TheChek News Flow

CDSs/SEC: easier to spotlight wheezes than stop them

Legal threat will probably have intended chilling effect on the most aggressive hedge funds

The distressed debt markets have resembled the Wild West in recent years. Free-wheeling hedge funds, not content with buying beaten-down bonds and loans, have turned to derivatives to amp up wagers. Some appear to have used credit default swaps — conceived originally as hedging tools for debtholders — to force companies to file for bankruptcy, or avoid doing so. This generated big gains or losses for CDS investors.

There is no new sheriff in town. But the old one is polishing up its badge before higher rates and tapering state support cause problems. The Securities and Exchange Commission last month proposed sweeping new rules to force the public disclosure of large CDS positions. These would also make CDS investors subject to the existing anti-fraud provisions of US securities law.

The disclosure requirements look sensible. The anti-fraud rider looks more like hand-waving. Odious though some CDS transactions may appear, very few look anything like market manipulation. But the mere introduction of a legal threat will probably have the intended chilling effect on the most creative and aggressive hedge funds.

In two high-profile CDS cases — involving Europe’s Codere SA and Hovnanian of the US — hedge funds with credit derivative bets fought to give weak companies better rescue financings. In return, the companies were meant to default, or avoid it, at specific dates.

In another case, US telecoms group Windstream was forced to file for bankruptcy when hedge fund Aurelius Capital successfully argued in court that a reorganisation had been improper. The hedge fund, which held CDSs, then seemingly won a windfall. How much is unclear, given the lack of disclosure the SEC seeks to fix.

Other regulators have previously frowned upon hedge fund manoeuvres involving CDSs. Bad headlines have made hedge funds more wary of appearing opportunistic and greedy. Company failures have a human as well as a financial dimension.

The SEC’s efforts to shine a light on swap transactions is wise. Enforcement actions will however be trickier to pull off than the moneymaking wheezes they aim to police.

And, by the looks of it, little else.

Half of 25GW seabed rights will use ‘floating’ technology turbine technology for the first time at large scale

The Scottish government has awarded 25 gigawatts of offshore wind project development rights, more than double the UK’s existing offshore wind capacity, in one of the biggest auctions of its kind in the world.

More than half the projects, with a total capacity of 13GW, will use “floating” wind turbines, the first time that this technology, which is tethered to the seabed, will be deployed commercially at a large scale.

The UK can already generate about 10GW of electricity from existing offshore wind farms but a number of other projects already under development will expand that capacity further. In 2020, the UK set a target of 40GW by the end of the decade as part of its 2050 net zero emissions target.

The Global Wind Energy Council trade body said Monday’s auction result would allow the UK to exceed its 40GW target by 2030.

The projects, valued at up to £50bn in total, will be built in various locations in Scottish waters over the next decade and would help the UK maintain its position as one of the world leaders in offshore wind generation. Many governments, including the UK, have identified maritime wind power as key in meeting challenging climate targets.

Crown Estate Scotland, which manages land and property on behalf of the Scottish government, on Monday awarded the rights for 17 projects by developers, including the UK’s BP and SSE, Anglo-Dutch rival Shell, Spain’s Iberdrola and Sweden’s Vattenfall. The auction, the first since the management of offshore wind rights were devolved by the UK government to Scotland in 2017, attracted more than 70 bids.

The permits grant developers access to specific areas of the seabed off Scotland’s coast, although successful applicants will still have to go through other planning processes and secure a UK government subsidy contract that guarantees a minimum generating price.

“This will be the first time that floating wind is built at commercial scale,” said Rebecca Williams, head of offshore wind at the Global Wind Energy Council. “That has huge global significance, because it means that offshore wind can be built in places with deeper coastlines, like Japan and Taiwan.”

The results surprised both developers and environmental groups as the initial aim of the auction was to add 10GW of generating capacity.

