TheChek News Flow

Investors must prepare portfolios for Covid-19 debt crunch

The recovery value of assets will soon come to the fore, demanding closer scrutiny

The financial stress caused by Covid-19 is far from over. Investors should brace for non-payments to spread far beyond the most vulnerable corporate and sovereign borrowers, in a reckoning that threatens to drag prices lower.

There is still time to get ahead of this trend. Rather than buying assets at valuations stunningly decoupled from underlying corporate and economic fundamentals, investors should think a lot more about the recovery value of their assets and adjust their portfolios accordingly.

So far, despite signs of rising stress on corporate and public balance sheets, non-payments have been largely contained to certain badly affected segments.

But the sense that the worst did not come to pass has fed complacency among investors of all stripes. A new generation of retail investors has emerged, helping stocks on their relentless march higher.

Contrast investors’ optimism with companies’ circumspection. While many central governments are focused on reopening economies that were locked down to contain the virus’s spread, most businesses have remained cautious. Many are still looking to further reduce their spending.

The wariness has been encouraged by the resurgence of infections around the world. In the US, a majority of states have now opted to halt or reverse their lockdown easing plans. And there is every reason for businesses and investors to tread carefully. Health experts warn us about over-optimism on a vaccine and, judging from the most affected areas, too many people are yet to properly take on board the infection threat and align their behaviours with the risks facing society.

Such a weak and uncertain economic backdrop reduces borrowers’ willingness and ability to meet contractual obligations. This is particularly the case in vulnerable sectors such as hospitality and retail, and in developing countries with less of a financial cushion and limited room for policy flexibility.

There are already plenty of worrying signs: a record-breaking pace for corporate bankruptcies; job losses moving from small and medium-sized firms to larger ones; lengthening delays in commercial real estate payments; more households falling behind on rents and continuing to defer credit card payments; and a handful of developing countries delaying debt payments.

Yet, judging from a range of market indicators, investors are showing insufficient concern. Some continue to expect a sharp, V-shaped recovery in which a vaccine, or a build-up of immunity in the population, allows for a quick resumption of normal economic activity. Others are relying on more backstops from governments, central banks and international organisations.

But policymakers’ support actions have already been extensive, including payment deferrals, direct cash transfers, covenant relief, rock-bottom interest rates and corporate bond purchases. The G20 group has agreed a “debt service suspension initiative” for the poorest developing countries.

While notable, such measures will not protect investors from sharing some of the capital losses, whether that is due to companies going bankrupt, or developing countries needing more than exceptional funds from bilateral and multilateral sources. Many have already made it clear that they expect “private sector involvement”. That is likely to mean, at the minimum, the short-term suspension of interest and principal payments.

As neither a quick income recovery nor more financial engineering is likely to avert a rise in non-payments, the best that can be hoped for in a growing number of cases may well be orderly, voluntary and collaborative restructurings, such as the one announced last week in Ecuador.

The complicated negotiations between Argentina and its creditors demonstrate that such deals are far from easy, especially given the lack of cohesion among creditors. But the alternative — a messy default — destroys even more value for debtors and investors.

The potential damage is not limited to finance. Disruptions in capital markets could also undermine the already sluggish economic recovery by making consumers more thrifty, as they worry about their job prospects, and by encouraging companies to postpone investment plans pending a clearer economic outlook.

The investing challenge may well shift in the months ahead from riding an exceptional wave of liquidity, which lifted virtually all asset prices, to steering through a general correction in prices and complex individual non-payments.

No wonder, then, that an increasing number of asset managers are raising funds in the hope of deploying a dual investment strategy.

The first involves waiting for a correction to buy rock-solid companies trading at bargain prices. The second involves engaging in well-structured rescue financing, debt restructurings and collateralised lending as countries, and some bankrupt companies, seek to reorganise and recover.

