TheChek News Flow

Arkhouse says it will take all ‘necessary steps’ to strike deal if talks fail to yield agreement

An investor that lodged a $5.8 billion bid to buy Macy’s M -1.67%decrease; red down pointing triangle threatened to bring the matter to shareholders if deal talks with the famed department-store chain don’t pick up.

Arkhouse Management and Brigade Capital Management on Dec. 1 submitted a proposal to acquire all of the outstanding Macy’s common stock they don’t already own for $21 a share, The Wall Street Journal previously reported.

After surging on the heels of the report, Macy’s stock has since given up a large part of those gains. It closed Friday at $17.63, giving the company a market capitalization of $4.8 billion.

The group, which has a sizable position through Arkhouse-managed funds, has met with Macy’s to discuss its offer privately, but with no agreement close, Arkhouse said Sunday it is ready to go directly to shareholders. That could entail launching a battle for board seats or a hostile takeover bid.

After the Journal reported on Arkhouse’s warning earlier Sunday, Macy’s rejected the offer, with Chief Executive Jeff Gennette saying in a statement: “Following careful consideration and efforts to gather additional information from Arkhouse and Brigade, the board determined that Arkhouse and Brigade’s proposal is not actionable and that it fails to provide compelling value to Macy’s, Inc. shareholders.” He added: “We continue to be open to opportunities that are in the best interests of the company and all of our shareholders.”

Arkhouse had said Sunday it could make a “meaningful increase” to its original proposal if it could proceed with necessary due diligence, as the Journal previously reported.

It offered to sign a mutual nondisclosure agreement to offer more information about its financing and strategy. Arkhouse had asked Macy’s to respond this week.

“We are highly motivated to consummate an acquisition of Macy’s and are prepared to pursue all necessary steps, including direct engagement with stockholders, to achieve this goal,” Arkhouse Managing Partners Gavriel Kahane and Jonathon Blackwell said in a statement. “We have conviction in the long-term success of Macy’s but believe that its potential will only be realized as a private company.”

The window for shareholder nominations at Macy’s opened on Saturday and closes Feb. 19, according to proxy materials.

Macy’s, which owns Bloomingdale’s in addition to its namesake department stores and Bluemercury beauty and skin-care shops, hadn’t previously issued a public response to the investor group’s offer. It is expected to provide more detail on its new strategy under incoming Chief Executive Tony Spring in the coming weeks.

There is no guarantee Arkhouse will follow through on its threats, and the campaign might fizzle. It is also possible another suitor for Macy’s could emerge.

Macy’s shares fell this past week after the company said Thursday in an employee memo that it planned to cut roughly 2,350 positions, or 3.5% of its overall workforce excluding seasonal hires. It also said it planned to shut five of its namesake department stores.

Macy’s has been working through a turnaround effort spearheaded by Gennette, who is set to retire next month and be succeeded by Spring, who oversees Bloomingdale’s. The turnaround effort has entailed closing hundreds of underperforming locations, opening smaller-format shops, launching new in-house brands and modernizing the company’s supply chain.

Macy’s has yet to disclose its holiday-season performance. The company is scheduled to report earnings in February.

Arkhouse is an investment firm that typically focuses on the real-estate industry. In 2021, it was part of a consortium that made an unsolicited bid for Columbia Property Trust, which put the office-real-estate investment trust into play. A different investor group ultimately agreed to buy Columbia Property for $2.2 billion.

Arkhouse also had a position in Preferred Apartment Communities, which was sold to Blackstone in a $5.8 billion deal two years ago.

Financial analysts lower forecasts in wake of Alaska Airlines accident and investigations into 737 production

Boeing BA 1.61%increase; green up pointing triangle was having trouble making enough 737s before the Alaska Airlines door-plug blowout. Now it faces new concerns that added inspections and regulatory scrutiny will sap its output this year.

