WSJ : Yellen Doubts Biden Administration Can Avoid Default Without Congress

Yellen Doubts Biden Administration Can Avoid Default Without Congress
Treasury secretary says invoking 14th Amendment would be ‘legally questionable’

NIIGATA, Japan—Treasury Secretary Janet Yellen said it was “legally questionable” whether the Biden administration could rely on the 14th Amendment to effectively ignore the debt limit, pouring cold water on a method favored by some Democrats to avoid a default.

The 14th Amendment to the U.S. Constitution states that American debt authorized by law “shall not be questioned.” President Biden said this week he was considering invoking the amendment as a way to keep paying the nation’s bills if Congress doesn’t raise the debt limit. But he added the issue would be subject to litigation and may not be a solution in the current standoff.

At a news conference in Niigata, Japan, where finance ministers of the Group of Seven advanced democracies are meeting this week, Ms. Yellen said she doubted whether the 14th Amendment was an effective solution.

“What I would say, it’s legally questionable whether or not that’s a viable strategy,” Ms. Yellen said.

Republicans and Democrats in Washington are locked in a standoff over raising the nation’s $31.4 trillion borrowing limit. Republicans, led by House Speaker Kevin McCarthy, are demanding cuts in federal spending in exchange for raising the debt limit. Democrats are pushing for an increase in the debt limit without policy conditions.

Ms. Yellen has warned that the U.S. could fail to pay its bills on time as soon as June 1 if Congress doesn’t authorize additional borrowing. The political impasse and looming deadline have prompted Biden administration officials to explore unilateral options that could stave off the first-ever U.S. default. A failure by the U.S. to pay its bills on time could have broad financial and economic consequences.

Ms. Yellen said she viewed all potential alternatives—which also include prioritizing interest payments on the debt or minting a $1 trillion coin—as risky.

“I’m often asked questions—if the debt ceiling is not raised, what would you do?” Ms. Yellen said Thursday. “And I don’t want to go there and discuss alternatives. There are choices to be made, if we got into that situation. But as you think about each possible thing that we could do, the answer is there is no good alternative that will save us from catastrophe.”

Ms. Yellen reiterated that she would support eliminating or significantly altering the current system under which Congress must authorize increases in the debt limit. She said her view was personal and wasn’t on behalf of the Biden administration. Mr. Biden has said he doesn’t support eliminating the debt limit.

One way to change the process, Ms. Yellen said, would be for the president to inform Congress that the debt limit had been raised—then allowing Congress to block the decision if it wished.

Of the current system, she said: “I don’t think that’s any way to run the government and so, there are a variety of alternatives and my own preference would be not to go through this every couple of years.”

Ms. Yellen is expected to meet next week with the Bank Policy Institute, whose board includes major bankers. The debt limit will be among the topics discussed.

FT : Schroders hits out at Silver Lake’s €2.6bn German tech deal

Schroders hits out at Silver Lake’s €2.6bn German tech deal
Top investor cites conflict of interest as US private equity firms compete for Software AG

The largest outside shareholder in Germany’s Software AG said a planned €2.6bn takeover offer by US private equity firm Silver Lake “materially undervalues the company” and criticised the technology group’s handling of the sales process.

London-based Schroders, which owns 8 per cent of Germany’s second-biggest provider of corporate software after SAP, said Software AG’s apparent unwillingness to engage with other potential bidders could raise conflict of interest issues.

In recent weeks the German group has been at the centre of competing from Silver Lake and rival private equity firm Bain Capital via its portfolio company, US-based Rocket Software.

Software AG’s board has recommended Silver Lake’s offer, at €32 per share, despite Bain’s bid of up to €36 per share, saying it offers more certainty than the latter offer. Both are cash bids.

“This offer does not represent a superior offer and therefore Software AG’s management board and the independent takeover committee of the supervisory board are not in a position to engage,” Software AG said on Tuesday about Rocket Software’s offer.

Schroders said in a statement that while competing bids for the business validate the long-term investment opportunity, “we are surprised that the takeover committee appears unwilling to engage with potentially higher offers from other interested parties.”

The statement added: “It could be seen as raising potential questions regarding conflicts of interest and whether appropriate fiduciary process is being followed to equally protect the interests of minority shareholders.”

Shares of Software AG traded above Silver Lake’s offer price at around €34 per share on Thursday, a sign that investors anticipate an agreement will ultimately be reached at a higher price.

The company’s executives will hear directly from its shareholders at its annual meeting is next Wednesday.

The competition for Software AG comes as private equity firms are under pressure to deploy the large funds that they raised over the past few years and are having to navigate a competitive landscape amid a scarcity of deals.

