TheChek News Flow

Proposed change could lift income-tax burden that wipes out most licensed marijuana retailers’ earnings

Many U.S. cannabis businesses could become profitable for the first time if the Biden administration follows through on its plan to reclassify marijuana as a less dangerous drug.

That is because the change could lift a heavy income-tax burden: Section 280E of the federal tax code currently bars cannabis businesses from claiming deductions on many basic business expenses. That rule often results in an effective tax rate of 70% or more, wiping out most licensed marijuana retailers’ earnings.

“It’s an absolute game-changer,” said Boris Jordan, executive chairman of Curaleaf Holdings, which operates 145 dispensaries and 19 cultivation sites across the U.S. “It’s something we’ve been waiting for, for the better part of 10 years.”

The proposed rule could take months to complete and could be further stalled by lawsuits. The public, including state regulators and marijuana companies, would have a chance to comment and the White House would have to sign off on a final version of the rule before it could go into effect.

Marijuana is legal in some form in 40 states and the District of Columbia, but is illegal under federal law—and would remain so even if the Drug Enforcement Administration moved marijuana from Schedule I to the less-restrictive Schedule III, equivalent to prescription medications such as anabolic steroids and some combinations of acetaminophen and codeine.

Cannabis businesses would still have to contend with limited access to banking services and financing. They still wouldn’t be allowed to transport marijuana across state lines. And companies that sell marijuana in the U.S. still couldn’t be traded on U.S. stock exchanges. (Several Canadian operators are listed on U.S. exchanges while U.S. operators are listed on Canadian exchanges.)

A national survey conducted in 2022 by Whitney Economics, a cannabis industry research firm, found that fewer than 25% of cannabis businesses were profitable. Licensed U.S. cannabis companies this year are expected to make $31.4 billion in sales and pay $2.3 billion more in federal taxes than they would under normal business tax rules, according to Whitney Economics forecasts.

For companies that have been hanging on in hope of one day making it into the black, the policy change could be transformative. Business leaders said they could use the cash to invest more in marketing, offer better benefits to employees and expand into newly opened markets such as Ohio. Industry leaders said they are also optimistic that the policy shift could reduce the stigma around cannabis, bring more investors into the sector and make federal lawmakers more open to legalizing marijuana.

Congress created Section 280E of the tax code in 1982, when Sen. Bill Armstrong (R., Colo.) tucked the provision into a larger bill as the federal War on Drugs was ramping up.

The law denies many ordinary deductions and tax credits to businesses that are “trafficking in controlled substances” listed under Schedule I and II.

When marijuana was illegal at the federal and state levels, that deduction limit had a relatively small impact, and it mostly gave U.S. authorities an additional tool to go after drug dealers and impose taxes on top of criminal prosecutions. But state legalization combined with Section 280E created an odd hybrid. The cannabis industry looked like regular businesses in many respects—except for the income-tax bills.

“Draconian, I think, is putting it lightly,” said Charlie Bachtell, chief executive of Cresco Labs, which has dispensaries and production facilities across eight U.S. states. For each of the past two years, Cresco has paid between $70 million and $80 million more in U.S. federal taxes than it would have under normal business conditions, he said. Despite the hefty tax bill, Cresco in the last quarter of 2023 became free cash-flow positive for the first time since it went public in 2018.

The cannabis industry has “really been kind of stumbling its way forward because of the economic burdens of 280E,” said Brian Vicente, a cannabis lawyer in Denver.

The current tax rules allow cannabis businesses to deduct their cost of goods sold, so growers that put most of their resources into production don’t get hit hard. Businesses closer to the consumer get hammered by Section 280E. For instance, a retailer selling clothes or food can deduct rent, marketing and wages when calculating taxable income. But a cannabis retailer typically can’t take any of those deductions.

“It’s impossible to make those numbers work,” said Wanda James, CEO and co-founder of Simply Pure Brands, which has a dispensary in Colorado and a new branch about to open in New Jersey. “It’s just a question of how long is your runway.”

James, a former Navy officer, restaurateur and political organizer, was among the first Black cannabis licensees in Colorado. She said the tax change could lower the barriers to entry for women, people of color and veterans, many of whom have struggled to keep their cannabis businesses afloat after winning state lotteries for social-equity licenses.

The tax change could also shrink the gap in profitability between legal and illegal cannabis businesses, helping licensed businesses that have struggled to compete with the black market. Unlicensed operations can sell marijuana at lower prices and pay fewer administrative and regulatory costs.

