FT : US dealmakers hope strong dollar will alleviate M&A drop

US dealmakers hope strong dollar will alleviate M&A drop
Fall in sterling and Europe’s economic problems raise prospect of cheap assets after drop in deals

US mergers and acquisitions activity has dropped 40 per cent year on year in volume terms but dealmakers hope the strengthening dollar will drive a flurry of activity in the coming months as buyers snap up cheap assets in the UK and Europe.

Just $1.2tn worth of transactions have been agreed in the US so far this year, according to data from Refinitiv. That is the slowest nine months since the start of the coronavirus pandemic in 2020, which preceded a boom in dealmaking. By comparison, M&A volume was down by 30 per cent in the Asia Pacific and 25 per cent in Europe for the same period.

However, US dealmakers find themselves in a strong position for cross-border transactions as Britain and Europe grapple with a cost of living crisis and a war that is much closer to home.

Guy Hayward-Cole, head of Europe, Middle East and Africa advisory at Nomura, said the sharp drop in sterling in recent weeks creates an opportunity for many US buyers. “If you thought that UK stocks were cheap beforehand, well then for anyone who’s got US dollars to spend it’s become very cheap,” he said.

However, he cautioned that buyers may want to bide their time. “As the UK outlook becomes so uncertain will it hold back from buying or will it actually attract bargain hunters? For strategic buyers, this could be a very interesting and opportune time to make a move on companies that they’ve always liked,” he said. “Other people will want to sit back and watch what happens for a bit.”

Global M&A is down 34 per cent from the same period last year to $2.7tn in the nine months to September. Dealmakers struck $642bn worth of deals in the third quarter, breaking a historic run for M&A where global transactions exceeded $1tn for eight consecutive quarters.

“As the global economy has been hit by serious headwinds, M&A activity has been a prime casualty. Interest in consolidation continues in many sectors so we are busy, but getting deals across the finish line at the moment is truly challenging,” said Frank Aquila, senior M&A partner at Sullivan & Cromwell.

Private equity firms, once a bright spot for softening M&A markets, are facing their own reckoning as financing conditions tighten and hamper their ability to get large deals done. Globally $642bn in buyouts have been struck through the first nine months of this year, a 26 per cent decline.

At the outset of the year, a string of large deals, including the privatisations of Citrix for $16.5bn and Nielsen for $16bn, signalled that buyout volumes might again surpass $1tn. Elon Musk’s $44bn buyout of Twitter bolstered expectations, though the South African billionaire is now waging a legal battle to back out of the takeover.

Sharply rising interest rates amid soaring inflation and the war in Ukraine has instead made it hard for banks to sell financing packages for these takeovers, crimping their ability to make new loans.

The third quarter was the lowest volume of institutional loan issuance since 2009 and was off 85 per cent from this time last year, said Michele Cousins, the Americas head of leveraged finance at UBS.

Earlier in September, a group of lenders led by Bank of America and Credit Suisse sold $8.55bn in debt to finance the Citrix takeover at large discounts, absorbing over $600mn in losses while retaining the riskiest pieces of the overall $15bn financing.

The poor debt sale has soured expectations that banks can clear their inventory of unsold financing commitments by year end and open their capacity to make new loans.

A number of large software-focused buyouts sidestepped frozen loan markets this summer by turning to direct lenders like Blackstone Credit, Ares, Sixth Street and Blue Owl.

“Both sponsors and strategics are remaining active, but their bar is higher as growth expectations recalibrate,” said Joshua Easterly, co-president of Sixth Street Specialty Lending.

A bright spot for dealmakers is demand for acquisitions among companies owned by private equity firms. David Mussafer, managing partner at Advent International, told the Financial Times he has asked companies to outline M&A targets by their next board meeting.

“Our message to portfolio companies has been, come back and give us your three best acquisition ideas,” said Mussafer, whose firm closed a $25bn fundraising in May.

