Barron's : Bank of England Stimulus Moves Could Fall Short


Bank of England Stimulus Moves Could Fall Short

Britain seems headed for a recession later this year, notwithstanding a sharp reduction in interest rates. Why sterling could fall further



The Bank of England delivered an unexpectedly broad range of measures Thursday aimed at stimulating growth, after the economy suddenly slowed following a vote by the United Kingdom to leave the European Union. The BOE’s moves might not be enough to offset recessionary head winds, however.


The U.K.’s central bank reduced interest rates from 0.5% to 0.25%, the lowest level in its history, and the first cut in seven years. The Bank of England said it will launch a 100 billion-pound ($131.4 billion) “term funding scheme” to provide funding for banks—similar to the European Central Bank’s targeted long-term refinancing operation—as a means to ensure that the lower rates are passed along to consumers.
It also allocated £60 billion to buy U.K. government bonds, its first quantitative easing in four years, and boosted its asset-purchase program to £435 billion. On top of that, the BOE plans to buy £10 billion in sterling-denominated corporate bonds.
Investors greeted the news by selling the British pound, which fell 1.4% against the dollar, to $1.3139. That drove up bond prices, pushing yields down to fresh lows. The yield on U.K. government debt with a 10-year maturity fell 16 basis points (hundredths of a percentage point) to 0.64% from 0.80%. German sovereign debt of similar duration offers a negative yield.
London’s benchmark FTSE 100 index, whose component companies earn about 80% of their revenue outside the U.K., gained 1.6% Thursday.
THE BREADTH OF THE STIMULUS package surprised many. “It’s the full gamut,” says Alan Wilde, head of global fixed income at Baring Asset Management. “It has gone beyond what markets tentatively discounted.”


A cut in interest rates had been flagged by Bank of England Gov. Mark Carney in June after the U.K. voted in favor of Britain’s exit from the E.U., or Brexit. The referendum result took markets by surprise, with sterling falling 10% against the greenback. But the consequences for the U.K.’s economic outlook are equally troubling.
Economists predict the U.K. economy will fall into recession in the third and fourth quarters of 2016 as uncertainty takes hold. Surveys already suggest that Brexit is taking a toll and activity is declining. The Bank of England has slashed its 2017 forecast for gross-domestic-product growth from 2.3% to just 0.8%, although that is still above analysts’ consensus estimate of 0.5%.
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Growth, or the ebbing of it, is a much greater concern for the bank than inflation, which appears to be gaining following the decline in the value of sterling. The rate of inflation, just 0.5% in May, is well below the central bank’s target of 2%, but economists forecast it could climb above 3% in the near term as import prices rise to offset the pound’s weakness.
While observers applauded the Bank of England’s decisiveness—in stark contrast to the seemingly tentative approach of the ECB—the efficacy of the latest moves might lack punch. The interest-rate cut was widely anticipated, and QE isn’t as potent as it had been in the past.
Intervention in the market for corporate credit has been tried before, with limited success. With only about £150 billion of bonds eligible for purchase, the strategy could run up against liquidity constraints.


The term funding scheme offers little comfort for banks that already are struggling to eke out profits.
“It is hard to see where the gains are going to come from,” says Azad Zangana, senior economist at Schroders.
THE BANK OF ENGLAND’S initiatives could help to bolster consumer confidence, which has taken a knock from Brexit. But most important, it could buy time for the new government to implement fiscal policies in the fall to spur economic growth. That could mean an end to austerity and more stimulus, possibly in the form of tax cuts, which tend to have a more immediate effect on the economy.
Whatever the government decides to do, the Bank of England made it clear it stands prepared to take further steps by the end of the year, if necessary, including cutting interest rates to a level “close to, but a little above, zero.”
Analysts at Credit Suisse see interest rates dropping to 0.05% in November. They see Thursday’s central-bank package providing only “slight economic stimulus” and expect the weakness in the U.K. economy to persist. “This is not a game-changer for the economy, even if it is supportive of U.K. financial-asset prices (in local currency terms),” they wrote.
It underlines the fact that sterling will remain vulnerable in the near term.

>>> Hilsenrath earlier in WSJ said if NFP above 200k strong change of Fed action

>>> Hilsenrath earlier in WSJ said if NFP above 200k strong change of Fed action in September...

Waiting for post number comment now...


"...The magic number in Friday’s jobs report is 200,000. If the Labor Department reports that employers expanded payrolls by 200,000 or more in July then that will likely keep alive the possibility of a Federal Reserve interest rate increase at its September policy meeting. Something much below that threshold will likely keep the Fed on a wait-and-see path, inclined to raise rates this year but in no hurry to signal an imminent move barring some other positive economic surprises...."

