FT : German rating agency fined €2.2mn for Greensill-related breaches

German rating agency fined €2.2mn for Greensill-related breaches
Esma levies rare penalty against Scope over failures to manage conflicts of interest

German credit rating agency Scope has been fined more than €2mn by European regulators for conflict of interest breaches connected to ratings it provided to Greensill Capital, the collapsed finance group.

The European Securities and Markets Authority did not publicly name Greensill when levying the rare fine last week, but the dates of individual credit ratings and other details referenced in the €2.2mn penalty exactly match Scope’s work for the failed supply chain finance group.

Scope handed Greensill Bank, the group’s German banking unit, a strong A- credit rating in August 2019, in a report that touted the Bremen-based lender’s very high capitalisation and liquidity. While it then downgraded this rating to BBB+ in October 2020, this still put Greensill Bank safely into investment grade territory.

Greensill Bank collapsed less than six months later and German prosecutors opened a criminal investigation into the bank’s management. Days after the collapse in March 2021, Scope downgraded the bank to junk and withdrew its credit rating.

While the bulk of Greensill Bank’s €3.5bn deposits were covered by an insurance scheme, the collapse inflicted severe losses on a number of small towns and municipalities who had about €500mn of uninsured deposits with the bank.

Esma did not name Greensill in its judgment and declined to comment on the identity of the parties involved. Instead, the regulator in its report referenced anonymised companies “[Company A] Bank AG” and “[Company A] Capital (UK) Limited”.

The penalty was for five breaches, which detail failures in Scope’s policies and procedures to flag and address potential conflicts of interest, and point to two potential conflicts “regarding one particular individual” and an entity.

During the period Scope Group entities provided other advisory services to Greensill as well as credit ratings, such as “industry risk reports” Esma said, and it failed to flag these services when rating the credit worthiness of Greensill Bank.

The rating agency also failed to raise the potential conflict of interest involving Maurice Thompson, a former executive at Greensill.

Between 2017 and 2021, Scope was providing credit ratings and other services to Greensill while Thompson, the chair of Greensill Capital at the time, was also a shareholder in the rating agency’s parent company, Scope Group, and a member of its advisory board.

“The individual also played a role in bringing these entities as a client to Scope’s group and was paid for this by Scope’s group,” Esma said in its report, adding that the person also “had interactions with Scope’s staff involved in rating activities”.

Scope told the Financial Times that the issues raised by Esma “had no influence on individual ratings issued by Scope”.

The rating agency’s policies state that it will not issue a credit rating if a person owning more than 5 per cent in Scope is also a member of the administrative and supervisory board of the rated entity, but failed to raise any concerns over Thompson’s less than 5 per cent shareholding at the time.

Thompson resigned as Greensill’s chair in March 2021, as the group fought to stave off insolvency, and is no longer listed as a member of Scope’s supervisory board. Scope declined to answer whether Thompson was still a shareholder.

Thompson could not be reached for comment.

Rating agency fines are relatively rare in Europe, although Esma levied a record €5mn fine against Fitch Ratings in 2019 around similar conflicts of interest surrounding its rating of French grocer Casino.

Greensill was the eponymous company of Australian financier Lex Greensill, whose connections to former UK prime minister David Cameron sparked a lobbying scandal when the company collapsed. Cameron, who is now the UK’s foreign secretary after being ennobled last year, earned millions of pounds as a boardroom adviser to Greensill, but has refused to publicly confirm his total pay.

FT : Blockbuster M&A deals more than double in first quarter

Blockbuster M&A deals more than double in first quarter
Dealmaking drought left behind as first-quarter transaction values rise 30% with European market standing out

Blockbuster deals more than doubled in the first quarter of this year, signalling a nascent recovery in the mergers and acquisitions market following a lengthy drought.

The number of takeovers worth at least $10bn jumped in the first three months of 2024 compared with the same period last year, driven by large US deals in the energy, tech and financial sectors, according to data from the London Stock Exchange Group.

Eleven such transactions, with a total value of $215bn, were struck during the quarter, up from five takeovers worth a combined $100bn in the first three months of 2023.