Key airline customers are inspecting existing 737 MAX 9 planes, while federal air-safety officials are delving into the jet maker’s broader manufacturing processes. They are also examining supplier Spirit AeroSystems SPR -3.09%decrease; red down pointing triangle, which produced the plane’s door plug and fuselage.

Several aerospace analysts have lowered their financial forecasts for Boeing following the Jan. 5 accident, which also led to the grounding of 170 MAX 9 jets. How significant the financial impact is will depend, they say, on how long it takes to identify the cause and secure long-awaited certification of other MAX models.

“The pace is clearly going to be affected,” said Michel Merluzeau of AIR, a research company in Seattle. “In the longer term, this puts a lot of pressure on Boeing.”

Boeing and Spirit have launched internal reviews and have said they support the government investigations. Boeing is slated to update investors on its latest financial results Jan. 31. Chief Executive Dave Calhoun plans to announce the results from the Seattle area, where Boeing builds the 737.

The 737 accounts for the bulk of Boeing’s total production and backlog of orders. The MAX 9 model isn’t as popular as the slightly smaller MAX 8 model. The MAX 9 accounted for about 20% of the MAX deliveries made in 2023. It comprises a far smaller share of the backlog of roughly 4,330 undelivered 737s.

It takes about 11 days in final assembly to produce a single 737 aircraft. Boeing has been promising to get back to producing about 50 a month from its factories. It delivered 45 in December and 396 for all of 2023.

Boeing this month has delivered just five 737s from its Renton, Wash., factory through Thursday, according to data from aviation analytics company Cirium. In the past few years, the plane maker has shipped out 10 to 15 in the same period. Deliveries often ebb and flow, and a slow start to the month isn’t necessarily indicative of longer-term delays.

Boeing had just begun to speed deliveries of the 737 following a series of production issues last year, including a snafu involving misdrilled holes on Spirit fuselages that all but halted production in the summer of 2023 and sapped its profits.

Boeing booked a net loss of $2.2 billion in the first nine months of 2023 on about $55.8 billion in revenue. In that period, the manufacturer generated about $1.5 billion in free cash flow, a closely watched measure, toward its full-year target of $3 billion to $5 billion.

The Federal Aviation Administration has launched a probe of Boeing’s manufacturing and is offering no estimate for when the grounded MAX 9s would resume flying. The scrutiny also could delay certification of two new jets, the shorter MAX 7 and slightly longer MAX 10. Boeing had been expecting certification of the planes, both of which are already delayed, early this year.

Merluzeau said Boeing likely won’t hit its goal of producing 57 MAX jets a month, which the company hoped to hit next year, until late 2026 or early 2027.

Even small delays can add up. A single 737 MAX costs more than $100 million.

Meanwhile, Boeing faces new delays in its long-awaited return to delivering MAX jets to China. China Southern Airlines, one of several Chinese carriers with undelivered MAX planes, is planning to conduct additional safety inspections on those aircraft following the incident, The Wall Street Journal has reported.

Jefferies analyst Sheila Kahyaoglu outlined a worst-case scenario in which Boeing fails to get clearance for the MAX 7 and MAX 10 and is unable to deliver MAX 9s for the entire year. She estimates that scenario would result in 73 fewer plane deliveries and a $2.2 billion hit to free cash flow.

A delay in certification for the MAX 7 and 10, especially if the MAX 9 remains grounded, could have ripple effects, said JP Morgan analyst Seth Seifman. But he said he doesn’t expect major disruption of Boeing’s manufacturing operations.

“The question overhanging all of this,” he said, “is how much impact does the desire to institute incremental controls and the likelihood of incremental regulatory scrutiny have on the pace of production?”

Longer delays could further push down Boeing’s share price, which is down more than 17% year to date and has never recovered to its prepandemic levels.

Boeing lost its crown as the world’s biggest plane maker by number of orders in 2019 following the second fatal crash of a MAX 8 that led to a global grounding and subsequent pause in production. European rival Airbus has been extending its lead: It delivered 735 jets to customers in 2023, while Boeing handed over 528.

