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European Companies Happily Take ECB’s Cheap Cash, but Don’t Spend It

The very reason the ECB started buying corporate bonds—a weak economy—is crimping the program’s success

The European Central Bank began buying billions of euros worth of corporate bonds earlier this year in a high-profile experiment aimed at spurring private investment. So far, the spending hasn’t materialized.

Since June, the ECB has bought €44.3 billion (around $46.9 billion) in corporate debt. Borrowing costs have tumbled, and debt issuance is up.

But the very reason the ECB started buying the bonds—a weak economy—is crimping the program’s success. The ECB buys bonds to stimulate tame growth with corporate spending. However, companies aren’t spending, executives say and data suggest, because they see few opportunities amid feeble growth and because credit was already cheap.

“We just don’t see much evidence that the behavior of corporates has changed as a result of the” corporate bond-buying program, said Hans Lorenzen, head of European credit strategy at Citigroup Inc. “On the whole, corporates in Europe remain very cautious.”

Corporate savings in the eurozone hit their highest level in at least 22 years in the year to June 2016, according to J.P. Morgan Chase. Corporate savings reflect the difference between cash flows and spending.

Nonfinancial companies in the eurozone held on to $315 billion more than they made over that 12-month period. U.S. nonfinancial firms, by comparison, had a financing deficit of $43 billion.

Unlike in the U.S., European companies have barely taken advantage of cheap debt to buy back stock and boost their share price. According to Goldman Sachs, a quarter of cash held by S&P 500 companies is spent on buybacks, compared with 5% for Stoxx Europe 600 companies.

Instead, that money is going into the bank, despite the ultralow interest rates that mean it isn’t earning hardly anything as it sits there.

There are few expectations of a boom in capital spending. Analysts project a 3.37% drop in capital expenditure for companies on the blue-chip Euro Stoxx index for 2016, followed by a shallow decline in 2017.

Mergers and acquisitions volumes for European companies are down 28% so far this year compared with the same period in 2015, according to Dealogic, amid a global slowdown in such activity.

The ECB says its actions have brought down credit costs, including in markets where it has not bought bonds, and spurred debt issuance.

That is true. Investment-grade companies have sold €116.2 billion of euro-denominated debt since June 8, when the ECB started buying. That is more than in the same period during any year since the euro was created in 1999, according to Dealogic.

In September, German consumer-products company Henkel AG and French drugmaker Sanofi SA each sold bonds at negative yields, meaning investors were essentially paying for the privilege of lending to the companies.

ENLARGE

Still, corporate borrowing costs were already very low before the ECB entered the market. It is doubtful that pushing down debt costs by fractions of a percentage point more will boost investment, analysts argue.

The average yield on eurozone senior debt of nonfinancial companies is 1.1%, down from around 1.4% before the ECB announced its buying plans in March, according to IHS Markit’s iBoxx index. Yields fall as prices rise.

That move is small compared with the decline in funding costs over the past several years. The yield was 7.1% in late 2008 at the height of the global financial crisis.

Juha Kervinen, group treasurer at Finnish telecom company Elisa, said the company hadn’t had any difficulty raising funds, so the ECB buying two of its bonds “really hasn’t changed our thinking.”

“For us to increase [investment] we’d need to see an improved return, not just building networks without any reason,” he added.

Rather than spend, many companies are instead locking in cheaper funding in longer-dated bonds. Others are simply getting cheaper debt to fund what they had already planned to do, such as acquisitions.

The ECB was among the buyers when Spanish company Cellnex Telecom SA raised €750 million this August to finance a series of acquisitions it had announced earlier this year. Central-bank buying helped push down Cellnex’s financing costs, which the company welcomed. But lower borrowing costs aren't about to make Cellnex invest more money.

“It has not driven us to do more M&A,” said Isard Serra, head of corporate finance at Cellnex. “If there is an opportunity we will look at it, whether the ECB is helping or not.”

In minutes from its most recent policy meeting, the ECB said uncertainty was holding back investment, including the potential for greater protectionism.

Some analysts say the program should be given time to work. Corporate finance departments can be slow to change investment plans. The ECB has also pointed to wider benefits such as lower interest bills across the region.

The ECB’s program was supposed to trickle beyond those companies whose debt is bought on public markets. If large corporations and banks find it easier to finance themselves, they may be willing to extend more credit to smaller businesses.

Bank credit to nonfinancial corporations increased from April to July, but it fell in August and was broadly flat in September, according to the ECB.

Some companies want to avoid loading up on debt to avoid problems down the road, when the debt may need refinancing.

