TheChek News Flow

Developers’ woes will make refinancings harder, and more defaults should be expected>

Struggling Chinese developers now face a new challenge: trust issues. Things have been bad for the sector since the Evergrande crisis last year. But a company seen as one of the few remaining pillars of strength has suddenly warned of a default. That damages what is left of investor confidence in the sector.

Zhenro Properties is the latest developer to admit it may not have enough cash to meet debt payments. The midsize mainland Chinese developer, previously valued at more than $3bn, has asked bondholders to waive any default claims on its $200mn perpetual note next week.

Zhenro shares fell 14 per cent on Monday, bringing them down 80 per cent for the month. Trading in a 2024 bond has been suspended following extreme volatility. Its dollar note fell to 25 cents on the dollar, down from 80 cents just a few weeks ago.

The surprise plunge is not something bondholders could have prepared for. Zhenro had recently secured a Rmb9.1bn ($1.4bn) credit line from state-owned Bank of China. Unlike peers, there have been no signs of redemption risk.

Rating agencies Fitch and Moody’s have downgraded Zhenro’s long-term issuer default risk and corporate family rating to junk, or B and B3 respectively.

The speed and scale of bond price falls points to a disconnect with such ratings. A “B” rating represents material default risk, but typically with a margin of safety. Such ratings have not historically signalled imminent defaults.

Information from companies themselves is hardly reliable. As shares plunged last week, Zhenro downplayed speculation about the default that is now imminent. Local peer Fantasia Holdings, which denied having any issues with liquidity, has defaulted on a bond payment.

Chinese property companies have about $100bn in debt maturing this year. The woes of companies such as Evergrande, Zhenro and Fantasia will make refinancings harder. More defaults from troubled companies should be expected.

Contagion from developers to the broader financial system remains unlikely. Instead, Chinese issuers will have to pay higher charges on capital raisings, regardless of their sector, to compensate investors for the unreliability of covenants.

Australian utility company rejects offer but bidders say it’s ‘only the starting gun’

Brookfield Asset Management and billionaire climate activist Mike Cannon-Brookes are prepared to pursue a hostile takeover of Australian energy giant AGL Energy after the company knocked back a preliminary offer.

Brookfield planned to take its bid to big shareholders, said Stewart Upson, Asia-Pacific regional head at the Canadian investment firm. “That’s a logical thing to do,” said Upson in an interview with the Financial Times. “They are the ones that ultimately need to determine what is in their best interest.”

Under the proposed A$5bn ($3.6bn) deal, Brookfield and Cannon-Brookes would take the publicly traded company private and spend up to A$20bn turning it from Australia’s biggest carbon emitter into one of the country’s largest net zero renewable energy retailers.

Central to that strategy is the early closure of AGL’s three coal-fired power stations and their replacement with about 8 gigawatts of renewable energy and storage capacity. Acquiring AGL would give the consortium control of one of the biggest energy retailers in Australia, with annual revenue of A$11bn and 4.2mn customer contracts, according to its 2021 annual report.

In a letter to AGL’s board, Brookfield and Cannon-Brookes argued that the capital required to replace AGL’s coal plants with renewable generation was “beyond what AGL can achieve in the public markets”.

Cannon-Brookes, co-founder of Australian tech success Atlassian and an outspoken proponent of renewable energy, said he hoped to shut down all AGL’s coal generation and reach net zero emissions by 2035, a dozen years earlier than AGL’s target.

“Decarbonisation is going to happen,” he said. “The question of how fast we do it, and how much we take advantage of the opportunity in front of Australia, is a purely economic one.” He said AGL was moving too slowly under current ownership.

Cannon-Brookes, whose investment firm Grok Ventures is Brookfield’s only partner in the consortium, said the initial offer was “only the starting gun”.

“We’ll keep explaining where we see the value of our offer to shareholders, and see how this plays out,” he added.

Both Cannon-Brookes and Upson said they hoped AGL’s board could be persuaded to recommend the deal but did not rule out going directly to shareholders if it remained opposed.

AGL rejected Brookfield’s offer on Monday morning, saying it undervalued the company. The company argued its own plan to spin off the coal plants into a new company would create value that was not yet factored into its share price.

