WSJ : SPACs Will Have a Tough Time Cleaning Up on Renewables

SPACs Will Have a Tough Time Cleaning Up on Renewables
Special purpose acquisition companies are targeting the renewable-energy industry, but there is less of a direct incentive for going public

Investor appetite for sustainable investments and yield have both been huge lately, but there have hardly been any debuts of cash-generating renewable-energy companies recently. Could SPACs, or special purpose acquisition companies, be the answer?

Of course it is possible to gain indirect exposure through a utility with heavy renewables exposure such as NextEra Energy, NEE 0.48% which recently surpassed Exxon Mobil in market capitalization. NextEra was the top developer of wind energy in 2019. But the second and fourth largest—Invenergy and Apex Clean Energy, respectively—are privately owned. Large solar developers such as 8minute Solar Energy, too, are private.

A burgeoning group of clean energy-chasing SPACs is aiming to change that. At least four filed since August are specifically targeting the renewable energy industry, according to a recent note by Trevor Pinkerton, partner at Norton Rose Fulbright. An even larger universe of SPACs—16 by Mr. Pinkerton’s count—are casting a wider net, looking for companies that help promote energy transition. At least one prominent renewable developer is eyeing a public market debut. Tom Buttgenbach, chief executive of 8minute Solar Energy, told The Wall Street Journal in August he is considering at least a partial public debut to take advantage of the growing interest in sustainable investments.

Experience shows it hasn’t been easy. The last time renewable energy companies went public in droves was in the 2013-2015 period in the form of yieldcos, so named because they promised attractive dividends from operating already-developed wind and solar facilities. One solar developer, SunEdison, went bankrupt after failing to deliver on its untenable growth promises with sister yieldco TerraForm Power, souring the market for other yieldcos. Pattern Energy Group and 8point3 Energy Partners have been delisted and taken private, while others, including Clearway Energy, CWEN 2.70% have sold off large pieces to private capital.

A handful remain publicly listed—including Clearway Energy, NextEra Energy Partners LP and Brookfield Renewable Partners—and have managed to outperform the S&P 500 year to date.

Aside from the SunEdison debacle, there are other reasons why public markets haven’t been as appealing for the industry. One is that there is no shortage of private capital—especially pension fund money—chasing relatively low-yielding renewable energy investments. Many have increased their allocation for alternative investments in recent years. Public markets, meanwhile, tend to favor rapid growth stories or splashy scale—not features of existing renewable developers or operators. Judging by green bonds’ relatively modest pricing advantage compared with plain vanilla bonds, investors don’t seem to be overly generous on valuation just because investments are cleaner.

Compared with oil and gas, there is also less of a direct incentive for going public. Tax-advantaged master limited partnerships, for example, are available only to those generating income from natural resources such as oil and natural gas or commodities. A House infrastructure bill that passed this summer proposes to expand that eligibility to include renewable energy. There is a good chance of that bill becoming law if Joe Biden becomes president and the Senate turns majority Democrat.

In the current market, SPACs are mostly trying to buy companies with “hockey stick-shaped” business plans,” according to Ted Brandt, Chief Executive Officer of Marathon Capital. It advised battery-operated truck company Hyliion Inc. on its combination with Tortoise Acquisition Corp. Mr. Brandt noted that likely targets include energy storage companies, renewable-related software, renewable natural gas or companies in the business of financing rooftop solar.

SPACs are more likely to find targets in those adjacent areas, bypassing the safe, boring green projects favored by yieldcos or pension funds. Because they have incentives to close a deal, SPACs tend to keep their mandates broad enough to be realistic. ArcLight Clean Transition Corp. ACTCU 0.05% , a SPAC that filed a prospectus in late September, is clearly focused on finding a renewable energy-generating target. However, the company is also open to energy storage, the distributed electrical grid, zero-emission transportation, carbon capture and even sustainable manufacturing, among others.

It will take a lot more than hungry SPACs to lure renewable-energy companies back to the public markets.

>>> US Early premarket gappers

Early premarket gappers

  • Gapping up:
    • SNAP +22.6%, CALX +15.3%, TCS +11.4%, PNM +7.8%, OCX +7.7%, XERS +6.9%, PINS +6.8%, USNA +5.8%, WDFC +4.8%, REXR +4.7%, PRTA +3.7%, HWC +2.8%, PNFP +2.8%, PSTH +2.7%, FULT +2.1%, TER +1.1%, TXN +0.8%
  • Gapping down:
    • REPL -7.8%, NFLX -6.1%, CWST -4.3%, NAVI -4%, THC -2.9%, CNI -2.8%, IBKR -2.6%, IRBT -2.5%, IFF -2.2%, APTX -1.3%, UNP -1.3%, AGR -1.1%, PE -0.8%, ROKU -0.8%, PXD -0.6%