>>> Weekend Papers Summary

Weekend Papers Summary

NEW YORK TIMES
-Hurricane Ian became a tropical storm over the Carolinas after making landfall. The governors of Georgia and South Carolina declared states of emergency. In Florida, officials said that at least three dozen deaths were possibly linked to the storm — a toll they expected to rise in the coming days.
-As Ian wrought destruction on southwest Florida’s barrier islands, a couple tried to flee. One of them did not make it.
-Officials in Lee County, Fla., delayed issuing an evacuation order. Now authorities are encountering mass death.
-With bluster and threats, President Vladimir Putin casts the west as the enemy. Putin asserted that Russia would take control of four Ukrainian regions and decried the US for “satanism” in a fiery speech.
Biden Calls on World to Punish Russia for Attempt to Annex Ukrainian Land
President Biden called the action a “fraudulent” violation of international law, and the US imposed new sanctions on Russian officials and companies.
-British Prime Minister Liz Truss tried to reassure Britain with media blitz. Her woes multiplied. In interviews, Prime Minister Liz Truss showed little sympathy for the pain that high interest rates could inflict on mortgage holders, critics said.
-Complex financial instruments that pension funds use to minimize the impact of interest rate changes led to the bond market rout.
-President Biden signs stopgap spending bill with $12.3B in aid to Ukraine. The House passed the bill and sent it to President Biden, who signed it just hours before a funding lapse would have forced a government shutdown.
-After Paramedic’s Killing, Detectives and Neighbors Grasp for a Reason Why A 34-year-old man fled into his apartment and barricaded himself after killing a paramedic in Queens Thursday, prosecutors said.
-Greg Abbott and Beto O’Rourke Clash on Guns and Abortion in Texas Debate. Mr. Abbott accused Mr. O’Rourke of holding an “extreme” position on abortion. Mr. O’Rourke said his rival’s rhetoric could be linked to deadly shootings.
-Military officers announce coup in Burkina Faso. The officers said they had decided to remove the president because of his inability to stem a growing Islamist insurgency in parts of the country.
-United Airlines to end service at JFK Airport. The airline said it was too small to compete at the airport and would cease flights there at the end of October.

THE FINANCIAL TIMES
-US stocks have notched their longest streak of quarterly losses since the market collapse of 2008, weighed down by central banks’ determination to tame inflation through higher interest rates.
-The second-in-command at the Federal Reserve said the US central bank was paying attention to tumult in global markets caused by monetary policy tightening, but insisted rates must still keep rising to combat inflation. Lael Brainard, Fed vice-chair, acknowledged rate rises across the world — a movement largely led by the Fed — would affect highly indebted emerging markets, with rapidly rising rates potentially causing instability.
-The chaotic events of the past seven days in the UK raise three questions. How did a G7 economy like the UK find itself the subject of such a ferocious market panic? How did the Conservative party, which was once so closely in tune with the City, end up trying to fight the bond market? And how will the impasse of the past week be resolved?
-Russian President Vladimir Putin has annexed four regions in south-eastern Ukraine and vowed to use “all the means” at Russia’s disposal to defend the territory in a speech that marked a further escalation in his war against Kyiv and his resentment at its western allies.
-The US has imposed sanctions on Elvira Nabiullina, the governor of Russia’s central bank, as part of a new package of measures intended to stiffen its financial punishment of Moscow in the wake of its annexation of vast chunks of territory in eastern Ukraine.
-Private home prices plummeted to the lowest level since February 2019, according to the latest government data. The value for resale flats fell more than 10 per cent in a year, according to Hong Kong property agency Centaline. Analysts and insiders are expecting home prices to drop 10% or more this year, despite the Chinese territory finally scrapping tough mandatory hotel quarantine requirements last month.
-The UK’s credit rating was threatened with a downgrade late on Friday when S&P, one of the world’s largest credit rating agencies, put the country on a “negative outlook” after chancellor Kwasi Kwarteng’s “mini” Budget last week. The rating agency maintained the UK’s double A investment grade credit rating but warned the outlook was negative. S&P said that after the chancellor’s statement, there were “additional risks” in lending to the UK.
-Germany’s pursuit of a massive borrowing package to help its economy withstand the energy crisis has heightened tensions among EU member states as they struggled to forge a common approach on lowering gas and electricity prices at meetings in Brussels.
-Hurricane Ian made US landfall for a second time on Friday, reaching the coast of South Carolina after leaving a path of devastation across Florida.
At least 21 people have been reported dead in Florida after Ian tore across the peninsula, the state emergency director said, a tally that would make the storm the deadliest in the state’s history. Insured losses to property are likely to total $30B-$40B, according to S&P Global Ratings.
-A US citizen was among 14 people killed in an Iranian bombing campaign on Iraq’s Kurdistan region, the US said, as Tehran stepped up attacks on foreign dissidents it accuses of fanning protests.