>>> Trina Solar chairman plans to boost stake as he takes company private - sour

Trina Solar chairman plans to boost stake as he takes company private - source - Merger Market

* Chairman currently owns 5.5%, could exceed 30%
* 13E3 filing expected before end of August
* Consortium has links to state-owned entities

Trina Solar [NYSE: TSL] Chairman and CEO Jifan Gao will increase his stake in the company quite significantly as part of the proposed USD 11.60-per-ADS take-private exercise, according to a source familiar with the situation.

The funding will come from a loan provided by Industrial Bank [SHA:601166] and may see the chairman end up with more than 30% of the company post delisting, including his rollover stake, the source added.

Chairman Gao and his affiliates currently own just 5.5% of the Chinese solar power company, according to the 1 August announcement that a definitive merger agreement (DMA) has been signed. No shares are held by the other bid consortium members, which include two Industrial Bank vehicles and two additional Chinese entities.

Aside from the loan that will finance the chairman’s equity portion, the USD 1.025bn take-private will be entirely equity funded, the first source and a second source familiar with the situation said. The financing package includes provisions for the total amount of equity raised to cover all costs arising as a result of the take-private, including Trina Solar’s two convertible bonds that have a combined nominal value of USD 288m, they said. Both CBs are well out of the money and come with change-of-control or delisting puts at par.

As of March 31, the company had USD 621.4m in cash and cash equivalents, including USD 169m of restricted cash, which could potentially be used to cover the redemption of the CBs.

The DMA didn’t provide any details about the financing, except to say that an equity commitment letter has been signed between the “parent” bid vehicle and each of the sponsors. It also mentions a debt commitment letter, but that refers solely to the loan covering the chairman’s portion of the equity, the first source said.

More information about the financing will be provided in the preliminary 13E3 filing with the US Securities and Exchange Commission, which according to the two sources should be out before the end of August.

SAFE, NDRC and MOFCOM approvals needed

The equity financing will consist mostly of onshore money that will need approval from China’s State Administration of Foreign Exchange (SAFE) before it can be exchanged into US dollars to pay for the transaction, the first source said.

Obtaining SAFE approval has become quite a lengthy process for some applicants this year – Qihoo 360 Technology, iDreamSky Technology [NADSDAQ: DSKY] and Baoxin Auto [HKG: 1293] are some examples – as Beijing attempts to limit capital outflows, as reported. The parties involved in the Trina Solar transaction have taken this into account by allocating more time than usual to the expected timetable, the first source noted.

In the 1 August press release, the parties said the deal is currently expected to close during the first quarter of 2017 – or eight months (about 240 days) from when the deal became binding.

According to Dealreporter analytics, the 16 US-listed Chinese companies (covered by this news service) that have been taken private since the beginning of 2015 needed on average 139 days between DMA and closing.

Take-private targets have also tended to be more optimistic in their own forecasts of how quickly the deals would complete post signing a DMA. Qihoo expected to close its USD 6.7bn deal in just under 6.5 months, Wuxi Pharmatech projected to get its USD 3.01bn deal done in 4.5 months and e-Commerce China Dangdang [NASDAQ: DANG], which was the most recent one before Trina Solar to sign a DMA on 31 May, said it expects the USD 369.4m deal to reach the finish line in 2H16, implying a maximum of seven months.

The long-stop date for the Trina Solar deal is 1 August, 2017.

Aside from SAFE approval, Trina Solar will also need clearance from the National Development Reform Commission (NDRC) and China’s Ministry of Commerce (MOFCOM), the DMA shows. It will need to make an antitrust filing with MOFCOM since it exceeds the revenue threshold, doesn’t operate under a variable interest entity structure and will see a change of control as a result of the delisting, the first source said. However, China’s solar power industry is highly fragmented so the regulator isn’t expected to raise objections, the same source added.

Trina Solar is a manufacturer of solar modules, but operates across the value chain, making ingots, wafers and cells as well. More recently it has started to get involved in downstream solar power projects and as of the end of March 2016 had 967.3MW of downstream projects, including 920.8MW in China.

Alternative energy is an industry that Beijing is putting a lot of focus on and the official target is to increase the installed solar power capacity to 150GW by 2020, versus 43GW at the end of 2015, as reported.

