TheChek News Flow

Senior figures at EDF are pushing to delay final approval for the £18bn Hinkley Point nuclear reactor for up to a year as the company seeks new investors for the project.

The long-delayed scheme to build the first in a wave of nuclear power stations in the UK has been awaiting a final investment decision from the French utility company for months.

EDF has said repeatedly that approval for the plant in Somerset, in the west of England, is “imminent”. Jean-Bernard Lévy, chief executive, said last week the decision was “very close”.

But two people involved said it could be delayed until next year.

According to one person close to the company, some directors are pushing EDF to find other investors before giving the go-ahead so that it will not have to take the full liabilities on to its balance sheet.

French rules dictate that the company must consolidate the debt for Hinkley if it owns more than 50 per cent of the scheme. Under a deal struck with CGN, the Chinese state-owned nuclear company, EDF owns 66.5 per cent of the project but it wants to offload a portion to avoid taking on the extra debt.

While Mr Lévy has said that he hopes to bring in other investors after taking the final investment decision, others on the board say it should do so as a prerequisite, a process likely to last into 2017.

One person close to the company said: “EDF is very concerned about its [A-grade] credit rating, and so is desperate to offload a share of this project.”

The British government’s plans for energy supplies are heavily reliant on the facility, which is due to provide 7 per cent of the country’s electricity. Under current plans, it will start producing power in 2025 — having originally been scheduled to open in 2017 — but analysts warn that this deadline will slip if the company delays further.

Standard & Poor’s, the rating agency, has warned it might downgrade EDF’s debt if it goes ahead. The company’s €37bn net debt load dwarfs its €18.5bn market capitalisation.

The major stumbling block for new investors is that none of the projects employing the European Pressurised Reactor design is up and running. Two under are construction in Finland and France but are years behind schedule and billions over budget.

EDF is looking at taking other measures to boost its cash position, such as a potential initial public offering of RTE, the French electricity transmission company.

Insiders say some on the EDF board even want to delay the process indefinitely and wait for the “new model” EPR — an upgraded version.

So far these people have been resisted by a majority of board members, most heavily by those from the French government, which owns 85 per cent of the company.

One person close to the deal in Paris said: “Many people on the board don’t even want it to go ahead and at the very least they want to see that there is a working EPR out there first. I honestly can’t see the final investment decision coming until next year.”

Deepa Venkateswaran, an analyst at Bernstein, said: “From EDF’s perspective, the more delay, the better. The problem is that they have previously said it would take 10 years between the final investment decision and completion of the project.”

Lobbyists defend the interests of corporates against disruptive technologies, writes Paul Marshall

If anyone wants to understand why so many UK-based hedge fund managers are inclined towards Brexit, they need look no further than the European Commission’s response to the 2008 financial crisis, a case study in producer capture.

Rather than a rational, fact-based response, the commission launched an onslaught on hedge funds, leaving the banks and their lobbyists largely alone.

Even shortly after the financial crisis, there was widespread agreement among regulators and central banks about its origins: an overleveraged US property market and overleveraged banks. Hedge funds had a walk-on part, a small number of them as winners from the calamity, most as victims.

Anglo-Saxon regulators focused quickly on the root of the problem. The US introduced the Volcker rule to constrain proprietary trading activity; Britain adopted the Vickers proposals to create a firewall between investment and retail banking. The Federal Reserve introduced bank stress tests as early as May 2009, and over the next six years US bank leverage fell substantially.

Not so the EU. The commission largely ignored the issue of bank leverage, focusing instead on hedge funds. The draft Alternative Investment Fund Managers Directive in April 2009 proposed restrictions on hedge fund leverage, rules on depositories, remuneration, liquidity, valuation, and protectionist measures to restrict the marketing of non-EU hedge funds.

Why did Brussels indulge in such a great act of displacement activity? One hedge consultant received the explanation from a Belgian MEP. “It is simple,” he said. “If you are in a bar and a fight breaks out, you do not hit the person who started the fight but the person you have always wanted to hit.” This would be funny if it was not serious. Nobody feels sorry for hedge funds but the reason the EU’s institutions left banks alone for so long is more worrisome.

