WSJ : In the Era of Cheap Oil, Gulf Producers Are Forced to Borrow

In the Era of Cheap Oil, Gulf Producers Are Forced to Borrow
Bankers say there has been a surge of interest in pre-export finance deals with the fall in the price of crude oil

Some Middle Eastern oil producers are considering taking money upfront against future production, as the fall in the price of crude pushes them to look at new ways to plug budget holes.

In this type of pre-export finance, companies or countries pledge revenues from future sales to banks and trade houses that lend money to them.

Oman recently closed its first crude-export finance, in which banks paid the country $4 billion in exchange for revenues from future oil production over five years, according to bankers familiar with the matter.

Last month the Abu Dhabi National Oil Co., or Adnoc, said it had signed a pre-export financing deal for the supply of liquefied petroleum gas over the next 10 years. And the world’s top exporter of oil, Saudi Arabia, also is considering such finance, bankers said.

Middle Eastern governments have spent extravagantly for years as the high price of oil filled coffers. But after almost three years of a weaker price, regional governments now need to borrow.

Bankers say there has been an increase in interest for such export finance.

“Ten to 15 years ago, you didn’t see Middle Eastern producers coming into the structured trade commodities finance market to raise financing, but now they are,” said Irfan Afzal, a director of syndication and agency at African Export-Import Bank.

Representatives from Oman and Saudi Arabia didn’t immediately respond to requests for comment.

Such deals, particularly a potential Saudi Arabian deal, could be large.

“If they go ahead, it would have to be big if it was to be meaningful for the budget,” said Kris Van Broekhoven, head of commodity trade finance at Citibank. Still, some countries may be reluctant to use this type of finance because it entails handing over future royalties from a national resource.

“It’s the crown jewels of the country, and you don’t pledge your crown jewels as a matter of principle,” Mr. Van Broekhoven said.

Since 1992, Ghana has borrowed hundreds of millions of dollars in pre-export financing from banks each year so it can buy the local cocoa crop from farmers. Angola’s state-owned oil producer Sonangol also has used pre-export finance.

But for oil-rich Middle Eastern nations, it is a novel tactic. Oil producers in the region so far have mostly used public bond markets.


Last year, after oil prices fell below $30 a barrel, the governments of Saudi Arabia, Qatar, Abu Dhabi, Bahrain and Oman raised around $39 billion on international bond markets, up from around $2.5 billion in 2015, according to Moody’s Investors Service.
The 2016 sum included $17.5 billion in bonds that Saudi Arabia sold last October, the largest-ever emerging-market debt issue. Kuwait has launched its debut international bond sale earlier this month to raise $8 billion.

Pre-export finance is one way oil producers can diversify their funding.

Such deals tend to be cheaper than an unsecured bond, bankers say. That is because banks can typically take comfort in a producer’s record of exporting fuel, they say. The risk to the borrower is that if the price of oil falls dramatically, they may have to either extend the repayment term or pump more oil.

“The Middle Eastern producers have relatively low political risk…banks would rather finance Qatar, Oman or Saudi then they would Venezuela or indeed some of the emerging countries in Africa,” said Mr. Afzal from the African Export-Import Bank.

Rating company Moody’s expects the six Gulf Cooperation Council countries—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates—to raise almost as much again this year, after their combined balance sheet for 2015-2016 swung to a deficit equivalent to 9% of combined gross domestic product, compared with a combined surplus of around 5% of their GDP in 2014 when oil traded above $100 a barrel.

But that may not be enough. Saudi Arabia’s $17.5 billion bond covered only 22% of its 2016 fiscal deficit.

Moody’s estimates that oil accounts for around 25% of GDP in Gulf Cooperation Council countries, and around two-thirds of government revenue.

“If oil prices were to fall back to $40, we would see much larger deficits to finance,” said Mathias Angonin, analyst at Moody’s.

On Friday the price of Brent, the international benchmark, was at $50.80 a barrel, while West Texas Intermediate, its U.S. equivalent, was trading at $47.97.

>>> Barrons weekend update: Positive on VIA, SIVB; cautious on SEDG

Barrons weekend update: Positive on VIA, SIVB; cautious on SEDG 

* Cover story: Barron's list of the World's Best CEOs includes newcomers Mary Barra of GM, Satya Nadella of MSFT, and Stephen Hensley of UNH. 