More broadly, moving cannabis to Schedule III could create an unusual tax regime. Businesses would still face significant state taxes and high costs for banking and other services. But cannabis would actually have more favorable federal tax treatment than alcohol and tobacco, which are subject to federal excise taxes on top of income taxes.

Sens. Chuck Schumer (D., N.Y.), Cory Booker (D., N.J.) and Ron Wyden (D., Ore.) are reintroducing legislation that would decriminalize marijuana and impose federal excise taxes of up to 25%.

Two senior OpenAI executives—vice president of people Diane Yoon and Chris Clark, head of nonprofit and strategic initiatives—left the company earlier this week, a company spokesperson said.

The two resignations are the latest high-profile changes to OpenAI’s leadership in the aftermath of Sam Altman’s dramatic ouster and subsequent rehiring by the nonprofit board that runs the startup, events that highlighted its unusual corporate structure. Both executives were among the most long-tenured managers at the developer of ChatGPT, recently worth $86 billion in an employee share sale.

Yoon will continue to serve as an adviser to the company for the rest of the year, OpenAI spokesperson Kayla Wood said in statement. Julia Villagra, currently OpenAI’s head of human resources, will replace Yoon as vice president of people, Wood said. She didn’t comment on whether Clark would be replaced. Both executives made the decision to resign on their own, Wood said.

“We are immensely grateful to Diane for her dedication and leadership over the past six years,” Wood said. “Under her guidance, OpenAI has grown significantly while maintaining a high standard of excellence across research, product, and other functions.”

Yoon, who joined OpenAI in 2018, oversaw the rapid growth of the company’s staff to more than 700 by late last year, as well as a week of turmoil in late November, when hundreds of the company’s staff threatened to resign over Altman’s firing.

Clark had been at OpenAI for more than eight years and served as its first chief operating officer starting in 2016, according to his LinkedIn profile. He also sat on the nonprofit’s board of directors in 2016 and 2017, according to tax filings. Clark previously worked with Altman at Y Combinator and at Loopt, the Y Combinator-backed location sharing startup Altman co-founded in 2005 and later sold.

In May 2022, Clark took on his most recent role, which he described as “leading OpenAI’s nonprofit and several global ops functions, including real estate, workplace, and strategic initiatives.” In a note to staff, Clark said that “after eight incredible years, I’ve decided to step back and devote more time to the people and projects I care deeply about outside of OpenAI.”

Andrej Karapthy, one of the founding members of OpenAI, left the company in February, The Information first reported.

Yoon did not respond to requests for comment. Clark couldn’t be reached for comment.

If you’re lying awake at 3 a.m. one night, try reading the Justice Department’s 509-page “proposed finding of fact” in its antitrust lawsuit against Google’s search business, a revised version of which was filed with the court on Tuesday. You likely won’t make it past the extensive table of contents before you fall asleep. Even so, getting through the document is probably worth it, at least for investors in Google’s parent company, Alphabet. For those people, understanding the government’s case is essential. A government victory could impose restraints on Google’s search business, its cash cow. And depending on what those constraints are, they could hurt Google’s earnings power enough to affect its ability to keep up in artificial intelligence.

We’re a long way from there, for sure, but a final decision on the case is getting closer. Today the judge overseeing the case heard closing arguments from both sides. Perhaps not coincidentally, Google stock was conspicuously flat even as the rest of the stock market rallied. Investors are surely conscious of the threat posed by the search case (which is separate from the antitrust lawsuit over Google’s ad tech business). And the earnings updates from major tech companies in the past two weeks help put things into perspective. As much as we associate Apple with minting money, it actually generated less cash than either Microsoft or Alphabet in the March quarter. In fact, according to analysts surveyed by S&P Global Market Intelligence, Alphabet this year will generate more cash from operations—$131 billion—than either Apple or Microsoft.

The difference is that Apple returns nearly all of the cash it generates to shareholders, and the other two don’t. As we’ve talked about a lot this week and last week, Alphabet and Microsoft spend a portion of their cash on capital expenditures—things like servers and data centers, which are necessary for AI development—and return much of what is left over to shareholders. (It’s a bit more complicated than that, but you get the gist.) This year, for both Microsoft and Alphabet, capex spending is soaring, so that balance will shift a bit. Apple, in contrast, can return so much money to shareholders because its capex spending is tiny. As Chief Financial Officer Luca Maestri explained on Thursday night during the company’s earnings call, Apple shares the cost of its capex investments with its suppliers. (For more on Apple’s relationship with its manufacturing partners, see our story today.)

