FT : IMF sounds warning on China’s corporate debt


IMF sounds warning on China’s corporate debt
Shawn Donnan in Washington and Tom Mitchell in Beijing

China’s corporate debt risks sparking a bigger crisis if the authorities fail to tackle it, the International Monetary Fund has warned.
It is the latest red flag over China’s ballooning debt, which rose to a record 237 per cent of gross domestic product in the first quarter on the back of massive lending designed to boost economic growth.

That has put the subject to the fore of this year’s annual IMF review of the Chinese economy with a team from the Fund set to conclude its latest monitoring mission on Tuesday.
“Corporate debt remains a serious — and growing — problem [in China] that must be addressed immediately and with a commitment to serious reforms,” said David Lipton, the IMF’s number 2 and the leader of its latest mission, which ends on Tuesday.
Speaking in Shenzhen, where then-paramount leader Deng Xiaoping kicked off China’s experiments with capitalism more than three decades ago, Mr Lipton pointed to the potential risk to the global economy.
“We have learned over and over in the past 20 years how disruptions in one country’s economy and markets can reverberate worldwide,” he said, citing the global “spillovers” from last year’s turmoil in Chinese markets.
He warned that efforts to address China’s corporate debt load — which at 145 per cent of GDP was “very high by any measure” — had seen only “limited progress”.
“With the rapid increase in credit growth in 2015 and early 2016, and the continued high rates of investment, the problem is growing. This is a key fault line in the Chinese economy . . . And it is important that China tackles it soon,” he said.
Zhou Xiaochuan, governor of the People’s Bank of China, has long warned of the dangers of the corporate debt build-up, according to people familiar with the central bank’s deliberations.
In May the official People’s Daily newspaper picked up the theme, running a front-page interview with an unidentified “authoritative figure” who warned that soaring debt levels could trigger a “systemic” financial crisis.
China has since launched a series of initiatives to whittle back the bad debt sitting on banks’ balance sheets, including securitisation and debt-for-equity swaps — although Mr Lipton echoed analysts who see these as having limited resuts and doing little to eliminate bad debt from the overall financial system.
Zhang Tao, deputy governor of People’s Bank of China, speaking at a financial forum in Shanghai on Sunday, signaled a willingness to let zombie companies die. “Any industry that lacks the mechanism to elevate winners and eliminate losers can’t develop in a healthy and sustainable way,” he said.
He said an orderly system would be put in place for failed financial institutions: “We will permit financial institutions to go bankrupt in an orderly way, restructure those that need restructuring, shut those that need to be shut, and strengthen market discipline.”
Mr Lipton highlighted the state-owned enterprises, which he said were responsible for 55 per cent of the corporate debt pile despite representing 22 per cent of economic output and which “are essentially on life support”.
“In a setting of slower economic growth, the combination of declining earnings and rising indebtedness is undermining the ability of companies to pay suppliers or service their debts,” Mr Lipton warned. “Banks are holding more and more non-performing loans [and] the past year’s credit boom is just extending the problem.”
While concluding the issue is “manageable”, he warned that a recent IMF estimate that put the potential losses for China’s banks from bad corporate loans at 7 per cent of GDP was a conservative estimate that excluded exposures in the “shadow banking” sector.
The risk was also that if the problem wasn’t dealt with speedily it could grow into a large crisis. “Company debt problems today can become systemic debt problems tomorrow,” Mr Lipton said. And “systemic debt problems can lead to much lower economic growth, or a banking crisis. Or both.”

>>> HNA Hospitality Group declares no participation in acquisition Of Accor

HNA Hospitality Group declares no participation in acquisition Of AccorHotels Group

In response to the recent groundless reports, claiming that "AccorHotels attempts to join forces with HNA to counter Jin Jiang Hotels", HNA International Hotels & Resorts Management Co., Ltd. ("HNA Hospitality Group") issued the following statement:

As of now, HNA Hospitality Group neither has discussed with French AccorHotels Group on the equity acquisition, nor plans to have such discussion. Relating reports are false.

As a global leading hotels group, HNA Hospitality Group is on the mission to establish a Chinese hotel brand. At the same time, HNA Hospitality Group actively fulfills a company's responsibilities in the society, with the dedication in creating a healthy market environment for the hotel industry with stakeholders, including the government, investors, industry peers, and customers.

HNA Hospitality Group has always been cautious with investments, following industry standard business codes and company work rules strictly, and will not participate in hostile bidding with any projects.

HNA Hospitality Group reserves the rights to pursue any legal rights available should any individual or company discuss project acquisition in the name of HNA Hospitality Group without authorization.

HNA Hospitality Group declares the statement hereby.