“Mega-deals are thriving,” said Tyler Dickson, Citi’s head of investment banking, with companies “capitalising on the market conditions to accelerate growth”.

The overall value of global M&A climbed 30 per cent to $690bn, the data showed, even as the total number of deals announced fell 31 per cent.

The rebound in dealmaking comes after M&A activity plunged to a decade-long low last year, as a frenzy of activity fuelled by rock-bottom interest rates during the Covid-19 pandemic was followed by a sharp decline in takeovers.

“We’re back to average, or back to normal,” said Andre Kelleners, Goldman Sachs head of M&A in Europe, the Middle East and Africa. “We’ve seen a real, robust rebound from exceptionally low levels this period a year ago.”

Among the largest deals struck in the quarter were Capital One’s $35bn acquisition of Discover Financial, and chip design toolmaker Synopsys’s $35bn takeover of engineering software maker Ansys.

M&A has increased in anticipation of rate cuts from central banks, which investors bet could come as early as June. That has made financing for deals easier and cheaper to obtain, while IPOs have started to return to public markets that are trading at record highs.

“It’s clearly a better environment from a transaction point of view,” said Massimiliano Ruggieri, head of Emea investment banking at Morgan Stanley. “You can definitely point to a higher level of engagement from clients, both investors and issuers, that has continued throughout the quarter.”

While the US accounted for the majority of activity in the first quarter, with its share of global takeover activity at a 35-year high, dealmaking in Europe recovered particularly sharply. The value of European deals climbed 60 per cent from a year earlier to $127bn.

However, Asia-Pacific deals fell 28 per cent, to $90bn.

Bankers said sentiment in the market still remained cautious, with room for a pick-up in activity among private equity investors in particular. Buyout groups sit on a record number of assets, and face pressure to sell some of their portfolio companies and return capital to their backers.

“There’s a lot of volatility with a lot of fits and starts in the pace of activity,” said Stephan Feldgoise, global co-head of M&A at Goldman Sachs. “It’s a mixed-signal market. You have this extraordinary equity market performance but also some red flags, particularly when it comes to more economically sensitive consumers.”

However, a lag between when transactions are announced and when they close means that bankers must still wait for fees to rebound.

LSEG estimated that $24.2bn in investment banking fees overall have been earned so far this year, down 1 per cent on the same time last year. M&A fees recorded the steepest fall, dropping 14 per cent to $6.4bn, their lowest level since 2016.

JPMorgan held the top spot globally for M&A advice, followed by Goldman Sachs and Morgan Stanley.

WSJ : EVs Are Splitting the Auto World Into Two: Made in China, or Not

EVs Are Splitting the Auto World Into Two: Made in China, or Not
Automakers are becoming more conscious of where they get certain parts and where those vehicles can be sold, to avoid sanctions

BEIJING—The rise of electric vehicles is dividing the global auto market into two: one that welcomes China-made cars, and the other that effectively rejects them.

Last spring, a group of Nissan executives huddled at the company’s headquarters in Yokohama, Japan, staring at a world map.

The map color-coded the world in four: red, for countries that block vehicle exports from China; yellow, for countries that risk halting them in the future; gray, for countries that might place some restrictions in the future; and green, for countries without restrictions or such likelihood.

The exercise was designed to find out whether Nissan had a shot at exporting cars it made in China, including electric vehicles, even as geopolitical tensions grow. The executives found that roughly 60% of the countries fell under what the company assessed as “green” or “gray.” Including the “yellow” countries, the tally was higher.

“When you look at the map, you can see that 80% of the market has an environment in which it could accept” China-made cars, said Masashi Matsuyama, who heads Nissan’s China investment unit. Nissan declined to say which countries fell under which color category.

Nissan decided to give its export plan a go. In November, the automaker said it would start shipping vehicles from China in 2025, including electric and plug-in hybrids—though it has yet to disclose the exact destinations of those cars.

