TheChek News Flow

Markets seem unconcerned that the pandemic has left borrowing at all-time highs

Early in the Covid-19 pandemic, it became clear that the global economy would require a massive extension of public and private debt to avoid an extraordinarily deep and persistent depression.

Because this unprecedented explosion in debt provided a “bridge” over the collapse in world output, corporate bankruptcies and economic hardship for households have been significantly mitigated.

In light of the progress on vaccines, investors can be more confident that the end of the debt bridge is in sight. Nevertheless, this year’s surge in borrowing has been called the largest wave in a great “debt tsunami”.

The Institute of International Finance recently reported that the ratio of global debt to gross domestic product will rise from 320 per cent in 2019 to a record 365 per cent in 2020. The IIF concludes starkly: “more debt, more trouble”. Financial markets have ignored these warnings. Global equities have reached new highs and credit spreads have been narrowing, almost as if extreme debt is a good, not a bad, economic development.

It is a stretch to share this optimism over the long term. As the World Bank explained in December 2019, previous waves of debt have frequently ended in global financial meltdowns, including in Latin America in the 1980s, Asia in the mid-1990s and US housing in the 2000s. The World Bank says another wave of emerging market and global debt started in 2010, but this has shifted to an entirely new level this year.

Is this a serious near-term threat to the stability of financial markets? Here, the verdict seems more encouraging.

Macroeconomic conditions offer some support for higher debt ratios. The forces of secular stagnation have created a further excess of global savings over investment, reducing equilibrium real interest rates and inflation. This has encouraged central banks in advanced economies to purchase about 63 per cent of the rise in their government debt, mitigating the risks of funding crises.

The safety net offered by central bank support, notably by the US Federal Reserve, has been greatly extended compared with previous crises. Market-maker of last resort functions have prevented liquidity problems that would otherwise have tightened global financial conditions. These actions have made debt crises far less likely.

The immediate provision of large-scale dollar swaps to emerging economies has reduced the severity of dollar shortages. Many emerging market central banks have started their own quantitative easing, despite weakening currencies that might trigger inflation.

The Fed has also provided direct lending to corporates, state and local governments, and households, supported by capital injections from the US Treasury. Although these facilities have not been greatly used, they have been a game changer by providing a backstop for credit markets, unlocking trillions of dollars of private sector lending.

Economist Paul Krugman has correctly compared the effect of these initiatives with the “whatever it takes” speech of Mario Draghi in 2012 when he was president of the European Central Bank, which effectively ended the euro crisis by promising unlimited central bank intervention if needed.

While Treasury secretary Steven Mnuchin has now started to withdraw this support in defiance of unambiguous advice from the Fed, it seems probable that expected new secretary Janet Yellen will keep the facilities operating by using the Exchange Stabilisation Fund in any new emergency.

A final contrast with the 2008 financial crisis is that households now account for a much smaller fraction of the extra global debt, and the banking sector seems better capitalised and less leveraged. But global debt should not be treated as a homogenous commodity. Its distribution is perhaps more important than its total and, clearly, some categories should cause concern. These include US corporate debt, already a headache, and now greatly increased in the consumer sectors most damaged by Covid-19. Small and medium-sized companies are facing severe bank funding stress, especially in the EU.

China has also been a dominant contributor to the 2020 debt surge, and the authorities are trying to dampen a property boom by restricting credit growth, thus slowing the expansion in GDP. Other emerging market debt is clearly a potential problem, especially in the low-income group.

A far more dangerous, systemic debt crisis probably requires a reversal of secular stagnation, and a rise in world inflation, forcing the Fed to tighten monetary policy significantly. Luckily, that still seems a very long way off.

Airbnb plans to target a range of around $30 billion to $33 billion, while DoorDash will seek a valuation of around $25 billion to $28 billion

Airbnb Inc. and DoorDash Inc. are planning to release higher-than-expected valuation ranges for their initial public offerings, in the latest sign of strength in a booming market for new issues.

Airbnb is planning to target a range of around $30 billion to $33 billion—using a fully diluted share count—when the home-rental startup kicks off its investor roadshow Tuesday, according to people familiar with the matter. That is greater than $30 billion people close to the offering had expected.

DoorDash, meanwhile, plans to target a range of around $25 billion to $28 billion on a fully diluted basis, excluding the more than roughly $3 billion in cash and proceeds expected after the IPO. That is greater than the $25 billion people close to the offering had expected. DoorDash’s roadshow is expected to begin Monday.