The EU’s financial system is bank-centric; the Anglo-Saxon system, in contrast, is “market-centric”. Bank lobbyists patrol the corridors of Brussels and Strasbourg. The French are particularly effective. In France, the banks are part of a power nexus which enables “enarques” to float unaccountably between politics and business. Look no further to understand why the French sought to sneak in to the recent negotiations between the UK and fellow EU member states a new clause that “a single rule book is to be applied by all credit institutions and other financial institutions”. They are very nervous of the new wave of financial sector disrupters.

The result is that while European bank leverage has come down from the heights of 2007-8, it is still on average higher than in the US, roughly 18 times bank equity capital versus 12. Some European banks, like Deutsche Bank and the big French institutions, are still on leverage ratios of 25-30 times, enough to put fear about their stability at the heart of the recent market sell-off.

This little regulatory episode is symbolic of some of the worst aspects of the EU. It is not a parliamentary democracy as we know it. Regulations are initiated by an unelected commission which is schmoozed on a daily basis by lobbyists.

Lobbyists work to defend the interests of incumbent corporates against entrepreneurs and disruptive technologies. An estimated €1.5bn is spent on corporate lobbying in the EU every year.

We can fully expect the lobbyists to work unstintingly for the status quo and against innovation — for the diesel industry and against electric cars, for banks and against financial sector innovators, for big pharma and against biotech innovation, for big appliance companies and against bagless vacuum cleaners — in summary, for big business and against entrepreneurs.

If Britain wants to be a home to innovators, disrupters and entrepreneurs, we will find little help and much hindrance from Brussels.

The writer is founding partner and CIO of Marshall Wace LLP. He writes in a personal capacity

Investors pulled more than $60bn from mutual funds globally in January, marking the worst month of outflows since the height of the financial crisis.

The outflows were most acute for European mutual funds, with investors redeeming €42.6bn ($47bn), according to Thompson Reuters Lipper, the data provider.

January marked the worst start to a year for markets in at least two decades. More than $2.3tn was wiped off global stocks in the first week alone, amid fears about China’s slowing economy and currency depreciations.

Amin Rajan, chief executive of Create Research, the consultancy, said: “Investors have become ultra jittery about market contagion. They ran for the hills after the meltdown in Chinese markets at the start of 2016.”

Although the outflows are a significant concern for asset managers, the fact that the redemptions were met without any big problems will assuage some of the fears that asset managers represent a systemic risk to financial markets.

“No liquidity problems have been evident,” said Mr Rajan.

Speaking at an FTfm event last week on potential liquidity issues, Martin Parkes, director of government relations and public policy at BlackRock, the world’s largest asset manager, said: “The fund management industry is on top of this. Liquidity issues have not just been around since the Lehman collapse. One of the first client presentations we gave on fixed income some 28 years ago placed liquidity risks firmly at the top of the agenda.”

The scale of January’s fund redemptions has raised concerns about the growth prospects for asset managers, according to David McCann, an analyst an Numis Securities, a stock broker.

Mr McCann has downgraded his outlook for Henderson Global Investors, after the £92bn fund house warned earlier this month that the difficult market conditions in January could affect its short-term growth plans.

Andrew Formica, chief executive of Henderson, said: “The first few weeks of 2016 have been challenging for investors and our clients, with a wide range of economic and geopolitical risks weighing on markets.”

According to Lipper, the last time global outflows were this large was in September 2008.

Haley Tam, an analyst at Citi, the US bank, said: “Fundamentally, the outlook is quite negative for the asset management industry in 2016.”

Trophy properties for wealthy foreigners hit by growing supply and falling demand

A 24-hour butler service. Interiors by Versace. A swimming pool suspended mid-air between buildings.

These are some of the unusual features available with new London luxury apartments, tens of thousands of which are being built all over the capital. All that is missing are the buyers.