>>> Biogen beats by $0.77, beats on revs; lowers FY 20 EPS/Revenue guidance, ann

Biogen beats by $0.77, beats on revs; lowers FY 20 EPS/Revenue guidance, announces $5 bln share repurchase (267.12)
  • Reports Q3 (Sep) earnings of $8.84 per share, excluding non-recurring items, $0.77 better than the S&P Capital IQ Consensus of $8.07; revenues fell 6.2% year/year to $3.38 bln vs the $3.34 bln S&P Capital IQ Consensus.
    • Multiple sclerosis (MS) revenues, including $272 million in royalties on sales of OCREVUS®, decreased 4% versus the prior year to $2,257 million.
    • SPINRAZA revenues decreased 10% versus the prior year to $495 million.
  • Co also announces new $5.0 billion share repurchase authorization
  • Co issues mixed guidance for FY20, sees EPS of $32.50-33.50, excluding non-recurring items, vs. $31.98 S&P Capital IQ Consensus; sees FY20 revs of ~$13.2-13.4 vs. $13.8 bln S&P Capital IQ Consensus

Breaking Views : Okay Boomer : The world can safely love the Tesla bubble

Okay Boomer

Tesla’s stock price is at nosebleed levels. Elon Musk’s $400 billion electric-vehicle maker’s market value has rocketed fivefold this year. At well over 10 times this year’s estimated revenue, according to Refinitiv data, and dizzying multiples of profit, it’s probably an EV bubble. But past technology-stock excesses suggest investor zeal can fuel innovation – with shareholders, not the economy as a whole, suffering when the bubble bursts.
Tesla should post solid third-quarter results on Wednesday. It delivered around 139,000 vehicles in the period, a more than 40% year-over-year increase. But the valuation remains a headscratcher. Tesla – which should represent less than 1% of global auto sales this year, according to ValuAnalysis – is worth almost twice as much as Toyota Motor, a traditional manufacturer with over 10% market share.
But overvaluation may have positive side effects. The fervor is in part behind blank-check companies wanting to buy and inject fresh investment into EV startups including Nikola and Fisker, which both have near-zero revenue. True, the $7.8 billion Nikola has stumbled after fraud allegations, but the share price of the acquisition vehicle that acquired it has still doubled since the deal was agreed.
Tesla’s share-price rise has also coincided with established automakers upping commitments to new technologies. In July, General Motors said it would allocate over $20 billion to electric and autonomous vehicles by 2025, and Volkswagen recently pledged to boost EV sales nearly 30-fold by the same year.
There are lessons from history. The 1890s boom in British bicycle-related shares fueled innovation that made bikes cheaper, improved automated machine tools, and helped speed the car’s development. And the national economy posted bumper growth after the bicycle bubble deflated. The end of the bubble in technology stocks in the late 1990s cost shareholders in some companies a lot, but it was only associated with a mild recession. And all the speculative investment helped put in place the bones of today’s digital economy.
Tesla isn’t even in the S&P 500 Index, and Musk owns over three times as many shares as the next-largest holder. Even if EV stock ownership expands, a massive slump in valuations wouldn’t cause banks to close or credit markets to seize up. Shareholders would lose money. But in return for accelerating the larger economy’s shift to electric cars, that’s not a bad trade.

WSJ : Pfizer Sets Up Its ‘Biggest Ever’ Vaccination Distribution Campaign

Pfizer Sets Up Its ‘Biggest Ever’ Vaccination Distribution Campaign
The U.S. pharmaceutical giant is preparing to ship billions of Covid-19 vaccines using frozen boxes, cargo planes and trucks in a mega logistics operation

In Kalamazoo, Mich., a stretch of land the size of a football field has been turned into a staging ground outfitted with 350 large freezers, ready to take delivery of millions of doses of Covid-19 vaccine before they can be shipped around the world.

The facility is a hub in the sprawling supply chain Pfizer Inc. has built to handle the delivery of a vaccine widely awaited as a possible relief from the coronavirus pandemic. The U.S. pharmaceutical giant says it wants to deliver up to 100 million doses this year and another 1.3 billion in 2021.

Like other drugmakers testing potential vaccines, Pfizer is urgently laying the groundwork with its logistics partners so it can move quickly if its vaccine gets the go-ahead from the Food and Drug Administration and other regulators around the world.

“It’s the biggest-ever vaccination campaign,” said Tanya Alcorn, Pfizer’s supply-chain vice president. “If we get the FDA approval, we will be able to ship the vaccines very shortly after.”

The New York-based drugmaker is working with Germany’s BioNTech SE on one of several experimental Covid-19 vaccines in late-stage testing. Pfizer says it may know whether its vaccine works by the end of October and that it could be ready to apply for emergency-use authorization of its Covid-19 vaccine by late November.

