Closing Stock Market SummaryToday's trade started on an upbeat note following yesterday's pleasing price action. Initially, the main indices all logged decent gains paced by the Nasdaq thanks to relative strength from chipmakers and mega cap stocks.
Early momentum dissipated, though, and the main indices slowly declined, hitting their session lows around midday. The downturn was attributed to renewed selling pressure in the banking sector, indicating that concerns about additional fallout remain in play for investors. The SPDR Regional Bank ETF (KRE) fell 2.0% and the SPDR Bank ETF (KBE) lost 1.5% today.
Unsurprisingly, the S&P 500 financial sector (-0.3%) was the worst performer today. It was the only sector to close with a loss, partially weighed down by the recently embattled First Republic Bank (FRC 13.69, -0.57, -4.0%). Charles Schwab (SCHW 52.47, -2.74, -5.0%) was another top laggard for the sector after being downgraded to Equal Weight from Overweight at Morgan Stanley.
Following the midday dip, the main indices bounced and closed near their best levels of the day. The S&P 500 was able to extend its position above its 50-day moving average (4,017). Fortunately, buying interest in chipmakers and mega cap stocks remained fairly robust. The PHLX Semiconductor Index rose 1.6% and the Vanguard Mega Cap Growth ETF (MGK) rose 0.8%.
The ten remaining S&P 500 sector, aside from financials, logged gains ranging from 0.2% (industrials) to 1.2% (real estate). The influential information technology (+1.1%) and consumer discretionary (+0.9%) sectors were among the top performers.
The 2-yr note yield rose four basis points to 4.11% and the 10-yr note yield fell two basis points to 3.55%.
The U.S. Dollar Index fell 0.5% to 102.14. On a currency related note, China and Brazil agreed to trade in their own currencies instead of the U.S. dollar.
As a reminder, investors receive the market-moving February Personal Income and Spending report tomorrow at 8:30 a.m. ET, which will include the PCE Price Index (the Fed's preferred inflation gauge).
- Nasdaq Composite: +14.8% YTD
- S&P 500: +5.5% YTD
- S&P Midcap 400: +1.6% YTD
- Russell 2000: +0.4% YTD
- Dow Jones Industrial Average: -0.9% YTD
Reviewing today's economic data:
- Initial jobless claims for the week ending March 25 increased by 7,000 to 198,000 (consensus 196,000) while continuing jobless claims for the week ending March 18 increased by 4,000 to 1.689 million from last week's revised level of 1.685 million (from 1.694 million).
- The key takeaway from the report is that claims remain at a stable level near the 200,000 mark, suggesting little recent stress in the labor market.
- The third estimate for fourth quarter GDP showed a slight downward revision to 2.6% (consensus 2.7%) from 2.7% reported in the second estimate. The lowered estimate was owed to downward revisions to exports and consumer spending. The GDP Price Deflator was left unrevised at 3.9% (consensus 3.9%). The personal consumption expenditures index was left unrevised at 3.7% while the core-PCE Price Index was revised up to 4.4% from 4.3% in the second estimate.
- The key takeaway from the report is that it continues pointing to above-potential growth and inflation that remains above target, which the Fed could use as an argument for additional rate hikes.
- The weekly EIA Natural Gas Inventories showed a draw of 47 bcf versus a draw of 72 bcf last week.
Looking ahead to Friday, market participants will receive the following economic data:
- 8:30 ET: February Personal Income (consensus 0.3%; prior 0.6%), Personal Spending (consensus 0.3%; prior 1.8%), PCE Prices (consensus 0.4%; prior 0.6%), and Core PCE Prices (consensus 0.4%; prior 0.6%)
- 9:45 ET: March Chicago PMI (consensus 42.5; prior 43.6)
- 10:00 ET: Final March University of Michigan Consumer Sentiment (consensus 63.4; prior 63.4)
Private Equity Firms’ Secret Weapon for Big Software Buyouts
When Thoma Bravo was drawing up the financing of its $8 billion acquisition of Coupa Software last year, the private equity giant didn’t turn to a bank, and it didn’t get a traditional loan. Instead, it tapped a group of non-bank lenders including Sixth Street for a relatively obscure type of financing—one that has been making its way into more and more multibillion dollar deals.