Liquidity-driven rallies are deceptively attractive and tend to result in excessive risk-taking. This time, retail investors are front and centre. But it is the next stage that we should already be thinking about. That requires much more careful scrutiny from investors than the past few months have demanded.

The writer is Allianz’s chief economic adviser and president-elect of Queens’ College, University of Cambridge

New York-based firm homes in on opportunities in mortgage-backed securities

Axonic Capital, one of the hedge funds hit hardest during a big credit-market sell-off in March, has raised close to $1bn in new capital this year, suggesting that investors are clamouring for exposure to beaten-down assets they believe still offer value.

The New York-based firm, which was known for vacuuming up residential mortgage-backed securities at depressed prices after the 2008 financial crisis, raised the bulk of the money since the start of April, said two people familiar with the matter, shortly after financial markets bottomed. 

The cash will be deployed in areas such as commercial and residential mortgage-backed securities, where the firm sees opportunities in the wake of the market tumble, the people said.

Axonic declined to comment.

Other hedge funds such as DE Shaw, Baupost and TCI have been able to draw investors into new and existing funds in recent months. Such inflows show how some institutions have seen dips as buying opportunities — even via funds that incurred heavy losses during the period.

Several big funds specialising in structured credit, where debt to companies and consumers is bundled up to back sales of new bonds and equity, were squeezed during the market turmoil earlier this year. Structured credit was the main driver of losses at Sir Michael Hintze’s CQS Directional Opportunities fund, for example, which had lost about $1.4bn by the end of May.

Axonic’s Credit Opportunities fund, which has made gains of roughly 7-8 per cent in each of the past three years, lost about 30 per cent in March. It has since recovered, but remained down about 22 per cent for the first six months of the year, according to numbers sent to investors. 

Axonic’s Special Opportunities SBL fund, which focuses on buying bonds underpinned by mortgages on apartment buildings, is down 16 per cent for the year.

Large parts of the structured credit market have not experienced the kind of rebound seen in stocks and bonds since the US Federal Reserve unleashed a succession of stimulus measures in March. Lower-rated slices of debt — more exposed to defaults of companies and consumers — are among those still languishing.

But some investors are now betting that residential and commercial mortgage-backed assets will enjoy a similar resurgence, backstopped by huge monetary and fiscal stimulus.

Axonic tends to buy the lowest tranches of bonds backed by apartment buildings and issued by government agencies such as Freddie Mac, according to one person familiar with its strategy.

A smaller, computer-driven fund run by Axonic that tries to find arbitrage opportunities in fixed-income is up around 13 per cent this year.

After the inflows, Axonic manages about $3.5bn in total.

Analog/Maxim: signal boost

Deal looks to be low leverage consolidation without excessive risk on either side

In the semiconductor business, even a $50bn valuation may not be enough. On Monday, Analog Devices announced that it would acquire rival Maxim Integrated Products for $20bn. The augmented Analog will see its enterprise value approach $70bn.

The transaction is among the biggest M&A deals since the coronavirus fallout began in earnest in March. While US equity and debt markets have soared despite an economic and public health crisis, boards of directors have not had the confidence to pull the trigger on game-changing deals. Even if the Analog/Maxim tie-up involves some big numbers, the risk it entails is not excessive for either side.

Analog semiconductors are traditionally the less exciting sibling of digital chips that companies such as Intel make for PCs and smartphones. But the chips have become more interesting in an era of connected devices and automation. Analog free cash flow margins are relatively high because capital costs are less onerous than the broader semiconductor sector.

Analog is using its own shares to acquire Maxim. Maxim shareholders will end up owning 31 per cent of the new company. A theoretical analysis based on the most recent 12-month ebitda of both companies and their respective capital structures suggests Maxim should actually own 29 per cent of the new company. A slight premium to that is, however, understandable since Analog will be taking control. Neither company carries much debt so leverage will not be an issue. The companies project $275m of cost synergies — a juicy figure that reflects most of Maxim’s overhead spending. 