Both companies have enjoyed robust demand from airlines looking for more fuel-efficient models and to meet resurgent travel, leaving airlines with long wait times. Boeing continues to rack up orders for its 737s despite its production issues. Akasa Air, India’s newest airline, last week said it ordered 150 MAX planes through 2032 as it seeks to expand to international destinations.

State and local governments have long relied on muni market heavyweight

When bankrupt Jefferson County, Ala., needed to find buyers for a new bond sale, Citigroup was there. When Detroit tiptoed back to market after haircutting bondholders, Citi C 0.80%increase; green up pointing triangle was there. When the board overseeing Puerto Rico’s debt restructuring wanted advice, Citi was there.

Now municipalities will need to look elsewhere in good times and bad. Citi is exiting the $4 trillion market early this year after a quarter-century as a top trader of U.S. state and local government debt.

Citi is amid an overhaul, and munis are one of the businesses on the chopping block. Other changes include eliminating 20,000 jobs, curtailing overseas consumer business and exiting the market for distressed debt. The bank is trying to put its money to work in places where it has an edge and can get the best returns, said Howard Mason, an analyst with Renaissance Macro Research. “It wasn’t as if they were picking on the muni market.”

But Citi’s retreat from munis shows how the bank’s restructuring might have ripple effects far beyond Wall Street. States and cities are having to find new partners to underwrite planned road, school and sewer projects. They’ll also have one buyer fewer among a fairly limited network of banks and funds.

“People were shocked,” said Emily Brock, who runs the Washington, D.C., office of the Government Finance Officers Association, a trade group. “They had deals in the market.”

Citi’s departure is unwelcome news for investors, too. Muni prices can plummet in times of market turmoil, when scared retail bondholders yank billions from muni mutual and exchange-traded funds. That price drop, in turn, can drive down funds’ share values and payouts. What stops the bleeding is when firms with buying power step in to take advantage of deals.

“They’ve been a big player. Somebody that you always counted on to be in the mix is no longer in the mix,” said John Mousseau, CEO and director of fixed income at Cumberland Advisors. “Where you will really notice the lack of Citi being in the market is at the first sign of indigestion.”

Muni desks across Wall Street have weathered a brutal stretch, crushed by rising rates and depressed borrowing. But at Citi, executives also made a series of strategic decisions dating back to 2018 that wound up reducing the bank’s footprint in the market, according to people familiar with the matter. The bank has been trying to increase profitability and revive its languishing stock price, which has forced it to clamp down on costs and jettison businesses that aren’t earning enough. Munis, despite the institutional pride, ultimately didn’t make the cut.

A Citi spokesperson declined to comment for this article.

“We have taken hard, consequential, tough decisions here. They are not going to be universally popular within our bank,” Chief Executive Jane Fraser said about her broader restructuring in September. “It’s going to make some of our people very uncomfortable. I am absolutely fine with that.”

Municipal bonds, elsewhere derided as unwieldy and unsexy, had long occupied a place of honor at Citi. For years, the municipal securities division, with its teams of underwriters, traders and salespeople, operated separately from other fixed-income products groups, and the division maintained a direct relationship with top Citi executives. Employees rarely left for other jobs.

Many were alumni of Salomon Brothers and Smith Barney, firms that had joined Citi through a series of mergers. The deals gave a powerhouse team even more cash to dominate their market. Traders had liberal access to bank capital and outposts in major cities. By the dawn of the new millennium, Citigroup was the largest financial-services company in the world.

Longtime municipal-securities division head Ward Marsh encouraged his staffers to work as a team, protected the group from wider bank pressures and supported them in taking risks, former employers said. Citi built a thriving business in high-yield municipal bonds.

Marsh embraced technology, and Citi participated in an early form of electronic muni trading. One former trader recalled the time when, at an off-site in the early 2000s, the division head played a recording of Bob Dylan’s “The Times They Are a-Changin’” to encourage employees to welcome innovation. Citi was the only bank to rank among the top three underwriters of muni debt every year from 2000 through 2021, according to LSEG data.