“The proposal does not offer an adequate premium for a change of control and is not in the best interests of AGL Energy shareholders,” AGL chair Peter Botten said in a statement.

If the bid is successful, it will accelerate Australia’s transition to a renewables-dominated grid. Last week, AGL’s main competitor Origin Energy announced it would close its last remaining coal plant seven years earlier than planned, saying it was no longer economically feasible for coal generators to compete with cheaper solar and wind.

The Australian government called Origin’s decision “bitterly disappointing”, warning the early closure could put Australia’s energy security at risk and cause prices to rise.

David Leitch, Sydney-based energy analyst and principal at ITK Services, said it was expected that AGL would argue the full value of the demerger was not reflected in the share price.

“I believe the retail business could have some real hidden value,” he said. “I think the problem is going to be in the coal fired generation side of things. That is going to become more and more difficult for everyone.”

The incident could raise questions about the safety of ferrying EVs over long distances at sea

The large number of electric vehicles on board a ship that is drifting ablaze in the Atlantic Ocean is complicating efforts to extinguish the fire, the Dutch experts contracted to salvage the vessel said Sunday.

It is unclear whether the blaze was caused by the electric cars, whose lithium-ion batteries have been known to catch fire, but the presence of burning batteries on board means SMIT Salvage, the company contracted to rescue the ship, is facing fire that spreads fast and cannot be fought with water alone, the company’s owners said.

“The cars are electric and part of the fire is the batteries that are still burning,” said a spokesman for Royal Boskalis Westminster NV, which owns SMIT Salvage and the company that freed the ship Ever Given after it became stranded in the Suez Canal last year.

The spokesman added that it was too early to say how SMIT would put out the battery fires.

The 60,000-ton Felicity Ace merchant ship was carrying around 4,000 cars from Germany to the U.S., including 1,100 Porsche sports cars and 189 super-luxury Bentleys, which are all units of Volkswagen AG, when it caught fire last Wednesday, leading to the evacuation of the 22 crew members. It has been drifting just off the Azores islands since.

The fire is the latest in a string of supply-chain setbacks to befall an auto industry that has faced production bottlenecks due to a shortage of components and Covid-19-related disruptions to international-trade routes.

Although it will be months before the cause of the fire is known, the blaze on the Felicity Ace, one of the first major fires during a transport of electric vehicles, also raises questions about how to safely transport such vehicles in the future.

The Felicity Ace, a cargo ship carrying thousands of cars including Porsches to the port of Davisville, R.I., was on fire and adrift in the mid-Atlantic after the crew was evacuated Wednesday. Photo: Portuguese Navy

For days, spokesmen for the car makers have declined to provide details to the public about the models on board the ship, but Portuguese navy officials monitoring the vessel and salvage workers fighting the blaze say based on cargo lists they have it is clear that many of the cars on board are electric vehicles.

VW and its brands export electric models such as Porsche’s Taycan, Audi’s e-tron, and VW’s ID.4 from Germany for sale in the U.S.

“The fire continues to be active, although it has diminished in intensity,” said João Manuel Mendes Cabeças, captain of the nearest port on the island of Faial in the Azores. “The expectation is that everything or almost everything burned.”

Over the weekend, SMIT Salvage piloted its Phor B tug boat to douse the sides of the boat with water as smoke continued to billow out of the decks high above. Footage of the scene showed the hull was bruised and scarred from the heat inside.

The Portuguese navy isn’t directly involved in efforts to quell the fire but is monitoring the ship at sea for signs of instability and leakage.

Capt. Cabeças, who is coordinating the navy’s operation, told The Wall Street Journal that he spoke to the ship’s captain when he arrived on shore after the crew was rescued by the Portuguese air force.

According to the ship captain’s initial statements to Capt. Cabeças, alarms alerted the crew Wednesday morning to a fire on Deck 1, just above the main deck. Crew members rushed to Deck 1 but smoke prevented them from entering the cargo hold, Capt. Cabeças said. This prompted the captain to abandon the ship.

The ship’s captain couldn't be reached for comment.