That deal, the 10th-biggest buyout of last year, according to Dealogic, was financed not based on profits, but on annual recurring revenue. Recurring revenue loans have been used for smaller software buyouts for years, but are being used more and more to fund some of the biggest technology takeovers, several private equity dealmakers told The Information.
Private equity firms are increasingly tapping non-bank lenders like investment firms for loans, and ARR loans are more of an option with those firms since they’re less regulated and risk averse than traditional banks.
The option of using ARR loans to fund bigger technology buyouts is key for private equity firms, which have been mostly unable to get loans from traditional banks for months. The banking industry has all but stopped funding private equity buyouts because interest rates have risen and the banks have struggled to offload the existing debt on their balance sheets.
At least 10 notable private equity deals were financed with ARR loans last year, compared to six in 2021, none in 2020 and two in 2019, according to data from LCD, a division of Pitchbook that tracks notable-–but not all—of these deals because the data is elusive.
Among the deals done with ARR loans last year were Thoma Bravo’s $10.4 billion acquisition of Anaplan, Hellman & Friedman and Permira’s $10.2 billion acquisition of Zendesk, and Vista Equity’s $8.4 billion acquisition of Avalara.
“There’s more money pouring into software businesses from private equity and venture capital,” said Justin May, a managing director at investment bank Lincoln International who advises private equity firms about deal financing. He said investors are also looking for innovative ways to finance the deals as appetite for them grows.
In the back half of last year, the amount of bank-led leveraged buyout loans fell 80% year-over-year to $13.2 billion in the U.S., according to Pitchbook. Non-bank direct lenders—including investment firms and the credit arms of private equity firms—have picked up much of that slack.
To get a sense of how easily a company should be able to pay off its debt, lenders look at its leverage ratio, which is typically calculated by dividing a company’s net debt by its earnings before interest depreciation and amortization. If this debt-to-EBITDA ratio falls outside of a generally accepted range, warning bells go off.
With ARR loans, the leverage ratio is calculated by dividing net debt by annual recurring revenue rather than by EBITDA. Doing so enables lenders to fund buyouts of unprofitable companies, but because of their higher risk profiles, recurring revenue loans tend to have tighter documentation protections and covenants. They’re also more expensive. ARR loans typically carry slightly higher interest rates than traditional loans—for example, if a traditional loan had an interest rate of 7% over the secured overnight financing rate, an ARR loan might have a 7.5% rate, May said.
Many of the ARR loans also have a provision that requires the loan to flip to the more traditional debt-to-EBITDA ratio after a set number of years. If companies are unable to turn a profit by the agreed upon date, they might default on the loan.
This type of provision has become more common within the past six months to a year, according to Allison Liff, Head of U.S. Leveraged Finance at the law firm Freshfields Bruckhaus Deringer.
PE’s Eager Appetite for Software
The private capital industry is sitting on a record amount of dry powder, and both private equity firms and direct lenders have been directing much of it toward software deals. About 30% of private equity buyouts last year were within the technology sector, and 88% of those tech buyouts were in software, according to Bain.
“The predictable nature of [software] revenue and therefore the cash flow of those businesses make software a very exciting and stable industry to underwrite, particularly in uncertain economic times,” said Vista Credit Partners President David Flannery.
Several private equity dealmakers said depressed stock prices for unprofitable public companies have created an opportunity to scoop up growth-oriented firms with profitability potential at what they perceive as a discount.
“The valuation correction has been much more severe for these unprofitable companies versus profitable ones, which has attracted some more private equity buyers who have the expertise to help transition these companies to profitable growth,” said Thoma Bravo’s head of credit Oliver Thym.
Of course, not all recurring revenue loans are going toward multi-billion dollar buyouts of publicly traded companies. As fundraising becomes more difficult, founders of privately-owned software companies in Silicon Valley are increasingly interested in recurring revenue loans, too, as a way to put cash on their balance sheets, Vista’s Flannery said.