The first big blow came in the wake of the financial crisis with the sale of Smith Barney— Citi’s retail brokerage—which prevented the muni desk from easily selling its bonds to the masses. Postcrisis regulations also made holding bonds more burdensome, cutting into profits. But the crisis created opportunities, too. Low rates left household investors clamoring for yield, and municipalities needed help managing their debt.

Citi stepped up, playing roles in the biggest municipal bankruptcy filings including Jefferson County in 2011, Detroit in 2013 and Puerto Rico in 2017.

“In the restructuring world, there’s only one firm that has the issuer-side experience and scope of work,” said veteran restructuring lawyer Susheel Kirpalani, who represented creditors in all three cases. “They filled a niche that other municipal investment banks haven’t stepped into.”

Indeed, Citi’s advisory role in Puerto Rico has involved so much time on the island that lead banker David Brownstein undertook a side project rescuing local dogs. Brownstein is still advising on the workout of debt from Puerto Rico’s power authority. A spokesperson for the board overseeing the restructuring said the board is “working with its team of financial advisers on a transition to ensure continuity.”

Public officials turned to Citi in good times, too. Year in and year out, muni division staffers endured endless public hearings, burdensome disclosure requirements and changing voter priorities to finance projects ranging from the construction of small-town schools and sewers to the overhaul of LaGuardia Airport’s Terminal B.

Muni bonds can go years without trading. The market’s 36,000 borrowers include everything from property tax-backed highways to risky nursing homes. The ordinary investors who hold the most munis often flee the market at signs of trouble. Traders can profit from those idiosyncrasies, but doing so takes time and ties up capital.

As recently as 2017, it wasn’t unusual for Citi’s balance sheet to hold more than $2 billion in munis, according to people familiar with the matter. For 2011 through 2019, Citi was the muni dealer most frequently used by U.S. institutional investors every year, according to interviews conducted during that period by analytics firm Coalition Greenwich.

But Citi’s muni division started to change beginning in 2018. The bank had set fresh goals on profitability and was facing pressure to boost trading revenues in particular. Among the changes, Citi lumped its muni division in with other fixed-income assets such as corporate securities and mortgage bonds. The following year, the fixed-income group was reshuffled further, breaking up the formerly close-knit team and grouping muni salespeople with other sales staff and bankers with other bankers.

Across the bank, capital became a precious commodity. Traders no longer felt they had the same kind of license to take risks or spend money without prior clearance, according to people familiar with the matter. A wave of departures followed. Marsh retired, and veteran traders and salespeople left for other firms.

Then, the market delivered a series of blows to state and local debt investments just as Fraser was deciding where to cut. When munis first joined the larger fixed-income group in 2018, their increasing revenues helped offset decreases from other products, according to Citi’s annual report. But over the past couple of years, the numbers looked bleaker.

Some of Citi’s own decisions also caused trouble. After a 2018 school shooting in Parkland, Fla., Citigroup took a stance on gun control, issuing a policy to stop providing banking services to retailers who sell guns to anyone under 21. Executives knew it would possibly create trouble in the muni business, but the company pushed ahead anyway.

Texas struck back in 2021, initiating a law against contracting with companies that discriminate against the gun industry. Citi started losing school and road deals in the U.S. state that is adding the most new residents.

Meanwhile, experienced executives continued to leave the muni division. Citi’s rank among underwriters slipped from second in 2021 to sixth in 2023.

The muni trading desk was suffering, too. Bond dealers typically protect against losses from rising rates by using derivatives to make side bets against their portfolios. But the tax exemption on muni-bond interest means those types of derivatives are difficult to craft and generally unavailable for state and local government debt. That made the past two years particularly ugly for Citi’s muni division, even compared with its new fixed-income peers.