NY POST
-Gov. Kathy Hochul attended a secret meeting this week at the Upper East Side townhouse of Alexander Rovt — a billionaire mega-donor to her campaign whose hospital network was bailed out by the state in April.
A source provided The Post a video of Hochul — who is already under fire over accusations of pay to play campaign donations involving an overpriced, no-bid $637M COVID test contract — entering Rovt’s mansion on East 68th Street Thursday morning.
-Nike, the world’s biggest sportswear company, said it was stuck with a glut of out-of-season inventory that will force it to mark down prices going into the all-crucial holiday period. Nike, based in Beaverton, Ore., said it will be “aggressively” liquidating its apparel and sneakers as it powers through elevated inventory levels – up 44% overall and 65% in North America, the company said as it reported results for its latest quarter on Thursday.

>>> Barron’s Weekend Summary

Barron’s Weekend Summary: A long-term portfolio should look very different going forward than it did in the past 10 years


Cover Story:
-With stock and bond indexes projected to have low-single digit returns for the next market cycle, a long-term portfolio should look very different going forward than it did in the past 10 years. Barron’s suggests engaging in active stock-picking, or buying funds that do so, rather than deploying passive indexes; adding alternatives; and, yes, adding to fixed income.

Interview:
-Rick Rieder oversees some $2.4T in assets as BlackRock’s chief investment officer of global fixed income. His winning formula today is to focus on shorter-dated bonds and avoid taking too much risk. Rieder also serves as chairman of the BlackRock Investment Council and manages the $41B Strategic Income Opportunities Portfolio, among other mutual funds.
Rieder joined BlackRock when the asset manager bought his R3 Capital Management hedge fund in 2009. Before that, he spent more than two decades at Lehman Brothers, eventually rising to become the firm’s head of global principal strategies and credit businesses.

Tech Trader:
-The market downturn, the weaker economy, and the reversal of some pandemic-era trends have exposed weaknesses in the business models of companies such as Peloton Interactive, Zoom Video Communications, Shopify, Affirm Holdings, and Snap, and investors have adjusted valuations accordingly. But there are still some powerful underlying secular trends that should eventually drive tech stocks higher. Investors with long time horizons and strong stomachs might consider inching into the market. I have a few ideas on where to look.

The Trader:
-Petrobras stock may still be worth buying. That may sound like a terrible idea, at least at first glance. Petróleo Brasileiro, or Petrobras (ticker: PBR), as it is more commonly known, is the Brazilian national oil company. Brazil, meanwhile, is staging its presidential election on Oct. 2, one that pits current far-right President Jair Bolsonaro against far-left former president “Lula” da Silva, with Lula expected to win. A leftist government would be bad news for Petrobras, which would likely become a tool of government policy rather than a vehicle for shareholder returns. Yet J.P. Morgan analyst Rodolfo Angele argues that Petrobras is still worth owning.
-US economic data remains strong, as jobless claims fell below 200,000 for the first time since May, a sign that the Fed will have to keep raising interest rates to slow down inflation. On the other hand, the rest of the world seems on the verge of imploding, with the mess in the United Kingdom serving as Exhibit A. The stock market didn’t take it all that well. The DJIA and the S&P 500 both dropped 2.9% for the week, while the Nasdaq Composite fell 2.7%. All three indexes finished the week at new 52-week lows.

Features:
-Institutional players are now looking long-term when it comes to digital assets, despite the short-term volatility. This summer has seen leading asset managers including Abrdn, Blackrock, and Charles Schwab invest in digital-asset offerings. These developments are representative of a broader trend, with a wide spectrum of investors clamoring for access to the sector. According to a PwC report earlier this year, more than a third of traditional hedge funds now invest in digital assets, nearly double the figure from a year earlier.
-Is it time to buy UK yet? The answer isn’t an easy one. Investible assets, from blue-chip companies to prime real estate, have grown relatively cheaper in the UK, particularly if you’re paying in dollars, which have strengthened as the pound has weakened. Blackstone CEO Steve Schwarzman recently paid $85.5M for a 2,500-acre historic property in Wiltshire. As Bloomberg noted, the property would have cost $110M last year, purely on a currency-exchange basis.

European Trader:
FedEx’s unexpected profit warning may have delivered a buying opportunity for shares in Deutsche Post DHL Group. The global package-delivery and supply-chain company’s stock was caught up in its peer’s gloomy economic outlook, slipping to EUR 30.51 ($29.29), 15% below where they were before FedEx’s warning in mid-September. Those fears may have been overdone, however, as Deutsche Post said in August that it would meet its full-year earnings forecast range under a span of economic scenarios.