Among several commercial ships that came to assist the Felicity Ace was the Resilient Warrior, a Liberia-flagged 81,817-ton oil tanker, that was en route from Ingleside, Texas, to Rotterdam, Netherlands, according to a vessel-tracking site. The tanker took crew members on board to await rescue by the Portuguese air force.

The air force posted a video of the rescue operation on YouTube, showing its EH-101 Merlin helicopter lifting the Felicity Ace crew members off the deck into the aircraft. They were removed from the Resilient Warrior in two groups of 11 and taken to the island of Faial.

The Boskalis spokesman said that the Alp Guard, the first of two oceangoing tug boats en route to the area was in Portuguese water and a second called Bear, was departing from Rotterdam. Later in the week, a SMIT helicopter was due from France that the spokesman said would enable the firefighters to board the ship once conditions were stable.

“We’re hoping to go on board in the course of the week,” he said. “Once we’re on board we can start locating and extinguishing the hot spots.”

When the fire is extinguished, the Alp Guard and the Bear will tow the Felicity Ace to a safe harbor, the spokesman said.

Four governments face legal challenge under secretive treaty to stymying of schemes

Five energy groups are suing four European governments for almost €4bn over the stymying of coal, oil and gas projects as climate change concerns rise, using a secretive process based on an international energy treaty.

Energy and exploration companies including Germany’s RWE and Uniper and the UK’s Rockhopper have launched cases against the Netherlands, Italy, Poland and Slovenia under the Energy Charter Treaty (ECT).

The active cases revolve around the decisions by the relevant governments to either mandate the closure of coal power plants, prevent the development of specific projects, or require an environmental impact assessment.

RWE said it endorsed “the importance of the energy transition” but “does not consider it right” that the Dutch coal phaseout “does not provide for compensation for the disruption to the company’s property”.

Uniper said its “first concern” was “to obtain legal clarity” about having to close its coal power plant early without adequate compensation. Rockhopper declined to comment.

The ECT, crafted after the cold war and signed by more than 50 countries, was intended to protect international energy investments by foreign companies or individuals. This protection extends to fossil fuel projects and climate change experts say it discourages governments from making policies to wind down the industries behind global warming owing to the risk of legal action.

The various companies are seeking an estimated €3.7bn in compensation in the five cases, according to documents reviewed by the Financial Times. A sixth case, for an unknown sum, was brought against Romania by the Austria-based Petrochemical Holding over a petroleum development contract.

Petrochemical Holding legal counsel Andrew Savage, a partner at global law firm McDermott Will & Emery, warned Romania’s “stated desire to move away from fossil fuels . . . may lead to further claims”.

Climate experts rang the alarm about the treaty becoming an obstacle to curbing projects that lead to global warming in an open letter more than two years ago.

Dmitri Evseev, a partner at law firm Arnold & Porter, agreed that the legal action “may have a chilling effect, undoubtedly, on all kinds of policy change”. “Investor-state arbitration is the biggest stick that investors have,” he said.

The German finance ministry warned the chancellor’s office in 2019 that using regulation to phase out coal would create an “increased risk of litigation, especially international litigation based on the ECT”, according to an email seen by the FT.

When the Dutch minister and state-secretary of economic affairs and climate were asked last year about accelerating the decommissioning of coal and gas fired power stations, they said “further intervention in the coal sector entails major legal risks in the context of pending claims”.

One of the lawyers representing Italy in the case brought by Rockhopper — after the state’s refusal to permit the development of the Ombrina Mare oilfield in the Adriatic Sea — said a defeat would be “extremely serious”, as it would give other companies “the desire to emulate Rockhopper”.

The active cases add to mounting global climate litigation involving both public and private sectors. But ECT cases are often shrouded in secrecy, with documents rarely made public. The secretariat website notes that “some awards (and even the existence of some proceedings) remain confidential”.

The cost of bringing or defending a case related to the treaty can run into the millions, with some complaints financed by specialist litigation funders in return for a share of any damages. The compensation sought by investors can include estimated future lost profits.

A 2021 report by the International Institute for Sustainable Development found that “the majority of known fossil fuel [investor-state dispute] cases are decided in favour of investors”.