The rise of large language models sparked worries last year that LLMs could hurt Google’s search dominance and profits, because AI-powered searches are so expensive to run. We reported this week that Google has slashed the cost of those searches, even as its search market share has stayed strong. The real threat to search, and to Google’s earnings power, remains the federal government.

ArcelorMittal has told Michael Gove it may be forced to "cease operations in Britain" unless he blocks the redevelopment of Chatham Docks in a letter obtained by Sky News.

The world's second-largest steel company has warned the government that a planning verdict due this week could lead to a key division quitting the UK.

Sky News has seen a letter sent by ArcelorMittal to Michael Gove, the levelling-up secretary, in which it says that a decision to allow the closure and redevelopment of part of Chatham Docks would have "seismic adverse consequences… [for] the British economy and multiple strategic industries".

In the letter from Matthew Brooks, who runs ArcelorMittal's construction solutions arm in the UK, the company urges Mr Gove to issue an urgent order to allow fuller government scrutiny of the redevelopment proposals ahead of Wednesday's decision by Medway Council.

"This is highly time-sensitive - calling in the application after next Wednesday will not be possible," Mr Brooks wrote.

He warned that if the proposals were approved, ArcelorMittal would "regrettably be left with no alternative but to leave Chatham Docks and, more than likely, cease operations in Britain, given the lack of suitable alternative sites".

"This, too, would likely be the case for the majority of businesses at the Docks," Mr Brooks wrote.

"This would have a significant impact on Britain's manufacturing and construction industries, delay countless critical national infrastructure projects, come at a significant cost to the economy, and leave Britain vulnerable and exposed to the volatility of international supply chain shocks."

From East Africa to southeastern Australia, large parts of the planet are underwater after unusually heavy rains in unexpected areas

Deadly dam bursts in Kenya and Brazil, a highway sliding down a mountainside in southern China, desert airport runways underwater in Dubai, mining pits flooded in Australia: Large parts of the world are awash.

Extreme rainfall and killer floods that have struck around the globe in recent weeks have been unexpected both in their location and power.

Combined with infrastructure unprepared for such deluges, the intense rains have caused death, destruction and mass evacuations on several continents.

The powerful downpours are the result of natural weather patterns being supercharged by a record-breaking year for global temperatures.

As the globe gets hotter, it is getting wetter too. Simply put, the warmer the air, the more water it can hold.

Scientists still don’t know whether this yearlong record global heat—and the downpours that accompany it—amounts to a statistical blip, or requires a recalibration to a warmer, wetter future that will test national infrastructure, raise insurance premiums and complicate global food production.

In each of the deluges this April, a particular set of severe weather conditions came together to produce the storms, according to meteorologists and climate scientists.

The amount of rain that fell during these spring storms has been unusual, they say. East African countries, for example, were soaked with 4 to 20 inches of rain during April, up to six times the normal amount depending on the area, according to data from the National Weather Service’s Climate Prediction Center.

The intensity of the downpours can cause havoc. Nairobi, Kenya, received nearly 12 inches over a seven-day period, bursting dams, burying towns in mud and turning city streets into deadly rivers.

More than 10 inches fell in a single day in Dubai, submerging its international airport’s runways under at least a typical year’s worth of rain.

Record rainfall totaling 17 inches across the month inundated Guangdong province, in southern China, where on Monday a section of a highway collapsed in a mountainous area, killing 48 people. The province is home to 127 million people and many of China’s technology and manufacturing giants, mostly located along its southern shoreline.

Brazil deployed its armed forces to the country’s southern state of Rio Grande do Sul after 6 inches of rain fell in 24 hours, causing mass flooding over the past week that killed at least 55 people, left some 70 missing and displaced more than 80,000 others.

With one of the region’s main rivers at its highest level on record, roads and bridges were destroyed, disrupting harvests in the country’s second-largest soybean-producing state. Some half a million people were left without access to clean water and 300,000 people without electricity after a small hydroelectric dam burst, sending a 2-meter-high wave of muddy water crashing through local villages.

The rainfall-related disasters are the result of warming global temperatures. There have been 10 straight months of record-breaking global average atmospheric temperatures, and 12 consecutive months of record global average ocean temperatures.