Emerging Markets:
-Apple launched production of its new iPhone14 in the Indian city of Chennai, just weeks after its flagship factories in China. That could be the start of a dramatic trend. A quarter of the world’s iPhones will be assembled in India by 2025, up from 3% now, analysts at JP Morgan predict. “For iPhone, India appears to be the ideal location to diversify the supply chain away from mainland China,” they write. They expect other Apple products to gravitate toward Vietnam.

Commodities:
-Shares of aluminum producers Alcoa and Century Aluminum are taking off in response to reports that the London Metal Exchange could ban Russian aluminum. Alcoa stock was up 6% in early trading Thursday. Century shares are up almost 8%, while the S&P 500 and DJIA were off 1.3% and 1.1%, respectively. The stocks, of course, are moving right along with the price of the commodity. Benchmark aluminum prices are up more than 7%, according to Bloomberg. The news service reported that the exchange plans to launch a discussion paper on whether, and under what circumstances, it should block deliveries of Russian aluminum to its warehouses.

Streetwise:
-Jack Hough doesn’t think house prices are falling down significantly. “US house prices just fell for the first time in a decade, you may have heard. One report called it a record cooldown. Yikes—I considered panic-selling my house to myself, but when I learned how much I was asking, I had to walk away. There are reasons to believe we’re not headed for anything like the epic housing bust of 15 years ago. Home buyers might not face easy choices, but there are opportunities for stock investors. More on those in a moment.”

FT : German football reopens its door to private equity

German football reopens its door to private equity
Bundesliga in talks with buyout firms about multibillion-euro investment as it seeks to catch up with rivals

Germany’s Bundesliga has revived talks with buyout groups over a multibillion-euro investment, as the need to close the gap to wealthier football leagues forces clubs to review their resistance to the private equity industry.

Over the past three weeks, executives from Deutsche Fussball Liga, which runs the Bundesliga, have held preliminary talks with buyout firms, including Advent, Blackstone, Bridgepoint, CVC and KKR, according to two people familiar with the matter.

One option under discussion is to create an entity that would control the Bundesliga’s media and commercial rights, valuing them at up to €18bn, and then raise as much as €4.5bn by selling a 25 per cent stake to external investors, the people said. Any agreement would then be presented to the clubs, which include Bayern Munich, Borussia Dortmund and Bayer Leverkusen, for a vote, likely early next year.

The talks come a year after Spain’s La Liga and France’s Ligue 1 sealed media rights deals with private equity group CVC. At the time, the Bundesliga also explored bringing in €300mn through the partial sale of the league’s international television rights, but its 36 member clubs chose not to pursue it.

The plan’s revival will be a test of the appetite for private equity investment in a country where it has proven unpopular in the past and where football clubs were run as not-for-profit associations until the late 1990s. 

In 2005, a senior German politician from the Social Democrats likened private equity to a “plague of locusts”, though the hostility to buyout groups has eased since then. Two years ago, a consortium of PE firms acquired ThyssenKrupp’s lift business for €17bn.

Germany’s top football clubs, most of which are controlled by their members under the country’s ownership rules and have less debt than European rivals, last year judged they were in a strong enough position to reject the interest from PE firms.

However, one person close to the current discussions said the talks were now “coming from a different angle”. While last year clubs were seeking funds to repair the financial damage from the pandemic, now many in German football see new investment as key to growing the game long-term.

“If this was seen as just a boost to clubs’ financial health then 100 per cent this would not work”, the person said.

The DFL said in a statement: “There are various considerations regarding the future of German professional football. Among others, these include the option of a partnership that would provide growth capital and expertise for long-term strategic development.”

The buyout firms declined to comment.

The renewed push by the Bundesliga to raise money from its broadcasting rights comes as the sports industry has managed to largely defy the slowdown in the global economy.

The value of US broadcast rights for the pan-European Champions League and English Premier League have climbed in the most recently struck deals, while PE funds have snapped up stakes in the media businesses of both leagues and clubs.

“Sports rights is a long-term growth market. The Bundesliga is [a] top football property with a strong history and a record of delivering growth over time,” said one investor involved in the process. “The league needs a partner to refresh the approach.” 