Citi shut down its in-house trading desk and offered executives buyouts. The sales team, which had numbered around two dozen in 2018, was half that size by 2023, according to people familiar with the matter.

Muni prices finally got a boost in November and December. But at Citi, the wheels were already in motion. A week and a half before Christmas, the bank’s top banking and markets executives wrote to employees saying that Citi was pulling out of the muni market. “The economics of these activities are no longer viable,” the note said.

Not everyone on Wall Street sees it that way. By early January, 13 former Citi muni bankers had already landed on their feet at Jefferies, a smaller rival.

Companies squeezed from two sides as investments in both electric and combustion engine vehicles erode margins

Just five years ago, Andreas Wolf was struggling to convince investors of his plans to turn the Bavarian automotive supplier Vitesco Technologies into a specialist in parts and systems for electric vehicles.

“Nobody believed in it,” the Vitesco CEO said, underscoring just how late the incumbent automotive industry was to realise that combustion engine cars would soon be relegated to a technology of the past.

“There were thousands of arguments why [the era of electric vehicles] would never come,” Wolf said. “It only changed about two years ago.”

It has been a brutal few years for the German car industry, Europe’s largest, employing about 800,000 people. Companies such as BMW, Mercedes-Benz and Volkswagen are scrambling to ramp up EV sales while a growing number of Chinese start-ups announce electric model launches in Europe.

The transition to battery-powered cars has added to the challenges for Germany’s sprawling network of automotive suppliers, already squeezed by the economic downturn, inflation and rising interest rates.

In the three years leading up to 2023, the number of German tier one suppliers with more than 20 employees fell from just under 700 to roughly 615, with more than 30,000 jobs lost in the same period, according to official statistics.

Meanwhile, Vitesco’s early bet on EVs not only made it an outlier among car suppliers, but an attractive target for rivals. Wolf is set to leave the company this year, ahead of the completion of a €3.8bn takeover by fellow automotive supplier Schaeffler.

Some of Germany’s largest companies in the space, such as Schaeffler and Continental have in recent years warned of more than tens of thousands of job cuts, as they try to ramp up investments in future technologies.

Bosch last week announced 1,200 job losses, while ZF Friedrichshafen, which is largely controlled by the south German town whose name it bears, said it was reviewing its operations and in a worst-case scenario, could cut up to 12,000 roles over the next six years.

Much of the cost pressure that suppliers are currently facing comes from needing to invest in EVs at the same time as maintaining share in the legacy combustion engine market. In 2022, German suppliers spent €16bn on research and development — a record sum, according to a report by the PwC-owned consultancy Strategy&.

Suppliers are “double spending on double platforms — everything is double, except for growth or profit,” said Christian Kames, co-head of Lazard’s financial advisory business for Germany, Switzerland and Austria.

Even Vitesco has maintained a large combustion engine business that drives profitability while its electrification technologies division remains lossmaking. But Wolf said he expected profit margins in the range of 7 to 9 per cent in the next few years.

“In 18 months, we are launching 75 new products — we have to develop all that stuff,” he said, adding that although only 11 per cent of the company’s €9bn in 2022 sales were for EV parts, the equivalent figure was nearly three-quarters when it came to new orders.

Margins for legacy automotive suppliers globally, a segment that German companies dominate, have shrunk by an average of three per cent in the five years to 2022, according to a report by Lazard and consultancy Roland Berger.

German suppliers still hold 25 per cent of global market share, but the figure has slipped by three percentage points since 2019, according to the report by Strategy&, which pointed out that most was lost to Asian rivals.

New car models are no longer marketed on their engine capacity, but by software capabilities — a distinctive technological shift away from a German speciality to a field where the country’s car industry has been notoriously slow.

While the number of car suppliers worldwide have risen, thanks to growth in China and the US, Germany’s network of suppliers have continued to lose market share to Chinese rivals.