Typically companies and their underwriters seek to set relatively conservative initial ranges, with room to potentially price the shares at the high end or above them before trading starts.

It isn’t clear what per-share price ranges the companies will disclose.

Airbnb and DoorDash are on track for listings in mid-December—typically a quiet month for offerings, ending a banner year for IPOs with a bang. There has already been a record amount of money raised in new issues on U.S. exchanges as soaring technology valuations entice a raft of private companies to join the public markets.

Activity has been buoyed by the record-setting run for the stock market. The Nasdaq Composite hit a new closing record on Friday during a holiday-shortened trading session. The broad S&P 500 notched its 26th record close of the year Friday, and the Dow Jones Industrial Average vaulted above the 30000 mark for the first time last week.

So far this year, more than $140 billion has been raised in 383 initial public offerings on U.S. exchanges, far exceeding the previous full-year record high set at the height of the dot-com boom in 1999, according to Dealogic data that dates back to 1995.

Both Airbnb and DoorDash have weathered the coronavirus pandemic as more people shun hotels in favor of houses for vacations or longer-term stays, and order out to avoid restaurants.

Airbnb was valued at $31 billion in a 2017 investment round. The San Francisco company’s valuation fell to $18 billion when bookings plummeted at the outset of the pandemic as travel came to a virtual standstill.

Airbnb Chief Executive Brian Chesky quickly borrowed $2 billion, slashed marketing spending, laid off a quarter of the company’s staff and put many noncore projects on hold. Bookings at Airbnb rebounded by summer, though nowhere near pre-pandemic levels, as people increasingly seek houses for local getaways.

For DoorDash, a valuation of more than $25 billion would continue what has been a sharp upward march. San Francisco-based DoorDash’s private valuation had already ballooned to more than $15 billion this year from just $1.4 billion in 2018 as it took an even greater share of the U.S. food-delivery market. It is now the biggest player in the sector.

DoorDash will take a relatively new tack in determining the price of its IPO. Working with its underwriters, the company will ask investors to put orders into an online platform built by Goldman Sachs Group Inc. Investors will be asked to place orders for various amounts of shares at different price points. DoorDash and its bankers will then use those bids to price the deal and allocate the shares. Typically, underwriters set pricing based on more generalized feedback on investor demand.

For both companies, their roadshows will look different than they would have in the pre-Covid-19 world. Executives at both companies will market their offerings to mutual funds and hedge funds in Zoom meetings rather than in a whirlwind tour across the country.

Both companies and their respective underwriters will set their final IPO prices based on feedback from investors in the roadshows. Morgan Stanley and Goldman Sachs are leading Airbnb’s IPO, while Goldman and JPMorgan Chase & Co. are leading DoorDash’s.

Corrections & Amplifications

The S&P 500 notched its 26th record close of the year on Friday. An earlier version of this article incorrectly said the S&P 500 was near a record. (Corrected on Nov. 29)

Landmark deal would combine two of the largest providers of data to Wall Street

S&P Global Inc. SPGI 1.04% is nearing a deal to acquire IHS Markit Ltd. INFO 0.30% for about $44 billion, according to people familiar with the matter, a landmark deal that would combine two of the largest providers of data to Wall Street.

The all-stock deal, which at that price would be the largest of the year, could be announced as soon as Monday, the people said. There is always a chance the talks could fall apart at the last minute.

IHS Markit, based in London, has a market value of about $37 billion; S&P’s is about $82 billion.

The deal would combine one of the oldest names in financial markets with a relative newcomer. S&P traces its roots to an 1860 compendium of information for railroad investors and is best known for its bond ratings and its iconic stock-market indexes, which serve as shorthand for the health of global markets.

IHS Markit, formed in 2016 by the merger of two smaller players, tracks millions of data points in financial markets. It owns software that big Wall Street banks use to underwrite corporate stock and bond offerings, and tracks transportation and energy data, the latter of which could pair with S&P’s commodities business, Platts.

Financial data has exploded over the past two decades as markets sped up and computer-driven investment strategies replaced human stock pickers. The success of Bloomberg LP, which launched in the 1980s offering electronic bond-price quotes, spawned a wave of competitors seeking market intelligence that could be packaged and sold to information-hungry investors.