>>> Mooted Smith & Nephew bidder Medtronic boosts coffers with tax case win - FT

Mooted Smith & Nephew bidder Medtronic boosts coffers with tax case win

Medtronic (NYSE:MDT), the Dublin-headquartered medical devices group long tipped as a prospective acquirer for its British peer Smith & Nephew (LON:SN), has freed up cash after winning a legal battle over tax, the Financial Times reported. The report said USD 3bn of cash which was held in Puerto Rico will be released as a result.

Medtronic, whose operational headquarters is in Minnesota, USA, has played down talk of any tax-inversion deal and management has forecast a USD 1.5bn potential acquisition spend for the year, the report noted.

Smith & Nephew has a GBP 10.4bn (USD 14.8bn) market cap.

The original report appeared in the Financial Times, page 22


Financial Times

WSJ : Monsanto Turns Back Bayer Again

Monsanto Turns Back Bayer Again

German company is aiming to seal a deal that would form the world’s largest supplier of crop seeds and chemicals

Bayer AG’s bid to buy Monsanto Co. for more than $60 billion has hit an impasse that could pose a challenge for the blockbuster agriculture tie-up.

Bayer has offered to buy the U.S. seed giant for $62 billion including debt, or $122 a share, which Monsanto last month rejected as too low.

In an effort to bring Monsanto to the negotiating table, Bayer in recent days sent the company a letter saying it has lined up financing for the deal and is confident any regulatory obstacles can be overcome, according to people familiar with the matter.

It sought access to detailed business information, known as due diligence, which Bayer said could lead to a higher offer. Bayer didn’t increase its bid.

Monsanto, which considered the proposal little changed, responded by refusing to grant such access until Bayer raises its bid, the people said. Monsanto also told the German company that in addition to more money, it needs clarity on other matters including regulatory risks before agreeing to a deal, the people added.

Companies frequently engage in sometimes-tense negotiations before agreeing to combine.

Monsanto shares declined as much as 2% Friday afternoon after The Wall Street Journal reported on the stalemate. They recovered somewhat and closed at $109.20. Bayer shares earlier closed down 2.5% at €88 ($99) in European trading.


Bayer aims to seal a deal that would form the world’s largest supplier of crop seeds and chemicals and follow a brisk round of consolidation in the industry. St. Louis-based Monsanto, which failed last year in its effort to buy Swiss rival Syngenta AG, has indicated it is open to a deal with Bayer but hasn’t detailed terms it would accept.

The deal would combine Monsanto, the biggest seed provider with a leading position in biotech crop development, with Bayer, which has a robust lineup of pesticides but a smaller presence in major crops like corn and soybeans. Rivals Dow Chemical Co. and DuPont Co. are pursuing their own combination and Syngenta is working toward a $43 billion sale to China National Chemical Corp.

Bayer has secured more than $60 billion in debt financing for the deal from a handful of banks, people familiar with the matter have said. It would have to assume about $8 billion in Monsanto debt.

Bayer has also faced pushback from its own shareholders. The German company’s stock traded at roughly €100 before its bid surfaced last month, and the decline from that level is a sign some shareholders oppose the combination or worry Bayer will pay too much.

Others worry the tie-up would leave Bayer—a hybrid health care and agriculture giant—too exposed to crop-price swings.

After outlining its plan for the deal in late May, Bayer executives spent two weeks meeting with investors in Germany, the U.K. and the U.S. to pitch them on its merits.

“We have on social media the nice term ‘shit storm’ to summarize what the immediate feedback was,” Liam Condon, head of Bayer’s agricultural division, told the company’s staff in a meeting this week. Bayer filed a transcript of the meeting with U.S. securities regulators.

Some investors said they have come to see the long-term merits of a merger between the companies.

“What this does is undoubtedly make [Bayer’s] current crop-protection business much stronger,” said David Moss, head of European equities for F&C Management Ltd., part of BMO Global Asset Management.

Barrons : As Bond Yields Tumble, Junk and Gilts Shine


As Bond Yields Tumble, Junk and Gilts Shine

The European Central Bank boosts its asset-buying program, pushing returns lower. Corporate issuance soars, but sovereigns suffer.

The hunt for yield got a little harder after the European Central Bank dived into the Continent’s corporate credit markets, pushing returns even lower last week.


