from Rmb600bn at the end of 2012 to an estimated Rmb7.3tn ($1.09bn) in March, making it the second-largest market in the world after the US.”
“But in recent months China’s central bank has tightened monetary policy and access to credit, forcing down the funds’ once-attractive yields. At the biggest funds, average returns have dropped to an annualized to 3.7% from about 4.5% at the start of the year.”
“In response, funds have rushed into bank credit, such as negotiable certificates of deposit, as a means to boost returns and continue attracting retail investments.”
“Investors are now warning that the push into bank credit comes just as regulators are forcing banks to recognize vast amounts of bad debts that were once hidden off their balance sheets, leading to greatly increased risk for the investments. Falling credit ratings at banks could force money market funds to exit their investments, something that could lead to a shock through the massive fund industry.”
“Ant Financial’s Yu’e Bao, with about $200bn under management, is the world’s largest money market fund. Last month it reduced the amount of money investors could withdraw within one day to Rmb10,000 ($1,498) per investor from Rmb50,000. About Rmb200bn flowed out of the fund between April and June. The company declined to comment.”
“The risks at the funds are centered around their source of high-yielding investments: credit from hundreds of small banks with weakening balance sheets.”
“The Hong Kong government is considering banning a pro-independence political party on unprecedented ‘national security’ grounds, a move decried by activists as the latest violation of the city’s promised freedoms and rights.”
“WeWork’s steep valuation depends on a blinkered faith in its originality despite a crowded market of competitors. If the company’s equity value was based on the same multiple of sales as flexible workspace peer IWG (formerly Regus) it would be worth less than $3bn.”
“The company’s pitch is scale. WeWork envisions a world in which offices are so attractive that workers will choose to spend more time in them. Eventually, it pictures global cities of We-flats and We-offices, where members work out at We-gyms, learn at We-schools and network at We-events — all the while tracked by the We-operating system.”
“WeWork’s valuation comes courtesy of the deep pockets of Japan’s SoftBank and the Saudi-backed $100bn Vision Fund , which led a $3bn investment last year. That came with an additional $1.4bn raised for WeWork’s Asian subsidiaries. The fundraising round transformed WeWork into one of the world’s top 10 most valuable start-ups. Further financing from the Vision Fund, valuing WeWork at $35bn, has been mooted. This would exceed the value of SpaceX, Elon Musk’s space technology company.”
“In the meantime, WeWork needs financing. It is likely to require at least $2bn from investors in the next two years. To plug future outflows, it may seek far more. A successful initial public offering will require WeWork to convince investors that its value is based on more than giddy markets and a millennial-friendly aesthetic.”
“Unfortunately for WeWork, costs are growing just as steeply. Some look extravagant. Last year the group spent an additional $6.5m on events that included a weekend summer camp. The company justifies this as the price of growth.”
“However, WeWork’s valuation is based on its growth potential. Airbnb might therefore be a better comparison. It is valued at a higher $31bn. Yet even this is a more sober reflection of business than WeWork’s. The value is equal to 12 times trailing sales versus 20 for WeWork.”
“For now, WeWork is far from self-sustaining. The company lost nearly $1bn last year. Office occupancy at 82% is higher than IWG’s 75%. However, average membership fees are falling. There is little reason to think the decline will reverse while expansion is driven by Asia, where rates are lower.”
“Funding rounds were the only reason the company ended 2017 with cash of $2bn on the balance sheet. On FT estimates it is likely to need about $2bn more by the end of 2019.”
Markets / Economy
WSJ – Daily Shot: Deutsche Bank – US-Europe monetary policy divergence 7/3
“FlyHomes’ ability to turn clients into cash buyers exploits a quirk in the capital markets that’s arisen since the housing meltdown: Consumers are being put through more rigorous standards when they apply for a mortgage. Meanwhile, it’s comparatively easy for companies—even those with new, barely tested ideas—to get buckets of money from banks, venture capitalists, and other institutional investors.”
“Redfin CEO Glenn Kelman says these new ventures are part of a shift in how homes will be bought and sold. ‘There is just money coming out of every possible part of the world, and it isn’t going toward the consumer,’ he says. ‘It’s going toward real estate businesses who charge the consumer for access to that money.’”