Those players have themselves merged in recent years into a handful of giants, as data providers such as S&P Global and FactSet battle it out with big exchanges eager to monetize their pricing data to offset falling trade commissions.

Blackstone Group Inc. in 2018 bought a majority stake in Thomson Reuters Corp.’s financial-data arm and a year later agreed to sell the company, by then rebranded as Refinitiv, to the owner of the London Stock Exchange.

In 2016, IHS, which provided analytics for businesses and governments, bought London-based Markit Inc. and moved its domicile to the U.K. It was part of a wave of such deals, known as inversions, in which American companies moved overseas to lower their tax rates.

Markit was founded in 2003 in a barn outside London by former TD Securities executive Lance Uggla and was backed in its early days by a group of large banks eager for transparent pricing data in the opaque world of credit derivatives.

It went public in 2014, raising $1.3 billion in a larger-than-expected IPO that allowed 12 Wall Street banks including Goldman Sachs Group Inc. and Bank of America Corp. to sell portions of their stakes.

Mr. Uggla took over the combined company around the end of 2017 from his counterpart at IHS.

At the time of the merger between IHS and Markit, the two companies had a combined market value of about $13 billion. Today, IHS Markit is nearly three times as valuable, a sign of how hot the market for financial data is.

IHS in late September reported that its third-quarter profit rose while its revenue fell as its customers—which include companies in financial services, transportation and oil and gas—recovered from the shock of the coronavirus pandemic at varying speeds. A unit that supplies data to energy companies and one that sells technical information to product designers, among other things, were worst hit.

S&P is now bulking up after years of slimming down. The company in 2011 was spun out of the McGraw Hill publishing conglomerate and in 2016 sold J.D. Power, the marketing firm known for its customer-satisfaction rankings, before rebranding from McGraw Hill Financial.

S&P’s revenue rose 9% in the third quarter, rising in all of its divisions and especially in the ratings business, its largest. The business has benefited as bond issuance soars with interest rates at historic lows. Profit fell compared with a year ago.

At $44 billion, S&P’s deal for IHS would be the largest of the year globally, according to Dealogic data, topping both chip maker Nvidia Corp.’s nearly $40 billion deal to buy chip designer Arm Holdings. and a roughly $40 billion deal between Nippon Telegraph & Telephone Corp. and a subsidiary.

Global M&A volume so far this year is running 12% lower compared with the same period a year earlier, with the U.S. down 28%, after the pandemic forced companies to tend to their own businesses. Deals dried up in the second quarter but have come roaring back since late summer, particularly among technology and health-care companies. As in prior years, technology is by far the most active sector for M&A, with $669 billion worth of deals so far.

With the stock market rallying, many acquirers are using their richly valued shares as currency, prompting a steady stream of all-stock deals in recent weeks.

The Wall Street Journal reported last week that Salesforce.com Inc. is in talks to buy Slack Technologies Inc., for more than the $17 billion market value of the maker of a popular office-chat app.

Asset manager’s fate hangs in the balance amid controversy over its links to German financier Lars Windhorst

“There is a very simple rule in investment,” said Bruno Crastes with a wry smile. “If you are not able to get poor, you will never get richer. When you don’t want to lose, you will never make money.”

The tanned and silver-haired chief executive of H2O Asset Management articulated his philosophy of risk-taking at an awards ceremony in 2018, where he was collecting a trophy for market-beating returns.

The Frenchman used his acceptance speech to assert that his industry had become “corrupted by all this regulation and all this risk management”, which made investors “behave like software”.

Two years later, Mr Crastes’ approach to investing is under strain. The fate of his €20bn investment firm hangs in the balance. A year of drastic losses, renewed scrutiny around risk controls and regulatory difficulties pushed H2O’s majority shareholder Natixis to cut ties.

Natixis, the French bank that has backed H2O since its inception a decade ago, declared earlier this month that it was looking to sell out of the London-based asset management subsidiary.

It marked a sharp U-turn from a partner that had previously given H2O its unequivocal backing. That endured through a bruising 18 months, which began when the FT revealed that H2O had poured more than €1bn into hard-to-sell bonds linked to the controversial German financier Lars Windhorst.