Maxim shares jumped about a tenth on Monday to reflect the slight premium it is getting. Analog shares dropped about 5 per cent. This is not a terrible reaction given the size of the deal, especially as most of the benefit of the deal will occur over time if synergy targets are met.

Do not expect an immediate wave of blockbuster dealmaking, even if capital markets remain on fire. But this may not be a bad time for more defensive, low leverage consolidation.

$11bn deal highlights the rise of ‘blank cheque’ companies

MultiPlan to go public in merger with a special purpose acquisition company

US healthcare company MultiPlan is to go public in an $11bn merger with a special purpose acquisition company run by former Citigroup dealmaker Michael Klein.

Churchill Capital Corp III, which raised $1.1bn in February, will merge with MultiPlan in one of the largest deals executed by a “blank cheque” buyout fund.

The healthcare technology provider is owned by private equity firm Hellman & Friedman, which will remain its largest shareholder.

The deal shows how Spacs are increasingly competing for big deals while providing an alternative to traditional initial public offerings.

As part of the $11bn transaction, which includes debt, MultiPlan will receive a $3.7bn cash infusion that involves $2.6bn of investor commitments in equity and convertible debt. The company said it would use the capital to pay down debt, purchase shares from existing investors and bolster its balance sheet. Longtime chief executive Mark Tabak will remain in his post. 

“As a public company, MultiPlan will have greater strategic and financial flexibility, making it better equipped to expand organically, through adjacent acquisitions and by investing in new technologies,” Mr Tabak said in a statement. “We will deliver even more value for healthcare payers in particular, but also for their consumers and providers.”

MultiPlan’s business identifies cost reductions in healthcare plans for insurance providers and takes a cut of those savings.

The company projected it would make $860m in adjusted earnings before interest, taxes depreciation and amortisation on revenues of $1.1bn in 2021, according to a shareholder presentation.

Hellman & Friedman agreed to buy MultiPlan in 2016 for $7.5bn from Starr Investment Holdings and Partners Group. The company, which has been under private equity ownership since 2006 when it was acquired by The Carlyle Group for $1bn, has a heavy debt load. 

The San Francisco-based private equity firm and its co-investors will retain a 62 per cent stake in the company. Hellman & Friedman is subject to a six-month lock up period before it can sell its shares. 

Spacs have experienced a resurgence in popularity, raising a record $13.4bn in proceeds last year, according to Dealogic data. The blank cheque buyout funds pull in investor capital by listing as a public company and then put the funds to use once a target acquisition is identified. For shareholders, they effectively amount to wagers on the acumen of the sponsoring dealmakers.

Bill Ackman, the hedge fund manager, is aiming to raise the largest Spac in history this week, targeting up to $6.5bn for his Pershing Square Tontine Holdings vehicle.

Mr Klein, who headed the institutional clients practice at Citigroup before leaving to start the advisory firm M Klein & Co, is also seeking an acquisition target for his Churchill Capital Corp II Spac. His first Churchill vehicle took the data company Clarivate Analytics public last year in a $4.2bn deal. 

The MultiPlan transaction is expected to be completed by October, pending approval from Churchill’s stockholders.

UBI chief says takeover by Intesa ‘would create a kind of monopoly’

Victor Massiah says he wants to be a buyer, not seller, in the consolidation of Italian banking

The chief executive of UBI Banca has vowed to be a buyer rather than a seller in the consolidation of Italy’s fragmented banking sector, dismissing a takeover bid by the country’s largest bank Intesa Sanpaolo as anti-competitive.

“I understand that in certain countries it is desirable that large banks buy out smaller peers but . . . while Spain, France or the UK have several large banks, Italy only has one,” Victor Massiah told the Financial Times. “The takeover would create a kind of monopoly and I don’t think it’s appropriate.”

Earlier this month UBI rejected the all-share offer by Intesa, which was valued at €4.9bn when it was first announced in February, and has since dropped to €3.5bn amid the fallout from the coronavirus pandemic. It said the offer was too low and the conditions detrimental to shareholders.