Silver Lake first backed Darmstadt, Germany-based Software AG in 2021 via a €344mn investment. As part of the deal, two Silver Lake representatives joined the Software AG board, including Christian Lucas, Silver Lake’s co-head of Europe, the Middle East and Africa, becoming the technology company’s chair.

Software AG announced last month that it had entered into a deal with Silver Lake to be taken private at a price of €30 per share in cash.

The company also said that its largest shareholder, the Software AG Foundation, had agreed to sell a quarter of the company’s stock to Silver Lake.

Software AG Foundation was established in the 1990s by Peter Schnell, the company’s co-founder, and has held just over 30 per cent of the shares.

Combined with Silver Lake’s own share purchases, the private equity firm has now secured a more than 30 per cent stake in the company.

In early May, Silver Lake raised its offer to €32 per share after Software AG said it received a competing offer. Silver Lake’s latest offer values the company’s equity at about €2.4bn; Software AG has about net debt of €230mn.

Silver Lake’s improved bid was followed up by Bain’s Rocket Software announcing publicly its own revised offer of €34 per share, rising to €36 per share if Silver Lake and the Software AG Foundation agree to support the deal by selling their holdings.

Software AG has said that Silver Lake’s representatives recused themselves and an independent takeover committee was formed to assess the deal.

The company, which had €958.2mn in sales last year, with an operating profit of €178.5mn, has said that it prefers Silver Lake’s offer because of the certainty it offers on financing and the fact it knew the private equity group well.

Software AG has held conversations with Bain in recent weeks but does not see the synergies to be gained from a merger between Rocket Software and its own business, a person familiar with the matter said.

Bain has also been buying up shares, amassing around a 10 per cent stake in the company.

FT : The City needs to embrace risk

The City needs to embrace risk
Proposals to overhaul listings rules are step in the right direction but much more work needs to be done

It seems the City of London has developed a new passion — commentating on its own demise. The challenges the UK faces are significant and important. The long-term wealth creation capacity of the country is at stake. But the arguments over those challenges have been well rehearsed to the point of becoming cliched.

The Financial Conduct Authority should be applauded for joining the movement for change with proposals for a regulatory overhaul last week. Reforming the listings regime and simplifying related party transactions will make London an easier place to do business.

As importantly, the FCA‘s move recognises that we cannot aspire to a risk-free market in which there are no participants. Understanding the need to take risk to achieve return is a fundamental tenet on which the City was built.

“It’s not enough” has been a familiar refrain in the past few days. Nobody says it is. But it is part of a set of wholesale changes that are now moving swiftly in the right direction. A series of government-sponsored reviews led by Ron Kalifa on fintech, Lord Jonathan Hill on listings and Mark Austin on secondary capital raising have all made important contributions.

The Edinburgh reforms proposed by chancellor Jeremy Hunt for financial services set out an ambitious agenda. The Prudential Regulation Authority is engaging constructively on reforms of the so-called Solvency II for insurance. Nicholas Lyons, the lord mayor of the City of London, is making strides in pushing for the creation of a UK sovereign wealth fund. Regulators, politicians and the wider business community have reached an extraordinary state of agreement. The skies are brightening.

Reform is never comfortable, and we should not expect diehard defenders of the status quo and corporate governance fanatics to lead the charge. Equally, they should not hold us back. The reality is that neither companies nor savers have been better off for their protestations. My own industry, asset management, needs to come to the party wholeheartedly if it wants a vibrant market in which to operate.

This will include some uncomfortable conversations over executive compensation. It is a critical issue. I applaud Julia Hoggett, the London Stock Exchange’s chief executive, for speaking out and sparking that debate by calling for UK executives to be paid more if the country wants to retain talent and deter companies from moving overseas.

No one person, politician, regulator or corporate can answer this question in isolation; it is a question for broader society. Which is more important: limiting the gap between chief executive and worker pay, or accepting that boards need the freedom to attract the best talent to run Britain’s global companies for the best long-term outcomes?

This is just one problem. There is more work to do elsewhere. Asset managers need to support productive growth by allocating finance to those businesses that deserve it. They must also not indulge in tick-box governance — slavishly following proxy agencies instead of investing resources in independent thought. And asset managers cannot continue to apply strict rules to UK companies listed in London but show less rigour elsewhere.

The excellent returns achieved by the huge pooled pension funds in Canada and Australia also provide an important signal for one area the UK should focus on. We need to push for the consolidation of the fragmented defined contribution pensions plans nationwide. Likewise, requirements on local government to pool their pension funds need to be properly implemented. Insurance company regulation needs to permit investment into more growth assets.

Our efforts should be directed towards the opportunities of the future. We should look to capitalise on our national ability to innovate in areas such as life sciences or green technologies. We should be preparing for the continued, rapid growth of private markets. Technology, particularly blockchain, will massively shrink the difference between public and private markets — and London has the opportunity to lead in this.