Now, cut off from the powerful Natixis fund marketing machine that helped H2O grow to more than €30bn in assets at its peak, Mr Crastes faces the biggest test of his more than 30-year career. He will need all of his charisma and self-confidence to retain investors, many of whom once regarded him as the finest European fund manager of his generation.

“He’s super charming, very smart and very arrogant,” according to an investment consultant, who said that the 55-year-old inspires “cult-like” loyalty in some of his clients.

Even among his most ardent supporters, cracks have begun to appear. Several of France’s biggest life insurance firms — once the backbone of H2O’s domestic investor base — have halted new investments.

If Mr Crastes cannot cure the crisis of faith among some of his disciples, it would prove a stunning downfall for a star fund manager once lionised for his moneymaking bets on the direction of bond and currency markets. He declined to be interviewed for this article.

In his heyday, the UK’s fallen star stockpicker Neil Woodford was known as the “man that made Middle England rich”. Mr Crastes’ Midas touch, in contrast, generated outsized returns for a truly international group of investors. His fan base stretched from retail investors in France and Italy to professional money managers in Switzerland and South Korea.

That broad appeal was no mystery. In the 25 years to the end of 2019, Mr Crastes recorded an astonishing return of close to 2,500 per cent, according to H2O marketing materials. In its first decade, the asset manager recorded annual returns of over 30 per cent on five separate occasions.

The firm’s 2019 accounts show that its discretionary profit shared between H2O’s management team and Natixis topped £400m, the largest ever annual pre-tax payout to its owners. By then Mr Crastes had swapped a home in London’s Kensington for the tax haven of Monaco.

“Bruno was seen as the French Soros,” said one former investor, referring to legendary hedge fund billionaire George Soros.

A trained actuary and mathematics graduate of the University of Lyon, Mr Crastes began his fund management career in 1989 after a brief stint as a proprietary bond trader. He made his name in the early 2000s at the asset management arm of Crédit Agricole, France’s largest retail bank, running a team in London that became known for skilfully navigating swings in bond and currency markets.

One investor recalled how the Frenchman’s desk was at the centre of a large room in Crédit Agricole’s offices near the Bank of England. Trading teams would sit around it, with those in favour often parked closest to him. “It was like a royal court with the king in the centre,” the investor said.

It was here that he earned a reputation for an uncanny ability to bounce back — even from periods of extreme losses.

In 2007, Mr Crastes dismissed the brewing US subprime mortgage crisis as “something that shouldn’t damage the state of the real economy”. This disastrous misjudgement meant that several of his team’s funds at Crédit Agricole were sitting on huge losses. But the following year, they staged a stunning comeback.

With a stellar period of performance behind him, Mr Crastes struck out on his own in 2010, setting up shop with his longtime business partner Vincent Chailley as chief investment officer. The pair convinced Natixis, Crédit Agricole’s rival co-operative lender, to snap up a 50.01 per cent share in the newly minted H2O Asset Management — named after the importance of managing liquidity risks that Mr Crastes learned during the financial crisis, he said at the time.

Natixis operates a multi-boutique asset management model, where subsidiaries are run at arm’s length but can tap into the parent group’s marketing might. Mr Crastes became a fixture at the French bank’s fundraising roadshows, drawing attention with his bold and often contrarian macroeconomic outlooks. When economists from other investment firms spoke, the H2O chief had no qualms about publicly disagreeing with or dismissing their predictions, according to attendees. 

“Stop listening to economists; listen to traders!” he implored during one such presentation.

H2O’s team “weren’t in any doubt about their own brilliance”, said another former investor. “They were firmly of the view that they were the smartest guys in the room.”

H2O’s present predicament arose after Mr Crastes strayed far from his usual area of expertise. He invested heavily in the debts of a ragbag assortment of businesses linked to one man: Lars Windhorst, a financier who had previously weathered the collapse of two companies, personal bankruptcy and served a suspended prison sentence.

H2O began dabbling in trading bonds linked to Mr Windhorst just over five years ago, after he met the firm’s co-founder Mr Chailley. In the past few years, Mr Windhorst developed a close relationship with the H2O duo. He and Mr Crastes would sometimes socialise together on the German businessman’s yacht or at private members’ clubs, according to people who also attended.

H2O’s investors and members of Mr Windhorst’s circle have questioned why a firm whose bread and butter was trading government bonds decided to pour billions of euros into thinly capitalised businesses such as La Perla, a lossmaking lingerie maker.