But in an environment of higher interest rates, earlier stage companies that aren’t able to turn a profit are more likely to default on recurring revenue loans starting later this year, said Bill Cox, Global Head of Corporate, Financial and Government Ratings at credit rating agency KBRA. Cox contrasted these companies with larger companies that might take out a recurring revenue loan to reinvest their earnings into sales and marketing initiatives. That second group of companies could more easily “turn off the marketing and sales spigot” and refocus that money elsewhere, Cox said.
“I don't think this is going to be a situation where folks say, “We shouldn't have done that,’” Cox said. “It’s more likely to be a case where economic conditions don't support as many of these companies being able to be invested in this way—at least for the time being.”
Vitol profits soar to record $15bn on back of energy crisis
Commodity trader’s profits in 2022 matched previous six years combined as turmoil swept through markets
Vitol, the world’s largest independent commodity trader, has emerged as one of the biggest winners of the energy crisis, reporting record profits far in excess of its rivals.
The privately owned group, whose top executives are largely based in London, made almost $15bn of net profit in 2022, according to people familiar with the matter.
The bumper profits matched the trading house’s combined earnings for the prior six years and were larger than some of the world’s biggest oil producers, including Italy’s Eni, illustrating how traders have benefited from the extreme volatility in energy markets triggered by Russia’s invasion of Ukraine.
The blockbuster year will mean a bumper payout for Vitol’s shareholders — approximately 450 senior partners spread across the trading hubs in London, Geneva, Singapore and Houston.
Vitol’s rival commodity houses, including Trafigura, Glencore and Mercuria, have also reported record results as the industry profited from the wild price surges and dislocations unleashed by the war. But the scale of Vitol’s returns has far surpassed its competitors.
The jump in Vitol’s profits was bolstered by windfalls in power markets, power generation, refining and the trading of liquefied natural gas. The company’s turnover nearly doubled last year to $505bn, it said last week.
In the UK, Vitol owns and operates five power plants through its partially owned subsidiary VPI, making it a bigger power generator than Centrica. VPI also has three further power facilities under construction in the region — two in the UK and one in Ireland.
The profits made by energy companies have attracted the ire of politicians in several countries, including the UK, which increased its energy profit levy this year. While commodity trading houses have escaped similar treatment, many analysts believe they could be next in line.
Vitol is a Dutch-registered company, with large offices in Geneva, London, Houston and Singapore.
The group is the world’s largest independent oil trader, though it traded slightly less crude last year than in 2021 after curbing the volumes of Russian oil it handled. Vitol stopped trading Russian crude in June.
Chief executive Russell Hardy told the FT Commodities Global Summit last week that a lot of the profits were being re-invested in capex projects to strengthen energy supply, such as upgrading the efficiency of its power stations.
The year ahead is going to be “very different” to last year, in terms of profitability and margins, Hardy said, adding that “it’s a much more conservative market going forward, so our strategy and approach has to reflect that”.
Chief financial officer Jeff Dellapina told the summit that 2022 was a “cyclical high” in terms of profit.
“Last year, performance was strong,” he said. “Most things were working well in terms of our integrated investments across refining, production, power generation, so this was quite a positive year.”
In the past, Vitol has usually returned the majority of its profits to its shareholders through buybacks over time, though there is no formula for how to do so.
Vitol’s LNG trading operations also experienced a big increase in revenue, as the company shipped LNG to Europe to help replace lost Russian gas. The value of LNG cargoes soared last year, and Vitol’s total LNG shipments rose slightly to 17.6mn tonnes of oil equivalent.
Vitol declined to comment.
Bertelsmann chief puts goal of national TV mergers on ice
Thomas Rabe says stance of European regulators means it ‘doesn’t make sense’ to pursue big broadcast tie-ups
The head of Europe’s largest media company has admitted temporary defeat in his goal to create national TV giants capable of challenging global streaming services after the failure of two key proposed tie-ups.
Thomas Rabe, chief executive of Bertelsmann, said the decision by regulators in France and the Netherlands to effectively block big television deals in their countries had forced the group to put the idea on ice.
“It’s very clear [that in] the next two to three years, it doesn’t make sense to come up with large-scale merger plans in TV, because the position which the authorities took in France and the Netherlands is likely to be the same in other countries,” Rabe told the Financial Times.