Seldom has there been such uniform agreement about how financial services can serve the country. Let’s seize the moment. The total pool of global wealth will continue to grow. London’s cultural, legal and timezone advantages remain strong. It is time to stop admiring the problem and — in the words of Canadian ice hockey player Wayne Gretzky — “skate to where the puck is going, not where it is”.

FT : Taiwanese car battery maker bets on Northern France with €5.2bn plant

Taiwanese car battery maker bets on Northern France with €5.2bn plant
ProLogium, which has picked Dunkirk, France, praises Brussels’ EV push

The head of Taiwanese car battery maker ProLogium has praised Europe’s electric vehicle push as a reason for choosing France for a €5.2bn plant, in a boost to Brussels’ efforts to counter the appeal of massive US green subsidies.

Chief executive Vincent Yang said a Brussels-led commitment to ban the sale of new combustion engine cars by 2035 had created a stable backdrop for international battery makers, reducing the risk of policy shifts by individual states.

“Europe is a good place to start business as there is a growing market demand for electric vehicles,” Yang told the Financial Times. “The regulation is neutral in the sense it is supranational and will not be affected by national elections.”

ProLogium, which counts Mercedes-Benz and Vietnam’s VinFast among its shareholders, picked the northern French port of Dunkirk after scouting out dozens of European locations and shortlisting the Netherlands and Germany as possibilities.

Availability of low-carbon nuclear energy in France, as well as state subsidies that kick in up front rather than when production starts like the US tax credits, were other advantages, Yang said.

“In Europe we can have support during the investment phase,” Yang added, declining to disclose the level of subsidies the group was promised.

The investment comes as French president Emmanuel Macron has sought to increase industrial jobs in the former coal mining northern France region. France still lags European neighbours such as Germany with only 10 per cent of its output derived from manufacturing.

Earlier this week Macron, who has faced mass protests over his pension reform, unveiled measures to shorten the time it takes to set up a factory and expand the use of tax credits.

France and other countries in Europe have been feeling the pressure from the US Inflation Reduction Act, Joe Biden’s $369bn green investments package. As a result, Tesla scaled back its plans for a battery factory in Germany in favour of the US.

ProLogium had had “many discussions” around the IRA and was not ruling out a US investment at a later stage, said Gilles Normand, the head of international development.

The company’s Dunkirk plant is the fourth battery plant in development in northern France. China’s Envision Group, French start-up Verkor and ACC, a venture backed by carmakers Stellantis, Mercedes-Benz and oil and gas group TotalEnergies, are also planning battery plants in the region.

ProLogium is focused on solid-state batteries, which developers say are safer and more durable than liquid-based lithium-ion batteries.

The company is aiming to start production by the end of 2026 and reach a capacity of 48 Gigawatts per hour by 2030. It has a smaller-scale pre-production line in Taiwan starting operations later this year.

“Our project goes beyond just a Gigafactory. We would like to localise procurement of key materials in Europe, and have a research and development centre,” Yang said.

Other battery start-ups in Europe have said they have been courted by US government representatives and US states with big incentives, and some, such as Sweden’s Northvolt — Europe’s biggest challenger to Asian battery producers — have called on the region to respond with more subsidies.

Northvolt, which is building a second plant in Sweden, is yet to decide on whether to build a third in Germany or the US.

ProLogium has yet to disclose how it will fully finance its plans. It has raised $700mn so far from investors and is launching fresh fundraising discussions. The group aims to eventually go for a stock market listing.

“In the future we will go for an initial public offering,” Yang said.

>>> US Closing Stock Market Summary


Closing Stock Market Summary

The major indices closed in mixed fashion near their highs of the day, yet the underlying market was quite a bit weaker than index level performance suggested. Growth concerns sparked some flight to safety buying interest in the mega cap stocks, which drove a lot of the index level action. 

Alphabet (GOOG 116.90, +4.62, +4.1%) continued to rally after its Developers Conference yesterday, logging some of the biggest gains for the mega caps. Amazon.com (AMZN 112.18, +1.99, +1.8%), Meta Platforms (META 235.79, +2.71, +1.2%), and Tesla (TSLA 172.08, +3.54, +2.1%) all rose more than 1.0% today while Apple (AAPL 173.75, +0.19, +0.1%) closed with a slim gain. The Vanguard Mega Cap Growth ETF (MGK) rose 0.2%. Coincidentally, the Nasdaq Composite also gained 0.2% while the Nasdaq 100 gained 0.3%.

The Invesco S&P 500 Equal Weight ETF (RSP), though, fell 0.5% today. Decliners led advancers by a greater than 2-to-1 margin at the NYSE and a slightly less than 2-to-1 margin at the Nasdaq.