“In 10 years or 15 years, the rates can be completely different,” said Juraj Bayer, finance director at ZSE Group, a Slovak power distribution and sales company. “Therefore we do not want to take on high indebtedness,” he said, adding that he is focused on keeping the company’s investment-grade rating.

- Apple (AAPL): A few years ago, this stock was a hedge-fund-favorite but eventually firms moved on to other ideas. Enter Q3 2016: they have returned. Funds such as Viking Global, Glenview Capital, Appaloosa Management, Third Point, and Coatue Management all started new stakes in the smartphone giant. The company recently released its new iPhone 7 suite of smartphones. Going into the event, sentiment was low in AAPL shares, as they had previously reported slowing iPhone growth, especially in China. Perhaps these funds thought AAPL would outperform low expectations, or perhaps they’re buying on the rumors that the next iPhone won’t be an “S” upgrade model but instead will be an all new, fully re-designed device with an edge-toedge OLED display.

- Alibaba Group (BABA): Hedge funds including Tiger Global, Lone Pine Capital, Coatue Management, and Third Point all piled into BABA shares during Q3. This is the largest e-commerce player in China via its Taobao and Tmall platforms. After trading down after its initial public offering last year, BABA shares have stabilized and built a base. During the quarter when funds were buying, BABA reported solid numbers and shares gapped higher. They have, however, since retraced that move a bit.

- Bank of America (BAC): This is one of the few financial stocks that hedge funds have been accumulating recently. And they’ve had impeccable timing with this one, whether through luck or skill. Post Donald Trump’s victory in the US presidential election, financial stocks have rocketed higher now that the thought is interest rates will rise and these companies will capture the spread. Funds such as Pennant Capital, Appaloosa, and Viking Global all acquired shares in Q3.

- Williams (WMB): Shares of WMB were in a tailspin last year as oil prices sank lower and their potential merger with Energy Transfer (ETE) came into question. Since early 2016, however, WMB shares have slowly but steadily climbed higher. Funds took advantage of the decreased uncertainty as Energy Transfer called off the merger in June. Buyers included Third Point, Lone Pine Capital, and Omega Advisors, among others.

- Facebook (FB): This is probably one of the most widely owned stocks among hedge funds out there. Any dip in shares seems to be bought and that was the case with FB in Q3. Funds such as Tiger Management, Paulson & Co, Blue Ridge Capital, Third Point, and Coatue were all out accumulating shares. The company continues to take advertising spend as companies shift marketing from offline to online mediums. Alphabet (GOOG) and FB are the two biggest recipients by far and have basically cornered the market. While it has popular platforms like Facebook, Instagram, WhatsApp, and Oculus Virtual Reality, its core social media network is seeing pressure from SnapChat, which recently reportedly filed to go public.

- Liberty Global (LBTYA & LBTYK): This is the third consecutive quarter that shares of John Malone’s European cable giant have been accumulated by hedge funds in the newsletter. Managers such as Third Point, Glenview, Coatue, Berkshire Hathaway, Brave Warrior, and Coatue all bought more. Different funds bought different share classes as well: LBTYA are the voting shares and LBTYK are non-voting and typically trade at a slight discount to the ‘A’ shares. Shares have sold off for a couple of reasons: ‘Brexit’ fears remain as the company’s UK cable unit, Virgin Media, earns revenues in British Pounds (the Pound saw a steep decline postBrexit vote). The company in general is also facing more competition in some of its markets (like the Netherlands) but has been buying back more stock given the increased volatility in its shares. This has been a longtime favorite among hedge funds but shares have vastly underperformed over the past year.

- HD Supply (HDS): Hedge funds such as Appaloosa, Farallon, and Blue Ridge all added to pre-existing positions during the third quarter. The company focuses on three different segments: facilities maintenance, waterworks, and construction.

- Charter Communications (CHTR): In reality, this is more of a ‘mixed activity’ name. While Hound Partners, Blue Ridge, Lone Pine, and Berkshire all increased their positions, a decent amount of funds were also trimming exposure and locking in some gains. The company closed on its acquisition of Time Warner Cable (former ticker TWC) and is now the second largest cable and internet service provider in America. CEO Tom Rutledge will look to turn around those assets as they implement their ‘Spectrum’ brand service. This has been a hedge fund favorite name for quite a few quarters now.