“Who is the winner and who is the loser is changing,” said Kames, pointing out that more modern suppliers of batteries, semiconductors and automotive software had significantly higher margins than legacy players with an increasing number of them based in Asia.

While most German suppliers have significant businesses in China, they mainly supply the businesses of VW, Mercedes-Benz and BMW. Their customer base has not grown far beyond the German carmakers as Chinese brands such as BYD have grown alongside their own local suppliers that specialise in batteries and software.

For Schaeffler, its merger with Vitesco will offer synergies of €600mn a year, allowing it to invest in both battery-run and combustion engine cars.

The combined group would be able to serve the rapidly growing EV market while providing spare parts for the hundreds of millions of combustion engine cars that are set to remain on roads for decades to come, according to its chief executive Klaus Rosenfeld.

Wolf said that while Vitesco was wrapping up a transformation that started five years ago when “we saw that there was a high likelihood that the combustion engine would die,” many of its German rivals were just embarking on a journey across choppy waters.

“It’s scary and it’s scary for our customers too,” Wolf said. “Are they transitioning fast enough towards electrification, or are they still somehow emotionally bound to those nice revving sounds of the combustion engines?”

Companies rush to bond market in record $150bn debt splurge

Investment-grade companies tap dollar-denominated debt market at fastest year-to-date pace to lock in lower yields

US corporate bond markets are “on fire” as companies have sold a record $150bn of debt since the start of this month, the busiest opening to the year for more than three decades.

Investment-grade groups have issued $153bn worth of bonds this month, according to data from London Stock Exchange Group, the highest year-to-date figure for dollar-denominated debt in records going back to 1990.

Borrowers are rushing to lock in lower interest costs, while investors are keen to buy new bonds before policymakers start cutting US interest rates later this year.

“The market is just on fire,” said Richard Zogheb, head of global debt capital markets at Citi.

Investors “want to lock in longer-term yields now”, Zogheb said.

Corporate borrowing costs have fallen sharply since financial markets rallied strongly late last year, after the US Federal Reserve signalled that it had completed its campaign of interest rate rises.

Investment-grade yields sit at 5.34 per cent — higher than their levels at the end of last year, but well below their mid-November levels of more than 6 per cent.

The “spread” — or premium — paid by borrowers to issue bonds over the cost of US Treasury yields has shrunk to just 1.01 percentage points, according to Ice BofA index data. This is the lowest level in two years.

The first month of the year is typically busy for new issuance, but bankers and strategists said this month’s particularly strong burst of activity reflected companies rushing to take advantage of that fall in yields.

“It’s a lot cheaper for [issuers] to borrow now than it was just a few months ago,” said Matt Brill, senior portfolio manager at Invesco Fixed Income. “So in that regard, they’re thinking ‘hey, this is a good time to go ahead and do it’.”

More than two-thirds of this month’s borrowing has been by banks and other companies classified as financials by LSEG.

Zogheb pointed to concerns that banks’ regulatory capital requirements could increase. But, he said, “the biggest factor” driving issuance was “just pent-up need to issue paper”. Many companies postponed debt-raising plans last year after the collapse of Silicon Valley Bank.

Banks that have issued bonds since the start of 2024 include JPMorgan, Wells Fargo and Morgan Stanley, raising $8.5bn, $8bn and $6.75bn respectively.

Non-financial companies tapping lenders include energy group Energy Transfer with a $3bn deal, natural gas producer EQT with a $750mn deal, telecoms company T-Mobile with a $3bn transaction and Canada’s Liberty Utilities with an $850mn offering.

Borrowers may be trying to get ahead of any economic data that could threaten the positive mood, some of those involved in the market said.

“Everybody’s bought into the ‘soft landing’ narrative at this point,” said Maureen O’Connor, global head of Wells Fargo’s high-grade debt syndicate. “It just feels priced for perfection . . . And so I think there are some nerves that there are near-term catalysts for volatility.”

Many finance directors believe it is better to issue debt now rather than risk waiting for further falls in case the market turns.