Scotland is already home to the world’s first but small-scale floating offshore wind farms. Traditionally, offshore wind farms use turbines that are fixed to the seabed. But the nascent floating technology allows projects to be built further out at sea at greater depths, where wind speeds are typically higher, or over parts of the seabed where the geology would not support fixed foundations.

The auction will bring in an initial £700m for the Scottish government, which said it expected the developers to deliver at least £1bn of investment in the UK’s renewable energy supply chain for every gigawatt of power.

Successive governments have been criticised for failing to ensure that local suppliers benefited from the drive over the past decade that has seen the UK establish itself as a world leader in offshore wind. Most of the lucrative manufacturing contracts have instead gone to companies abroad.

ScottishPower, owned by Spain’s Iberdrola, was the most successful in the auction, securing rights for three projects with a total capacity of 7GW.

The winners of the auction included some new entrants to the offshore sector, including Italy’s Falck Renewables and BayWa of Germany, which are both better known for their onshore wind projects.

Some of the largest offshore wind developers, Germany’s RWE and Norway’s Equinor, failed to secure any rights.

China’s call to foster semiconductor independence has sent investors chasing after chip startups of all sorts. Moffett AI, a Shenzhen-based chip design company, has received a fresh Series A injection. The company did not disclose the exact amount, only saying that the proceeds were in the “several tens of millions of dollars.”

The round was led by CoStone Capital and the Greater Bay Area Homeland Development Fund, a financial vehicle set up to support startups in the GBA economic zone, which is China’s grand project to integrate Hong Kong, Macau, Shenzhen and several other cities in the southern province of Guangdong.

Other investors in the Series A financing include Co-Power, Grand China Capital, and Shenzhen Angel Fund of Funds, a strategic fund set up by Shenzhen’s municipal government to “hunt down the next Huawei, Tencent and DJI.” Moffett’s last round from March 2020 closed at 100 million yuan (around $16 million).

From autonomous driving vehicles to video streaming recommendations, artificial intelligence has become an essential part of our digital life. The skyrocketing demand for AI capabilities has put a strain on computing performance, so companies that provide AI acceleration, such as Moffett and Foxconn-backed Kneron, become coveted.

Moffett vows that its AI chips differentiate by using a technology called “sparsification“, a process that prunes redundant information from neural network models and ultimately leads to faster processing. The startup plans to spend its new funding on expanding the “ecosystem” of partners and clients that use its sparse technologies and mass-producing its first chip, Antoum, which is manufacturered by TSMC.

The startup claims that its chip has a sparsity rate of 32x, which makes its processing power 5-10 times higher than that of “international flagship products.”

Headquartered in Shenzhen, Moffett also keeps R&D teams in Beijing, Shanghai and Silicon Valley, where it was founded in 2018. The startup is run by a group of AI research scientists from Carnegie Mellon University and semiconductor veterans from Intel, Qualcomm, Marvel and Oracle.

Indices of trade disruption being created by economists are helpful but hardly definitive

China’s economy grew 4% from a year earlier in the fourth quarter—faster than expected. But December data should give investors pause.

After a tumultuous 2021 marked by near-disaster in the property sector and a widening crackdown on other previously fast-growing industries such as internet technology, China’s economy demonstrated a bit of spark Monday. New figures showed fourth-quarter growth at 4% year over year, slower than the third quarter’s 4.9% but still well above the 3.3% consensus estimate among economists polled by FactSet.

Still, policy makers clearly don’t see much to celebrate: On Monday the People’s Bank of China also announced a 0.1 percentage point cut to two of its key policy rates.

The upbeat data shouldn’t be so surprising, particularly for October and November. Although China’s economy still struggled in the fourth quarter, it benefited from the absence of two big problems from the third quarter: the midsummer Delta variant outbreak and late summer power shortages. Resilient exports supported manufacturing investment, and the slow trickle of monetary easing since July appears to have helped stabilize weak infrastructure investment.