Talks to “modernise” the treaty are under way. The European Commission has submitted a proposal that would see protections for fossil fuel investments phased out, which so far has been rejected by other signatory countries.

EU member states that remain reliant on fossil fuels, including Poland, are pushing the commission to leave the treaty if the debate is not resolved. “The EU needs to have a set of well-prepared options for a possible EU exit from the ECT,” wrote Poland’s minister for climate and environment, Michał Kurtyka, in a letter seen by the FT and sent to the EU’s climate policy chief Frans Timmermans last year.

However, countries that withdraw from the treaty remain bound by it for 20 years under the agreement’s so-called “sunset clause”.

Sports car brand is targeting 100-fold increase in production in six years with custom-built plant in China

Sports car brand Lotus is exploring a stock market listing within two years to help fund a major international expansion and investment in electric vehicles.

Last year, the historic brand split its operations into two business units — the Norfolk-based company making sports cars, and a luxury lifestyle company based in China that plans to make electric sports-utility vehicles.

The Lotus Group, which is majority owned by China’s Geely, has now begun exploring a listing of the lifestyle business, with the aim of raising capital to help it meet growth targets of a 100-fold rise in sales over the next six years, one of the company’s most senior executives said.

The brand plans to sell 100,000 vehicles worldwide by 2028, a huge rise on the 1,500 sports cars turned out by the company’s plant at Hethel last year, Matt Windle, managing director of the Lotus sports car division, told the Financial Times.

Geely has already tapped public markets with its float of Volvo Cars last year, while Volvo’s spun-off electric-car brand Polestar has announced plans to list in the first half of 2022.

At the centre of the new Lotus lifestyle unit is a series of sports-utility vehicles that aim to achieve the nimble handling of the brand’s sports cars, but broaden its appeal to drivers in China.

The first Lotus SUV, developed by engineers in the UK and Germany, will go into production later this year or early in 2023 at a custom-built plant in Wuhan, China.

A sports saloon will follow, with a smaller SUV expected around 2025. The plant, which was financed by Geely, has a capacity of 150,000 vehicles a year.

“We are in early discussions” about an IPO, said Windle.

Geely bought a 51 per cent stake in Lotus in 2017 as part of its deal to take control of Lotus’s former owner Proton. The Chinese group has poured more than £3bn into the business, allowing it to end production of its long-serving line-up of traditional “analogue” sports cars and develop new vehicles.

The company now has an electric supercar, the Evija, as well as its last combustion engine-driven sports car, the Emira. It also developed a platform for the three electric models to be built in China, as well as a dedicated system to make electric sports cars, which it expects to underpin a new electric supercar from 2025 or 2026.

Renault’s Alpine sports car brand will also produce cars using the Lotus sports car system. These are expected to be made in the UK.

Lotus expects that by 2028, 10 per cent of sales will be its sports cars, with the China-made vehicles accounting for 90 per cent.

The Lotus senior team last week held a two-day event in London to test investor appetite, following similar events in Guangzhou, Shanghai and Beijing last year.

The new Lotus SUV was shown at the event, with more details about the model expected to be released later in the month.

Nikkei -0.78% Hang Seng -0.75% CSI -0.36% Shanghai +0.00% Shenzen +0.61%

Eur$ 1.1373 CNH 6.326 CNY 6.3319 JPY 114.94 GBP 1.3629 CHF 0.9196 RUB 76.6785 TRY 13.6215 WTI$90.78-0.32% Gold 1,890.60-0.41 BTC 39,250 +2.60% ETH 2,750+6%

S&P -0.95% Nasdaq +0.93% EuroStoxx +0.94% FTSE +0.55% Dax +1.01% SMI +0.45%

Macro :

- ‘Danger Zone’ for Italian Debt the Next Focus for Bond Traders

- Johnson to Unveil Plan This Week to End U.K. Covid Restrictions

- JPMorgan Quant Says Fastest Trend Followers Are Set for Comeback

- EU Open to Cryptocurrency But With Regulation, Top Official Says

- Goldman Touts Attractive Risk-Reward in China Internet Sector

- Italy Approves $9 Billion Aid Package for Energy, Auto Relief

Keep an eye on :