Nissan is in good company: Ford, Tesla and BYD have all been increasing exports from China. Their moves underscore how geopolitics is reshaping the car industry, driving carmakers to update their strategies for where they make and sell cars.

The schism in the global auto sector follows similar splits in areas such as the telecom industry and the internet as the world becomes increasingly polarized around the top two economic powers.

More global carmakers are considering increasing exports from China—where cars, and especially EVs, are typically cheaper to make—but only to select destinations. Few are likely to end up on the U.S. market, but places such as Southeast Asia and the Middle East are rapidly growing markets.

Wary of sanctions
Meanwhile, Chinese carmakers are setting up factories in Europe—where they face an antisubsidy probe—and in Mexico, possibly to export into markets such as the U.S. from there and get around some tariffs.

Global and Chinese carmakers are also becoming more cautious about where they get certain technologies and components, and which markets those cars with such technology and parts can end up in, to avoid getting hit by sanctions or restrictions in the future.
Volkswagen, the biggest foreign carmaker in China, plans to keep certain China-developed technology, such as chips and software linked to autonomous driving, in China to limit the fallout from geopolitical tensions. It recently had to halt imports to the U.S. of thousands of luxury cars containing a sanctioned Chinese part.

In China this year, officials urged major Chinese automakers to source more chips from domestic suppliers, according to people familiar with the matter.

For consumers, a gap could emerge between two blocs: one region that is increasingly dominated by lower-cost, advanced-technology EVs made in China, and the other region, likely including the U.S., with more expensive cars and a slower adoption of EVs.

“It’s unlikely that new technology will scale at the same pace in mature markets like the U.S.A., which will become increasingly isolated, and new technology will only be dispensed at premium prices,” said Bill Russo, chief executive of Automobility, a Shanghai-based strategy firm.

China as Asia’s Detroit
In the U.S., as demand for electric vehicles loses momentum, some auto companies have been delaying plans for EV spending. In China, the world’s biggest EV market, many companies are still investing heavily even as the market becomes crowded and many manufacturers operate at a loss.

Industry executives say China’s electric transformation is on course given that EVs and other battery-powered vehicles already account for one-third of sales, even though sales growth has been slowing. China is pushing its carmakers and parts suppliers to go global as well as export more.

Fears of the world being flooded with less costly Chinese imports are growing in some regions. Last year, China surpassed Japan to become the biggest automotive exporter, shipping some five million vehicles overseas. The biggest destinations included Mexico, Australia and Saudi Arabia.

Chinese cars are rarely seen in the U.S., given the U.S. already levies an additional 25% tariff on vehicles imported from China. In February, President Biden ordered the Commerce Department to open an investigation into foreign-made software in cars, an effort to halt Chinese EVs from flooding the U.S. market.

Europe was the biggest recipient of China-made electric vehicles in 2023, accounting for about 40% of the $34 billion exported, data from the Atlantic Council showed. The European Union last year launched an antisubsidy investigation into China’s electric-vehicle makers. In early March, the European Commission said it found sufficient evidence that vehicles were subsidized, and was taking steps to prepare for tariffs to be applied retroactively.

China has called the European probe protectionist, while it has called on the U.S. to stop discriminating against Chinese companies.

Many of China’s top exporters are homegrown companies such as Chery Automobile and BYD, which has overtaken Tesla as the world’s top EV seller and has ambitious plans to increase exports.

Global carmakers want to position their China plants as export hubs, too, given China’s proximity to markets such as Southeast Asia and the Middle East.

Tesla has been exporting its Shanghai-made cars to regions including the Asia-Pacific. It shipped about 344,000 vehicles overseas last year, up 27% from a year earlier, data from the China Passenger Car Association showed. Ford, which has been grappling with declining sales in China, is targeting Southeast Asia and the Americas. It said it exported more than 100,000 vehicles from China last year.

In Thailand, the market share of the traditionally dominant Japanese carmakers including Toyota and Nissan fell to 78% in 2023 from 85% a year earlier, as Chinese brands swept up most of the electric-vehicle sales, data released by Toyota Thailand showed.