Single-month December data released alongside gross domestic product was largely bad, however, particularly for consumers and the all-important housing sector. Retail sales rose just 1.7% year over year, the weakest growth in over a year. And with China still fighting multiple Covid-19 outbreaks in mid-January—including some linked to the hyper-contagious Omicron variant—the prospects for January and February look bleak too.

More worrying, mortgage lending appears to have retreated in December, after a noticeable bump in November: Growth in seasonally adjusted medium- and long-term loans to households slowed to 9.5% from 14.3% month on month annualized, according to Goldman Sachs. Housing sales also fell back. With infrastructure investment still struggling to accelerate and consumers hunkering down, it is difficult to imagine a floor for overall Chinese growth without more definitive signs of a bottom in real estate.

Even after today’s modest policy rate cuts, monetary easing so far still looks conservative compared with past cycles—and many market rates are still relatively high. More help will be needed to head off a deeper slowdown in the first half of 2022.

Yemen’s Houthi Rebels Claim Suspected Drone Strikes on U.A.E. Capital

Rebels say deadly attack was retaliation for Emirates’ intensifying role in Yemeni war

The Houthis, who are backed by Iran, said they had targeted Abu Dhabi in retaliation for a recent escalation by the U.A.E. in Yemen, where Emirati-backed militants last week dealt the Houthis an unexpected defeat in the oil-rich province of Shabwa. Three people were killed and six injured in explosions Monday that showed the Houthis are willing to strike in the heart of a country seen as the region’s main hub for international business.

If confirmed to be a drone strike, as suspected by local police, Monday’s strike is the latest in a string of attacks that U.S., European and Israeli defense officials say illustrate the rapidly developing ability of Iran and its allies across the Middle East to build and deploy drones, which is changing the security equation in the region.

In the past year, the Houthis have developed advanced versions of their drones that are capable of long-range strikes with vastly improved precision, according to a draft report by the U.N. panel of experts seen by The Wall Street Journal.

U.A.E. officials said they are investigating the incident. The Abu Dhabi police said it had detected small flying objects “possibly belonging to drones.”

Abu Dhabi, the Gulf state’s capital, didn’t immediately blame anyone for the attack. While the Houthis claimed responsibility, Iranian-backed Iraqi militias last week also threatened to attack the U.A.E. with drones and missiles for allegedly unifying Sunni politicians against them and tampering with Iraqi elections.

The strikes caused an explosion involving three fuel trucks in Musaffah, an industrial area west of Abu Dhabi and a fire in a construction site at Abu Dhabi airport, according to U.A.E. state media. Those killed were two Indian citizens and a Pakistani, according to state media in the U.A.E.

Nasr al-Din Amir, deputy chief of the Houthis’ ministry of information, said more attacks were planned.

“The aim of this operation is to respond to their escalation and deter them, and if the Emirates continue their escalation, we will keep responding with our military operations against the U.A.E.,” he said.

The strike on Monday is the most recent sign that Yemen’s seven-year war is flaring back up, as opposing sides accelerate military operations, threatening a dangerous new spiral of violence.

While the Houthis have repeatedly targeted Saudi Arabia with missiles and drones, and claimed to strike the U.A.E. in 2018, Houthi long-range drone and missile attacks usually don’t cause fatalities.

Despite being part of the Saudi-led coalition in Yemen fighting Iranian-backed Houthis, the U.A.E. has for years taken a less prominent role in the region’s conflicts. Two years ago, the U.A.E. announced it was withdrawing from Yemen’s war, leaving only a small contingent of forces.

But in recent days, the Emiratis stepped up support for local militias, said militia fighters and U.S. officials. The U.A.E.’s moves include airstrikes and repositioning militia fighters from the coast to prop up ranks in Shabwa, say local Emirati-backed militia members and the Houthis. The U.A.E. has for years supported the fighters with medical treatment for wounded troops and wages.