In June 2019 the Financial Times revealed the scale of H2O’s exposure to Mr Windhorst. Initially Mr Crastes appeared unruffled, coolly assuring clients in a video address that the financier was “extremely talented”.

But one week and €8bn of investor withdrawals later, Mr Crastes appeared rattled. In a second video, this time much more emotional, he pledged that — unlike Mr Woodford’s eponymous firm — H2O would “never gate” its investment vehicles.

The bold promise halted the stampede. Loyal investors were once again rewarded for sticking with Mr Crastes through another difficult period: his main fund finished 2019 up by more than a third.

By mid-March of this year, however, Mr Crastes’ flagship fund had halved in value as fears about the coronavirus pandemic roiled markets. His losses were amplified by the high leverage that had previously boosted returns.

Since then, the Frenchman struck a deal with Mr Windhorst where the German was to buy back his illiquid bonds, but so far progress has been “very partial”. In a recent video message to clients, Mr Crastes appeared solemn, and had swapped his suit for a grey jumper. His face was uncharacteristically covered in light stubble.

In a September address to investors, Mr Crastes admitted that investing with Mr Windhorst had “created more problems than it has created performance”, but pledged that he would do everything possible to reward clients’ trust.

“We will fight to our last breath to ensure that these transactions, despite everything, won’t cost the investment portfolio.”

Ian Rogers trades Louis Vuitton glam for new frontier of digital currencies

Ian Rogers, LVMH’s chief digital officer, has left the luxury giant to join a French start-up called Ledger that is a world leader in making hardware-based digital wallets to hold cryptocurrencies such as bitcoin.

The California native has spent much of his career at the intersection of music and technology as a serial entrepreneur. LVMH recruited him in 2015 from Apple where he helped roll out its streaming service, and enlisted him to expand its ecommerce operations and inject brands such as Louis Vuitton and Dior with more digital knowhow.

Now Mr Rogers, 48, is trading in LVMH’s glitzy offices on luxury shopping street Avenue Montaigne for Ledger’s more modest digs in a central Paris neighbourhood called Silicon Sentier that is home to many start-ups. 

His mission as Ledger’s chief experience officer will be to expand its consumer business and help bring cryptocurrency ownership to the masses as opposed to the relatively niche activity it remains today.

“When I look at cryptocurrency, privacy and security, I have a similar feeling I did about music in the early 2000s at the beginning of the streaming era,” said Mr Rogers in an interview.

“There is an inevitable change coming, but it’s the very beginning, so not everything will be easily predictable . . . but these are very fast-growing markets, so that’s where I like to be.”

Mr Roger’s move to Ledger comes amid a rally in bitcoin this year — the price hit an intraday high last week of $19,510 before dropping back. Many new investors have flocked to the asset helped by improvements to the tools and trading platforms that facilitate bitcoin trading. Some also see bitcoin as a potential inflation hedge.

Ledger, which was founded in 2013, sells hardware security products to protect users of cryptocurrencies and blockchain applications to secure their digital assets. It has sold about 2m digital wallets across 165 countries, with its Nano series among the industry’s most popular hardware solutions.

Ledger has raised $87m from venture investors including Draper Esprit and Samsung Ventures. The valuation implied in its last funding round in 2018 has not been disclosed.

Pascal Gauthier, chief executive, said Ledger planned to hire more than 100 people next year to expand its existing workforce of 250.

Most of the start-up’s sales come from consumers, but in 2018 it began marketing a product called Ledger Vault to institutional investors such as hedge funds that needed to secure their crypto assets.

“We want to grow by bringing new features to the technology to make it more secure and easier to use,” said Mr Gauthier.

“I need help to scale the business and take it to the next level, and Ian has the experience, leadership, vision and management skills to help.”

While at LVMH, Mr Rogers helped refine the luxury conglomerate’s approach to how it sells and promotes its brands online, winning over some insiders who feared ecommerce and social media would dilute the exclusivity of the group’s products.

Ecommerce has accelerated in luxury this year as the pandemic has forced months of store closures. Some analysts predict ecommerce will account for nearly half of luxury sales by 2025 when the industry is expected to have recovered from the impact of Covid-19.

Mr Rogers said he would remain an adviser to LVMH on digital projects, as well as continuing to run its annual innovation awards, a competition for luxury, fashion and ecommerce start-ups.