From the perspective of consumers around the world, China’s carmaking technology is strong enough to be accepted globally, said Nissan’s Matsuyama. “We want to utilize that for our global strategy,” he said.

FT : Thames Water board locked in crisis talks about £3bn funding plan

Thames Water board locked in crisis talks about £3bn funding plan
Shareholders refuse to confirm they will make fresh equity injection

The board of Thames Water, Britain’s largest water company, was locked in crisis talks on Wednesday after shareholders refused to confirm they would provide about £3bn of fresh equity that is necessary for its survival.

Thames Water, which provides water and sewage services to about a quarter of the UK population, needs shareholders to indicate they will stand by plans to inject additional equity but had not received their backing at the board meeting that was running into Wednesday evening, two people briefed on the situation said.

One person close to the talks said the situation was fluid and a company announcement could be made on Thursday.

Thames Water is trying to avoid going into the government’s special administration regime but ministers have been on standby for the possibility of its collapse.

The company is the most leveraged in the sector and has come under increasing financial strain as higher interest rates have raised the cost of servicing £18.3bn of group debt.

Last year, Thames Water shareholders agreed to invest £750mn this year and more than £3bn by 2030 — but subject to certain conditions.

The company is lobbying industry regulator Ofwat to agree to sharp increases in water bills as well as concessions on regulatory fines and an agreement that it can continue to pay dividends.

Thames Water’s shareholders — which include pension funds Omers and USS as well as the Chinese and Abu Dhabi sovereign wealth funds — are dissatisfied with progress in the discussions with Ofwat, according to people familiar with the matter.

One person close to Thames Water described the talks as a game of brinkmanship with the regulator and the government.

“Equity is saying it won’t give any more money unless Ofwat blinks and Ofwat is refusing,” added this person.

“It’s a big ask for a shareholder to write a £500mn cheque with no chance of getting it back,” said an investor in another UK water company.

“They have Ofwat over a barrel. They are saying we will give you equity but only if you give us better returns.”

Ofwat launched an investigation last year into a £37.5mn dividend paid by Thames Water to its parent company Kemble.

Kemble, which has no other source of income other than bills paid by Thames Water customers, requires the dividends to service its debt. Kemble needs to refinance a £190mn loan that is due for repayment by the end of April.

A £400mn publicly traded Kemble bond that expires in May 2026 was trading at 26 cents on the dollar on Tuesday afternoon, indicating market nerves over the company’s future.

The government is keen to avoid a nationalisation of Thames Water in an election year and is optimistic that, even were Kemble to collapse, it can restructure the group debt or bring in new investors to recapitalise the regulated operating business, according to officials.

But some lawyers and investors have disputed that assertion, saying Thames Water’s troubles may be too entrenched to be fixed.

Thames Water and Kemble did not immediately respond to requests for comment.

FT : Why good news for Japan may be bad news for hedge funds

Why good news for Japan may be bad news for hedge funds
After three decades of corporate stagnation, there’s fresh momentum — but not everyone is pleased

When the Tokyo stock market closed on Wednesday afternoon, the sun was shining, a weekend of cherry blossoms lay in prospect and the once leaden-footed Topix index — the broad benchmark of corporate Japan — had skipped to within inches of its all-time high.

Tricky times, in other words, for some of the world’s biggest hedge funds. Good news, especially when fuelled by a fundamental change in the nature of a market, can sometimes be very tough going.

The problem, if it can be called that, is that Japan’s equity market is in excellent shape. Arguably, in terms of trajectory and narrative, the best shape it has ever been. Some weeks ago, the Nikkei 225 Average surpassed its December 1989 peak. It has gained nearly 22 per cent since the start of the year and has continued (as it did yesterday) to log new highs. 

In a whirl of share buybacks, new merger and acquisitions rules, successful activism and top-down pressure to improve returns, companies, the government and the stock exchange itself have done enough to convince the world that this time is different. There are always plausible ways it could unravel but the story of positive change is holding. 