Those efforts last week helped local militias push the Houthis out of Shabwa, dealing them the most significant battlefield loss in years. The capture of Shabwa challenges the rebels’ efforts to capture the oil hub of Marib, the last city under government control in the north of Yemen.

A U.S. official said the U.A.E. has been working with the Saudis to unify the fractured Yemeni forces as they make a concerted push to reverse Houthi gains.

“There’s been an increase in coordination and the Emiratis are providing a little more muscle as part of the Saudi-led coalition,” the official said.

Company’s stock fell 8.1% Monday in Hong Kong, to reach its lowest closing level in nearly five years

Investors in Chinese property bonds can’t catch a break, as a crisis of confidence spreads to stronger-looking developers that mostly avoided last year’s selloff.

The most recent cause for concern: Country Garden Holdings Co. 2007 -8.14% Ltd., which was China’s largest developer by contracted sales last year, according to China Real Estate Information Corp. It is one of the few privately owned companies in the sector with much healthier credit ratings than its highly leveraged peers.

Until recently, Country Garden’s dollar bonds had been largely insulated from the broader selldown triggered by government curbs on borrowing, declining home sales and the financial difficulties at rival China Evergrande Group.

On Monday, however, a Country Garden bond due in 2026 was quoted at 67.5 cents on the dollar, according to Tradeweb. The bond—which is rated investment-grade by two of the three major global credit-rating firms—has declined steeply in recent days, dropping by more than 20 cents on the dollar in three sessions.

Meanwhile, the company’s stock fell 8.1% Monday in Hong Kong, to reach its lowest closing level in nearly five years, while shares in some smaller competitors such as Cifi Holdings (Group) Co. and Sunac China Holdings Ltd. also fell.

Analysts and investors said Country Garden’s recent change of heart over a potential fundraising had helped unnerve investors.

Last week, the developer decided not to proceed with selling a convertible bond after bankers at Morgan Stanley and JPMorgan Chase & Co. failed to garner sufficient interest from investors for a potential $300 million deal, a person familiar with the matter said.

Country Garden said it had looked into different funding channels and engaged banks to offer different products, but “wouldn’t consider issuing convertible bonds when market conditions aren’t suitable.”

In an emailed response to questions, Country Garden said it held more than 186 billion yuan, the equivalent of $29.3 billion, of cash as of June and had strong cash flow. The company said it recently issued onshore corporate bonds and asset-backed securities, reflecting its standing with investors and regulators.

The bond-market turmoil has mostly shut the market for new issuance of standard corporate bonds by developers, depriving them of a crucial means of refinancing coming dollar debt. Convertible bonds are different instruments that blend some of the features of shares and bonds, paying an interest rate to holders but giving them the chance to swap their debt for shares if the issuer’s stock price hits a certain level.

Investors have cooled on some other comparatively strong developers in recent weeks, including Shimao Group Holdings Ltd. , which has fallen behind on some payments due on trust loans. These are a form of shadow financing in China that is popular with the country’s property companies.

Bonds from Logan Group Co. Ltd. have also fallen steeply in recent days, with one bond due 2023 dropping from 91.9 cents on the dollar a week ago to be bid at 62.8 cents on the dollar on Monday, according to Tradeweb.

Given weak investor sentiment, “even the stronger developers may experience volatility because of rumors and negative headlines,” said Luther Chai, senior research analyst at CreditSights.

At the same time, downward pressure has emerged on bonds from junk-rated developers. A property-dominated ICE BofA index of Chinese high-yield dollar bonds was yielding 24.2% as of Friday, up from 18.6% at the end of 2021.

Country Garden has $411 million of dollar debt due next week, and another $700 million due in July. The company said it would use its own cash to repay the bond next week, and has prepared the funds needed. It will arrange payments for the July bond based on market conditions at that time.

The company has a Baa3 credit rating from Moody’s Investors Service and an equivalent BBB- grade from Fitch Ratings, both on the lowest rung of investment grade. S&P Global Ratings gives the company a BB+ score, the highest non-investment-grade rating.