TheChek News Flow

Fed Will Buy Unlimited Amounts of Treasurys and Mortgage Securities

The Federal Reserve announced a major expansion of lending programs Monday that are designed to unclog credit markets that seized up last week, expanding its facilities to include certain types of corporate and municipal debt.

The rate-setting Federal Open Market Committee said the purchases of Treasury and mortgage securities that it approved one week ago are essentially unlimited, and the central bank said it would buy $375 billion in Treasury securities and $250 billion in mortgage securities this week.

It also said that it would begin purchasing commercial mortgage-backed securities issued by government-supported entities, which primarily consist of debt on apartment buildings.

“While great uncertainty remains, it has become clear that our economy will face severe disruptions,” the central bank said Monday morning. “Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.”

The Fed also said it would launch three new lending facilities, including the crisis-era Term Asset-Backed Securities Lending Facility, or TALF, which the central bank in 2008 used to support consumer and business credit markets. The Fed will lend money to investors to buy securities backed by credit-card loans and other consumer debt.

The central bank unveiled plans for two lending facilities to support corporate credit markets. One will lend to investment-grade companies and provide bridge financing of four years, while a second will buy corporate bonds issued by highly rated companies and U.S.-listed exchange-traded funds in the investment-grated corporate-bond market.

Those three facilities are designed to support $300 billion in new financing and the Treasury Department will cover $30 billion in losses.

It expanded two others that were unveiled last week to include additional classes of municipal debt, and said it would lower the pricing on one of those, the Commercial Paper Funding Facility.

The Fed also said it would soon roll out a Main Street Business Lending Program that will support lending to eligible small and midsize businesses.

Investors are braced for savage cuts in dividends across the FTSE 350 as companies hoard cash to see them through the coronavirus crisis.

On Monday, a further wave of dividend suspensions and cancellation of buybacks were announced by companies scrambling to assess the hit to their earnings from the pandemic.

* ITV said scrapping its dividend would save about £300m, and withdrew its guidance because of the drop in advertising spend and halt in production.

* IWG, the shared office provider, will not pay its final dividend and suspended a £100m share buyback as coronavirus forced the closure of properties.

* Fuller’s, the pub company, withdrew its forecast and said it would consider cutting its dividend after the government forced the closure of bars, pubs and restaurants.

* Royal Dutch Shell is to halt its share buyback programme.

* Kingfisher delayed its full-year results following the Financial Conduct Authority request, and said there would be no final dividend.

* Stagecoach said uncertainties caused by the impact of Covid-19 would mean any further dividends this year would be unlikely.

The rout began at pace last week, when groups spanning William Hill and Marks and Spencer heaped further pain on shareholders already suffering losses in their portfolios from the market sell-off. 

The pandemic appears set to end the decade-long run of bumper payouts for income-hungry investors. Since the end of the financial crisis, FTSE 100 dividend payments have almost doubled from £46bn in 2009 to about £90bn declared so far for 2019, according to stockbrokers AJ Bell. Special dividends and buybacks have been paid out on top.

Analysts had expected a further 2 per cent increase in dividend payments to £91.5bn, but Russ Mould, investment director at AJ Bell, said this was “starting to look optimistic”.

More than a dozen companies have already cut or suspended payouts in the UK. Many are in consumer-facing industries, such as pub groups Marston’s and Wetherspoons, while the cancellation of sporting events forced William Hill and Playtech to take action. 

Housebuilders including Travis Perkins and Crest Nicolson have also cancelled final payouts this year, alongside retailers such as M&S.

Next and National Express are among a second group of companies that are considering reduced shareholder payouts.

Investors are worried that dividend cover from earnings has become overly optimistic given an unprecedented drop in consumer demand across industries, and the knock-on effect on areas such as manufacturing and supply chains.

“With many governments pursuing a ‘close everything down’ strategy, the deterioration in corporate cash flows is growing by the day,” said analysts at Stifel, which warned about the impact on funds and the dividends that they are able to pay. 

The FTSE 100 offers a forward yield of 6.5 per cent — an artificially high level, according to investors, that will mean further cuts to come given falling earnings cover as the coronavirus crisis continues. 