Although questions remain about whether the rise in global temperatures will endure, what is certain is that a warmer atmosphere holds more moisture that later falls as rain, while a warmer ocean evaporates more water to the air, according to Sarah Kapnick, chief scientist of the National Oceanic and Atmospheric Administration.

“These events are happening more frequently now on the extreme precipitation scale,” Kapnick said. “They’re happening in places that we don’t think of as being rainy, like Dubai, so it’s all the more surprising when they do happen.”

Last month’s East Africa floods occurred during a rainy season that runs from March to May, although the actual amount of rain varies in a given year. This time, the rainfall has been amplified by a weather pattern called the Indian Ocean Dipole. In its positive phase, the dipole pushes warm water against the eastern coast of Africa; in its negative phase, the warm water sloshes back across toward Australia and Indonesia.

This year, the dipole is stronger than normal, which is fueling heavy rainfall in areas on the western side of the Indian Ocean, such as Kenya, according to Joyce Kimutai, a climate scientist at Imperial College London and member of World Weather Attribution, a group of scientists from universities and research institutes in Europe and the U.S.

The warm ocean temperatures plus the evaporative effects of a warmer atmosphere helped set the stage for Kenya’s powerful deluge, according to Kimutai.

At least 50 people were killed early Monday when the Old Kijabe Dam overflowed, unleashing a flash flood through the town of Mai Mahiu, which sits beneath the escarpment of the Great Rift Valley, 20 miles north of Nairobi. The incident brought the nationwide death toll from the flooding to 210, as of Friday, with another 90 people missing. “There’s just too much water,” said Kenyan government spokesman Isaac Mwaura. The national electric company reported power outages scattered across the country.

The flooding across the Arabian Peninsula in mid-April that brought Dubai to a standstill was the most severe since record-keeping began 75 years ago. The storm started as a slow-moving low-pressure system over Turkey and then picked up moisture as it moved across the Arabian Gulf and Red Sea, according to the World Meteorological Organization.

Normally, low-pressure systems would have stayed over Europe at this time of the year, but this one moved south and also caused storms over northern Pakistan and Afghanistan, dumping strong rains and killing 50 people, according to news reports.

Over April 14 and 15, Dubai recorded the highest daily rainfall since tracking began in 1949. The desert emirate’s 12-lane superhighways were littered with abandoned cars; schools and businesses shut; and the country’s army of blue-collar and domestic workers were stranded at home. The United Arab Emirates’ government said it would allocate roughly $540 million to help citizens affected by the deluge. Only around 10% of the population have citizenship.

An analysis of the Dubai storm released by the World Weather Attribution group found that the amount of rain that fell was likely influenced by El Niño, a Pacific Ocean weather pattern that leads to warmer ocean temperatures in the Eastern Pacific and can affect drought and rainfall patterns across the entire globe.

The current El Niño began in 2023 and is slowly waning, although it is still having an effect and is partly responsible for the deadly rains this past week in southern Brazil, according to the country’s National Institute of Meteorology.

Historically, the arid Arabian Peninsula receives more periods of heavy rainfall during El Niño years than non-El Niño years, the report said.

The Horn of Africa has had several years of drought, while flooding in Kenya has displaced more than 165,000 people, including tourists and staff evacuated by helicopter and boat from 19 safari camps flooded when the Talek River overran its banks in the Maasai Mara National Reserve, according to Kenyan and Red Cross authorities.

The back and forth between years of drought followed by periods of extreme and prolonged rainfall makes it difficult for soil and vegetation to absorb rainwater, Imperial’s Kimutai said.

“There are a lot of swings between extremes so the ecosystem really doesn’t get time to recover and get back to its natural, adaptive state,” said Kimutai. “It becomes a weakened system over time.”

The immediate impact on agriculture is significant too. In the rain-hardened British Isles, the past winter has been one of the wettest on record. Rains left farmers’ fields flooded in the middle of the planting season, threatening harvests. Combined with the cold, the wet weather has also delayed turning animals out to pasture, farming unions say, meaning fodder reserves for the coming winter are already being depleted. “Up to late April it’s been constant,” said Mike Thomas, a spokesman for the National Farmers Union. “With energy and feed costs going up, it’s been like a perfect storm.” The group is asking retailers for flexibility in the specifications demanded for crops and on contractual obligations given the weather conditions.