The company’s effort to deliver relief to pandemic-weary populations will revolve around refrigerated storage sites at two of the company’s final assembly centers—the Kalamazoo facility and another in Puurs, Belgium—and rely on dozens of cargo-jet flights and hundreds of truck trips every day. Distribution centers in Pleasant Prairie, Wis., and in Karlsruhe, Germany, have been outfitted for extra storage capacity.

Pfizer so far has spent about $2 billion on developing the vaccine and setting up the distribution network.

The U.S. government placed an initial order for 100 million doses, with the option to purchase 500 million additional doses. The EU ordered 200 million doses with an option for another 100 million. Japan ordered 120 million doses and the U.K. 30 million. Countries in South America and in the Asia-Pacific region also have placed significant orders.

In a typical vaccination campaign, pharmaceutical companies would wait until their product is approved before buying raw materials, establishing manufacturing lines and setting up supply chains to ship a vaccine.

Pfizer Chief Executive Albert Bourla said that the company began setting the groundwork for its supply chain in March, when it kicked off its vaccine development.

“Ensuring over a billion people globally have access to our potential vaccine is as critical as developing the vaccine itself,” he said.

Pfizer says it is preparing for distribution in case the vaccine wins authorization, with hundreds of thousands of doses already in the company’s warehouses in the U.S. and Europe.

To keep the vaccines safe in transit and to move them fast, Pfizer designed a new reusable container that can keep the vaccine at ultracold temperatures for up to 10 days and hold between 1,000 and 5,000 doses. The suitcase-sized boxes, which are packed with dry ice and tracked by GPS, will enable Pfizer to avoid the larger, temperature-controlling containers used in transportation, giving it more flexibility to ship the vaccines faster since planes and trucks won’t have to wait for the standard refrigerated metal boxes.

Pfizer expects to load those boxes on a combined 24 trucks a day from Kalamazoo and Puurs that will move roughly 7.6 million doses daily to airports.

The company plans to take cargo space on an average of 20 flights a day on planes operated by FedEx Corp. , United Parcel Service Inc. and DHL International GmbH to fly the vaccines as close as possible to vaccination centers, ranging from big medical facilities to far-flung hospitals. The air carriers are also in line to handle the next leg of the vaccine’s journey, trucking the doses to sites close to where they will be administered.

Total delivery time, from distribution center to point of use, is expected to be an average of three days, the company said.

Cargo airlines are scrambling to arrange scores of extra flights to move the vaccines. They could hit distribution channels at the height of the peak season for shipping goods ahead of the year-end holidays, squeezing expedited shipping capacity.

Unlike traditional vaccine rollouts, Pfizer plans to bypass distribution wholesalers, including McKesson Corp. , which has been tapped by the U.S. government to distribute Covid-19 vaccines through the federal Operation Warp Speed program.

“For the most part, we are not going to be building inventory,” Ms. Alcorn said. Going through wholesalers, she said, “adds time that we don’t have, and adds a touch point to a sensitive frozen product, taking it off and on trucks.”

Julie Swann, a North Carolina State University professor of industrial and systems engineering, and a health-care supply-chain expert who advised the Centers for Disease Control and Prevention on the H1N1 virus response, said the biggest complications in distribution likely would come closer to the final point of delivery rather than the first stages of shipping.

“Transportation from the manufacturer into a state is only the first step of what needs to be done,” she said. “The real challenges that concern me have to do with the ultralow cold storage. That is where we are in a space that is completely new for our systems in the U.S. for large-scale and wide geographic distribution.”

Shipments may have to be unpacked and moved in smaller lots, for instance, beyond the initial delivery point, increasing the chance that temperature controls could break down, Dr. Swann said.

“As logistics become more complicated around the secondary distribution, that’s going to take a little bit longer,” said Dr. Swann.