* Features: 1) Positive on VIA: The media company's shares are up since Bob Bakish became CEO, and his plan to reorganize programming, revive reality TV, and create more content for MTV could give shares a 40% upside; 2) Cautious on SEDG: Shares of company that makes residential and commercial solar-power systems have taken a hit along with those of other firms in the sector, but shares are underpriced and could rally if sales targets are hit this year; 3) Positive on SIVB: Lender to venture capitalists and start-up founders expects strong earnings growth in the years ahead, and shares could move 25% or more higher.

* Tech Trader: Tiernan Ray says the good times for MU aren't likely to last, since DRAM and flash memory chips "haven't become any less of a commodity since the stock bottomed out roughly a year ago." 

* Trader: Jason Trennert of Strategas Research Partners says that of nine factors that precede a market top, only one-slowing upward earnings revisions-is of concern; Robert Sluymer of Fundstrat Global Advisors says the number of energy stocks making new relative lows is no longer growing; Mall REITs have historically outperformed other real estate investments when rates are rising, a trend that should continue this year. 

* Interview: Mariko Gordon of small-cap specialist Daruma Capital looks for a positive rate of change in a company's fundamentals and for risks and rewards that aren't reflected in the valuation (picks: ABM, FCB, OMCL, NPO). 

* Profile: Jim Dondero of Highland Capital Management makes bets on alternative investments by focusing strongly on debt deals, turnarounds, and trends (top holdings: VSTE, CLO, TWTR, TRGP, LRN, PAGP, EPD, TerreStar, Argentina sovereign debt). 

* Follow-Up: Positive on YHOO: Company's shares trade at a discount to its likely asset value; assuming no change in its BABA stake, investors could realize a 20% return during the next year; Cautious on GME: Shares could rally if the company gains time for its transition to selling a wider range of merchandise, and strong sales on new products from Nintendo and MSFT. 

* European Trader: Positive on TOT: French oil major "could again find favor with investors after emerging from the recent oil-price collapse in better shape than many rivals." 

* Asian Trader: Positive on BABA, Tencent: With fintech set to be a major trend in China, tech giants have the potential to generate an estimated $65B in sales by 2020 from the technology, and add 60% to their current valuations. 

* Emerging Markets: Poland, Korea, and Mexico are the best-performing emerging-market countries so far this year, while Greece, Russia, and Qatar/UAE have performed the worst. 

* Commodities: Lumber prices are set to rise because of a small trade war under way between the U.S. and Canada related to the price Canadian foresters charge to cut down a tree. 

* Streetwise: "With the dollar's rise stalling and Americans balking at potential border adjustments that make imports pricier, investors looking to walk back their Trump trades could find NKE an increasingly comfortable fit."

FT : The five big questions Brexit poses for fund managers

The five big questions Brexit poses for fund managers
As Article 50 is triggered this week, the UK industry is no clearer on what come next

Europe’s asset management industry is bracing for significant upheaval as the UK prepares for its exit from the EU.

British prime minister Theresa May is this week expected to trigger Article 50, the formal notification of the UK’s two-year divorce process from the economic bloc.

The impact of triggering Article 50 on markets and currencies is unknown. This is one of the many uncertainties that has intensified pressure on asset managers, who are already nervous about the many questions Brexit has raised for their businesses.

Saker Nusseibeh, chief executive of Hermes Investment Management, the UK fund house, says: “We have absolutely no idea what the outcome [of Brexit] will be.”

Huge sums of money are at risk.

A report from the London School of Economics found that a quarter of the £24bn of revenues booked annually by UK asset managers is derived from EU-related business. About £3bn of this business could move outside of the UK post-Brexit, the report found.

Mr Nusseibeh says: “We are about to enter a period of huge change for the [UK] fund industry. Its main market is about to become a foreign market.

“The fund industry will have to abide by foreign market rules. How tough these regulations will be will depend on how acrimonious or friendly the [Brexit] negotiations are. Whether the future is bright or grey, no one knows.”

The big Brexit-related questions weighing on the minds of asset managers are whether they will be able to continue to access EU clients; what limitations they might face when hiring European nationals in Britain, and whether they need to relocate staff outside of the UK.