Considering the headwinds of retail over the last few years, I’d say things are doing not too shabby considering it took the closure of Toys ‘R’ Us to push the absorption rate negative (granted local situations vary).
“Cut from 68-hour maximum aims to improve life balance for country of workaholics.”
“The country is home to the longest working hours and highest suicide rate in the developed world. South Koreans put in an average of 2,024 hours in 2017, the second-most after Mexico among members of the Organization for Economic Cooperation and Development (OECD). But the long hours have not translated into better productivity, with the country’s per-hour productivity ranking near the bottom.”
“In Venice, Barcelona, Thailand and New Zealand, ‘overtouristing’ is straining local infrastructure and prompting restrictions; the ‘Lord of the Rings’ effect.”
“The good news is that about 40% of cancer cases are preventable and that smoking, the biggest single cause, is in decline across much of the world. The bad news is that overall rates are shooting up as more countries adopt western lifestyles.”
“By 2035, the number of new cases is set to rise by 58% to 24m, according to a report from the World Cancer Research Fund.”
“’Over the next 20 or 30 years, unless anything is done to stop it, [obesity or being overweight] is going to overtake smoking as the number one risk factor for cancer,’ says Dr Kate Allen, executive director of science and public affairs at the WCRF.”
“The report is a synthesis of a decade of research on cancer risks with a new set of recommendations (see graphic) to minimize a person’s chances of developing the disease. It says 12 cancers are now linked to being overweight or obese.”
“’It has taken 40 or 50 years to make a big dent in tobacco consumption,’ Dr Allen says. In dealing with the problems of obesity, ‘it’s going to take at least that to get some traction,’ she adds.”
“Vancouver is so expensive that politicians want to tax its real estate market into submission, and many homeowners — who will lose money if home prices fall — think it’s the best idea they’ve heard in years.”
“Like many cities around the world, Vancouver is grappling with punishing housing costs that have pushed out large swaths of residents — and are causing distress among young adults who can’t afford rent today and take it for granted that they will never own a home.”
“Vancouver, surrounded by snow-capped mountains and wide maritime views, has never been especially cheap. But home and condominium prices are up by close to 16% over the past year, and about 60% over the past three, according to the Real Estate Board of Greater Vancouver.”
“What makes these gains so remarkable is that unlike Silicon Valley, London or New York — where the presence of high-paying tech and finance jobs helps explain housing costs — Vancouver has relatively low salaries. As part of their bid for Amazon’s second headquarters, Vancouver officials boasted about having ‘the lowest wages of all North American tech hubs’.”
“Succeed or fail, Masayoshi Son is changing the world of technology investing.”
“The fund is the result of a peculiar alliance forged in 2016 between Mr Son and Muhammad bin Salman. Saudi Arabia’s thrusting crown prince handed Mr Son $45bn as part of his attempt to diversify the kingdom’s economy. That great dollop of capital attracted more investors—from Abu Dhabi, Apple and others. Add in SoftBank’s own $28bn of equity, and Mr Son has a war chest of $100bn. That far exceeds the $64bn that all venture capital (VC) funds raised globally in 2016; it is four times the size of the biggest private-equity fund ever raised.”
“The fund has already spent $30bn, nearly as much as the $33bn raised by the entire American VC industry in 2017. And because about half of its capital is in the form of debt, it is under pressure to make interest payments. This combination of gargantuanism, grandiosity and guaranteed payouts may end up in financial disaster. Indeed, the Vision Fund could mark the giddy top of the tech boom.”
“Rapid growth in debt levels is historically the best predictor of a crisis. And this year the corporate bond market has been on a tear, with companies issuing a record $1.7tn last year, and over half a trillion already this year. Even mediocre companies have benefited from easy money. But as the rate environment changes, perhaps more quickly than is imagined, many could be vulnerable.”
“Investors who bought some of the riskiest emerging market sovereign bond sales in the past year have been left nursing paper losses as a strengthening dollar has rattled sentiment for emerging markets.”
“JPMorgan’s emerging markets bond index has lost 5.1% since the start of this year.”
WSJ – Daily Shot: FRED – BOJ Assets YoY Change 5/13
“…is journalism really in such a parlous state? Look closer. News is an industry in transition, not in decline. It is reemerging as something more digital, more personalized, more automated, more paid for—and (eventually) less fake. In many ways history is repeating itself, with the main surprise being the survival of so many established names. And good journalism still does have the power to change lives.”