- Liberty Global Latin America (LILA & LILAK): This is a tracking stock distributed by Liberty Global (LBTYA / LBTYK) to shareholders and represents their Latin American cable assets. Funds such as Coatue, Glenview, Greenlight, and Maverick all dumped their shares. It’s unclear if they were dumping shares simply because they didn’t want exposure to Latin America and instead only wanted Liberty Global’s European assets, or if they were disappointed with results at LILA which have not been pretty as of late. The company recently purchased Cable & Wireless, a major TV and internet provider in the Caribbean. With this, they greatly expanded their footprint in the region (whereas they previously were mainly exposed to Chile and Puerto Rico). That said, investors have been disappointed by the guidance (or lack thereof) the company has provided and shares are down big this year. And while this is a tracking stock for the time being, the thought is that Liberty Global will eventually spin-off the Latin American assets in their entirety to LBTYA & LBTYK shareholders.

- 21st Century Fox (FOXA): Funds including Appaloosa, Farallon, and Greenlight all completely exited shares of this media company during the third quarter. Media stocks in general have been pressured seemingly all year for various reasons. Many funds were originally drawn to Fox’s attractive set of assets and warmed to the fact that Rupert Murdoch’s sons could be good managers.

- Citigroup (C): This financial was sold by the likes of Baupost Group, Hound, and Omega during Q3. These sales were perhaps ill-timed, as shares of financial companies have since spiked higher after the US presidential election.

- Pioneer Natural Resources (PXD): Hedge funds like Lone Pine, Omega, and Viking Global all dumped their exposure to this energy play during the third quarter. This has been a bit of a controversial name for some investors, as David Einhorn’s Greenlight Capital has been short the name.

- FleetCor Technologies (FLT): This stock has now graced this list in back to back quarters. This time around, it was trimmed by the likes of Pennant, Hound, Farallon, Blue Ridge, Tiger Global, and Lone Pine. This has been a roll-up story in the fleet payments industry.

- Allergan (AGN): While this was once a consensus hedge fund buy, it seems some funds have scaled back their enthusiasm for the name. Hedge funds including Omega, Pennant, Appaloosa, Third Point, and Paulson trimmed their exposure to the name. Carl Icahn sold some shares as well. The company sold its generic drug business to Teva Pharmaceutical (TEVA) and this has turned into a capital return story. That said, shares haven’t really performed well as they’re down 38% this year, including around 24% over the past three months.

- Shire (SHPG): Hedge funds including Tiger Management, Viking Global, Third Point, Lone Pine, and Paulson & Co all cut their position sizes in this pharmaceutical play that aims at developing medicines for rare diseases. Shares have traded largely sideways over the past six months.

- Charter Communications (CHTR): Realistically, this is more of a ‘mixed activity’ name as other funds were also buying more in the third quarter as detailed a few pages ago. However, this is also the third consecutive quarter CHTR positions have been trimmed by various managers. The company recently closed on its acquisition of Time Warner Cable and Bright House. Funds that trimmed their stakes in the third quarter include Glenview, Bridger, Farallon, Third Point, and Tiger Global. It seems likely that the main reason for selling some shares is for risk management purposes as many funds bet big on this company and shares have surged over the past year.

German luxury carmaker Daimler’s diesel vehicles use a liquid substance to reduce emissions, but the numbers don't appear to add up. Did the carmaker play dirty?

*ZODIAC CEO SAYS MARKET PREFERS CO. NOT FOCUS ON M&A FOR NOW

In 3Q16, overall French market revenues grew +0.2%, turning positive

following multi-year declines as pricing promotional intensity reduced. In

this note, we highlight stabilising mobile and fixed ARPUs and accelerating

fibre demand. France is still a four-player market, but with two players

generating limited cash flow, we believe the backdrop is supportive for nearterm

price rationality and modest growth. We model market revenues of

+1.1% 2016-18 CAGR. We also believe French consolidation remains possible

and could offer €10-20 bn value accretion.

Efforts by SFR, Altice’s France asset, to improve customer perception

following several years of underinvestment may take time to deliver

sustainable top-line growth. But market growth is supportive, and despite

modelling flat SFR top-line in perpetuity, cost-cutting drives 5.9% EBITDA

2016-20E CAGR. Altice US has a high structural growth outlook and drives

Altice Group revenue/EBITDA CAGR +1.8%/+5.9% 2016-20E, making its 14%

2018E FCF yield compelling. Net debt/EBITDA is 5.4x 2016E but no major

refinancing is needed before 2022. Orange’s 3Q16 showed sustained group

growth and French trends inflecting to growth as it leverages superior

investment and positioning. With +4.4% EBITDA 2016-20E CAGR for 12.3%

2018E FCF yield, Buy.