Italy’s antitrust regulator has already raised competition concerns in a preliminary verdict. Intesa sought to allay these by committing to sell more branches of the combined entity.

Some analysts are sceptical UBI will achieve this pledge because the bank had failed to take the initiative on multiple occasions before Intesa made its hostile takeover bid.

Mr Massiah said that such criticism failed to take into account new guidance that was issued by the European Central Bank earlier this month. This clarifies takeover rules in terms of capital requirements; badwill, which occurs when a company purchases an asset or another company at less than its net fair market value; and the use of internal models. It was drafted to spur consolidation.

“If UBI will continue being independent, [acquisition proposals] will be finalised by the end of this year,” he said.

In the past, some banks, including UBI, have said that the ECB’s stringent requirements were the main reason they held off dealmaking. “Our priority was to protect our shareholders and minimise capital increases,” said Mr Massiah.

UBI has also said it will return €840m of excess capital to shareholders during the next three years, a target seen as aggressive by analysts. “Our philosophy has always been to hold [cash] reserves . . . we had the responsibility to make shareholders aware [of the opportunity they would miss out on] if they opt to tender their shares [to Intesa],” said Mr Massiah.

Anna-Maria Benassi, a Kepler Cheuvreux analyst, said there was “upside” for UBI shareholders in accepting Intesa’s offer, and suggested “downside” if the bank remained a standalone entity, as well as “an uncertain outcome from alternative M&A”.

UBI is highly exposed to Lombardy, the Italian region worst hit by coronavirus. At the height of the pandemic it sought to trigger a material adverse change (MAC) clause to kill the proposed deal.

“We wrote to the board to ask whether they were going to trigger the MAC due to Covid-19,” said Mr Massiah. “They replied that it wasn’t the moment to discuss it. Buying time is not part of the rules of the game.”

Ray-Ban maker told concessions are needed for GrandVision acquisition to be approved

Brussels is demanding that Franco-Italian eyewear company EssilorLuxottica sell retail stores in Italy and another EU country — either France or Holland — to secure its planned €7.2bn acquisition of GrandVision.

But the maker of Ray-Ban and Oakley glasses has not yet committed to offloading shops as it argues that it might be too difficult to sell them at a time of particularly tough trading conditions because of the pandemic.

The group also warns that any opticians that are sold off could risk failure because of Covid-19. Last week UK pharmacist Boots said it would close 48 of its opticians stores and cut more than 4,000 jobs across the business.

The increasingly heated negotiations between the EU and EssilorLuxottica come ahead of a crucial deadline of August 20 when EU regulators must decide whether to clear the purchase of the Dutch group.

The EU is concerned that the proposed deal could undermine competition by reducing the number of rivals in the wholesale market for eyewear and lenses and the retail supply of optical products. People close to EssilorLuxottica say that guarantees of supply should not prove an obstacle.

Brussels has conducted a lengthy probe over worries that it could lead to reduced competition in the sector and higher prices for consumers.

“This transaction cannot be cleared without concessions,” said someone with direct knowledge of the EU’s thinking, adding that Brussels eventually expects the company to give so-called remedies to clinch the deal.

The proposed acquisition could still be approved without conditions or be blocked, according to people with direct knowledge of the matter.

EssilorLuxottica declined to comment. GrandVision, which is Europe’s largest operator of opticians, including Vision Express in the UK, did not immediately respond to requests for comment. The European Commission, the executive body of the EU, declined to comment.

EU regulators are not the only ones with concerns over the transaction. Small rivals, including groups representing opticians across the continent, have called for the deal to be blocked on the grounds that consumers will be worse off as a result of the merger.

Opticians in countries like the UK, France and Austria also share worries that they will receive less favourable terms than retailers owned by the new combined group.