Many companies now offer yields in the double-digits, but earnings cover stands at about 1.7 times on average across the FTSE 100, which is seen as low by analysts even before earnings come under pressure owing to the coronavirus outbreak.

Trevor Green, head of institutional equities at Aviva Investors, said the stated dividend yield for the FTSE 100 was now “hugely” open to question. 

“Some companies have chosen to cut dividends immediately, but others are likely to follow as management will have to balance being loyal to staff and keeping retention rates high with short-term cuts to dividends,” he said.

Often the dividend cut has come with the admission that these companies have started talking to their banks about covenants and drawing down credit facilities as they seek to secure cash and debt positions.

If a well-funded and carefully run retailer such as Next was even thinking of cutting, Mr Mould said, “then frankly pretty much no one is safe, barring maybe the utilities and even there they could be asked to give customers more time to pay their bills”.

He pointed to companies such as cruise ship operator Carnival and ITV, if it faced a prolonged advertising slowdown following cancelled sporting events.

A sustained downturn in economic activity could weigh on commodity prices, and in turn on payouts from groups such as Glencore, while BP and Shell are in focus, given the sharp fall in oil prices.

As well as cutting dividends, companies could also find themselves unable to pay a final dividend if they were forced to delay or suspend their annual meetings. 

FT : Big deals in limbo spell ‘arb-ageddon’ for hedge funds

Hedge funds that bet on the completion of pending mergers and acquisitions are nursing heavy losses, as the coronavirus outbreak wreaks havoc in global markets and puts many deals in jeopardy.

Data group HFR’s index of merger-arbitrage funds has tumbled 17.5 per cent so far in March, putting it on course for its worst month since at least 1997. Large hedge funds such as Millennium and more specialised groups such as Westchester Capital Management have been hit by bets on frozen deals, according to industry specialists.

Such funds try to capture the difference between a target company’s current share price and the higher value of a takeover offer. Typically, this gap stays at about 5 per cent or less in the run-up to completion: reflecting both the time to reach the deal’s closure as well as the risk that the deal falls apart. Traders use leverage to amplify potential gains.

However, whipsawing markets have slammed stock prices while raising the cost of credit, raising fears that a number of large deals awaiting completion may be recut or scrapped altogether. Analysts at Wells Fargo have described the events of the past few weeks as “arb-ageddon” — a term traders said was coined in 2008, during the global financial collapse.

“Spreads are moving with a volatility . . . we’ve never seen,” said a portfolio manager who runs a merger arb company.

Widening discounts, or spreads, can blow up the merger-arb trade by triggering margin calls from banks, forcing the arbitrageur to cut their losses. That can in turn increase the markdown on the shares and hit other hedge funds holding on to the trade.

One hedge fund portfolio manager described a “race for the exit” by the biggest investors as they rushed to sell out of positions.

Millennium declined to comment.

Traders highlighted examples such as EssilorLuxottica’s planned purchase of Dutch group eyewear retailer GrandVision for €7.1bn, which faces a long EU competition review. At one point last week, GrandVision’s shares fell to a 69 per cent discount to the value of EssilorLuxottica’s takeover offer. The gap sits at about 22 per cent after a rally.

The deal being watched most closely, according to merger arbs, is US drugmaker AbbVie’s planned $63bn cash-and-stock takeover of Allergan, which was agreed in June 2019.

At least three hedge funds — Farallon Capital, HBK Investments and Pentwater Capital — had positions in Allergan worth more than $1bn, according to regulatory filings. That means the funds are likely down on the bet as shares, which were trading close to the AbbVie offer, widened to a discount of as much as 12 per cent before narrowing to closer to 6 per cent by the end of last week. This month AbbVie president Mike Severino said he expected the Federal Trade Commission to clear the deal “early in the second quarter”.

In the US, Simon Property’s $7bn acquisition of Taubman Centers, the operator of 26 shopping centres in the US and Asia, also faces difficulty. Many of Taubman’s centres have had to shut down due to government measures to combat the spreading of Covid-19. Shares in the company were trading about 20 per cent below Simon’s takeover price.

The average discount among nearly 30 US public company deals outstanding was just above 10 per cent, according to FT analysis.