“In a world where the facts are known, commentary will become ever more important…”
“That points to the final series of changes: the multiplicity of formats. The standard print news story is being broken up, split among explainers, videographics, podcasts, and so on. Editorship is increasingly a matter of choosing the best way to deliver information to a time-starved consumer. News is likely to get shorter, quicker, and more graphical. But if you need to understand Syria or cryptocurrencies, you may save time reading one long story in Businessweek or the New Yorker rather than endless small ones.”
“The newspaper has not so much died as transmuted. News is in a state of transition—and what’s emerging is molded by both new technology and old verities. As journalists, we have to work harder to keep our audiences. But I’m still optimistic—not least about fake news. It won’t go away; it never has. But it will play a smaller role. And the big winner will be you, the consumer. Even if you have to pay a little more for it.”
“Retirement plans across the country still project their investments will grow at a median rate of 7.25%, according to Wilshire Consulting, an adviser to pension funds. Yearly returns on public pension plans have returned a median 6.79% over the past decade and 6.49% over the past 20 years, according to Wilshire Trust Universe Comparison Service, a database.”
“Unlike corporations, public pensions have wide latitude in projecting investment returns.”
“Public retirement systems had an average 72% of assets they need to pay for retirement promises in 2016, according to the latest data available in the Public Plans Database, which tracks about 170 pension funds. The figure a decade earlier was 85%.”
“Companies don’t have the same flexibility to set return expectations on their pension plans. Pension plans sponsored by S&P 1500 companies have an average 87% of assets needed to cover their pensions promises, according to Mercer, a consultancy.”
“An annual report released in late April revealed that HNA spent more on interest than any nonfinancial company in Asia last year, a $5 billion bill that represented a more than 50% increase from the year before.”
“Overall debt rose 21% in 2017, according to the report, with short-term borrowing climbing by 25%, to about $30.3 billion. Total debt amounted to about 20 times HNA’s earnings before interest and taxes…”
“Nonetheless, HNA, which Chen co-founded in the 1990s, counting George Soros among its early investors, isn’t at risk of immediate catastrophe. At the start of 2018, according to people familiar with the matter, it told creditors it would sell about $16 billion in assets in the first half to lighten its balance sheet. Happily for the banks that financed its rise, HNA is already nearing that goal, thanks largely to the Hilton sale ($8.5bn).”
“In a test of Chinese authorities’ commitment to reducing financial risk, a large Chinese manufacturing group has begged for a government bailout to avoid default on up to $7bn in debt after a regional lender withdrew loans.”
“Over the past year, China has tightened credit in a bid to tackle an explosion of corporate debt that the International Monetary Fund has called ‘dangerous’. But the plea highlights how painful Beijing’s deleveraging campaign has been for some indebted groups.”
“According to Caixin, a respected Chinese financial news website, the crisis involving DunAn began when Zheshang Bank, a regional lender in Zhejiang, demanded early repayment of loans, causing other banks to restrict lending to the group.”
“DunAn employs 29,000 workers and manufactures a range of equipment including air-conditioning parts, civil explosives and wind power equipment. It has also expanded into asset management and real estate.”
“Government bailouts are most common for state-owned companies, but officials have also rescued private groups when their potential collapse raised the prospect of contagion.”
“The Shanghai government shielded investors from losses on bonds from privately owned Chaori Solar, whose 2014 default was the first in China’s domestic bond market.”
“This week high-yield bond investors faced a puzzle: how to value a bond sold by an unprofitable company that does not own hard assets or offer a clear outlook for its free cash flow?”
“The company in question was WeWork, the office-sharing company that last year attracted a $4.4bn equity investment from Japan’s Softbank. WeWork, which hired JPMorgan to lead the sale but had more than a dozen other banks working as well, attracted enough demand to increase the sale to $702m from $500m.”
“Several investors who steered clear of the bond — and one who bought it — said WeWork’s debt was not the type that typically appealed to high-yield investors. But nor was it the first company vowing to disrupt an industry to have found buyers in the junk market. Last year electric carmaker Tesla sold a $1.8bn high-yield bond, and in March, Uber raised $1.5bn in a leveraged loan.”