Rain damage can be worse in urban areas like Dubai, where water can’t soak into the ground, or in rural areas where vegetation has been cut down for food or fuel, according to Justin Mankin, associate professor of geography at Dartmouth College.

“The land surface has a finite amount of water that it can absorb,” Mankin said. “The built environment shapes how that precipitation gets channeled and presents a hazard to people in the form of flooding. And that’s the case in all these areas whether you’re talking about eastern Australia, Dubai or eastern China.”

The high rainfall hit Australia in March, which was the country’s third-wettest March on record, with rainfall some 86% above a long-term average, according to the country’s Bureau of Meteorology. A tropical cyclone hit the remote northern part of the country that month, prompting authorities to close roads due to flooding and mining companies to suspend operations.

At a manganese mine on an island off Australia’s northern coast, mining company South32 said the storm flooded mining pits and damaged a haulage road bridge, as well as wharf and port infrastructure. Record rainfall hit the island, the miner said.

As hopes of interest-rate cuts fade, some commercial real-estate borrowers want to cut loose

Higher-for-longer rates are forcing commercial property owners to rethink their options.

“Restrictive monetary policy needs more time to do its job.” It was the last thing real-estate borrowers wanted to hear from Federal Reserve Chairman Jerome Powell when the central bank held interest rates steady last week.

Last year’s motto in real-estate circles was to “survive until ’25.” Property owners thought the Fed would cut interest rates throughout 2024. If borrowers could just sit tight, it would soon be easier to refinance troubled loans.

Over the past three weeks, borrowers and lenders have both realized this is probably a fantasy. Inflation has been stuck above 3% for three consecutive months. U.S. economic data have remained robust, despite a weaker-than-expected jobs report Friday.

The one-month forward curve shows that investors now think the secured overnight financing rate, or SOFR, which is closely related to the federal-funds rate, will be 4.825% at the start of 2025. This implies up to two small cuts this year. Back in January, six cuts were expected.

One immediate consequence is that the cost of hedging has shot up again. Lenders require borrowers of floating-rate debt to hedge their interest-rate exposure, often through interest-rate caps. These instruments pay out when a benchmark such as SOFR rises above a set strike rate, which reassures lenders that borrowers will be able to meet their repayments even if rates rise.

The cost of these caps has become a major headache for property owners, according to Carol Ng, a managing director at risk-management firm Derivative Logic. The price of a one-year extension for an interest-rate cap on a $100 million mortgage at a 3% strike rate is now $2.1 million. Back in January, when the market expected more rate cuts, the same extension cost $1.3 million.

It isn’t just borrowers who are in a tight spot. The longer rates stay high, the greater the weight of unresolved property loans on lenders’ books as commercial real-estate loans get rolled over. According to the Mortgage Bankers Association, $929 billion of outstanding property loans will mature in 2024—a 41% increase on MBA’s earlier estimate. This is because many loans that were due to be paid off in 2023 were extended, adding to this year’s pile of maturities.

The so-called extend-and-pretend strategy worked well after the global financial crisis because the Fed cut rates from roughly 4% at the start of 2008 to close to zero by the end of the year. Ultralow interest rates turbocharged property valuations in the subsequent years, bailing out bad loans.

But few people expect rock-bottom rates to make a comeback. Stringing things out may be preferable to reporting losses, but it could tie up a lot of capital. Commercial real-estate loans make up more than a fifth of U.S. banks’ overall loan portfolios on average.

The same thing is happening in securitized debt markets, where loans are also being extended rather than repaid. Investors in commercial mortgage-backed securities are becoming frustrated that their money is stuck in notes that may be generating very low returns by today’s standards. A triple-A CMBS bond issued in 2022 can yield as little as 3%.

Higher-for-longer interest rates could also prolong the deep freeze on property deals. Debt costs are so high that it is difficult for buyers to meet lenders’ requirements that the rental income generated by a property cover the debt-service costs by at least 1.25 times. Sellers could capitulate on price to make the math add up, but they are reluctant to take a hit.

This new reality leaves owners of troubled properties with unpleasant choices to make. Before granting extensions on maturing loans, lenders are asking borrowers to show commitment to their buildings by writing fat checks to cut their debts.

Last month, New York landlords SL Green and Vornado coughed up around $100 million to extend a $1.08 billion loan on an office building at 280 Park Avenue, according to CRED iQ analysis. Less deep-pocketed owners may decide their cash would be better spent elsewhere and hand the keys to the lenders. It is becoming harder to persuade landlords to put more money into troubled properties.