“No treasurer is going to get fired because he left 10 or 15 basis points on the table,” said one senior banker. “Some treasurer is going to get fired for not financing and then seeing the market shut down for a couple of months.”

Some analysts are arguing that a new era of capital returns to shareholders has dawned

When the Financial Times interviewed James Gorman just before Christmas, the then-Morgan Stanley chief executive was clear: the past decade had produced huge growth for Wall Street groups like his, while European competitors had been left behind. But, in an apparent gesture of festive generosity, he sounded a bullish note for the likes of UBS, Deutsche Bank and Barclays. “I don’t think [over] the next decade the gap will be as large,” he said. “I think there’s opportunities for the Europeans.”

There is no obvious fundamental driver for any such re-rating: the European economy is downbeat; net interest margins have peaked, with both the European Central Bank and the Bank of England widely expected to begin cutting interest rates at some point in 2024; and bad debts are likely to increase, as the delayed impact of higher rates over the past year or two filters through to corporate and individual borrowers alike. 

And yet there may be a valid technical trigger for higher European bank valuations: some analysts are arguing that a new era of capital returns to shareholders has dawned. After a decade during which US banks’ payout ratios — share buybacks and dividends as a percentage of earnings — trounced those of European rivals, the numbers are starting to look very similar, Autonomous Research points out. Since 2021, the ratio distributed by European banks has surpassed the historic norm of about 40 per cent and could now settle at closer to 80 per cent, it says.

Stronger earnings, combined with the willingness of European regulators to authorise a reduction in bank share counts for the first time ever helped the combined tally of dividends and buybacks by European banks to jump to €121bn for 2023 from €90bn in 2021. 

Future dividends are expected to remain broadly in line with the historic average, but overall payouts will be substantially topped up by share buybacks — long a US corporate tradition, thanks to generous tax breaks. 

For multiple reasons, buybacks have traditionally been less popular in European banking: investors in Europe have liked income stocks, so have preferred dividends; and since 2008 European regulators have been focused on the steady build-up of capital levels and have thus been unsympathetic to anything that would undermine that trend.

Over the past year, though, supervisors have become more receptive to an easing of equity demands. They were heartened by the events of early 2023, when eurozone and UK banks proved resilient in the face of the pressures that toppled regional lenders in the US and Credit Suisse in Switzerland. With existing capital levels deemed sufficient, mass buybacks have become feasible.

At the same time low share prices in many European sectors, but particularly in banking, have made buybacks a much more attractive option for banks themselves — especially given the absence of obvious opportunities to invest and grow instead.

Analysts at Berenberg point out that total returns from shareholder payouts could reach 14-19 per cent a year in 2024-2025, even before capital gains. Last year the sector clocked up a total shareholder return of 28 per cent.

Among those banks to watch this year will be UBS, where payouts should jump thanks to the vast $29bn “negative goodwill” gain made from its rescue of Credit Suisse on the cheap. Stockholm-based activist Cevian Capital recently made a €1.2bn investment in UBS in the hope that the share price will double in three to five years. UniCredit, a standout performer last year in terms of its share price recovery, is set to continue its efficiency drive to maximise returns. Analysts suggest the likes of ING, HSBC, Lloyds and the big Irish banks could also make outsized payouts.

For stock re-rating momentum to gather, though, the sector needs to attract more than a quirky Swedish hedge fund, and win over the mainstream US asset managers who have been put off by years of European bank underperformance and policymaker surprises.

We are still only a few weeks into 2024. But European banks may be tempted to think Gorman’s December prophecy is already coming true. Since January 1, all the European banks he name-checked have outperformed Morgan Stanley, not least because the group he still chairs reported disappointing fourth-quarter results. If they can maintain decent earnings and also deliver on analysts’ dividend and buyback expectations, they might just bear out Gorman’s faith.