“A combination of low interest rates and shrinking supply has made it harder for money managers to find bonds with attractive yields. WeWork’s bonds were sold at a yield of 7.875%.”
“Established to make mortgages more affordable and expand US home ownership — Fannie during the Great Depression and Freddie in 1970 — the Treasury propped them up with about $188bn in bailout funds after the housing market meltdown. While Fannie and Freddie have private shareholders, they send most of their profits to the Treasury.”
“Since then, far from being reined in as critics demanded in the aftermath of the crisis, the two ‘government-sponsored enterprises’ remain as important as ever; even more so for commercial real estate markets.”
“Fannie and Freddie are best known for their principal role as the leading source of financing for owner-occupied mortgages. But for decades, they have played another role in supporting the market for rental housing, by helping finance property companies that acquire or refinance investments in apartment blocks. This second, lower-profile, part of their business has boomed since the crisis.”
“By the end of last year the pair had a financial interest in almost $500bn of commercial mortgages, equivalent to 38% of the total outstanding across the US. That compares with almost $200bn, or 25% of the market, a decade ago. Last year alone, the pair financed almost 1.6m rental units.”
“The expansion has raised eyebrows in the industry. Competitors that provide this type of finance — banks, life insurance companies and other institutional investors — say the taxpayer’s backing allows Fannie and Freddie to offer borrowers better terms than they can.”
“Supporters say the pair have also helped stave off an affordable housing crisis, especially as a new generation of renters has been locked out of the post-crisis recovery. ‘If they didn’t exist, there would be a major problem for multi-family housing,’ says Shekar Narasimhan, managing partner at the real estate group Beekman Advisors, who was the first chair of Fannie Mae’s advisory committee on this type of housing.”
“For critics, the pair have played a central role in financing the boom. Developers have completed about 1.3m rental units in the US over the past five years, according to RealPage data, including a record 365,000 in 2017.”
“’Aggressive lending practices by the GSEs this cycle have been an important factor in the degree of over-investment and over-valuation of multi-family properties in certain key markets,’ says Michael Shaoul, chief executive of Marketfield Asset Management.”
“’I do not think that the GSEs have been as critical in commercial real estate as they were in traditional mortgages a decade ago — but they have perhaps allowed some of the more marginal projects to minimize equity capital this time around.’”
“In all, first quarter annual asking rents for ground floor retail space declined in 13 out of 16 shopping corridors, and the overall average asking rent for those areas dropped 19.5% from the previous year to $653 a square foot, according to a report from real estate services firm CBRE Group Inc.”
“The continued drop in retail asking rents comes as no surprise—as traditional companies reshape their businesses to the growth in online shopping, retailers reduce the number of brick-and-mortar stores they operate. Also, merchants continue to balk at high rents. Between 2010 and 2014, average asking rents in Manhattan jumped more than 100% across the 16 retail corridors, according to an earlier report from CBRE.”
“U.S. oil major Chevron Corp has evacuated executives from Venezuela after two of its workers were imprisoned over a contract dispute with state-owned oil company PDVSA, according to four sources familiar with the matter.”
“The Chevron workers may face charges of treason for refusing to sign a supply contract for furnace parts drawn up by PDVSA executives, Reuters reported earlier this week. The workers balked at the high costs of the parts and a lack of competitive bids.”
“The analysis of Census Bureau data tracks the differences in annual income between household income groups. The rich versus poor gap compared households in the top 20% to those in the bottom 20% by metropolitan area.”
“At No. 1 is San Jose, California, the Silicon Valley city where the rich versus poor gap widened by $73,600 to $339,000. At No. 100, with the smallest change among 100 largest metro areas, is the border city of El Paso, Texas, where the gap widened by $2,600 to $131,200.”
“Nationally, the rich versus poor gap expanded by $31,000 to just over $197,000. Last year’s measure, using data from 2010 to 2015, showed an increase of $29,500 to $189,600.”
“The Bloomberg ranking also shows the change in the gap between the super-rich to middle class which widened in 98 of 100 metropolitan areas, led by Bridgeport, Connecticut, which overlaps entirely with Fairfield County. The gap narrowed in Ogden, Utah and Colorado Springs, Colorado. The super-rich to middle class gap is defined by those in the top five percent of income vs households in the middle 20%.”