A sizable loss in Disney (DIS 92.31, -8.83, -8.7%) weighed on general sentiment today, leading the Dow Jones Industrial Average to underperform the other major indices. Disney reported fiscal Q2 results that featured a 2% year-over-year decline in Disney+ paid subscribers.

In addition to growth concerns and disappointing results from Disney, uncertainty about the debt ceiling and ongoing pressure on regional bank stocks loomed over the broader market. PacWest (PACW 4.70, -1.38, -22.7%) saw another sharp decline today after the company said its deposits declined approximately 9.5% for the week ending May 5. The SPDR S&P Regional Bank ETF (KRE) fell 2.5% and the SPDR S&P Bank ETF (KBE) fell 1.6%.

Most of the S&P 500 sectors closed with losses while the communication services (+1.7%) and consumer discretionary (+0.6%) sectors led the outperformers thanks to gains in their respective mega cap components.

Market participants were also digesting some economic data that was relatively pleasing with respect to the monetary policy outlook. The April Producer Price Index showed a moderation in inflation at the wholesale level while weekly initial jobless claims hit their highest level since October 30, 2021. Those readings effectively went the market's way, which is to say each moved in a direction that should leave the FOMC inclined to hold rates steady when it meets again in June.

The 2-yr note yield traded as low as 3.80% following the data, but settled the day unchanged at 3.90%. The 10-yr note yield, at 3.34% shortly after the data, fell four basis points to 3.40%.

Separately, the Bank of England raised its key lending rate by 25 basis points to 4.50%, as expected.

  • Nasdaq Composite: +17.8% YTD
  • S&P 500: +7.6% YTD
  • Dow Jones Industrial Average: +0.5% YTD
  • S&P Midcap 400: +0.1% YTD
  • Russell 2000: -0.9% YTD

Reviewing today's economic data:

  • April PPI 0.2% (consensus 0.3%); Prior was revised to -0.4% from -0.5%; April Core PPI 0.2% (consensus 0.3%); Prior was revised to 0.0% from -0.1%
    • The key takeaway from the report is that producer inflation continued to moderate. On a year-over-year basis, total PPI was up 2.3% versus up 2.7% in March. Excluding food and energy, PPI was up 3.2% versus 3.4% in March.
  • Weekly Initial Claims 264K (consensus 247K); Prior 242K; Weekly Continuing Claims 1.813 mln; Prior was revised to 1.801 mln from 1.805 mln
    • The key takeaway from the report is that initial claims reached their highest level since October 30, 2021, tracking in a direction that reflects a labor market that is becoming less tight.

Looking ahead to Friday, market participants will receive the following economic data:

  • 8:30 ET: April Import Prices (prior -0.6%), Import Prices ex-oil (prior -0.5%), Export Prices (prior -0.3%), and Export Prices ex-agriculture (prior -0.2%)
  • 10:00 ET: Preliminary May University of Michigan Consumer Sentiment survey (consensus 62.9; prior 63.5)

>>> US After Hours Summary: BLBD +26.6%, AMLX +5.2%, NWSA +4.6%, SANM +2.5% higher on earnings; IONQ -12.7%, HROW -9.5%, ANAB -6.1%, WEST -6% lower on earnings

After Hours Summary: BLBD +26.6%, AMLX +5.2%, NWSA +4.6%, SANM +2.5% higher on earnings; IONQ -12.7%, HROW -9.5%, ANAB -6.1%, WEST -6% lower on earnings

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: BLBD +26.6%, AMLX +5.2%, NWSA +4.6%, SANM +2.5% (also authorizes new $200 mln share repurchase program; also to delay form 10-Q), ARLO +1.3%, VTYX +1.1%, HRTX +0.9%,

Companies trading higher in after hours in reaction to news: OUST +8.6% (Motional selects Ouster as provider of sensors for IONIQ 5-based robotaxis; also files for offering by selling shareholders), BALY +1.8% (proposed site plan for Chicago casino approved by city dept; to begin construction in late 2024), VAC +1% (increases share repurchase authorization to $600 mln), PBA +0.9% (all facilities previously shut down due to wildfires have resumed ops), PAG +0.6% (increases dividend), ASH +0.5% (announces $100 mln share repurchase program, also increases dividend), BLDR +0.2% (added to MSCI World Index),

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: IONQ -12.7%, HROW -9.5%, ANAB -6.1%, WEST -6%, RCEL -5.8%, GEN -2.1%, SLF -2.1% (also increases dividend), SOUN -2%, EGHT -1.2%, GETY -0.2%

Companies trading lower in after hours in reaction to news: ANIP -6% (stock offering), MIR -3.4% (announces proposed 7 mln share offering by selling stockholders), MDRX -2% (to delay 10-Q filing), ATXS -1.3% (files $250 mln mixed shelf securities offering), DECK -0.1% (added to MSCI World Index)