German football clubs typically have newer stadiums than many of their European counterparts, cutting the need for expensive upgrades. The country’s model of limiting the influence of outside investors has also helped keep club finances on an even keel.

But while the Premier League, La Liga and Champions League have all increased their international appeal, German football has struggled to gain traction. The Bundesliga generates just €270mn a year from international TV rights, according to Enders Analysis, a figure dwarfed by the €2bn for the Premier League and €900mn for La Liga.

“Bundesliga is an inward-looking league”, said François Godard, media analyst at Enders. “They have not been looking for international opportunities in the way the Premier League and La Liga have done. Their clubs have been less active at building a global fan base than Manchester United or Real Madrid.” 

At the same time, income from domestic rights sales has seen little growth, with the low penetration of pay TV in Germany reducing the competition among potential broadcasters, added Godard.

One senior executive at a top-tier German club said there was now a “clear vision” for what needed to be done, with international expansion the top priority.

However, there are divisions on how best to achieve it. Fresh funds from the buyout industry could, for example, be used to pay for clubs’ pre-season tours overseas as well as for offices in new markets the Bundesliga is targeting.

Another option under consideration is building a direct-to-consumer streaming platform, echoing a move by La Liga, which recently launched its own streaming service in China, Thailand and Indonesia. UK-based fans can also pay to watch live Spanish games on Amazon Prime Video.

Some clubs and investors in the talks think the cash should be used to help narrow the gap between the top teams and the rest to help make the league more competitive. Bayern Munich have won the past 10 league titles.

“We could find ways of making the competition more exciting”, said another investor involved in the talks. “But this is a long-term project. There’s no way this is a short-term fix.”

According to people familiar with the matter, the talks remain wide in scope, leaving room for a variety of potential investments and there is confidence that a deal will be struck.

“It’s now being discussed with a much more positive view than before”, said one person with knowledge of the process. “But there’s no guarantee it will happen. German football is much more traditional, much more ideological and much more socialist than the English league.” 

“In the end, it all depends on the price and how you distribute the money,” they added.

FT : S&P puts UK credit rating on notice with ‘negative outlook’

S&P puts UK credit rating on notice with ‘negative outlook’
Agency cited ‘additional risks’ in lending to the country following Kwasi Kwarteng’s mini-Budget

The UK’s credit rating was threatened with a downgrade late on Friday when S&P, one of the world’s largest credit rating agencies, put the country on a “negative outlook” after chancellor Kwasi Kwarteng’s “mini” Budget last week.

The rating agency maintained the UK’s double A investment grade credit rating but warned the outlook was negative. S&P said that after the chancellor’s statement, there were “additional risks” in lending to the UK.

The threat of a ratings downgrade will prove embarrassing for the Truss government only a few weeks after the new prime minister took office. The “mini” Budget sent the pound falling and interest rates higher because financial markets thought it would stoke inflation at a difficult time.

S&P said its decision was based on the fiscal statement and the government’s plan to “reduce a range of taxes in addition to its previously communicated intentions to extend wide-ranging support for households on energy bills”.

Credit rating agencies have lost some of their power since the 2008-09 financial crisis when they failed to warn of the risk in many complex products they had given top triple A ratings. But their sovereign ratings are still closely watched.

Most experts in public finances have been more relaxed about the decision to spend billions on a temporary scheme to keep electricity and gas bills down this winter than the permanent cuts to national insurance and income tax, including the highest rate, and the decision not to raise the main level of corporation tax.

In the past week, the pound has hit an all-time low against the US dollar, before recovering, the cost of government borrowing has risen more than 0.5 percentage points, the Bank of England has had to intervene to protect the pension system and mortgage lenders have pulled most fixed-rate products from the market.

S&P estimated that the UK’s budget deficit would widen by 2.6 percentage points of gross domestic product by 2025 as a result of Kwarteng’s package, making it very difficult for the chancellor to achieve his ambition of bringing public debt down as a share of national income.

The rating agency said “net general government debt will continue on an upward trajectory, in contrast to our previous expectation of it declining as a percentage of GDP from 2023”.

S&P said it still expected the UK economy to contract over the coming quarters, adding it was still unclear whether government promises of lower borrowing from public expenditure cuts would materialise and be sufficient to bring debt back to a declining path.

This would be especially difficulty, it added, in the context of a weak global economy, rising interest rates hitting the housing market and shaky consumer sentiment.