Will Brexit hurt retail fund distribution?

One of the biggest concerns for asset managers is whether they will face restrictions when selling funds to retail investors following Brexit.

Europe’s asset management industry has grown rapidly over the past three decades thanks to the development of an EU-wide framework for mutual funds, known as Ucits. Under this regime, which accounts for nearly €9tn of assets in Europe, a fund can be regulated in Luxembourg, managed in London and sold in Paris.

The fear is that it will no longer be possible to sell EU-registered funds to UK investors, and vice versa, post-Brexit. More than two-thirds of investment professionals believe UK asset managers will not be able to sell their funds freely across the EU following Britain’s departure from the EU, according to a poll conducted by PwC, the accountancy firm, last year.

Julie Patterson, an asset management expert at KPMG, the consultancy, says: “Post Brexit, Ucits [domiciled in the UK] will have a problem because they will not be Ucits.”

Mark Holman, chief executive of TwentyFour Asset Management, the UK-based fund house, says any restrictions on selling asset management services overseas would be problematic.

“Our client base is very UK centric, so it does impact us less, but still we must make plans to ensure that our infrastructure can cope with us leaving the EU,” he says.

Some asset managers believe they can overcome this problem by establishing fund ranges in a European country like Ireland or Luxembourg for their EU clients, while offering UK-domiciled funds for British investors.

London-headquartered M&G has already bolstered its presence in Luxembourg and Ireland in order to hold on to its mainland European clients.

What does Brexit mean for targeting pension fund clients?

Another thorny issue for UK asset managers in the post-Brexit world relates to institutional investors, such as pension funds and insurers.

Fund houses fear that some of £1.2tn managed in the UK for European clients could be at risk when the UK exits the EU.

At the heart of the problem is Mifid, a sprawling set of European rules that outline how investment services can be provided across the EU.

If the UK opts for a hard Brexit and withdraws from the European single market, asset managers could find their Mifid license is no longer valid, leaving them unable to access or service some European clients.

Some countries, such as Italy, have rules that require pension funds to use EU-based investment managers. This means that British fund companies that received a Mifid license from the UK regulator could struggle to win institutional business in these countries.

Mr Nusseibeh, whose company has a UK Mifid license and a large European client base, says: “London is the main hub for managing money for pension funds in Europe. When Brexit happens, you are likely to have two separate regulatory frameworks.

“To do business in Europe, we have to abide by European rules. That might add additional cost.”

How will hedge funds and other alternative asset managers access EU clients?

Hedge funds, private equity and other alternative investment managers also fear they could face restrictions when it comes to accessing investors in the EU and the UK.

Under the EU’s Alternative Investment Fund Managers Directive, the regulation for private equity, real estate and hedge funds, there were plans to allow non-EU managers to sell their funds in the economic bloc.

But these plans appear to have stalled since Brexit, raising concerns that UK alternative fund managers could be frozen out of the EU as well.

Aima, the association for global alternative asset managers, in December urged the UK government to push for British investment managers to continue to be able to sell funds across the continent with ease.

According to Aima, more than three quarters of European hedge fund assets are managed from the UK. Aima deputy CEO Jiri Krol says: “The UK will need to ensure its rules are flexible enough to allow UK-based investment firms to continue to do business with the rest of the EU.”

Will asset managers need to hire more staff in Europe?

The City of London has traditionally been the employment hub for Europe’s asset management industry, accounting for around 37,000 jobs. But there is a growing view that asset managers will need to increase the number of staff they employ outside of the UK.

European regulators usually require asset managers to have some staff on the ground in the EU when granting licences and approving funds, rather than simply establishing a “brass plate” entity. Regulatory experts have previously told the FT that if asset managers want to set up a Mifid company in the EU, it would need to be staffed by at least 20-50 specialists to prove that it has substance.

There are also question marks about whether portfolio management staff might have to relocate because of growing scrutiny on so-called delegation. This refers to asset managers registering a fund in one country, such as Luxembourg, but keeping their portfolio management staff in another country, such as the UK.

Earlier this month the European Securities and Markets Authority said it was examining issues around delegation to limit “regulatory arbitrage”, whereby asset managers use EU bases to conduct business across Europe but keep most senior staff in London. This has intensified fears that asset managers might have to move investment staff to EU countries in order to satisfy local regulators.