The concessions being sought by Brussels could see EssilorLuxottica push to renegotiate the price of the deal, with people close to the group arguing that the EU’s current demands would lower its value and call into the question the agreement.

The original deal, signed one year ago, was for €28 per share, but GrandVision is now trading at about €25. Other deals, such as the planned $9bn acquisition of Bermuda reinsurer PartnerRe by France’s Covéa, have already collapsed because of the pandemic lowering valuations.

EssilorLuxottica agreed to buy rival GrandVision — snapping up a 76.2 per cent stake from Hal Holding — in the hope of adding more than 7,200 stores globally and more than 37,000 employees to the group.

The Franco-Italian eyewear company was itself created by a 2017 merger which drew intense regulatory scrutiny and has since found itself mired in a governance tussle between the two sides, which centred on the still pending appointment of a new chief executive for the group. So far this year its shares have fallen roughly 12 per cent.

U.S. Rejects Most Chinese Maritime Claims in South China Sea

In a direct but largely symbolic challenge to Beijing, Pompeo says China won’t be allowed to treat the strategic waters as ‘its maritime empire’

HONG KONG—The U.S. declared its formal opposition to a swath of Chinese claims in the South China Sea, in an unusually direct challenge to Beijing’s efforts to assert control in the strategic waters.

Announcing the policy shift on Monday, Secretary of State Mike Pompeo characterized the decision as an effort to uphold international law against what he called a “might makes right” campaign by China to coerce and intimidate its Southeast Asian neighbors into ceding their interests.

While Washington has previously said it sees Beijing’s expansive sovereignty claims over most of the South China Sea as unlawful, the U.S. is now officially rejecting specific Chinese claims for the first time, according to diplomats familiar with the matter.

The Trump administration has recently ramped up naval operations to challenge the claims. This month, the U.S. sent two aircraft carriers to participate in one of its largest naval exercises in recent years in the South China Sea—at the same time that China was holding drills in the area.

“The world will not allow Beijing to treat the South China Sea as its maritime empire,” Mr. Pompeo said.

Washington’s new stance on the South China Sea disputes could exacerbate an escalating row with Beijing on trade, technological competition, China’s efforts to tighten control over Hong Kong and its treatment of ethnic Uighurs and other Muslim minorities in the region of Xinjiang. The practical implications of the policy shift weren’t immediately clear, though it could portend tougher U.S. efforts to challenge disputed Chinese claims through military, diplomatic or legal means.

“We advise the U.S. side to earnestly honor its commitment of not taking sides on the issue of territorial sovereignty, respect regional countries’ efforts for a peaceful and stable South China Sea and stop its attempts to disrupt and sabotage regional peace and stability,” a spokesman for the Chinese Embassy said Monday.

The announcement marks a departure from past U.S. practice of not taking sides on maritime disputes in the South China Sea, where Beijing’s claims overlap with those of six governments, including five Southeast Asian countries. The U.S., which doesn’t have claims in these waters, has generally called on rival claimants to resolve their disputes peacefully and in accordance with international law.

“America stands with our Southeast Asian allies and partners in protecting their sovereign rights to offshore resources, consistent with their rights and obligations under international law,” Mr. Pompeo said.

The announcement came a day after the fourth anniversary of a 2016 ruling by an international arbitration tribunal that found there was no legal basis for Beijing’s claims to historic and economic rights in most of the South China Sea.

It also follows a joint statement issued by Southeast Asian leaders last month insisting that the 1982 United Nations Convention on the Law of the Sea should be the basis for determining sovereign rights and entitlements in maritime areas—an unusually firm display of regional unity against Beijing’s expansive claims over the South China Sea.

China is a party to the convention while the U.S. isn’t, though Washington says it recognizes the pact as customary international law and complies with its provisions.

China rejected the 2016 ruling, issued by a tribunal at the Permanent Court of Arbitration in The Hague following a legal challenge brought by the Philippines in 2013. Beijing didn’t take part in the tribunal, which Chinese officials insisted had no jurisdiction on the matter. Instead, China continued efforts to build artificial islands around disputed South China Sea features and fortify them with weaponry.