“A third take of data shows the middle class income span — defined as the gap between those within 30 and 80% of an areas income. The middle class span grew the most in San Francisco where it rose to $140,800 in 2016 from $108,300 five years earlier.”
“A new report by the Brewers Association — a trade association representing small and independent American craft brewers — showed that craft brewers saw a 5% rise in production volume in 2017. Yet with that growth comes an increasingly crowded playing field, leading to more closures of small craft breweries. In 2017, there were nearly 1,000 new brewery openings nationwide and 165 closures — a closing rate of 2.6%. That’s a 42% jump from 2016, when 116 craft breweries closed.”
“WeWork, the lossmaking provider of shared office space, will seek to raise money from debt investors for the first time in a sale that will provide a stern test of sentiment in the junk bond market.”
“The $20bn US company has hired more than a dozen banks to pitch a bond sale to US money managers this week, according to five people with knowledge of the planned sale.”
“Sales at the company more than doubled to $886m in 2017 from the year before, although its loss also widened to $884m, according to bond documents reviewed by the Financial Times. WeWork said sales had continued to quicken and by last month had reached an annualised pace of between $1.4bn and $1.5bn.”
“WeWork has raised nearly $7bn through equity investments over the past seven years. Its ambitions received a big boost in the middle of last year with a $4.4bn injection of cash from SoftBank and the Japanese conglomerate’s Saudi-backed technology fund, laying the ground for more rapid expansion around the world.”
“The move by WeWork to tap the $8.8tn US corporate debt market, a vital source of funding for companies, will bring new investor scrutiny to the company at a time when corporate borrowing costs are on the rise.”
“The bond offering drew junk labels from the leading US credit rating agencies, underlining the risk of investing in the debt. One person briefed on the sale added that the seven-year bond could price with a yield as low as 7%, although a second added that the final price WeWork pays could be higher.”
Real Estate
WSJ – Daily Shot: US Existing Home Sales 4/24
WSJ – Daily Shot: NAR – US Existing Homes Months Supply 4/24
WSJ – Daily Shot: NY Fed – US Households average probability of moving 4/24
“Since the shale oil boom began a decade ago, exploration and production companies have needed a steady inflow of capital to pay for drilling and completing new wells but thanks to the rise in crude prices, many can now finance themselves.”
“From the time the first shale oil test wells were drilled in the US in 2008-09, the industry’s capital expenditure has exceeded its cash from operations, with producers only able to stay in business by attracting hundreds of billions of dollars in financing from bond and share sales and bank loans. From 2008 to 2017, US exploration and production companies raised $293bn from bond sales, according to Dealogic.”
“Another factor that has helped producers turn the corner is the continued improvement in the techniques of horizontal drilling and hydraulic fracturing, which have brought costs down sharply.”
“Halliburton, one of the world’s largest oilfield services groups, wrote off its remaining investment in Venezuela at a cost of $312m on Monday, highlighting the decline of the crisis-hit nation’s oil industry.”
“Halliburton said it would continue to operate in the country ‘at a reduced level’, but would be careful about its future exposure. It last year wrote down $647m for late payment by PDVSA, Venezuela’s national oil company, and the fall in the value of a promissory note intended to cover some of those bills.”
“Venezuela’s crude production has dropped 30% from 2.15m barrels a day in 2016 to 1.5m b/d last month. It is less than half its level when Hugo Chávez, the former president, was elected in 1998.”
“Schlumberger, the world’s largest listed oilfield services group, similarly wrote off its investment in Venezuela at the end of last year, taking a pre-tax write down of $938m. It continues to operate a cash business in the country, but that has continued to decline into this year.”
“Paal Kibsgaard, Schlumberger’s chief executive, said Venezuela’s oil production was in ‘free fall’.”
“Although the rise in oil prices since last year has offered some help to Venezuela, the benefit has been muted because most of the oil PDVSA produces does not generate cash, according to Francisco Monaldi of the Baker Institute at Rice University.”
“He argued in a recent report that of the roughly 1.8m b/d that PDVSA produced last November, 400,000-450,000 b/d were used in the domestic market at a huge loss, while about 500,000-600,000 b/d were committed to repaying loans from China and Russia and owed to joint venture partners.”