The boss of Bertelsmann, whose brands include European broadcast network RTL, publisher Penguin Random House and music label BMG, insisted the strategy of creating “national media champions” that could take on the likes of Netflix remained unchanged.
But Rabe said the company would now pursue what he called “alternative paths to scale” such as advertising and distribution partnerships.
“These will be smaller steps to consolidate and create scale,” he said. “But, frankly, [they are] the only steps which are currently available, given the position of the competition authorities.”
Rabe has run Bertelsmann since 2012 and was credited with reshaping the company and driving strong revenues and profits at the German family-owned media empire.
But he has suffered a series of setbacks in recent months that have struck a blow to his core strategy.
In October, Bertelsmann abandoned a plan for its French channel M6 to merge with Bouygues-owned TF1 after regulators raised far-reaching objections about the impact on the advertising market and imposed conditions that the companies said would have made the deal unworkable.
In January, the Dutch competition authority blocked a proposed merger between RTL Nederland and Talpa Network, citing similar concerns about the power it would give the new combined entity over the Dutch advertising market.
Bertelsmann was dealt a further blow in the US last year when a New York judge blocked Penguin Random House from proceeding with a proposed $2.2bn acquisition of Simon & Schuster after the US justice department argued the merger would create a “publishing behemoth” that would harm both authors and readers.
Rabe was critical of European regulators and their refusal to change the definition of “relevant market”, used to assess competition risks, to include online advertising as well as television — a move that would have reduced the size of the market share of the combined broadcasters.
He said they had failed to sufficiently take into account the changing media and advertising markets, adding: “That’s a big missed opportunity.”
His comments came as Bertelsmann reported record revenues of more than €20bn in 2022, but the group’s net profits more than halved to €1bn — down from €2.3bn the previous year.
Results at Bertelsmann’s publicly listed RTL group, which is on the front line in the battle against streaming giants, painted a mixed picture. It recorded growth in the number of paying subscribers and revenues from its streaming business, but a 6.5 per cent fall in operating earnings before interest, taxes, depreciation and amortisation — a fall driven partly by declining advertising revenues.
Gapping down
In reaction to earnings/guidance:
- SMTC -16.4%, ANGO -14.3%, CNXC -6% (also combining with Webhelp), RH -5.5%, AVDL -4.9%, PL -2.3% (also acquiring the business of Holding Sinergise), VRNT -2%, ROG -1.6% (guidance)
Other news:
- AVDL -4.9% (enters royalty agreement with RTW Investments; prices offering of 10,000,001 ADSs at $8.50 per ADS)
- VKTX -3.8% (prices offering of 17.242 mln shares of common stock at $14.50 per share)
- FC -3.4% (approves $50 mln for repurchases)
- RNA -3% (provides regulatory update on AOC 1001 for myotonic dystrophy type 1 and plans to present top-line data from phase 1/2 MARINA trial at AAN Annual Meeting)
- STEM -1.6% (prices $200 mln of 4.25% Green Convertible Senior Notes due 2030)
- BTU -1.1% (confirms fire at Shoal Creek Mine)
- PRQR -0.8% (stock offering by selling shareholders)
Gapping up
In reaction to earnings/guidance:
- CXM +16.8%, EVGO +7.5%, NEOG +5.6%, ATAT +1.3%, MANU +1.1%
Other news:
- VIGL +6.8% (FDA has lifted the partial clinical hold on VGL101 - remains on track to report interim data from Phase 2 trial in the second half of 2023)
- TREE +6.2% (committed to a workforce reduction plan that is intended to reduce operating costs; the reduction plan includes the elimination of approximately 13% of the company's current workforce)
- AVXL +5.6% (reports preliminary 48-week open-label extension Parkinson's disease dementia ANAVEX2-73-PDD-EP-001 Phase 2 study data)
- STIX +4.8% (authorizes $5 mln additional repurchases)
- LICY +3.2% (Reports Operational and Financial Results for Two-Month Period Ended December 31)
- GPRE +3.1% (Chairman retiring)
- PACW +2.7% (joining S&P SmallCap 600)