But there are still strategies for investors looking to make a buck. Sterling-denominated debt that has sold off in the run-up to the United Kingdom’s European Union referendum on June 23 could rebound if the country opts for continued membership, as seems the most likely outcome. The high-yield, or junk-bond, market also still looks attractive.
European debt markets have rallied strongly since March, when the ECB announced that it would increase the size of its asset-purchase program to 80 billion euros ($90.38 billion) a month from €60 billion, and would widen the scope of eligible assets in June to include nonfinancial investment-grade credit.
The purchase program is the ECB’s latest initiative designed to spur inflation and economic growth. Analysts estimate that the central bank could splurge as much as €10 billion a month on corporate debt, but in reality the figure is likely to be closer to €4 billion to €5 billion.
The rally shows little sign of abating, and yields are hitting record-low levels. (When bond prices rise, yields fall, and when bond prices fall, yields rise.)
This compression in yield is most evident in the market for sovereign debt. On Friday, the yield on German sovereign bonds with a 10-year maturity fell to a puny 0.02%. But that still seems comparatively rich compared with Swiss government debt of a similar duration, which yields minus 0.45%. U.K. 10-year sovereign bonds, or gilts, yielded 1.23%, also a record low.


Yields aren’t plunging just in Europe. Sovereign yields are at lows, or flirting with lows, in the U.S., Japan, and Australia. It is difficult to see value anywhere in the sovereign spectrum.
Low interest rates in Europe’s corporate debt markets are great news for companies seeking to reduce their borrowing costs. Investment-grade credit issuance has rocketed in the past three months, as companies look to take advantage. Issuance in the first five months of 2016 was €226 billion, putting European markets on track for their biggest year of issuance. In 2014 and 2015, average issuance was only about €120 billion.
Companies have been able to sell issues with meager returns. Unilever (ticker: UN) sold €300 million of bonds due in 2020 with a 0% coupon and a yield of just 0.08%. Sanofi (SAN.France) and Allianz (ALV.Germany) have also successfully offered zero-coupon issues.
Since March, some 30% of investment-grade issuance has priced with a yield lower than 1%, according to an analysis by Goldman Sachs. In the same period last year, the figure was 11%. “The only direction for European yields in an environment with no inflation is down,” says Vincent Juvyns, global markets strategist at J.P. Morgan Asset Management.
His favorite space is European high yield. “It is the only market where the ECB won’t stimulate,” Juvyns says. “It is where investors will be pushed to” as they search for yield. He likes the fact that the sector recently has seen more rating upgrades than downgrades, and that it has almost no exposure to energy.


EUROPEAN HIGH-YIELD DEBT has attracted more new issues, but not to the same extent as investment-grade. Issuance in May was €6.1 billion, more than twice the €2.4 billion in the same month in 2014, but just a fraction of the €58.3 billion in investment-grade. The sector has returned more than 3% in 2016 to date.
Uncertainty surrounding the U.K. referendum later this month—and the threat of a further decline in the value of the British pound, in particular—appear to have created a trading opportunity. Sterling-denominated bonds of companies that have both euro and sterling instruments with the same maturity “have dramatically underperformed” since February, according to an analysis by research firm CreditSights.
There are 21 investment-grade credits that have sterling and euro senior bonds. Among them, sterling-denominated bonds underperform by around one percentage point. The list of issuers includes Bayerische Motoren Werke (BMW.Germany), Daimler (DAI.Germany), Investor (INVE.A.Sweden), and Telefonica (TEF).
“We see that spread as an uncertainty premium,” says Tomas Hirst, European credit strategist at CreditSights. “It is large enough that we don’t think it is a random trading pattern.” If the U.K. votes later this month to remain part of the EU, “that gap could well close,” he says, offering a healthy return for fixed-income investors.
For investors, the best way to get exposure could be through exchange-traded funds like iShares Euro Corporate Bond Large Cap UCITS (IBCX.UK) or iShares Core Euro Corporate Bond UCITS (IEAC.UK).

Barron's : Pension Funds, Keep It Simple: U.S. Stocks for the Long Run

Pension Funds, Keep It Simple: U.S. Stocks for the Long Run
Pension consultants’ advice has often been misguided, emphasizing everything but U.S. stocks.

Dear Pension Trustees Everywhere: Do you ever experience feelings of self-doubt or guilt, brought on by acting on bad investment advice? Are you concerned about your fiduciary responsibility to your beneficiaries? You should be.
Most of you have been taken in by pension consultants—members of a fairly new profession who have track records that mostly are short and bad.


They advise big investors like you, and also wealthy individuals, charitable endowments and similar institutions, on how they should allocate their money among many possibilities: stocks, bonds, private equity, real estate, gold, commodities, emerging markets, and other small markets.
Have you noticed that since the stock market selloff in 2008, these folks have consistently advised clients that they reduce exposure to U.S. stocks? Their advice has been consistently wrong, as the tough-to-beat Standard & Poor’s 500 hit new highs last year.
They also have advised you to redefine the word “risk.” No longer is it the chance of permanent loss of capital. Now the consultants say it is volatility—the amount your portfolio bounces up and down in good years and bad—and they say it should be avoided by creating a broadly diversified portfolio of all possible investments.
Naturally, you have hired more consultants to balance your investments and manage the ones you don’t understand.
Shame of the Cities
Pension consultants’ advice has contributed mightily to the insolvency of cities, states, municipalities, and corporations unable to meet their pension obligations because of poor investment returns on their pension funds.