At the time of the ruling, the Obama administration called on relevant parties to respect it and resolve their differences peacefully, while reiterating that the U.S. doesn’t take sides on in disputes over sovereignty claims in the South China Sea. Washington has long insisted that it has an interest in maintaining freedom of navigation in the area.

Mr. Pompeo said the newly announced rejection of Chinese claims aligns the U.S. stance with the tribunal’s ruling. He said “Beijing has offered no coherent legal basis” for its expansive claims over the South China Sea as demarcated by a vaguely defined “nine-dash line.”

Under the new posture announced Monday, the U.S. broadly rejects Chinese maritime claims in the South China Sea beyond what can be claimed under international law, as well as territorial claims over submerged and other features that aren’t permanently above sea level.

This means Washington rejects Beijing’s claims over certain waters and features—including reefs and shoals—near Brunei, Malaysia, Indonesia, the Philippines and Vietnam. Mr. Pompeo’s statement didn’t indicate a policy shift on Chinese claims to land features above sea level.

Chinese efforts to “harass other states’ fishing or hydrocarbon development in these waters—or to carry out such activities unilaterally—is unlawful,” Mr. Pompeo said.

American diplomats had briefed Southeast Asian counterparts about Washington’s policy shift ahead of the formal announcement, people familiar with the matter said.

In a position paper used for these briefings, the U.S. cites “a deeply concerning uptick” in aggressive Chinese behavior in the Indo-Pacific region, including recent maneuvers by Chinese navy, coast guard and fishing vessels in disputed South China Sea waters.

“China’s maritime claims pose the single greatest threat to the freedom of the seas in modern history,” the paper said, according to a copy seen by The Wall Street Journal. “We cannot afford to re-enter an era where states like China attempt to assert sovereignty over the seas.”

As share of GDP, deficit is on pace to be the largest since World War II

WASHINGTON—The U.S. budget deficit reached $3 trillion in the 12 months through June as stimulus spending soared and tax revenue plunged, putting the federal government on pace to register the largest annual deficit as a share of the economy since World War II.

As a share of gross domestic product, the 12-month deficit came to 14% last month, compared with 10.1% in February 2010, when the U.S. was still recovering from the last recession. In June alone, the deficit widened to a monthly record of $864 billion, the Treasury Department said Monday—nearly as much as the gap for the entire previous fiscal year, which totaled $984 billion.

The Congressional Budget Office has projected the annual deficit could total $3.7 trillion in the fiscal year that ends Sept. 30. But the gap could widen even further if Congress and the White House agree later this month on another round of emergency spending, which economists argue is vital to keep households and businesses afloat until the economy begins to recover.

Congress has authorized $3.3 trillion in new spending since March to help combat the impact of coronavirus shutdowns, including stimulus checks to American households and emergency loans and grants to struggling businesses and state and local governments. The Trump administration has also delayed personal and corporate income-tax payments until July 15 in an effort to keep more cash in Americans’ wallets.

“The good news is this means we’re getting fiscal relief out the door fast,” said Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, a deficit watchdog group. “The bad news is that we’re having to borrow record amounts on top of so much unpaid-for spending and tax cuts that lawmakers approved in the past few years.”

Widespread unemployment and business shutdowns have pushed down tax revenue while also boosting spending on safety net measures including unemployment insurance and nutrition assistance. A renewed surge of coronavirus cases across the South and West is forcing some states, including Texas, to reimpose social distancing measures, putting a quick economic recovery in doubt.

Federal deficits typically widen in times of recession and narrow when the economy grows. This time, the deficit was already rising in the final years of the decadelong expansion that ended in February following the Trump administration’s sponsored tax cuts of 2017.