Business Of Fashion : The Future of Handbags


PARIS, France — Despite luxury fashion's recent successes outside the realm of leather goods — with hit products including Balenciaga sneakers, Moncler puffers and Givenchy pool slides seizing the spotlight — handbags remain the industry's biggest and most profitable category.
Bags will therefore be critical to any post-Covid sales rebound. This may seem worrying for brands at a time when fresh waves of coronavirus cases in the US and Europe are prolonging work-from-home arrangements and cancelling social events, leaving consumers with fewer places than ever to actually carry a bag.
And yet, luxury handbags' biggest player, LVMH, the owner of Louis Vuitton and Christian Dior, saw its fashion division roar back to growth during the summer months. Sales in fashion and leather goods surged 12 percent year-on-year while watches, jewellery and cosmetics continued to tumble, the company reported last Thursday. The following day LVMH shares surged, as did those of rivals including Gucci-owner Kering and Hermès, as investors suspected a broader leather-goods renaissance was underway.
A swift comeback for handbags might be hard to reconcile with lingering economic uncertainties, as well as the fact that in the streets of many fashion capitals, hardly anyone seems to be carrying one. Over a sunny October weekend in Paris, ladies with a proper handbag, the kind you carry instead of wearing, and can actually fit things inside — as opposed to less-expensive crossbodies, mini-bags, and purses on chains — were a rare sight.
Categories like luxury jewellery and footwear have often grown faster than accessories in recent years, and as handbags became more competitive, brands hedged by diversifying into products like beauty at Hermès or fine jewellery at Vuitton.
Still, the handbag’s mix of utility and status-conveying power make the category difficult to unseat. "Bags remain the easiest product to carry around to prove a point. When you carry a handbag from Louis Vuitton or Chanel, everyone's going to know what it is," said Erwan Rambourg, luxury analyst at HSBC. "It's more difficult to put a big logo on a ring."
So who are the clients driving the rebound in accessories, which styles are they carrying — and why? BoF unpacks the key trends shaping luxury's most crucial category.
Smaller bags continue to dominate
Many shoppers may have already satisfied their desire for a small bag in recent years, be it with one of Yves Saint Laurent’s Lou camera bags, Prada's reissued nylon baguettes or a Louis Vuitton pochette. But don't expect the needle to swing back to the heftier totes of yesteryear just yet. A number of forces are expected to conspire to keep smaller, if no longer truly tiny, styles in the forefront.

For one, Asian and particularly Chinese clients are driving growth for the sector more than ever since the region managed to get Covid-19 largely under control, buoying consumer spending and allowing for a quicker return to shopping. Luxury brands have been catering to China's rising Gen-Z shoppers, who often have no siblings and can draw on their own salaries as well as the undivided resources of parents and grandparents.
The focus on Asia's first-time luxury buyers and Gen Z should continue to support the momentum around smaller styles, due to their more accessible prices and easy-to-carry nature. "We've seen a massive rejuvenation of the consumer," Rambourg said. "Your reservoir to recruit new clients from is basically unchanged post-Covid."
Body type and culture can also play a role. "For Asians, we’re not as tall, and people in the cities still use public transportation wearing their Chanel or Hermes bag, so smaller is better," said Maiko Shibata, creative director and buyer for the luxury boutique Restir in Japan.
Other forces supporting the success of smaller bags are worldwide. The increased use of smartphones has meant more consumers prefer to keep both hands free, as well as not needing as much space in their bags for documents, agendas and books.
The hands-free imperative has prompted brands to reissue top-handle classics with additional long straps, and often in smaller sizes. Gucci's reissued Jackie 1961 hobo bag, named for its most famous wearer, Jacqueline Kennedy Onassis, is now sold with a shoulder strap that turns it into a crossbody. It's another iconic shape joining the ranks of swinging miniature Lady Diors, Prada Gallerias, and "nano" Celine Luggage totes.
"Luxury brands want to develop big, proper handbags you can fit some A4 papers in. But this isn't necessarily what's working."
"Luxury brands still want you to develop big, proper handbags you can fit some A4 papers in, because they're seen as nice and luxurious, and they look good in stores. But this isn't necessarily what's working," said Maxime Congost, an accessories designer who has worked for Chloé and Proenza Schouler. Giant propositions like Bottega Veneta's $6,250 oversized hobo bag can make for surprising photos and spark conversation online, but are less likely to be broadly adopted by clients than the brand's $2,800 crossbody "Cassette".