- AF FP : Air France Has Shareholder Support for Capital Increase: Echos

- AON US : Aon Adds $7.5b to Buyback Program, Raises Quarterly Dividend 10%

- BAMI IM : Banco BPM Restarts Govt Incentives Tax Credit Trading Business

- BDT GY ; Bertrandt 1Q Ebit EU9.91M Vs. EU4.53M Y/y

- BOCH LN : Bank of C CNyprus 4Q Adjusted Pretax Profit EU31M

- BOO LN : Battle of the billionaires as hedge fund tycoon targets Boohoo

- SHL GY : FTC Approves Changes to Boston Scientific Divestiture Agreement

- BP/ LN : BP CEO Looney Gets GBP 1.2 Million in Company Shares as Bonus

- CO FP : Casino’s GreenYellow Said to Raise About 200 Million Euros

- CLG LN : GXO Logistics Plans to Buy U.K.’s Clipper for About $1.3 Billion

- CSGN SW : Credit Suisse Had Clients Tied to Corruption, Reports Say

- CSGN SW : SoftBank Calls Credit Suisse Subpoena a ‘Fishing Expedition’

- DGE LN : Diageo Starts Third Phase of Return of Capital Program

- DGI9 LN : Digital 9 Says Pact for Tetra Ireland Majority Stake Is Ended

- DNO NO : DNO 2P Reserves 321M BOE at End of 2021, Down From Year Earlier

- DUFN SW ; Dufry Names Xavier Rossinyol CEO as of June 1

- ENI IM : Eni Said to Add Six Banks for IPO of $11 Billion Renewables Unit

- ENO SM : Elecnor Seeks Financial Partner for Wind Power Generation Unit

- ERICB SS : Apple Bid to Block Ericsson Base Stations Get ITC Investigation

- EXO IM : Exor Says It Made Settlement With the Italian Tax Authorities

- EO FP : Faurecia SE FY Ebitda Beats Estimates

- FIXX US : plunges 34% in after hours, after saying it was notified by the FDA that its pheNIX gene therapy trial of HMI-102 has been placed on clinical hold due to the need to modify risk mitigation measures.

- HNR1 GY : Hannover Re Transfers Catastrophe Bonds to Capital Market

- HLMA LN : Halma Bought International Light Technologies for $26.6M

- ICAD FP : ICADE FY Group Net Current Cash Flow per Share Beats Estimates

- INTRUM SS : Intrum Committee Proposes Magnus Lindquist Board Chairman

- MNZS LN :Menzies Gets Increased Proposal From Agility at 608p/Share Cash

- MRK GY : Merck KGaA Gets EC Approval for Tepmetko for Advanced NSCLC

- NWG LN : NatWest to End Ties to Some Clients Over Pollution: FT

- NHY NO : Norsk Hydro Says Power Failure Cut 25% of Brazil Plant Capacity

- NDX1 GY : Nordex Weighing Options for Its German Production Sites: DPA

- PHA GY : Porsche to Invest $570 Million for Electric 718: Automobilwoche

- PAH3 GY : Porsche Taycan Overtakes 911, But Both Winners in IPO or Spinoff

- REC BB : Greiner to Sell 22.6% Stake in Recticel to Baltisse

- REP SM :

- SFOR LN : S4 Capital Considers Listing in U.S.: Times

- SFQ GY : SAF-Holland SE Prelim 4Q Adjusted Ebit EU22M vs EU20.3M

- SEM PL : Semapa FY Net Income EU198.1M Vs. EU106.6M Y/y

- TEF SM : *TELEFONICA, DAZN REACH EU1.4B ACCORD ON SPANISH FOOTBALL: CONFI

- TSLA US : Tesla Faces Scrutiny by German Regulator Over Autopilot Feature

- TIT IM : Telecom Italia Says Plan Targets Not Yet Discussed

- TIT IM : *KKR MAY OPPOSE TELECOM ITALIA'S GRID SPINOFF PLAN: LA STAMPA

- TTE FP : TotalEnergies, APA Make Significant Oil Discovery in Suriname

- WLN FP : Worldline Gets EU2.3b Offer From Apollo for TSS