Political support for taming deficits has faded in Washington in recent years, as persistent global demand for U.S. Treasury assets has kept borrowing costs near historic lows. Despite the surge in government borrowing, net interest costs fell 11% in the first nine months of the fiscal year, the Treasury said Monday.

The dramatic rise in red ink has rankled some Republicans and White House officials, who have argued against another sweeping economic relief package and called instead for aid that is more narrowly targeted at the hardest hit-industries, in part due to concerns about the deficit.

Democrats and many economists, however, have said policy makers must tackle the more pressing problem—controlling the virus and supporting American households and businesses—and worry about deficits later, especially when the cost to borrow is so low. The yield on the benchmark 10-year Treasury note was around 0.622% late Monday, down from more than 2% a year ago.

The CBO estimated last week that the jobless rate will end the year at 10.5%, compared with a 50-year low of about 3.5 percent before the recession. While the economy is expected to grow in the second half this year, output in the fourth quarter of 2020 will be 5.9% lower than a year earlier, the agency said.

The economy showed signs of reviving in May and June as parts of the country reopened. The number of Americans receiving unemployment benefits fell by nearly 700,000 to 18.1 million for the week ended June 27, the lowest reading since the week ended April 18. Employers added a combined 7.5 million jobs in May and June after shedding 21 million jobs in March and April.

Whether that recent rate of job creation and relatively lower pace of layoffs, can continue is in doubt because coronavirus infections are causing state authorities to reconsider reopening plans and creating renewed uncertainty for many businesses and consumers.

In June, spending soared to $1.1 trillion, compared with $342 billion in the same period a year earlier, the Treasury said Monday. Nearly half of that spending went to emergency small-business loans provided under the Paycheck Protection Program, aimed at helping small firms meet payroll and keep workers attached to their jobs.

Outlays for jobless benefits climbed from roughly $2 billion in June 2019 to $116 billion last month, about half of which was due to the extra $600 in weekly benefits that Congress authorized as part of the so-called Cares Act. Those enhanced payments are set to expire at the end of this month unless Congress chooses to extend them.

Meanwhile, federal revenue sank 28% to $241 billion, due in part to the administration’s decision to delay tax payment deadlines. The government typically receives an influx of revenue in June when corporations and individuals make quarterly estimated tax payments. Senior Treasury officials said Monday they expect to receive a large share of that revenue in July, though declining wages and reduced economic activity have also constrained federal receipts.

For the first nine months of the fiscal year, the budget gap totaled $2.7 trillion, the Treasury said, more than triple the deficit during the same period a year earlier. Receipts fell 13% from October through June compared with a year earlier, and spending rose 49%.

Japanese conglomerate bought British tech company four years ago for $32 billion

SoftBank Group Corp. 9984 -2.11% is exploring alternatives including a full or partial sale or public offering of British chip designer Arm Holdings, which the Japanese conglomerate bought four years ago for $32 billion, according to people familiar with the matter.

The review, on which Goldman Sachs Group Inc. is advising, is at an early stage, the people said. It isn’t known how much interest financial or industry players might have in Arm, and it is possible SoftBank will ultimately choose to do nothing.

SoftBank has previously indicated it could return Arm to public markets at some point. Such a move has gained urgency, however, as SoftBank seeks to raise cash from its varied stable of assets to mollify activist investor Elliott Management Corp., which has been agitating for changes at the company.

SoftBank has said it plans to sell up to $41 billion in assets to prop up its struggling portfolio and buy back its own shares, which trade at a steep discount relative to net asset value. It has a grab bag of assets to choose from; in addition to Arm and roughly $20 billion worth of T-Mobile US Inc. shares it recently sold, SoftBank also owns large stakes in Chinese e-commerce giant Alibaba Group Holding Ltd. and a leading Japanese cellphone provider.

SoftBank bought Arm, which designs microprocessors that power most of the world’s smartphones, in 2016. At the time it was SoftBank’s largest-ever acquisition.