The strategic importance of the sector might explain why the Trina Solar consortium members appear to have close links to the Chinese government. Research by this news service shows that Liuan Xinshi Asset Management Co is partly backed by state-owned Shanghai Industrial Investment Holdings (SIIC) and Lu’an Industrial Investment Development Co, which is state funded and backed by the local government of Lu’an. Also, Great Zhongou Asset Management (Shanghai) is 51%-owned by Zhong Ou Asset Management, which in turn is 35%-owned by Italian bank UBI Banca and 20%-held by China Private Ventures, the second largest shareholder of Tsinghua Science Park.

Separately, the two sources said that Shanghai Xingsheng Equity Investment & Management Co and Shanghai Xingjing Investment Management Co are both subsidiaries of Industrial Bank, whose largest shareholder is the Ministry of Finance of the Fujian Province.

Eyes on shareholder vote

The deal is also conditional on shareholders’ approval and given that the consortium owns only 5.5% of the shares and voting rights this could be one potential deal risk to monitor. At least two-thirds of the shares represented in person or by proxy at an extraordinary general meeting have to vote in favour for the deal to go through. Notably, Trina Solar has a few substantial third party investors – as of 15 April, Franklin Resources held 14.8%, Platinum Investment Management 12.9% and Oaktree Funds 5.8%, all according to Trina Solar's latest 20F filing.

Trina Solar lost 35% of its stock market value between mid-March and late June this year as solar power companies globally came under pressure from intense competition, a reduction in government subsidies and weak profitability. Just before the announcement of the DMA, Trina Solar’s shares traded at USD 8.25, representing a 40.6% spread to the indicative offer price. However, the chairman didn’t follow the path of some other take-private bidders who lowered their offers in response to market performance, but stuck to the terms flagged earlier, perhaps with the upcoming EGM vote in mind.

The news service understands that there have been some discussion with other potential bidders since the indicative announcement in mid-December, which may have contributed to keeping the offer price unchanged.

Four days after the DMA was announced (4 August), the stock closed at USD 10.49 and the spread had narrowed to 10.6%.

A representative for Trina Solar declined to comment beyond the public filings.

>>> US Gapping down

Gapping down
In reaction to disappointing earnings/guidance:
  • HDP -32.7%, (also President and Chief Operating Officer Herb Cunitz resigns), SWIR -20.2%, FEYE -16.4%, AQXP -14.7%, CPSI -13%, (also announces ceases providing guidance and new dividend policy), NOG-12.1%, TWOU -12%, OLED -10.3%, (also signs five-year License and Supplemental Material Purchase Agreement with Tianma Micro-electronics )
  • SHEN -9.6%, NVO -9.2%, FLR -7.9%, WTW -7.8%, AINV -7.2%, ZNGA -6.7%,INAP -6.4%, RBS -6.3%, NDLS -6.2%, CARA -5.7%, ZG -5.4%, LADR -4.4%,CERS -4%, CERS -4%, ACAD -3.4%, TCRD -3.4%, OTIC -3.1%, GST -3.1%
  • SYRG -2.8%, NRP -2.6%, TRUE -2.3%, MACK -2%, RATE -1.7%, FDUS-1.6%, BBG -1.4%, INGN -1.3%, WING -1.2%, ATRC -1.1%, EMKR -1.1%,FPRX -0.9%, AES -0.9%, CTSH -0.9%
Other news:
  • PDLI -17.5% (decides to eliminate its quarterly cash dividend)
  • DMRC -2.4% (announces proposed public offering of common stock)
  • LYG -1.4% (in sympathy with RBS earnings)
  • AZN -1.2% (in sympathy with NVO earnings)
  • SNY -1.2% (in sympathy with NVO earnings)
  • GSK -0.9% (in sympathy with NVO earnings)
  • CLX -0.8% (ticking lower; appoints CEO Benno Dorer as Chairman of the Board)
  • VER -0.7% (upsizes offering by 10 mln shares and prices 60 mln shares of common stock for gross proceeds of ~ $621 mln)
Analyst comments:
  • WIN -1.8% (downgraded to Underperform from Mkt Perform at Raymond James)
  • OME -1.7% (downgraded to Hold at Wunderlich)
  • TRIP -0.6% (downgraded to Hold from Buy at Deutsche Bank)
  • TEVA -0.6% (downgraded to Perform from Outperform at Oppenheimer)