Price inflation is another factor that could keep tastes stuck on smaller styles. As the share of small bags nearly doubled between 2015 and 2018, growing from less than a quarter of sales to nearly one-half, according to Bernstein analyst Luca Solca, top-end brands were quick to increase prices to offset the shift to less expensive items. In the name of coherence, larger shapes followed suit.
The price of a medium Lady Dior bag, for example, has risen roughly 22 percent to 3,900 euros ($4,600) since just 2016 —out of the range of many new buyers driving growth. This May, Chanel raised prices for some of its most popular styles by as much as 17 percent at the same time that coronavirus lockdowns caused OECD economies to shrink by 10 percent, their quarterly drop on record.
First-time buyers, resale favour top brands
The importance of first-time buyers, as well as an increased drive to show off online, is reinforcing the position of the biggest and most recognisable brands, like Louis Vuitton, Chanel, Gucci, Hermes and Dior.
With unmatched marketing firepower to recruit new customers, these brands have already been vacuuming up demand in recent years. But a shaky world economy has only intensified that trend, as clients are more concerned about whether they are spending money wisely. An influx of first-time buyers is likely to go to the biggest brands not just because they know about them, but also because they're more confident the products won't go out of style.
"When you're in an environment of buying less and buying better, you go to one of the iconic brands"
"When you're in an environment of buying less and buying better, you go to one of the iconic brands," Rambourg said.
The rise of resale platforms like The RealReal or Vestiaire Collective has also made shoppers less likely to turn away from the handful of top brands where they feel confident they can get their money back if needed. "A customer who has a place to sell something buys differently," said Tina Craig, a social media influencer and founder of the blog Bag Snob.
Also supporting the expansion of big brands is a crop of Gen-Z clients who are unabashed about pursuing "clout" — the status conveyed by brand recognition and logo-driven products — whereas many older Millennials and Gen-X clients had in the past fuelled the rise of discreet propositions, like Celine and Mansur Gavriel. "For Gen-Z, it's all about the clout," Craig says.
Men's bags have become a force
While the importance of shiny briefcases declined in importance, the luxury industry was slow to generate an alternative. The past two years have finally seen big brands hit their stride with new leather goods propositions for men, be it Kim Jones' $2,900 Saddle bags at Dior Homme or Virgil Abloh's $4,500 "soft trunk" bags at Vuitton.
The products represent a major step up from wallets, phone cases and monogrammed pouches, and are more closely aligned in terms of price with the houses' womenswear offer. Those products could help maintain momentum in a tough market.
‘K-shaped recovery’ in the US drives sales
Accelerating coronavirus cases in many states, months of social justice protests and millions of Americans who have lost their jobs due to the pandemic makes the US sound like an unlikely engine for growth for luxury leather goods sales.
But spending on fashion is expected to surge among households that managed to maintain their income levels, some of whom also saved thousands of dollars by spending far less on restaurant meals and travel. Indeed, sharply diverging fortunes — what economists are referring to as a "K shaped" recovery — are already playing out for luxury fashion brands.
"Ladies in the U.S. are trying to choose their first handbag, or maybe their first one in years"
US fashion sales rebounded "extremely well" for LVMH, Chief Financial Officer Jean-Jacques Guiony said in a call with analysts last week and might continue to gain pace during the holidays.
"I get messages all the time from ladies in the U.S. who are trying to choose their first handbag, or maybe their first one in years," Craig said.
The global trends for hands-free, entry-priced and recognisable bags are relevant to the US luxury market, particularly among Gen-Z shoppers. But tastes remain heterogeneous, and some former luxury clients who still favour the logo-free propositions of Bottega Veneta and Celine may be reactivated as they shift their budget away from experiences.
Brands are also seeing some renewed interest from the US for larger totes and backpacks as remote working booms. Many white-collar workers have yet to return to the office (at least not full-time) but still want to get out of the house, so styles that lend themselves to lugging a laptop and notebook to cafes and coworking spaces could make a comeback.
"Our tote business is quite strong right now. Backpacks are very strong right now," Capri Holdings chairman John Idol told investors in August. "People are moving around in society. They may not all be going back to the offices, but they're definitely moving around."
A narrow path for accessible luxury & smaller brands
Even if the company's share of bigger and pricier styles rose, analysts still estimate that Capri's revenues fell 38 percent year-on-year from June through September, highlighting the difficulty in the market for "accessible luxury" holdings like its Michael Kors and Versace Jeans Couture units. The contrast with double-digit growth at houses like Louis Vuitton and Dior would suggest that clients increasingly prefer the social currency and pleasure they obtain from buying a single small luxury bag— even when it costs them as much as two or three more accessible options.
"Heritage has become really key. People are looking for thoughtful product that isn't trend-driven."
Many smaller luxury houses are also struggling in the current market, though some have managed to renew their appeal by focusing on craft and expanding their range of prices, MatchesFashion's accessories buyer Cassie Smart said. Hand-woven raffia and wicker options from Loewe's "Paula's Ibiza" line performed well over the summer by "offering emotional escapism at attractive price points" including $450 and $650 dollar bags.
Kering's Bottega Veneta house also took market share since the pandemic — without relying on a logo or monogram print — by feeding the market revamped designs that still leaned heavily on the houses' signature intrecciato leatherwork. "Heritage has become really key," Smart said. "People are looking for thoughtful product that isn't trend-driven."
(Much-larger Burberry, by contrast, whose luxury credibility lies principally in outerwear, has struggled to radically increase the share of its leather goods business during a turnaround attempt by former-Celine Chief Executive Marco Gobbetti and star designer Riccardo Tisci.)
Emerging designers can still make it in accessories, too, though the success stories are rare. For these small companies, an "it-bag" design is unlikely to work on its own, but should rather be a way for fans to appropriate an entertaining or emotional fashion story, or to feel like they belong to a community. Paris designer Jacquemus — whose mix of poetic runway images and selfies from the South of France have made him an international social media star — cracked the market with the extremely tiny Chiquito bag, popularised by pop singers Rihanna and Lizzo. His brand now capitalises on that buzz by selling the bags in more practical sizes. New York designer Telfar Clemens also managed to secure momentum in bags, in his case by steering fans of his runway creations to a utilitarian, affordable tote (limited supplies of which only helped fuel interest).
"Handbag brands that have recently broken into the space understand the need for integrity, authenticity and the power of community," said Stefano Martinetto, founder of the distributor and brand accelerator Tomorrow London. "Additionally, they entertain their consumers through clever social media and brand experience."