According to Alex Killick, a managing director at real-estate services company CWCapital Asset Management, owners have recently started to talk about a plan B: moving early to sell their buildings. This is unappealing as it is still hard to pin down exactly what price a building might fetch. But if they wait, the risk is that a flood of troubled buildings hits the market at the same time, depressing values further.

“Last year, borrowers were saying, ‘I just need three months for rate cuts to kick in’,” says Killick. “We aren’t hearing that anymore. Powell sounded pretty clear that this is the new normal.”

Investors Were Burned by European Banks for Years—Until Now

Shares in European banks such as UniCredit have been on a tear

After years in the doldrums, European banks have cleaned up their balance sheets, cut costs and started earning more on loans.

The result: Stock prices have surged and lenders are preparing to hand back some $130 billion to shareholders this year. Even dealmaking within the sector, long a taboo topic, is back, with BBVA of Spain resurrecting an approach for smaller rival Sabadell.

The resurgence is enriching a small group of hedge funds and others who started building contrarian bets on European lenders when they were out of favor. Beneficiaries include hedge-fund firms such as Basswood Capital Management and so-called value investors such as Pzena Investment Management and Smead Capital Management.

It is also bringing in new investors, enticed by still-depressed share prices and promising payouts.

“There’s still a lot of juice left to squeeze,” said Bennett Lindenbaum, co-founder of Basswood, a hedge-fund firm based in New York that focuses on the financial sector.

Basswood began accumulating positions around 2018. European banks were plagued by issues including political turmoil in Italy and money-laundering scandals. Meanwhile, negative interest rates had hammered profits.

Still, Basswood’s team figured valuations were cheap, lenders had shored up capital and interest rates wouldn’t stay negative forever. The firm set up a European office and scooped up stock in banks such as Deutsche Bank, UniCredit and BNP Paribas.

Fast forward to 2024, and European banking stocks are largely beating big U.S. banks this year. Shares in many, such as Germany’s largest lender Deutsche Bank, have hit multiyear highs.

A long-only version of Basswood’s European banks and financials strategy—which doesn’t bet on stocks falling—has returned approximately 18% on an annualized basis since it was launched in 2021, before fees and expenses, Lindenbaum said.

The industry’s turnaround reflects years spent cutting costs and jettisoning bad loans, plus tougher operating rules that lifted capital levels. That meant banks were primed to profit when benchmark interest rates turned positive in 2022.

On a key measure of profitability, return on equity, the continent’s 20 largest banks overtook U.S. counterparts last year for the first time in more than a decade, Deutsche Bank analysts say.

Reflecting their improved health, European banks could spend almost as much as 120 billion euros, or nearly $130 billion, on dividends and share buybacks this year, according to Bank of America analysts.

If bank mergers pick up, that could mean takeover offers at big premiums for investors in smaller lenders. European banks were so weak for so long, dealmaking stalled. Acquisitive larger banks like BBVA could reap the rewards of greater scale and cost efficiencies, assuming they don’t overpay.

“European banks, in general, are cheaper, better capitalized, more profitable and more shareholder friendly than they have been in many years. It’s not surprising there’s a lot of new investor interest in identifying the winners in the sector,” said Gustav Moss, a partner at the activist investor Cevian Capital, which has backed institutions including UBS.

As central banks move to cut interest rates, bumper profits could recede, but policy rates aren’t likely to return to the negative levels banks endured for almost a decade. Stock prices remain modest too, with most far below the book value of their assets.

Among the biggest winners are investors in UniCredit. Shares in the Italian lender have more than quadrupled since Andrea Orcel became chief executive in 2021, reaching their highest levels in more than a decade.

Under the former UBS banker, UniCredit has boosted earnings and started handing large sums back to shareholders, after convincing the European Central Bank the business was strong enough to make large payouts.

Orcel said European banks are increasingly attracting investors like hedge funds with a long-term view, and with more varied portfolios, like pension funds.

He said that investor-relations staff initially advised him that visiting U.S. investors was important to build relationships—but wasn’t likely to bear fruit, given how they viewed European banks. “Now Americans ask you for meetings,” Orcel said.

UniCredit is the second-largest position in Phoenix-based Smead Capital’s $126 million international value fund. It started investing in August 2022, when UniCredit shares traded around €10. They now trade at about €35.