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance:
  • EGLT +17.5%, (also announces that the joint meeting of the FDA voted 18 to 1 to recommend approval of ARYMO), PACB+16.1%, GSAT +14.2%, (also discusses status of talks with FCC ), AAOI +10%
  • ONVO +9.7%, TRXC +8.9%, KTOS +8.8%, OSIR +8.5%, ICON +7.9%, PETX +7.9%, RPTP +7.5%, UBNT +6.9%, AMRS+6.6%, MTZ +5.8%, CTRL +5.7%, PCLN +5.6%, LGF +5.3%, SYMC +5.1%
  • LOCO +4.7%, MGA +4.4%, KHC +4%, (increases quarterly dividend to $0.60/share from $0.575/share ), PTCT +3.8%,VVUS +3.8%, MELI +3.8%, FLT +3.4%, (also acquired Travelcard Nederland from LeasePlan; terms not disclosed), AHS+3%, FRPT +3%, SGMS +3%, ATVI +2.9%, APRI +2.8%, LNTH +2.8%, RVNC +2.5%, SSNI +2.5%, EOG +2.3%, MNST+2%, (also authorizes $250 mln share repurchase, ASYS +2%
  • TASR +1.9%, ECYT +1.9%, ABTL +1.8%, IVR +1.7%, IMPV +1.6%, (also Board commences review of strategic alternatives), IBP +1.5%, BMRN +1.4%, MDRX +1.3%, HMSY +1.3%, ESPR +1.2%, WY +1.1%, JUNO +1%, (announces multiple myeloma partnership with Memorial Sloan Kettering Cancer Center and Eureka Therapeutics for developing car t cell immunotherapy against multiple novel targets)
M&A News:
  • RAX +16.7% (following late spike/halt on potential PE interest)
  • RIO +2.2% (completes sale of Mount Pleasant thermal coal assets for $220.7 mln plus royalties to MACH Energy Australia Pty)
Select metals/mining stocks trading higher: BBL +3.5%, BHP +3.4%, HL +1.8%, BTG +1.8%, GFI +1.6%, CLF +1.4%, .

Other news:
  • IDXG +37% (very thinly traded, announces that the NY State Department of Health has reviewed and approved ThyraMir for marketing in New York State)
  • VIVE +19.2% ( receives regulatory approval for the sale of the Viveve System from the Ministry of Food and Drug Safety in South Korea)
  • MRK +12.6% (on potentially reduced competition for its Keytruda drug, following BMY's failed cancer drug trial)
  • OSIR +8.5% ( Osiris Therapeutics announces that the manuscript from its multicenter prospective post-market clinical trial using Grafix was accepted for publication in the International Wound Journal)
  • AVP +2.8% (upsizes & prices an offering of $500 mln 7.875% senior secured notes due 2022 )
  • SAUC +2.7% (Diversified Restaurant Holdings to split into two separate, publicly-traded companies through the tax-free spinoff of its Bagger Dave's business, also reported earnings)
  • LDOS +2.1% (declares special cash dividend of $13.64/share in connection with IS&GS transaction)
  • DLTR +0.9% (Dollar Tree announces corporate restructuring related to merger integration)
  • RYAM +0.9% (prices 1,500,000 shares of co's 8.00% Series A Mandatory Convertible Preferred Stock)
Analyst comments:
  • CLVS +1.7% (initiated with a Buy at SunTrust)
  • FLT +1.1% (upgraded to Outperform from Perform at Oppenheimer)

>>> BMY - Top-Line results from CheckMate 026, Phase 3 Study of Opdivo (nivoluma

Top-Line results from CheckMate 026, Phase 3 Study of Opdivo (nivolumab) in treatment-naïve patients with Advanced Non-Small Cell Lung Cancer did not meet primary endpoint 

Announced today that CheckMate -026, a trial investigating the use of Opdivo (nivolumab) as monotherapy, did not meet its primary endpoint of progression-free survival in patients with previously untreated advanced non-small cell lung cancer (NSCLC) whose tumors expressed PD-L1 at = 5%. The company will complete a full evaluation of the CheckMate -026 data and work with investigators on the future presentation of the results.Opdivo did not meet trial primary endpoint of progression-free survival in patients expressing PD-L1 = 5%CheckMate -026 is a Phase 3, open-label, randomized study of Opdivo as monotherapy versus investigators choice chemotherapy in patients with advanced non-small cell lung cancer (NSCLC). Patients enrolled in the trial had received no prior systemic treatment for advanced disease and tested positive for PD-L1 expression. The trial randomized 541 patients to receive either Opdivo 3 mg/kg intravenously every two weeks or investigators choice chemotherapy in squamous patients (gemcitabine with cisplatin/gemcitabine with carboplatin/paclitaxel with carboplatin) and non-squamous patients (pemetrexed with cisplatin/pemetrexed with carboplatin) until disease progression, unacceptable toxicity, or completion of 6 cycles. The primary endpoint is progression-free survival, as assessed by the Independent Radiology Review Committee, in patients with = 5% PD-L1 tumor expression.