Iliad continues to leverage its cost base advantage in France, driving EBITDA

+8.6% 2016-20E CAGR. It has an opportunity to create material value in Italy,

but we see too many uncertainties today to incorporate this into valuation.

Our SOTP-based 12-month target price is €210, implying 18% upside (vs

sector average 27%). At our target price, Iliad would trade on 6.2x 2018E

EBITDA, in line vs the sector, reflecting its modestly superior long-term

growth, offset by its higher-for-longer capex and Italian uncertainty.

We continue to believe that Bouygues Telecom is structurally challenged

as a predominantly mobile operator that is struggling to gain traction in

fixed. But a more rational French telco market is boosting its near-term

growth and a more optimistic outlook in construction means we raise our

group EBITDA estimates +0.7%/+2.1% in 2017/18 and our SOTP-based 12m

target price to €35.5 (from €29), implying 12% upside vs. sector +27%.

ML

* DOMETIC - EQT V placing 80.9m shrs @ SEK 6.5 per share; UBS/Carnegie/Jeff....

* SABADELL - Itos Holding Sarl selling 2.99%, 168.4m shrs through Deutsche.....

ENEL - 2bn shr buyback, payout ratio 65% in '17, up cost saving plan (3.72).+2%

ROTORK - Trading remains challenging but revs to be at top end of exp (204).+2%

ASTRAZENECA - FDA lifts partial hold on head & neck cancer trails (4410)....+2%

MINERS - Copper +2%, Iron Ore +2.5% with BHP OZ +3.95% and RIO OZ +2.2%...+1-2%

HMSO - Raises £400m in US private placement transaction, 1.7% coupon (555)+1-2%

BIG YELLOW - Good occupancy and rate growth, drives profits up 13% (678)..+1-2%

UNIPER - 9M16 results ahead, EBITDA +4% and mid-point guidance inline (11.5)+1%

COMPASS - FY16 org rev growth +5% v BAML +5.2%, EBIT £1445m v £1425m (1405).+1%

LLOYDS - UK Gov now sub 8% in last disclosure, went sub 9% on Oct 28th(59)+0.5%

VIG - Slightly worse qtr for underwriting. 9m PBT is inline with cons (20)+0.5%

SPIRAX - Solid updatge with 10mth inline, nudging ests higher on FX (4221)..u/c

DE LA RUE - H1s are inline with expectations & outlook remains unch (576.5).u/c

CREDIT SUISSE - Said to face tax probe over undeclared accounts; bbg (14)...u/c

TEFD - Negative surprise. CEO Dirks to leave at the end of Q1 17 (3.52).....-1%

RICHEMONT - Poor watch export data -16.4% v SEP-5.7% & oct 2015 -12.3%(63)-1-2%

KGF - UK inline, France weaker than exp. B&Q LfL +3.5% vs cons +3% (362)....-2%

ZODIAC - FY16 inline but big d/gs for '17; €310m op profit v €425m cons (21)-2%

BABCOCK - Inline with exp, with slightly lower than exp org growth (971)....-2%

SWATCH - Poor watch export data -16.4% (v SEPT-5.7% & oct 2015 -12.3%) (291)-2%

SPECTRIS - Underlying deterioration & impairments. FX tailwinds help (1993).-3%

M&B - FY16 and current trading both soft with EBIT -3% & PBT -2% YoY (265)..-3%

ESSILOR - Sees '16 rev growth at 3.5% LfL v prev target of 4.5% growth (99).-3%

INTERTEK - Poor. Org growth below exp -0.7%, is on weak resource biz (3150).-3%

CYBG - Big miss PBT inline, lower income offset by better bad debt (274)..-6-8%

CS

AstraZeneca M/P Reported a $453mn tax benefit

Babcock +1-2% Headline numbers inline, EBITA 2% ahead of CS est

Big Yellow +2% headline numbers fine, well positioned going forward

Bouygues +1-2% CS UPGRADE to OUTPERFORM (Positive outlook for Telcos)

Compass -1% US business inline, Europe slowed, UK slightly light

De La Rue M/P Numbers inline, maintaining guidance

Enel +2-3% CMD - 2017-2019 strategic plan looks good

Essilor -3-4% Cut FY sales growth to around 3.5% vs +4.5% previously

Genmab +5% Positive FDA approval and raises guidance

Halma +1% Headline numbers inline, outlook solid

Huhtamaki +1% CMD comments supportive on EBIT margin

Intertek -1 Growth slightly light, may be tough to hit FY

Kingfisher UNCH Trading inline, remain confident, CS is corp broker

Luxottica -1-2% Competitor Essilor cuts guidance

M&B -1-2% FY revs inline but op prof £318m vs cons £322m

Mittal +1-2% Raises steel prices in the EU

Miners +1-2% Copper +1.70%, Brent +1.40%, Iron Ore +3.50%, China +0.75%

Novo Nordisk +1-2% FDA Approval for Xultophy in Type 2 Diabetes

Pearson -0.5% CS DOWNGRADE to UNDERPERFORM (Change of coverage)