Several dealmakers said that many transactions would survive the current market volatility, arguing that the huge discounts are just an example of dislocations caused by indiscriminate selling by investors.

In the US, moreover, courts have been reluctant to provide acquirers with much wriggle room. Merger agreements have “material adverse change” or “material adverse effect” provisions that determine whether a deal can be altered after having been agreed. Those tend to be ironclad and leave little space for renegotiations, lawyers said. Sometimes, however, targets and acquirers will mutually agree to lower the purchase price to avoid extensive litigation.

“Asserting a MAC walkaway generally requires that the negative financial impact is unique to the company being acquired with a long-term impact on the business,” said Frank Aquila, a partner at law firm Sullivan & Cromwell in New York. “Covid-19 is impacting the global economy, so it would be extremely difficult to show that it’s specific to a particular company.”

For example, the $6bn buyout of US-listed Tech Data by private equity group Apollo might seem to be in danger, judged solely by the spread below the deal value. Shares in the IT equipment distributor sit at $114, a long way from the agreed takeover price of $145 a share.

However, the merger agreement signed by the two companies — reviewed by the FT — states that it would be hard to use a MAC clause to terminate the deal unless a pandemic “had a materially disproportionate adverse effect on the company relative to other companies of similar size operating in the [same] industries”.

Another deal threatened by the viral outbreak is Eldorado Resorts’ debt-fuelled $17bn acquisition of Caesars, a rival casino operator. The spread between Caesars’ share price and Eldorado’s offer has widened to more than 40 per cent, from less than 1 per cent. Traders said that reflects fears that Eldorado would not survive the downturn.

While stores say that COVID-19 induced anxiety and dim economic forecasts have caused a steep drop-off in overall fashion sales, sweatpants appear to be an exception — their popularity spiking at a rate that may indicate they are the biggest (and perhaps only) trend in fashion right now.

With restaurants and nonessential stores closed by mandate and most professionals working from home, fashion status symbols have been rendered nearly useless. Consumers have few places to go that require any degree of style or savoir-faire, and in turn have begun dressing for comfort.

“There is a real shift in values within this moment,” said Scott Sternberg, founder of the sustainable basics label Entireworld, which saw its site traffic and sales conversion rate double last week, the first full workweek charted under quarantine.

Sweatpants have not appeared this relevant or widespread since the early-Aughts craze for Juicy Couture. Even the most devoted of fashion plates who have made a career out of getting dressed for the sake of it — including influencers Danielle Bernstein, Olivia Palermo and Courtney Trop, as well as models Kaia Gerber and Bella Hadid — have dialed back on their preening in COVID-19’s U.S. outbreak. Instead, each has been spotted in some form of lounge pants, encouraging followers to remain inside and stay safe.

America Right Now?

Sweatpants sales have surged as Americans spend more time at home to curb the spread of coronavirus.

Emerging label Suzie Kondi — which launched its candy-colored velour and terrycloth track suits on Net-a-porter last week — said sales on its own web site have doubled compared with this same time last month.

A representative for Net-a-porter said the site experienced a 40 percent uptick in general sweatpant sales in the first week of COVID-19 lockdown, along with exceptionally high sell-throughs of full-price product. Aéropostale reported a 23 percent increase in women’s sweatpants and Russell Athletics has seen a double-digit increase in searches for sweatpant styles. Vuori — an ath-leisure brand that sells in some 800 stores throughout the U.S. — has seen a 50 percent spike in sweatpant sales on its e-commerce site. (The company’s five bricks-and-mortar locations are currently closed.)

“People are still shopping, they are just doing things a little differently — they want to stay comfortable,” said Nikki Sakelliou, Vuori’s vice president of marketing.

Ariel Katz, of the Los Angeles-based sustainable loungewear brand Everybody, feels that there’s still a level of care involved in getting dressed under lockdown. “You are not getting dressed up to go out, but you are still dressed enough to be in your element,” she said.

Sternberg waxed further poetic on sweats, admitting that they exemplify, “an alternative set of values that are not part of fashion system, but still play on an emotional level.” For him, sweats are “something that keep you warm and cozy, it’s a fashion statement in itself…it’s a choice, it’s not a devolution.”