Christian Edelmann, global head of the institutional banking practice at Oliver Wyman, the consultancy, says: “The biggest concern for the industry is the question mark about delegation of portfolio management rights.”

The LSE report suggested that about 15,000 wealth and asset management jobs in the UK are at risk following Brexit.

Will the UK suffer a brain drain?

A recent Aima survey found that about a fifth of employees in the UK hedge fund industry come from mainland Europe. EU nationals also account for around a tenth of the workforce at mainstream UK asset management companies, including Schroders, M&G and Henderson.

The fund industry is concerned that efforts by the UK government to clamp down on immigration from the EU could restrict access to vital employees, from investment professionals to cleaning staff.

Mr Edelmann says: “There is a risk of a brain drain and a further inability to recruit talent in the future.”

Mr Holman adds: “This is a key issue. Being able to attract and retain the best talent from around the globe is integral to outperformance.

“Whilst we wait for what we hope is a sensible and pragmatic result, we are also prepared to deal with a more cumbersome process should it come to that.”

What next for the industry?

Chris Cummings, chief executive of the Investment Association, the trade body for UK fund houses, says the industry needs clarity about its future, particularly any changes to how it accesses investors.

“Our industry serves millions of savers across the EU and the world, and it is in our clients’ interests that there is a smooth transition from the status quo to the post-Brexit world,” he says. “It is crucial that asset managers have legal certainty and the appropriate timeframe to adjust to any new requirements so they can continue to serve their clients’ needs.”

FT : Oil trading surge strengthens grip of big commodity houses

Oil trading surge strengthens grip of big commodity houses
Vitol, Glencore and Trafigura handle daily volumes equivalent to half Opec output

The world’s largest independent commodity houses have expanded their oil trading volumes by more than 65 per cent during crude’s near three-year slump, marking them out as the biggest beneficiaries in the industry from oil’s protracted downturn.

Vitol, Glencore and Trafigura together trade more than 17m barrels of crude oil and refined fuels every day, according to company statements and industry sources, handling daily volumes equivalent to more than half the Opec cartel’s output.

Their rapid expansion, up from a little over 10m barrels a day in combined oil volumes in 2014, underlines the rising influence and power of a trading industry that for decades tried to shun close scrutiny. Together with Gunvor and Mercuria, the other two top-five independent oil traders, they account for 22m barrels a day.

“There is a huge race between them,” said Jean-Francois Lambert, a former head of commodity trade finance at HSBC and consultant. “You need to trade a lot of barrels to make a big profit.”

Their growth highlights how trading houses have developed from their roots as buccaneering merchants to playing an increasingly influential role in global trade.

One of the drivers of their growth has been cash-for-crude deals, where they provide multibillion-dollar loans to cash-strapped commodity producers and national oil companies to secure long-term supplies.



Rising US production and the lifting of restrictions on exporting crude from the country last year has also boosted volume growth for independent traders, while higher global demand means they are chasing a bigger slice of an expanding market.

“Scale enables us to add value to customers . . . it means we can access opportunities,” said Vitol chairman and chief executive, Ian Taylor.

Commodity traders operate on razor thin margins, so require huge volumes to turn big profits. Since oil fell from above $100 a barrel in 2014, volatile markets have also increased trading opportunities, from storage deals to increased arbitrage shipments of oil to different regions.

“We’ve been seeing a focus on volume growth in a significant way,” said Roland Rechtsteiner at consultancy Oliver Wyman.

Privately held Vitol has gone from shipping 5m barrels a day in 2014 to more than 7m barrels a day last year, the company said on Friday. It has utilised a number of loan for oil deals with countries such as Kazakhstan, as well as selling fuel to Libya.


Glencore, the only publicly listed company among the three, is expected to handle up to 5.5m b/d this year, according to people familiar with the company, an 80 per cent increase on 2014.

It will be helped by its purchase of a fifth of Russia’s Kremlin-backed oil company Rosneft with the Qatar Investment Authority.

Trafigura is now handling about 5m b/d, up from 2.5m b/d in 2014. It has grown trading volumes partially through a competing deal with Rosneft. Volumes could rise further after it purchased a stake in India’s Essar oil refinery.