Publicis -0.5% CS INITIATE with UNDERPERFORM (Margin worries)

Relx +0.5% CS UPGRADE to OUTPERFORM (High quality assets)

Richemont -2% Swiss watch exports -16.4% y/y

Rotork -1% Trading inline but challenging outlook

Sanofi UNCH Positive FDA update for type 2 diabetes drug

Sky +0.5% CS INITIATE with OUTPERFORM (Underperformance)

Spectris UNCH Trading tough but strategic progress on acquisitions good

Swatch -2% Swiss watch exports -16.4% y/y

UBM -0.5% CS DOWNGRADE to NEUTRAL (Change of coverage)

Vienna Ins +1% Q3 Net Income light but 17% higher YoY

Wolters +0.5% CS DOUBLE UPGRADE to OUTPERFORM (Change of coverage)

WPP +0.5% CS INITIATE with OUTPERFORM (Agency theme)

Zodiac Aero -2-3% Revs inline but operating income 3% light

Mainfirst

*BAYER-CEO tells Bild Monsanto t/o going according to plan.........+0.5%

*ZODIAC-FY Net 108.1m(131.4),Rev 5.21b(5.19),Div 32c(32),FCF +ve...-2%

*ESSILOR-Cuts FY Sales Target(Grth 3.5% vs 4.5%),s/down in US......-4%

*CS-Said to face Tax probe over undeclared accounts-$200m assets...-0.5%

*GENMAB-Boosts FY Rev 1.65-1.7b(1.2-1.25),FDA approves Darzalex....+4%

*NOVO NORDISK-Gets FDA approval for Xultophy in Type 2 Diabetes....+1%

*NATIXIS-Always looking at acquistion opportunities................U/C

*CARREFOUR-Picks MST,Soc Gen for Carmilla IPO-shopping mall prop...U/C

*AENA-Spain mulls selling stake in Aena says Expansion.............-1%

*UNIPER-Q3 Sales 14.67b,Ebitda 282m(244),Ebit 117m(54),FY ok.......U/C

*SWATCH/RICHEMONT-Oct Data weak -16.4% y/y,weak across all prices..-2%

*ENEL-Tgts NI 4.1b '18,Selling 3b of assets over 3yrs,2b buyback...+2%

Shore

CHESNARA - in acq.talks,Sky Spec.in talks to Buy L&G's Dutch 

ARM............

MKT HALMA - revs +16% £442m,PBT +12%,order intake good,benefits from weaker £...+1% 

SCAPA - revs +13.5%,profits +27%,margins strengthen,FY ahead of expec.......+5% 

SPIRAX-SARCO - organic sales slow as expected,markets remain lucklustre.....-1% 

HOMESERVE - revs +20% £314m,PBT +9%,strong start to year,sees FY in line....+2% 

KELLER GRP - awarded major ground improvement contract in Durban worth £40m.+1% ROTORK - order intake +22.2%,margins lower then prev yr,rep.revs at top end.+1% 

SPECTRIS - sales+18%,LfL-4%,revs +18% driven by weak £ offsets weak demand.UNCH 

CYBG - swings back to profit,brings fwd RoTE target by a year,well placed...+1% 

KINGFISHER - Q3 sales 3b.Q3 trading following similar trend to H1...........+1% 

BABCOCK - Expects full year to be in line with views........................+1% 

AO WORLD - H1 website sales for UK +20.8%.On track with long term goals.....+2% 

DE LA RUE - H1 pbt 17.2m.Divi 8.3p.Full year outlook unchanged..............+1% 

SEVERFIELD - Sees fy pft growth comfortably ahead of views..................+4% 

SPORTECH - Racing and digital secures contract with Tote Ireland...........UNCH 

MITCHELLS&BUTLER - Fy rev 2.09b.Ptp 94m.Sees downward pressure on margin....-2% 

COMPASS - revenue a beat divi better than f'casts positive organic rev gwth.+2% 

INTERTEK - 10% rev gwth in line with forecasts.............................UNCH

BIG YELLOW - occupancy rates up revenue in line with forecasts.............UNCH