Cole Smead, the firm’s chief executive, said the stock has further to run, partly because UniCredit can now consider buying rivals on the cheap.

Sentiment has shifted so much that for some investors, who figure the biggest profits are to be made betting against the consensus, it might even be time to pull back. A recent Bank of America survey found regional investors had warmed to European banks, with 52% of respondents judging the sector attractive.

And while bets on banks are now paying off, trying to bottom-fish in European banking stocks has burned plenty of investors over the past decade. Investments have tied up money that could have made far greater returns elsewhere.

Deutsche Bank, for instance, underwent years of scandals and big losses before stabilizing under Chief Executive Christian Sewing. Rewarding shareholders, he said, is now the bank’s priority.

U.S. private-equity firm Cerberus Capital Management built stakes in Deutsche Bank and domestic rival Commerzbank in 2017, only to sell a chunk when shares were down in 2022. The investor struggled to make changes at Commerzbank.

A Cerberus spokesman said it remains “bullish and committed to the sector,” with bank investments in Poland and France. It retains shares in both Deutsche and Commerzbank, and is an investor in another German lender, the unlisted Hamburg Commercial Bank.

Similarly, Capital Group also invested in both Deutsche Bank and Commerzbank, only to sell roughly 5% stakes in both banks in 2022—at far below where they now trade. Last month, Capital Group disclosed buying shares again in Deutsche Bank, lifting its holding above 3%. A spokeswoman declined to comment.

U.S.-based Pzena, which manages some $64 billion in assets, has backed banks such as UBS and U.K.-listed HSBC, NatWest and Barclays.

Pzena reckoned balance sheets, capital positions and profitability would all eventually improve, either through higher interest rates or as business models shifted. Still, some changes took longer than expected. “I don’t think anyone would have thought the ECB would keep rates negative for eight or nine years,” said portfolio manager Miklos Vasarhelyi.

​Some Pzena investments date as far back as 2009 and 2010, Vasarhelyi said. “We’ve been waiting for this to turn for a long time.”

Firms including BlackRock, Pimco form committee, hire advisers to negotiate deal

Ukraine’s lenders said Kyiv could wait to pay them back after Russian troops stormed into the country two years ago. Now, their patience is starting to run out.

A group of foreign bondholders including BlackRock BLK 0.91%increase; green up pointing triangle and Pimco plans to press Ukraine to start paying interest on its debt again as soon as next year, according to people familiar with the matter.

The group, which holds around a fifth of Ukraine’s $20 billion of outstanding Eurobonds, recently formed a committee and hired lawyers at Weil Gotshal & Manges and bankers from PJT Partners PJT 1.09%increase; green up pointing triangle to negotiate on its behalf.

The group wants Kyiv, which is fresh off clinching roughly $60 billion in U.S. aid, to strike a deal in which it would resume payments in exchange for forgiveness of a big chunk of the country’s outstanding debt. Some bondholders in the group have discussed the plans with senior officials in Kyiv.

A spokesman for the bondholder group said it “looks forward to engaging constructively to assist with Ukraine’s sovereign debt.”

Ukraine is preparing to start talks with the bondholders this month, and Kyiv’s advisers are working to get the U.S. and other governments on board.

That approval isn’t guaranteed. The U.S. and its allies are concerned that taxpayers’ money will wind up in bondholders’ hands if Ukraine resumes any type of debt service. The countries agreed to give Ukraine a debt holiday on roughly $4 billion of their own loans, until 2027, and have voiced concerns that bondholders could start to be repaid ahead of them.

Without a deal, Ukraine could default after the bondholder-debt holiday ends in August, tarnishing its reputation with investors and complicating its ability to borrow more.

Officials from the International Monetary Fund and some members of the bondholder group met in April in Washington, D.C., where fund representatives indicated total debt relief from the private sector might need to be higher than the bond markets currently indicate. Ukraine’s bonds trade at between 25 and 35 cents on the dollar, according to AdvantageData, implying losses as high as $15 billion.

When the bondholders agreed to a two-year debt holiday in 2022, many thought the war would be over by now.

Even though the conflict is dragging on, lenders say they are optimistic that Ukraine’s finances are stabilizing. The country has clinched crucially needed aid from the U.S. and Europe and boosted its foreign-exchange reserves to a record high in April, while Ukraine’s central bank is considering a rollback of capital controls this year.