With the government’s fiscal watchdog muzzled until late November, S&P forecast a difficult period for the UK economy.

“We consider that our updated fiscal forecast is subject to additional risks, for instance if the UK’s economic growth turns out weaker due to further deterioration of the economic environment, or if the government’s borrowing costs increase more than expected, driven by market forces and monetary policy tightening,” it said.

FT : UK pension fund crisis shows there is no capitalism without capital or risk

UK pension fund crisis shows there is no capitalism without capital or risk
Current turmoil is the culmination of policy mistakes made a generation ago

It is beyond ironic that an investment strategy that claimed to eliminate risk threatened the unprecedented failure of the UK pension system this week.

The main focus of attention so far in probing what went wrong has been on what took place over the few days leading up to the Bank of England’s emergency intervention on Wednesday to stem a crisis in pension funds over so-called liability driven investment strategies.

These strategies aim to hedge the liabilities of funds to meet their pension promises with the use of derivatives. But they suddenly exposed the sector to a now infamous “doom loop”, when falls in gilt prices triggered calls on schemes to provide more collateral on such trades, in turn spurring more sales of UK government bonds to raise cash.

However, the origins of the crisis stretch back more than 25 years when some of the current government’s members were still in secondary school. Starting in the late 1990s, a series of tax and regulatory changes made the provision of defined benefit pensions by companies to their employees so onerous that, by and large, companies closed their funds to new members.

Such schemes typically promised workers a retirement income that was a multiple of their years of service. The closure to new members of the vast majority of these schemes would lead to seismic — and completely foreseeable — implications for the UK economy and financial system over the following two decades. It led to a profound change in the way funds would be managed because of the compound interaction of two factors.

First, the funds now had a finite time horizon, servicing only existing members, and were therefore no longer indefinite intergenerational savings vehicles. Rather, they had become more akin to annuities and would need to be managed as such. For example, their now foreshortened time horizons made it harder to recover from the impact of poor investments, which significantly curtailed their appetite for risk.

Second, corporate sponsors’ risk profiles were asymmetric — companies were on the hook for all of the funds’ deficits and losses but had no practical access to any upside surplus until the last pensioner had died. So they behaved completely rationally to support pension trustees in their quest to eliminate all risk.

These two factors, combined with the increase in longevity, has had devastating consequences for the entire UK economy ever since. The recent meltdown is just an inevitable culmination of those earlier decisions.

The pursuit of zero risk led to a massive and permanent change in pension funds’ asset allocation — the proportion of their funds invested in bonds increased from less than 20 per cent in 2000 to 72 per cent in 2021. The Investments in listed UK equities declined steadily, from 50 per cent of their asset allocation in 2000 to 4 per cent in 2021.

For all practical purposes, defined benefit pension funds have ceased to supply long-term equity capital to invest in the growth of UK companies. The reservoir of equity capital built up by these funds over generations has been mostly drained.

This has reduced funding for homegrown centres of research and innovation while rendering critical infrastructure and much of the country’s technology and defence sectors dependent on foreign companies or private equity for capital.

Tragically, we have ended up with an emasculated system that is unintentionally self-destructive and, as this week has shown, still remains vulnerable. If anything good is to come out of this latest crisis, it is hopefully a recognition that, rather than a few tweaks here and there, we must now change this system root and branch, once and for all.

The UK government should as a matter of urgency commission an official inquiry into both how the nation’s pension savings system could have been put at such extreme risk and what steps need to be taken to ensure that this can never be allowed to happen again.

We now need to put in place a new, longer-term and more resilient savings system, better matched to the long-term interests and global competitiveness of the real economy. We need a pension system that is more inclusive of all generations and especially one that can supply long term risk capital to support the economic growth ambitions to which our new government is committed.

FT : Buy-to-let landlords under strain from mortgage rate rises

Buy-to-let landlords under strain from mortgage rate rises
Sharp jump in interest charges for those refinancing will hit profits

Soaring interest rates are piling pressure on mortgaged buy-to-let landlords, forcing some to consider selling properties or seeking higher-yielding homes outside the expensive regions of southern England, housing market experts say.

Like most banks and building societies in the residential mortgage market, lenders to landlord investors have withdrawn hundreds of fixed-rate loans in the days following last Friday’s “mini” Budget.

Nearly 40 lenders have pulled their fixed-rate buy-to-let products since the chancellor’s speech, according to buy-to-let mortgage broker Property Master. Angus Stewart, chief executive, said landlords’ dwindling choices in the mortgage market “would have a further impact on the rising cost of mortgages”. 