FT : UK regulator proposes to beef up auditors’ obligation on fraud

UK regulator proposes to beef up auditors’ obligation on fraud
Reforms in accounting standard sought after series of scandals damaged industry’s reputation

The UK accounting regulator has proposed enhanced requirements on auditors to identify fraud in company accounts, the first such reform in 16 years after a series of scandals that damaged the industry’s reputation.

The Financial Reporting Council has launched a review into the international accounting standard that sets out an auditor’s obligation to detect fraud. A proposed revision to the standard in Britain intends to “provide increased clarity” on auditors’ responsibilities to spot fraud, and to expand the requirements on an auditor to identify the “risk of material misstatement due to fraud”, the FRC said.

The collapse of Patisserie Valerie in the UK last year ignited a debate about whether auditors had to look for fraud in company accounts. The chief executive of the café chain’s auditor, Grant Thornton, said his firm was not looking for fraud when it missed a £95m black hole in the Aim-listed company’s accounts.

The debate has deepened this year following the implosion of Wirecard, the German payments processor, amid a fraud that eventually totalled €1.9bn that its auditors at Big Four firm EY missed for years.

“Sometimes the UK needs to show leadership and move in advance of international standards to address urgent stakeholder concerns in the public interest,” said Mark Babington, the FRC’s executive director of regulatory standards. “We believe that some of the misunderstandings that have been communicated around the auditors’ responsibility in respect of fraud meet this test.”

He added: “In response, we have developed a revised standard which makes auditors’ obligations clearer, enhances the risk assessment they carry out and sets clearer requirements for what the auditor then does.”

The proposed new standard, which will be consulted on until January, clarifies that auditors are required to look for fraud.

One proposed new paragraph states that the objective of an audit is to “obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement due to fraud”.

The current accounting standard, known as ISA 240, was adopted in the UK in 2004 and has not been substantially revised since. It only requires auditors to “identify and assess the risks of material misstatement of the financial statements due to fraud”.

Donald Brydon, the former chairman of the London Stock Exchange, raised a number of concerns about a lack of clarity in the rules for auditors regarding fraud in his review into the quality and effectiveness of audit, which was published last year.

The FRC said the proposed new standard would address Sir Donald’s concerns. The regulator said the changes would promote a “more consistent and robust approach” to auditor responsibilities around fraud, and that they would be in the public interest.

After the collapse of Wirecard in July, Sir Donald urged faster reform in an interview with the Financial Times. “We must not wait until there is a market failure, there has to be a whole mindset change on what is the purpose of an audit,” he said.

WWD : Model Natalia Vodianova Turns Tech Investor

Model Natalia Vodianova Turns Tech Investor
The well-known model is making a new name for herself as a "hands-on" early stage investor of many tech start-ups.

In addition to model and philanthropist, Natalia Vodianova now needs tech investor in her descriptor, too.

Over the last few years, Vodianova has quietly managed to invest in 20 start-ups (a 21st is on the way) alongside her partner in the endeavor Timon Afinsky, through a France-based company called Supernova. The investments range from a sleep app, Loóna, to a simplified legal contract app, e-gree, to Zenia, an AI-driven yoga assistant. There’s also Little Tummy, cold-pressed baby food; Wannaby, an AR-driven shopping app, and 3Dlook, mobile body-scanning tech for fit, among more than a dozen others. But it all started with Elbi, an app the two launched several years ago that turned the idea of social media “likes” into $1 charitable donations.

“We suddenly opened ourselves up to this world of tech, just by diving into it and investing in Elbi and building it,” Vodianova said, speaking on video chat from her Paris apartment, where she’s mostly been with her children and longtime partner and now husband Antonie Arnault during the lengthy coronavirus pandemic. “We made so many mistakes, hired so many wrong people. In that sense there was a real learning curve. But some things we did really well.”

Communication, branding and marketing, utilization of the platform itself — all of that Elbi excelled at, even if at times its tech was lacking. Vodianova said with pride that Elbi was also “very, very loud” in terms of publicity and the charitable campaigns it undertook, something she saw many founders in the tech space had difficulty doing for themselves.

“A lot of founders have fantastic tech, very interesting companies scaling hugely with a large audience, but absolutely no brand and no visibility,” Vodianova explained. She and Afinsky started to get requests for help.

“That’s literally how it started,” Vodianova added. “Then just word of mouth. Founders know each other.”

The investment portfolio has grown so much that Vodinova and Afinsky seriously considered starting their own fund, but ultimately decided against it, mainly because the mechanics of it would be a drain on already limited time.