The bondholders hope to take in as much as $500 million in annual interest payments after agreeing to debt relief. They have signaled they could be willing to provide further relief later.

Some bondholders have suggested that frozen Russian assets in Europe and North America be used to help repay some of what they are owed.

The IMF and several G-7 countries so far aren’t on board with that idea but have indicated they could support smaller interest payments between now and 2027—at well below market rates. Ukraine would be reluctant to resume a normal debt-repayment schedule before 2027 at the earliest, some of the people said.

If a deal is reached, it could be financially rewarding for investors who bought Ukraine’s bonds at bargain prices.

National security adviser Jake Sullivan tells FT Weekend Festival three-way pact necessary for Mideast peace

US national security adviser Jake Sullivan said the Biden administration would not sign a defence agreement with Saudi Arabia if the kingdom and Israel did not agree to normalise relations, insisting “you can’t disentangle one piece from the others”.

In an interview at the FT Weekend Festival on Saturday, Sullivan dismissed recent suggestions that a bilateral deal between the Biden administration and the kingdom was being considered if Israel refused to make concessions to the Palestinians.

The Biden administration has been pushing a three-way deal to encourage Riyadh to formalise diplomatic ties with Israel as part of plans to ensure a sustainable peace in the Middle East after Hamas’s October 7 attack triggered the near seven-month war in Gaza. It hopes to use the prospect of the kingdom — long Israel’s grand prize — and other Muslim states normalising relations to convince Israel to agree to significant concessions to the Palestinians.

But Israeli Prime Minister Benjamin Netanyahu has repeatedly rejected any moves towards a two-state solution to the protracted Israeli-Palestinian conflict.

“The integrated vision is a bilateral understanding between the US and Saudi Arabia combined with normalisation between Israel and Saudi Arabia, combined with meaningful steps on behalf of the Palestinian people,” Sullivan said. “All of that has to come together . . . you can’t disentangle one piece from the others.”

Sullivan said that President Joe Biden intended to publicly detail “the path [to] . . . a more peaceful region”.

“I do expect in the months ahead that you will hear from the president and others of us more of the . . . of the path that we believe could produce a more secure Israel and a more peaceful region,” Sullivan said.

He added: “All we can do is work out what we think makes sense, [and] try to get as many countries in the region on board with it and then present it, and it will ultimately be up to the Israeli leadership and frankly ultimately the Israeli people can decide whether that’s a path they want to take or not.”

The Biden administration was edging towards a deal for Saudi Arabia to normalise relations with Israel before October 7, which would have led to Washington agreeing to a defence pact with Riyadh and supporting its civilian nuclear ambitions in return for Israel making concessions to the Palestinians.

Hamas’s attack and Israel’s retaliatory offensive in Gaza upended that process, but the US and Saudi Arabia have continued to discuss a potential deal as part of wider postwar plans to secure peace in the region.

But Saudi Arabia has made it clear that after October 7 it would require Israel to make far more significant concessions to Palestinians, insisting it would need to see “irreversible steps” towards the establishment of Palestinian state.

Some analysts believed that media reports this week that the US and Saudi Arabia were considering moving ahead with a bilateral deal if Israel refused to take concrete steps towards a Palestinian state were designed to put pressure on Netanyahu’s government.

Saudi foreign minister Prince Faisal bin Farhan said this week that Riyadh and Washington were “very close” to a bilateral agreement on the US element of a deal, but reiterated that there also “needs to be truly a pathway to a Palestinian state” that is “credible and irreversible”.

Yet Netanyahu, who faces intense pressure from far-right members of his governing coalition to make no concessions to the Palestinians, boasts that he has for years successfully thwarted any progress towards a two-state solution.

Sullivan was speaking as CIA chief Bill Burns was in Cairo, where mediators are seeking to convince Hamas to accept a proposal for deal that would lead to a ceasefire and the release of hostages held in Gaza. Mediators hope to broker an initial six week pause in fighting that would then be used to negotiate a sustainable ceasefire.

US officials have praised Israel for making concessions on the terms for a deal, but Netanyahu still insists that he will launch an offensive in Rafah, the southern Gazan city where more than 1mn people have sought sanctuary.

Arab states have for months been discussing with Washington their vision for a postwar plan, which includes the US and other western powers recognising a Palestinian state and supporting its full membership of the UN and a reformed Palestinian leadership administering Gaza and the occupied West Bank.