Gunvor and Mercuria trade 2.6m b/d and 2.5m b/d respectively, largely steady from 2014, though they have grown in other commodities.

Mr Rechtsteiner at Oliver Wyman said he expected the traders’ expansion to continue despite signs conditions are becoming more difficult as oil has recovered to $50 a barrel.

Supply deals in the oil industry were becoming larger and increasingly complex, giving them an advantage over smaller rivals.

“Volume growth for the largest independent traders will go on,” Mr Rechtsteiner said. “There’s a bifurcation of the market where the very large players are getting bigger while for the smaller players it’s becoming more difficult.”

Reuters Iran sanctions 15 U.S. firms, citing human rights abuses and Israel ties

Iran has imposed sanctions on 15 U.S. companies for alleged human rights violations and cooperating with Israel, the state news agency IRNA reported on Sunday, in a tit-for-tat reaction to a move by Washington.

The agency quoted Iran's foreign ministry as saying the companies had "flagrantly violated human rights" and cooperated with Israel in its "terrorism" against the Palestinians and the expansion of Jewish settlements.

It was not immediately clear if any of the companies, which included defense technology firm Raytheon, had any dealings with Iran or whether they would be affected in any way by Tehran's action, which IRNA said would include seizure of their assets and a ban on contacts with them.

The sanctioned companies also included ITT Corporation, United Technologies and specialty vehicles maker Oshkosh Corp. For a full list click on: bit.ly/2noZWNo

The Iranian move came two days after the United States imposed sanctions on 11 companies or individuals from China, North Korea or the United Arab Emirates for technology transfers that could boost Tehran's ballistic missile program.

Iran would face tighter U.S. sanctions over ballistic missile launches and other non-nuclear activities under a bill announced on Thursday by a bipartisan group of senators, echoing a harder line on Tehran espoused by Republican President Donald Trump.

>>> China’s HNA to buy stake in Old Mutual US asset management unit

China’s HNA to buy stake in Old Mutual US asset management unit

HNA Group, the Chinese travel-to-financial services conglomerate, has agreed to acquire a 25 per cent stake in Old Mutual’s US asset management business for about $445m, according to people briefed about the deal.

As part of the transaction, Old Mutual, the British insurer, will reduce its stake in OMAM to 26 per cent, down from 51 per cent, those informed about the details of the transaction said.

The latest deal by the company that started as a private airline on the tropical island of Hainan further cements HNA’s status as one of the most acquisitive and ambitious companies in China.

Reuters - Germany's Schaeuble wins party endorsement for September election

Germany's Schaeuble wins party endorsement for September election

German Finance Minister Wolfgang Schaeuble, a key figure in Berlin's handling of the euro zone crisis and Greece's bailout programs, won a ringing endorsement from his conservative party on Saturday to stand in September's federal election.

With 95 percent support, 74-year-old Schaeuble secured first place on the conservative Christian Democrats' (CDU) list of candidates in the southwestern state of Baden-Wuerttemberg for the federal election to be held on Sept. 24.

Germany has a mixed-member proportional voting system under which voters cast two ballots: one directly for a candidate in his or her constituency and the second for a party. Seats from the second vote are allocated from the parties' lists.

Schaeuble, a passionate pro-European, told CDU party members it was up to Germany to hold together the European Union, which has come under pressure from the migrant crisis, Brexit and other challenges.

He also stressed the special role of Chancellor Angela Merkel, the CDU leader, in preserving the EU: "The whole world expects that Angela Merkel can do this job, because nobody else in Germany and Europe can fulfill the role."

On Friday, Schaeuble criticized Germany's foreign minister - who is from the junior coalition partner, the Social Democrats - for saying more money should be given to Greece and the EU. Differences between the parties of the ruling coalition are becoming more visible six months before the election.

Schaeuble, who has come to personify the austerity Berlin has demanded in return for aid for Athens, said the suggestion by Foreign Minister Sigmar Gabriel that Greece could be given more aid "goes in the wrong direction completely".

Saying Germany must give more money to the EU would not solve the problem and would give countries the wrong incentive, Schaeuble said. He added that the problem in Europe, as in Greece too, was not money but rather how to use it correctly.

The Social Democrats have enjoyed a revival under their new leader, Martin Schulz, and threaten Merkel's bid to win a fourth term in September.