“Maybe one day if we feel like we really want to invest in a much bigger team, we’ll do it, but until then, it feels right to do it like this,” Vodianova said. “We feel more free.”

As it stands, Supernova has a team of six working on investments.

Her first two investments were Flo, a women’s health app that tracks hormonal and menstrual cycles, among other uses, and PicsArt, a mobile app for editing photos and video. She’s still invested in and sits on the board of both.

Vodianova actually has 12 board seats, all with start-ups she’s invested in, including Loóna, (which she said has helped her husband stay asleep at night), and e-gree, of which she is chairwoman.

Generally, being at the angel investor level means you do not get automatic board placement. Vodianova’s investments range between $25,000 and $100,000, getting her usually around a 5 percent stake in a business. Even so, she’s been asked to sit on several boards, Afinsky said, speaking from London, “because these companies need this expertise.”

“Natalia approaches these businesses from their pain point,” added Afinsky, whose background is in p.r. and media. “It’s the most important thing and she tries to understand and then tries to solve it. It’s very efficient.”

Vodianova, being a well-known model and philanthropist and member of the influential Arnault family, surely doesn’t hurt, but she has a keen sense of what a new company needs to do to get a foothold through her years of work.

She admits that her knowledge of the fashion industry after about 20 years as a working model, and the business machinations behind that are helpful for the startups she invests in and works with. But she credits her creation and operation of the charity Naked Heart Foundation as the most valuable in terms of investing and advising.

“I built a very successful organization and for that I’ve done a lot of events. You learn so much by doing live events, what people respond to.”

She throws an annual charity gala and auction for Naked Heart and said figuring out what sort of lots would pique the interest of bidders showed her that, in many instances, people need someone from the outside to come in and imagine for them what they want. Her example was auctioning off a stay at The Château de La Colle Noire, the former country home of Christian Dior, which the brand now owns and keeps private. Even though Dior is part of LVMH Moët Hennessy Louis Vuitton, such a stay had never been auctioned before, and Vodianova said assurances had to be made that the right bidder would get the experience.

“It’s a lot of meticulous work but it’s also storytelling and imagining something that doesn’t exist yet, that neither a brand nor a potential client sees yet,” Vodianova said.

In the case of investing, she imagines what type of marketing will work for a brand, or what unique ambassador or investor they should bring on.

“[Working with start-ups] is so much about storytelling,” she said. “And so often, especially tech people, they build a product and they iterate all the time to fit the demand and find what works. But sometimes they iterate so much they lose the initial vision they had.”

If all of this sounds a little in the weeds for a typical early stage investor, it’s true. Vodianova admits that she and Afinsky are “very hands-on” and so selective about who and what they invest in. “We spend a lot of time with our founders.”

And what Vodianova and Afinsky are looking for in their investments is simple but rather lofty.

“We’re looking for products that will either change industries or will change people’s lives, as grand as it sounds,” Vodianova said.

Making piles of money on a big exit of one of her investments is not a central concern.

“This is definitely a business and we do invest money so of course we want a return… but who I invest my time into, that for me is the most precious thing,” Vodinova said. “I’d much rather get less return on a good investment, than invest in a company that gets huge because it, for example, sells cigarettes.”

WSJ : More Corporate Bonds Are Rated Triple-A in China Despite Coronavirus Pande

More Corporate Bonds Are Rated Triple-A in China Despite Coronavirus Pandemic
Bonds with top grades make up 57% of all onshore Chinese corporate debt outstanding

China’s credit-rating firms are doling out more triple-A bond ratings, a trend that has continued this year in spite of the coronavirus pandemic and greater borrowing by companies in the world’s second-largest economy.

As of mid-October, more than 18.3 trillion yuan, equivalent to $2.7 trillion, in outstanding yuan-denominated bonds issued by companies and financial institutions in mainland China had the highest possible rating from the country’s credit raters, according to data provider Wind and asset manager Invesco Ltd.

Bonds with triple-A grades currently make up 57% of all the onshore Chinese corporate debt that is outstanding. The proportion of top-rated debt has climbed in recent years. In 2015, about 37.5% of corporate debt in mainland China was rated triple-A.

In the U.S. and many other countries, triple-A corporate bond ratings are rare and have been awarded to the financially strongest debt issuers with minimal default risk. Microsoft Corp. and Johnson & Johnson are the only American corporations with the coveted grade from S&P Global Ratings. In the U.S. dollar bond market, S&P has rated about 300 nonfinancial Chinese companies, giving them grades of single-A-plus to triple-C-minus.

In China’s vast domestic debt market, triple-A ratings—mostly awarded by domestic raters—are commonplace. S&P and Fitch have Chinese subsidiaries that rate a small number of Chinese institutions and they have similarly been awarded triple-A grades. Their subsidiaries’ rating scales and methodologies in mainland China differ from what the firms’ use internationally.