- MPW +2.7% (agrees to sell Healthscope portfolio)
- WW +2.1% (Millennium Management discloses 5.1% stake)
- MSGE +2% (Board approves spin-off of traditional live entertainment business; Expected to be Completed April 20)
- WWW +1.5% (working to improve operating performance)
- SSYS +1.5% (confirms receipt of revised unsolicited acquisition proposal from Nano Dimension (NNDM) for $19.55 per share in cash)
- VLO +1.1% (awarded $906 mln contract)
- CR +1% (joining S&P MidCap 400)
- OMGA +1% (announced a clinical supply agreement with Roche (RHHBY) to evaluate OTX-2002)
Analyst comments:
- GMED +3% (upgraded to Buy from Hold at Canaccord Genuity)
- EQNR +1.8% (upgraded to Buy from Hold at Deutsche Bank)
- NBIX +1.5% (upgraded to Buy from Hold at Canaccord Genuity)
- AMT +1.1% (upgraded to Outperform from Market Perform at MoffettNathanson)
- CCI +0.8% (upgraded to Outperform from Market Perform at MoffettNathanson)
Bankers found guilty of helping to hide Putin’s millions by Swiss court
Employees of Gazprombank’s subsidiary failed to conduct due diligence on accounts of Kremlin-connected figure
Four senior bankers have been found guilty by a Swiss court of helping to launder tens of millions of francs linked personally to president Vladimir Putin through the country’s banking system.
The four — three Russians and one Swiss national — were employees of Gazprombank’s Swiss subsidiary, and include its chief executive.
A Zurich district court ruled on Thursday that they were guilty of financial negligence in failing to perform due diligence on highly suspicious transactions run through the bank.
Conditional criminal fines of between SFr540,000 and SFr48,000 were imposed, which do not have to be paid if parole conditions are kept over the next two years. Prosecutors had sought custodial sentences.
In their case, prosecutors detailed how accounts had been opened at Gazprombank on behalf of Sergei Roldugin, a cellist and the godfather to Putin’s daughter, without questions being raised about how a musician had amassed vast wealth.
Roldugin deposited SFr50mn in Gazprombank’s Swiss accounts, and promised to funnel at least SFr10mn more annually into them through a complex web of shell companies and offshore trusts.
Judge Sebastian Aeppli said it was “beyond doubt” that the money did not belong to Roldugin.
The funds originally flowed from Bank Rossiya, which Swiss prosecutors said was known to be the house bank of the Russian kleptocracy.
“The chair of the board [Yuri Kovalchuk] is considered Putin’s treasurer,” their indictment noted.
The Gazprombank bankers declared that Roldugin was not a “politically exposed person” — a designation that would have triggered additional internal and regulatory scrutiny — and performed a nugatory investigation to back up such assertions, the prosecution said.
The official internal due diligence file on Roldugin contained only a printout of the website for the Mariinsky theatre in St Petersburg — where Roldugin was a conductor — and a single negative search result on Worldcheck, a compliance database.
“It is notorious that Russian President Putin officially has an income of just over SFr100,000 and is not wealthy, but in fact has enormous assets managed by people close to him,” prosectors wrote in their indictment. “Roldugin . . . [was] a straw man.”
The four bankers may opt to appeal against the verdict to the cantonal appellate court. A further appeal would then be possible on the federal level.
The case was triggered as a result of the Panama Papers leak in 2016, in which a huge cache of documents was disclosed to international media organisations from the Panamanian law firm Mossack Fonseca, the world’s fourth-largest offshore services provider.
Germany’s Der Spiegel magazine and the UK’s Guardian newspaper homed on on accounts they found in the documents under Roldugin’s name.
Shortly afterwards, the Swiss market regulator Finma began an investigation of its own into Gazprombank’s role in the Swiss part of the Roldugin network.
In 2018 the regulator concluded that the bank was “in serious breach of its anti-money laundering due diligence requirements in the period from 2006 to 2016”, and imposed strict penalties.
It also lodged a complaint with cantonal prosecutors in Zurich, triggering the formal criminal investigation.