As these products return, they are expected to come with much higher interest rates to reflect rises in wholesale borrowing costs for lenders and market expectations of future increases in the Bank of England’s main interest rate.

“We expect to see a continuing tightening of [lending] criteria given the concerns about the market and economic conditions,” Stewart said.

Jeni Browne, sales director at broker Mortgages for Business, said a handful of lenders had already repriced their fixed-rate deals, but at “incredibly expensive” rates of interest at around 7 per cent, up from around 2 per cent earlier this year.

The criteria that lenders use to judge buy-to-let affordability include a calculation of rental income as a ratio of interest costs. This previously gave lenders and borrowers headroom for rises in interest rates. But some lenders have begun toughening up this “rent-to-interest” calculation.

Those looking to remortgage with another provider may no longer pass this test, she added, though they would still be able to move on to a new loan with their existing lender, known as a product transfer. “Some landlords may find that they struggle to remortgage going forward,” Browne said.

Aneisha Beveridge, research director at estate agent Hamptons International, said the higher rates at which landlords would be forced to remortgage would pitch some of them into losses.

Calculations by Hamptons found that a higher-rate taxpaying landlord on an average yield of 6.1 per cent who remortgaged last month would see their annual net profit fall by 72 per cent to £884 from £3,198. Assuming the Bank of England’s half-point base rate rise last week was passed on to mortgage costs (before taking into account the impact of the “mini” Budget) this would reduce average profits to £212 a year.

If base rates rise to 2.5 per cent from 2.25 per cent, only those with properties yielding more than 7 per cent would continue to make a profit, the agent said.

“This is one of the main reasons why London-based investors are increasingly purchasing buy-to-lets beyond the capital, targeting higher yielding areas. So far this year, a record two-thirds (66 per cent) of London-based investors chose to purchase a buy-to-let property outside the capital, up from just 26 per cent a decade ago,” Hamptons said.

Aside from selling up or buying elsewhere, other options for landlords seeking bigger yields include investing in houses of multiple occupation (HMOs) for higher rental income; moving to limited company ownership so as to take advantage of tax relief on mortgage interest payments; or curbing their ambitions for new purchases by buying a smaller home.

Landlords might also try to pass on some or all of their higher mortgage costs to their tenants. However, sharp rises in rents this year, combined with the financial strains of soaring inflation, will limit their ability to do so.

Ben Beadle, chief executive of the NRLA, which represents landlords, said its research showed that landlords would much rather have a reliable long-term tenant than risk being left with an empty home because of insupportable rent increases.

“But it tends to depend on individual circumstances and the property owner’s ability to either absorb [higher interest payments] or the tenant’s or property’s ability to warrant higher rents,” he said.

A surge in the number of landlords requiring refinancing is expected over the next 12 months. A stamp duty surcharge for buy-to-let purchases in 2016 and new rules on borrowing constraints in 2017 led to a spike in purchases by landlords before these rules came into effect. Many of those who signed up for five-year fixed-rate deals around that time are now seeing their fixes run out.

Of 1.3mn buy-to-let mortgages on fixed rates in June 2022 (out of a total just over 2mn), about 220,000 were set to mature over the 12 months to June 2023, according to industry body UK Finance. A further 250,000 will come due over the 12 months to June 2024.

The typical borrower in the private rented sector uses interest-only loans, which amplify the effects of interest rate changes on their monthly payments compared with those paying down capital and interest together. However, lenders restrict landlords from borrowing more than 75 per cent of a property’s value, making them less vulnerable to falls in house prices than, for instance, a first-time buyer on a 90 per cent LTV mortgage.

FT : Oliver Blume, team-building car fan at the wheel of Porsche

Oliver Blume, team-building car fan at the wheel of Porsche
German executive faces tough task leading newly listed sports car brand as well as its Volkswagen parent

Oliver Blume tries to avoid queues, riding a bicycle to Porsche’s offices rather than brave the Stuttgart traffic in one of his company’s sports cars.

But this week the chief executive did find himself waiting in line. At the Frankfurt Stock Exchange for the listing of the carmaker’s shares, so many dignitaries wanted to speak beforehand that Blume’s remarks were interrupted by the start of the day’s trading.

It was a rare lapse of time management for an executive known by colleagues for his efficiency and diligence.