Japanese tech giant will spend up to $18 billion for share buybacks

SoftBank 9984 18.61% Group Corp. said it planned to sell up to ¥4.5 trillion ($41 billion) of its assets to buy back shares and redeem debt, in an unprecedented move to combat the tumbling price of its stocks and bonds.

The company said it would spend up to $18 billion for share buybacks after the global markets rout caused by the coronavirus pandemic raised concerns about the value of its investments and one of the world’s most aggressive activists had pushed for a large buyback.

The Japanese technology and investment company said it would use the balance of the funds it raised for paying back debt and increasing cash reserves.

“This will allow us to strengthen our balance sheet while significantly reducing debt,” Chief Executive Masayoshi Son said.

SoftBank said its shares were substantially undervalued. They had fallen more than 50% from the year’s high in February before gaining 19% following the announcement Monday. The shares rose by their daily limit.

SoftBank said the transactions would be executed over the next year. Combined with a previously announced ¥500 billion share buyback program, the company said it could end up repurchasing 45% of its shares outstanding.

Elliott Management Corp., which had recently built a $2.5 billion stake in the Japanese tech giant, was pushing for as much as $20 billion in share purchases, The Wall Street Journal has reported.

SoftBank didn’t say which assets it planned to sell. Its most valuable holding is in Chinese internet company Alibaba Group Holding Ltd., and it also holds a majority stake in a major Japanese telecommunications provider, SoftBank Corp., which is separately listed in Tokyo.

SoftBank Group said its board hired an independent search firm to identify up to three director candidates to be nominated at this year’s annual general meeting of shareholders.

Ministers seek reassurance that system can cope with increase in demand linked to virus outbreak

A surge of up to 50 per cent in the number of phone calls being made over mobile and landline networks has put Britain’s telephone system under significant strain and led ministers to call for industry action to improve coverage of voice services. 

The rise in voice calls has led to issues of call quality, dropped calls and a major outage last week.

The issue was discussed on a conference call between Melanie Dawes, Ofcom’s chief executive; Oliver Dowden, the culture secretary; Matt Warman, the minister for digital infrastructure; and industry leaders on Friday as politicians called for reassurance that networks can handle a dramatic rise in communications use. 

The capacity of broadband networks to handle a huge increase in traffic generated by millions of people working from home because of the coronavirus outbreak has been tested in recent days and led to Netflix and YouTube agreeing to lower the capacity demands of their streaming services. 

The release of a new game in the Doom franchise on Friday was the latest stress point for networks that remain confident that broadband capacity is sufficient to meet the needs of millions of people working from home at the same time that children are off school using online learning materials or streaming films or games. 

Yet it is voice calls that have caused the most teething problems in relocating the working population from urban centres to residential areas.

The number of mobile phone calls being made by homebound workers overloaded the system that connects phone messages between different mobile networks last Tuesday and triggered a bout of industry finger pointing over who was to blame. That issue was resolved quickly but voice call quality remained poor over the course of the week. 

The number of phone calls made over the O2 mobile network surged 50 per cent that day which was the equivalent to seven years of growth in one day. It saw 160m calls lasting an average seven minutes, 40 per cent longer than normal.

BT has said that its EE network can deal with the rise in the number of phone calls being made but has now urged phone users to revert to landlines or internet-based services like Skype for longer calls. 

Dean Bubley, the founder of advisory firm Disruptive Analysis, said that the changing patterns of consumer behaviour had meant that old mobile networks were having a “rough ride”.

“The good old fashioned phone call seems to have made a comeback and everyone is calling their [metaphorical] granny who may have a 3G phone that doesn’t run over the WiFi,” he said of the capacity crunch. Mobile networks are also configured to handle huge amounts of traffic in areas like central London rather than a row of terraced houses in the home counties. 

Enrique Blanco, chief technology officer of Telefónica which owns O2 in the UK, said that Spain faced a similar situation when it was hit by the pandemic, and workers and schoolchildren were sent home.

Mobile voice traffic immediately rose between 40 and 45 per cent, he said, while fixed-line calls surged 30 per cent. That has been replicated in other markets, including Germany and the UK.