Let’s consider pension funds, looking at each 20-year period—roughly the typical career length of a policeman or fireman–on a rolling basis over the past 50 years. That is, we’ll look at 20 years, starting in 1965, then 20 years starting in 1966, and so on.
Returns on investment in the S&P 500 stock index for each period have fluctuated between 8% and 12%. Each period contained some bad years, but there were always more good years and they outweighed the bad results for every 20-year stretch.
While the actuarially assumed rate of return for most public pension systems is approximately 7.5%, the stock market has managed to climb the proverbial wall of worry and offer superior returns, compared to virtually all available alternatives—if you stayed fully invested in the index for the full 20 years.
You could look it up on the first page of Warren Buffett’s Berkshire Hathaway (ticker: BRKA) annual report, where he presents the S&P 500’s record over the past 51 years. Any way you slice these numbers in 20-year increments, the basic result is the same. Each rolling 20-year period produces returns adequate to maintain fully funded actuarial values for defined-benefit pension funds.
If there is a drawback, it’s that some of you will lose your jobs, because two or three professionals could direct money to index funds, versus the hundreds of employees who currently manage large funds.


Home-Grown Success
In addition to being wrong, the consultants’ advice to cut or avoid exposure to U.S. stocks seems gratuitously unpatriotic to some.
The object of this article, however, is not to impugn your motives, but to try to get you to objectively evaluate the data–the U.S. stock market’s compelling record over the past 50 years. Instead of relying on consultants who seem to view the world through their broken rearview mirrors, you have the opportunity to look forward at what is likely to work best, and then act accordingly.
How did our money-management industry so cleverly manage to avoid the U.S. stock market? A cynic might think it had something to do with fees or wanting to emulate the inimitable David Swensen, who has managed Yale’s highly diversified endowment for the past 30 years. The Yale model would seem to be another shining example of that old saying about fads: “What the wise man does at the beginning and the fool does at the end.”
A far more realistic model would be the Tampa, Fla., firefighters and police officers pension fund, run by Jay Bowen and featured in these pages a few weeks ago (“Consider Investing With Rip Van Winkle,” April 23). Bowen has strictly stuck to owning quality bonds and shares of great companies. He uses a high-quality, long-term balanced approach, relying on high-quality bonds for income and stability, and common stocks for growth and capital gains. Typically, the fund holds 50 to 70 stocks. Since 1974, it’s generated a compound annual return of 11.8%; its common stocks returned 14.5%. This compares quite favorably with the S&P’s 12.1% total return in the same time frame.
While the stock market is near all-time highs and employment is at supposedly acceptable levels, this has been a timid economic recovery and joyless bull market.

It’s important to note that the stock market is a leading indicator. Business investment is at very low levels. Currently, the only net new money coming into stocks is from companies themselves—buying their own shares. That will change eventually.
What happens when a roaring bull market gets started? Animal spirits rise. Companies conclude they need to earn more to justify their rising stock prices, which in turn would help fund underwater pensions. Then we are off to the races again. The stock market is huge, relative to private equity, collectibles, gold, etc. And so, we could easily see a bull market, a few more funded pensions, and rising economic activity, as political fears subside and economic greed takes over.
Here is a prediction. A gigantic market move to the upside is coming, as investment committees assess their costs and reach the conclusion that the stock market is their best and only hope to meet their obligations.
You public pension trustees, whose funds own such a high percentage of American business, should make a better effort to hold down your controllable costs. Some of you are raising Cain about the compensation of the senior managers of the companies in which your funds are invested. You should also pay attention to what you are paying for others to manage the funds’ money.

Betaville : Wirecard


Betaville

Chinese said to be in talks with Wirecard about purchasing a 25pc stake; could make move on the whole company - sources - part 2

Posted: 09 Jun 2016 02:55 PM PDT

Wow - I thought yesterday's piece might ruffle a few feathers but I never expected the torrent of angry banter I received throughout the afternoon.

It sort of reminds me of last year's shenanigans when I broke a series of stories about Slater & Gordon interest in purchasing the majority of Quindell. For several months I was on the receiving end of serious abuse, scepticism and denials (from Slater & Gordon itself) but stuck to my guns. And what happened: Slater & Gordon eventually bought Quindell's professional services division for just under £640 million. Here is a link to my final piece in that series:

http://betaville123.blogspot.co.uk/2015/03/quelle-surprise-quindell-announces-sale.html

Now, I'm not saying it's going to play out the same way with Wirecard (these type of situations rarely follow exactly the same path) but the fervour and fury of those people on either side of the argument is eerily similar to when I broke a series of stories on Quindell...