Blume will need all of his time skills — as well as his consensus-nurturing attitude and the “iron will” that associates say lurks beneath his charm — to balance the twin roles of CEO at both Porsche and Volkswagen.

Investors were told on the roadshow that Blume, 54, will be able to steer Porsche into the future while simultaneously overseeing a tectonic shift at its vast, globe-spanning parent company.

Yet privately there is less certainty.

“It will be extremely difficult to retain those two roles,” predicts one person who worked on the Porsche listing and spent the past month fielding questions from investors over its unusual governance arrangements. “They are two complex worlds with . . . complex, different stakeholders involved.”

Blume, the person says, “is genuinely convinced he can cope with both roles but also he is rational enough that if he perceives that he is not able to cope with it, he will adjust and just retain the VW CEO role”.

Publicly the Porsche chief has said there is no timeline for him to relinquish his old role.

“He does not micromanage, this is how I think he can handle both,” said one industry executive who has worked with him.

There is precedent for VW executives juggling roles. Herbert Diess, Blume’s predecessor as VW CEO, briefly ran the VW brand as well as the wider company.

Blume, however, will have two listed businesses to oversee in a conundrum reminiscent of the late Sergio Marchionne, who ran the Fiat group at the same time as the newly listed Ferrari.

While Marchionne was a chain-smoking taskmaster who often only slept in cars between meetings, Blume would return home at the weekend to see his family even during the busiest periods preparing the IPO listing. But detailed answers to “extensive material” sent by advisers on Friday would always trickle back over the following two days.

Balancing the two roles will also require the ability to bring vast numbers of workers along on a journey that will lead to huge workforce shifts.

Universal among those who have worked alongside him is a recognition of his calmness.

Blume was one of the driving forces behind Porsche’s deal to form a joint venture between the top-end Bugatti brand and Rimac, the Croatian hypercar and technology group.

Group calls during the two-year process would run to more than a hundred attendees, some with wildly different ideas for the brand. Yet, through the soup of ideas, the deal got done.

Only once during the drawn-out saga of the Porsche IPO did advisers see the faintest trace of pressure.

Blume learnt he would be ascending to the VW position while also juggling the sport scar job shortly before presenting a corporate strategy underpinning Porsche’s flotation that had been weeks in the making

“He was not as pleasant as always,” said one person who worked closely with him at the time. “But he never lost any control.”

Yet once the PowerPoint slides were over, Blume gathered staff at the end of the day to thank them for their work over a beer in the office — something insiders say was not uncommon after significant events.

One friend recalls how Blume, at the end of a lavish motorsport party hosted near the company’s headquarters several years ago, took to the stage at 2am to thank the Porsche catering staff individually.

People who remember VW’s leadership in years gone by remark that his approach could not be further from that of VW’s longtime leader Martin Winterkorn, who used to have superior wine supplied to his top table at official company dinners.

Blume was born in Braunschweig, the closest German town to VW’s Wolfsburg headquarters, and studied mechanical engineering at the city’s technical university.

He joined Audi in 1994 as an intern, working his way up through the VW group to its highest echelons, including a stint as head of production for the Seat brand in Spain, where he still has a house.

Renault CEO Luca de Meo, who worked with Blume during his tenure at Seat, described him as a “very down to earth and very approachable . . . a normal guy, who doesn’t behave like a superstar.”

Blume was “liked by the people, because he has a very reassuring character”, and “fits the culture of the [Volkswagen] group”, he added.

In 2015 he was elevated to CEO of Porsche, Volkswagen’s cash-spewing gem and the crown jewel of the Porsche and Piech family who control the group.

At Stuttgart, he became close to Wolfgang Porsche, who takes a deep interest in his family company.

Volkswagen’s leaders are often brought down either from above by the family, or from below by the works council that is so powerful many investors joke it runs the company.

Associates at Porsche point to the brand’s tight-knit management team, and a “performance culture” harboured by Blume, for an indication of his morale-spurring approach.

One supplier who works closely with Porsche described Blume as intensely focused in meetings. In an era when many executives are permanently smartphone-tethered, Blume was always “in the room”.

“What I like about him is that he’s really there, he pays attention,” said the person, who has met many of the industry executives.

People who have seen Blume behind the wheel of sports cars describe him as an “excellent driver”, able to control drifting vehicles with ease even as they pour tyre-smoke.

Investors in the company will want him to show similar nerve in the months ahead.