RXR and Ares Management are betting on a thaw in the commercial real estate market

One of New York’s biggest property developers is launching a $1bn fund to invest in the city’s distressed office buildings, potentially heralding a new phase in the commercial real estate crisis.

Scott Rechler, the chief executive of RXR, one of New York’s largest office landlords, is teaming up with Ares Management, an alternative investment manager that has $49bn in real estate assets.

The partners are convinced that a prolonged paralysis in an office market frozen by uncertainty about interest rates and the threat of remote working is now breaking, with many players ready to accept losses to unload or restructure assets.

“We have clarity as to where rates are, we have clarity about the future of offices, and which buildings are going to be competitive, and we have a capitulation, I think, to a recognition that values aren’t just bouncing back like they did in ‘08,” said Rechler. “There’s a reset and that this is more permanent.”

Leasing activity for US offices picked up in the fourth quarter of 2023, with several large deals announced, also contributing to expectations that activity was resuming in the market after an extended pause.

RXR and Ares are planning to target a sliver of office buildings around the city that they believe are still appealing but that may need fresh capital to remain competitive or a restructuring of their debts to reflect the new realities of higher interest rates and slower — or non-existent — rent growth.

In what many are now calling a trifurcated market, those buildings rank below the newest and most modern towers, which are still fetching record rents, but above a growing list of older offices that are fast becoming obsolete.

“Where we’re seeing the best opportunity is to buy the upper quartile of that middle, class-A part of the market,” Rechler said, arguing that many of those properties had been shunned by lenders and investors desperate to exit the sector altogether. “If you’re able to be almost a stockpicker, you can buy real value at these prices.”

Craig Snyder, an Ares partner, said that “the broad, indiscriminate flight of institutional capital from the office sector has resulted in many high-quality properties trading down to historic lows,” and that the partnership was “hoping to identify long-term winners”.

Other developers have also been hatching plans to buy distressed office buildings and related debt but have, until now, been frustrated by a lack of willing sellers.

Identifying good buildings is an unproven art. One essential is their proximity to public transit. The partners are also measuring mobile phone data, retail activity and other indicators to try to sift the good from the bad.

Rechler is the scion of a Long Island real estate family. He was proved prescient during the 2008 financial crisis, selling his company in 2007 and then returning to the market in 2009 to buy about $4.5bn in offices over the next two years. Those towers rebounded quickly after the crisis passed, and then soared in value.

This time is different, he believes: it is not a question of the wider financial system seizing up or a lack of liquidity. Rather, the offices themselves are the problem because remote working has reduced demand for space. The sharp rise in interest rates that began in 2022 compounded the challenge for their owners, who needed to refinance loans they took at historically low rates.

Some $117bn in commercial mortgages tied to US offices will come due this year, according to data from the Mortgage Bankers Association, part of a wall of looming maturities that is contributing to expectations of distressed sales. A broader measure by Trepp forecasts $2.2tn in commercial real estate debt maturing over the next three years. 

Banks have been keen to shed their exposure to commercial real estate, in part under pressure from regulators after several regional lenders collapsed last year. Many investors have also shied away.

As a result, office owners have been left with few options to refinance loans coming due or find new capital to pay for improvements necessary to lease their properties. Some — including RXR — have responded by simply handing the keys back to lenders for buildings whose debts may now exceed their value.

Ares has shown a willingness to step in where lenders have pulled back. Last year it bought a $3.5bn loan portfolio from PacWest Bancorp, which was then desperate to raise liquidity.

Together with RXR, it has seeded the new fund with $500mn. The partners are hoping to raise at least an additional $500mn. 

“We bring capital and operational expertise and an understanding of what’s happening in the leasing market to know where tenants are going,” said Rechler, noting that they were already in negotiations to buy $1bn in office loans from different banks at varying discounts.

Those transactions were playing out behind the scenes. “No one really wants to expose either that they have loans they have concerns about or buildings that can’t fund [improvements] because then tenants stop coming to look at the buildings,” said Rechler. “So this is very quiet.”