China’s unique bond-rating system poses challenges for international investors who are looking to enter the market or hold global index funds that own domestic Chinese bonds, said Kate Jaquet, a co-portfolio manager at Seafarer Capital Partners, a Larkspur, Calif.-headquartered investment firm.

“A rating scale like that is not healthy for a bond market,” she said.

Foreign investors have been increasing their holdings of yuan-denominated bonds, though their participation in China’s $14.5 trillion domestic bond market is still small and they have, for the most part, stuck to government debt and bonds from state-owned development banks.

The pattern of issuing more triple-A ratings in China has been a bit of a head scratcher for international investors and analysts. Companies have been borrowing more during the pandemic and some have put off repaying banks and investors after their revenues took a hit. China’s economy, however, has recovered faster than much of the world; the country said this week that third-quarter GDP grew 4.9% from a year earlier.


While bond defaults in China happen less frequently than they do in the U.S., they have been ticking higher this year. Some companies have blamed lockdowns, business closures and a slowdown in economic activity caused by the spread of the coronavirus. Defaulters have included real-estate developers, manufacturers and highly indebted conglomerates.

“The trend of rising ratings is clearly contrary to the overall trend in credit risk within China’s corporate bond market,” said Logan Wright, director of China markets research at consulting firm Rhodium Group. Elsewhere in the world, there have been numerous corporate bond-rating downgrades as economic slowdowns have reduced revenues for many firms.

Owen Gallimore, head of credit strategy and research at ANZ, said China’s onshore debt markets appear to have benefited from injections of large amounts of liquidity from the country’s central bank during the pandemic. Broadly speaking, Mr. Gallimore said he feels domestic ratings in China aren’t good measures of credit risk. A triple-A grade “tells you whether the company is important or not,” he added, and there is an expectation that the government won’t let state-owned enterprises and large politically connected firms fail.

Consider the case of China Evergrande Group, the country’s most indebted property developer and the largest junk bond issuer in Asia’s dollar bond market. Last month, prices of Evergrande’s shares and bonds plunged in value after documents circulated online said the company was in a tight financial spot, with a deadline looming to take a key subsidiary public or repay certain investors billions of dollars.

On Sept. 24, S&P changed its outlook on Evergrande to negative, saying it believed the group’s liquidity was weakening and it was facing increasing financial pressures. S&P has a B+ speculative-grade rating on Evergrande.

Domestic Chinese rating firms, on the other hand, rate Evergrande at triple-A. In late September, China Chengxin Credit Rating Group said it was closely monitoring news from Evergrande, adding that it is evaluating whether it will affect the company’s overall credit situation. At the end of the month, Evergrande staved off a near-term cash crunch after a group of strategic investors agreed not to force the company to cough up more than $12 billion as soon as next January. Moody’s Corp. has a 30% stake in the Chinese rater’s parent, China Chengxin International Corp.

While Evergrande isn’t a state-backed conglomerate, the vast majority of triple-A ratings in China have been awarded to state-owned enterprises and large companies. Troubled airlines-to-hotels conglomerate HNA Group Co., which has struggled with heavy debts over the past two years, is also rated triple-A in China.

“The methodology is different,” said Freddy Wong, head of Asia-Pacific for Invesco Fixed Income. Many companies with triple-A ratings in China have implicit or explicit government support, he notes, and most domestic ratings tend to fall into a narrow band when compared with international rating scales.

Official guidelines on credit ratings from the People’s Bank of China say triple-A grades reflect an “extremely strong” ability to repay debt that is unaffected by an adverse economic environment, and extremely low default risk. The domestic scale goes from triple-A down to single-C and the lowest rung is for issuers who are unable to repay their debts.

A seven-year study of the Chinese bond market and credit-rating industry found that more than 90% of domestic ratings were rated double-A or higher in a sample of 6,528 bonds. Domestic raters tend to pool bonds with very different default risks into one of the top three rating notches, it said.

Winnie Poon, a professor of finance at Lingnan University in Hong Kong and a co-author of the study, said more recently, domestic raters have also upgraded a significant number of corporate bonds from so-called local government financing vehicles that have issued debt to fund infrastructure projects.

More than 140 of these off-balance-sheet entities controlled by local governments saw their ratings upgraded to triple-A in the year to date, according to Wind data. Domestic rating firms pointed to stability in their local economies and support from their government in justifying the changes.

Some investors say it is clear not all bonds rated triple-A in China are equal. Bonds with higher default risk in some cases are yielding two to three percentage points higher than securities that investors perceive to be safer, said Mr. Wong of Invesco.

“Right now there’s a lot of liquidity in the market, which is keeping defaults relatively low, but if the pandemic lasts for five years, it’s going to be a different story,” he added.