For the better part of three decades, the story was very different. Once the late-1980s bubble had burst, and the economy entered its tussle with bad loans, deflation and corporate stagnation, the Tokyo market became an avatar of weariness and dreariness. There were moments, of course, when the whole thing moved decisively in one or another direction, but these stints were mostly shortlived. 

Japan’s stock market, for all its sophistication, breadth and liquidity, became characterised by its tendency to return to the long-term mean. Other big markets would trade for extended periods on momentum; Japan did not. Colourful things would happen, but the gravitational pull of beige always won, and usually in a matter of days. 

Crucially, though, the reliability of Japan’s “nothing to see here” market offered specific opportunities to certain hedge funds. Rapid, predictable mean reversion is very useful if you are running a long-short strategy and your risk managers are obsessed with maintaining neutrality in all things — whether that be country, market, sector or factor risk. For a certain type of hedge fund — a breed now dominated by the huge multi-manager platforms such as Citadel, Millennium, Polymer and others — neutrality reigns supreme and Japan, accordingly, has been very appealing.

Part of that appeal has been the depth of the market: you want neutrality but also a portfolio full of idiosyncratic risk (think of Pigeon, the baby-product manufacturer whose shares used to rise when an imperial pregnancy was announced) of a type that Japan is quite good at. There are thousands of companies to trawl for potential longs and shorts, and, despite the stagnancy of the market, plenty of stock-specific incidents to produce big movements on individual shares.

Generations of market participants learnt to sell their winners and buy the underperformers, said one manager whose hedge fund is now in urgent search of a new strategy.

Everything worked beautifully until about 18 months ago when the Japanese market became, in effect, momentum-driven. With the whole market rising at the same time, market neutrality has been far harder to maintain. Some funds continue to thrive but many of the multi-manager platforms, according to dozens of brokers and asset allocators, have found the rally to be the hardest environment they have operated in for many years.

And the momentum increasingly looks like more than just mood music. Shareholder activism is moving stock prices, and, critically, the fear of activism is pushing Japanese companies to pre-emptively reward shareholders with non-core asset sales and share buybacks. For pickers of stocks to sell short, this is nerve-racking, says one market strategist: you never know when a previously bad-looking company is going to do the right thing, announce a buyback and watch its shares fly.

Big, long-only money is coming into the Japanese market chasing high-quality companies with improving governance standards, exposure to global growth and a “not China” story. Significantly, momentum-chasing global investors who previously sought their fix in China are turning to Japan, say brokers, and bringing the momentum with them. 

The new money coming in, explains one aggrieved manager, has a growth mindset that prefers to add to its winners and buy more on good news — the antithesis of the zero-sum mindset of many of the long-short platforms that have dominated trading in Japan equities for so long.

>>> US After Hours Summary: CXM +7.6%, RH +7.6%, VRNT +6.1% higher on earnings;

After Hours Summary: CXM +7.6%, RH +7.6%, VRNT +6.1% higher on earnings; MLKN -12.1%, FC -10.2%, CC -9.5% lower on earnings

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: CXM +7.6%, RH +7.6%, VRNT +6.1%

Companies trading higher in after hours in reaction to news: SNOW +2.9% (CEO bought 31542 shares worth ~$5 mln), SGMT +1.7% (completes Phase 1 hepatic impairment study with denifanstat), FOXF +1.6% (to move to S&P SmallCap 600 from S&P MidCap 400), VFC +0.9% (to move to S&P SmallCap 600 from S&P 500), GDYN +0.7% (introduces GenAI-powered data migration starter kit), ALLY +0.5% (names new CEO), MACK +0.3% (receives $225 mln milestone payment from Ipsen)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: MLKN -12.1%, FC -10.2%, CC -9.5% (also determines internal control was not effective), VNET -4.4%, FUL -3.7%, BRZE -2.6%, RUM -2.1%, JEF -0.1%