SoftBank chief Masayoshi Son hailed the acquisition as a “paradigm shift” at the company, enabling it to take advantage of the potential of the Internet of Things, which refers to the connectivity of everyday devices. But sales of the software that Arm developed for managing connected devices have been relatively flat, excluding a boost from acquisitions.

Arm last week said it planned to transfer two IoT-services units into new entities that would be owned and operated by SoftBank as part of a move to focus on its core semiconductor-IP business. The company said it expected the transfer, if approved, to be finalized by the end of September.

SoftBank’s $100 billion Vision Fund, which invests in tech companies and holds a 25% stake in Arm, has in the past considered transferring the stake back to SoftBank because fund executives believe the tech company’s lackluster revenue growth has been a drag on the overall valuation of its portfolio.

SoftBank’s earnings have been battered recently by huge losses at the Vision Fund, undermining plans to raise a second big investment vehicle.

The chip sector has been a reliable source of deal activity in recent years as companies position themselves to support the evolution of the auto and industrial sectors and the proliferation of smart devices. On Monday, Analog Devices Inc. agreed to buy Maxim Integrated Products Inc. for roughly $20 billion in a deal that would create a company specializing in analog semiconductors used in power management that could better compete with industry giant Texas Instruments Inc.

South Korean group has overtaken China’s CATL to become world’s largest EV battery maker

LG Chem says it has Won150tn ($125bn) worth of orders that will keep it busy for the next five years and help the world’s largest electric vehicle battery maker ride out the coronavirus pandemic.

The South Korean company, which controls about a quarter of the global market, is boosting capacity to meet a surge in orders driven by tighter environmental regulations in Europe and China. Its strong performance has helped it overtake China’s CATL to become the industry leader this year.

“We have survived the pandemic relatively unscathed as demand for our products has continued to increase despite lockdowns,” said Shin Hak-cheol, the company’s chief executive. “We need to expand our capacity to fulfil the backlog of orders.”

Although global EV battery sales fell 24 per cent in the first five months of the year owing to the pandemic, LG Chem’s sales jumped 70 per cent on the back of popular EV models including Tesla’s Model 3, Renault’s Zoe, and Audi’s E-tron, according to market tracker SNE Research.

LG Chem’s market share has ballooned from 10.8 per cent last year to 24.2 per cent this year, putting it ahead of CATL with 22.3 per cent and Panasonic with 21.4 per cent. Its share price has more than doubled over the past four months to near a 10-year high.

Mr Shin expects the global electric vehicle market to grow around 35 per cent a year with its share of the world’s auto market increasing from 2.8 per cent last year to as much as 15 per cent by 2024.

“The rapid growth of the EV market will continue,” said Mr Shin, “driven by stiffer environmental regulations in Europe and China”, which together account for more than 70 per cent of the global EV market.

While the virus outbreak has forced LG Chem to cut capital expenditure by 9 per cent this year to about Won6tn, it plans to push up capex next year and channel about 60 per cent of that increased amount into the battery business.

This year, the company plans to spend a record Won1.3tn — about 4 per cent of sales — on research and development, with about 40 per cent of that on EV batteries.

LG Chem credits a localised supply chain for helping it prosper despite the pandemic. In addition to its domestic facility, it has plants in China, Poland and Michigan in the US, where it is also building a plant in Ohio to supply GM.

“Our regional manufacturing hubs have played a big role at a time like this. We have seen few work stoppages and have had a good supply of raw materials,” said Mr Shin.

LG Chem, which has a joint venture with Chinese carmaker Geely, also started supplying batteries to Tesla’s new Shanghai factory this year after Beijing allowed electric cars using foreign-made batteries to receive Chinese subsidies for the first time since 2015.

Chinese rivals have larger volume and lower prices, “but we are still ahead of them in terms of technology, by at least a year or two”, said Mr Shin. “Technology development is our life blood. We will continue to increase our R&D spending for technology differentiation.”