Companies trading lower in after hours in reaction to news: PRAX -5% (stock offering), SSP -4.8% (to be removed from S&P SmallCap 600), SNX -3% (9 mln share offering by selling shareholders and concurrent share repurchase), ATS -2.8% (C$163 mln secondary offering), ABOS -2.2% (files $200 mln mixed shelf securities offering), MODV -2% (to be removed from S&P SmallCap 600), LMT -1.9% (awarded $440 mln U.S. Navy contract), PYXS -1.9% (stock offering by selling shareholders), ALK -0.5% (HA and ALK enter into timing agreement with DOJ relating to merger), FET -0.5% (stock offering by selling shareholders), DFS -0.3% (CEO to resign), XRAY -0.3% (to move to S&P MidCap 400 from S&P 500), PRKS -0.1% (shareholders approve $500 mln buyback authorization and amended agreement with Hill Path Capital)

>>> US Close Dow 1.22% S1P +0.86% Nasdaq +0.51% Russell +2.13%

Closing Stock Market Summary
Today's trade had a positive bias. Advancers led decliners by a 9-to-2 margin at the NYSE and by a 5-to-2 margin at the Nasdaq. The upside moves were driven by an ongoing inclination to buy on weakness following yesterday's afternoon slide.
Some normal consolidation activity in heavily-weighted names kept a limit on index gains in the early going. By the close, though, many stocks were participating in upside moves, sending the major indices sharply higher. The market ultimately closed at or near session highs, which had the S&P 500 at a fresh all-time high.

NVIDIA (NVDA 902.50, -23.11, -2.5%), Meta Platforms (META 493.86, -2.03, -0.4%), Microsoft (MSFT 421.43, -0.22, -0.1%), and Broadcom (AVGO 1318.79, -12.70, -1.0%), which are all sitting on large gains since the start of the year, were left out of the broad afternoon rally.

Meanwhile, the Russell 2000 continued its recent outperformance today, climbing 2.2%. The small cap index benefitted from strength in regional bank stocks, which also boosted the SPDR S&P Regional Banking ETF (KRE) (+3.7%). Other bank stocks outperformed, too, as evidenced by a 3.2% gain in the SPDR S&P Bank ETF (KBE).

Regional banks received some extra attention after Standard & Poor's lowered the outlook on First Commonwealth Bank (FCF 13.80, +0.47, +3.5%), M&T Bank (MTB 144.80, +3.57, +2.5%), Synovus Financial (SNV 39.82, +1.32, +3.4%), Trustmark (TRMK 28.06, +0.81, +3.0%), and Valley National Bancorp (VLY 7.90, +0.29, +3.8%) to Negative from Stable due to ongoing stress in commercial real estate, but that didn't deter buying activity in the space.

On a related note, the S&P 500 financial sector jumped 1.2%. Eight of the 11 S&P 500 sectors gained more than 1.0% from yesterday's close. The rate-sensitive utilities (+2.8%) and real estate (+2.4%) sectors were the top performers, responding to a drop in yields.

The 10-yr note yield settled four basis points lower at 4.20% and the 2-yr note yield fell three basis points to 4.57%.

  • S&P 500:+10.0% YTD
  • Nasdaq Composite: +9.3% YTD
  • S&P Midcap 400: +9.1% YTD
  • Dow Jones Industrial Average: +5.5% YTD
  • Russell 2000: +4.3% YTD

Reviewing today's economic data:
  • Weekly MBA Mortgage Applications Index declined 0.7% with purchase applications falling 2% and refinance applications down 0.2% from the prior week
  • Weekly EIA Crude Oil Inventories had a build of 3.17 million barrels; prior week showed a draw of 1.95 million barrels

Thursday's calendar features a slate of economic releases, including:
  • 8:30 ET: Q4 GDP -- third estimate (Briefing.com consensus 3.2%; prior 3.2%), Q4 GDP Deflator -- third estimate (consensus 1.7%; prior 1.6%), Weekly Initial Claims (consensus 213,000; prior 210,000), and Continuing Claims (prior 1.807 mln)
  • 10:00 ET: Final March University of Michigan Consumer Sentiment (consensus 76.5; prior 76.5) and February Pending Home Sales (Briefing.com consensus 2.1%; prior -4.9%)
  • 10:30 ET: Weekly natural gas inventories