More than 50,000 homes are planned or under construction in the most expensive areas of London — after a building boom that followed the 2008 crisis, when prime property recovered quickly and overseas buyers piled into the UK capital.

Even though 2014 was a strong year for sales, only 3,900 homes worth more than £1m were sold in central London.

Now, as more shiny residential towers rise on the banks of the River Thames, buyer appetite has paled.

JLL, the US-based property group, predicts that prices for new-build homes in central London will fall 3 per cent in 2016, and not rise again until 2018. Only three months ago it was forecasting a 1 per cent increase this year.

Falls in Asian currencies, the rouble and the oil price have cut deep into the purchasing power of overseas buyers. Changes to the UK stamp duty tax have piled additional charges on to homes costing more than £937,500.

In essence, the London market — once the favoured choice for a trophy property among wealthy international investors — is suffering the uneasy combination of growing supply and shrinking demand.

The effects are already being felt on developers.

Shares in Capco, a London property company, dropped 8 per cent after it revealed last Wednesday that sales of apartments in its Lillie Square development in west London — which cost between £600,000 and £6m — had not risen since November. The company cited “challenging conditions . . . as a result of increasing supply”.

Capco’s shares are down 27 per cent since the start of the year and investors have also punished other UK-listed companies. Shares in St Modwen, which owns 57 acres of development land in Battersea, south of the Thames, are down by a fifth. Meanwhile four hedge funds have taken short positions against Berkeley Group, a high-end UK housebuilder.

Overseas developers offering flats priced above £1m in central London — including Hong Kong’s Hutchison Whampoa and the Qatari state investment fund Qatari Diar — are also exposed.

In London’s “prime fringe” areas, developers include the Irish group Ballymore, China’s Dalian Wanda, Dubai’s Damac and a Malaysian consortium.

Analysts say there is concern some of these companies may have to write down the value of some development holdings.

“I suspect the land prices will actually start falling,” says Hemant Kotak, analyst at Green Street Advisors. “The stock market is much more negative than valuers are, and than the private market is.”

Many of London’s luxury new-builds have been marketed overseas, especially in Asia.

Developers have been “catering for the mass growth of international wealth, all of whom saw London as a great vehicle for investment”, says Roarie Scarisbrick, partner at Property Vision, an estate agency.

Luxury London new-builds are heavily advertised in Hong Kong, where the daily newspaper The Standard carries a weekly section dedicated to the UK property market. Billboards and print advertising in the Chinese territory, with glossy images of riverside views and dramatic skylines, direct potential buyers to property shows held in swanky hotels.

But Geoffrey Lau, a property negotiator at Knight Frank in Hong Kong, admits attendance at these shows is not what it once was.

“Purchasing is not as high as two to three years ago,” he says. While he once had about 40 inquiries a day at property shows, that is now down to about 20, he adds.

Developers — which often need to sell off-plan to secure finance — have already begun offering discounts in the over-£1m price bracket, mainly by paying stamp duty. This amounts to a 4.4 per cent reduction on a £1m home and a 7.7 per cent discount on one priced at £2m.

The luxury apartments gold rush took place in other global cities as well, but London has outstripped the competition. In 2009 London, Hong Kong and Manhattan were selling between 1,700 and 2,500 apartments in the $2m to $5m bracket each year. By 2014 London’s total had shot up to 6,250 while the other two cities remained at about the same level, according to figures from Knight Frank.

“They were buying in London in huge numbers because that’s where the capital gains could be made at the time,” says Henry Pryor, a central London estate agent.

Hundreds of apartments in luxury developments that are not even built are already being resold on property portals.

The latest slowdown has brought back memories of the 2008 financial crisis, when an investor-driven frenzy for new UK city-centre flats was followed by price falls that far exceeded those in the wider market.

Mr Kotak says this time is different. “Most of the [developers] are better capitalised than in the last cycle, because financing was stricter. But it depends how far prices fall — if we have a modest decline of 10 or 20 per cent then I don’t think we will see wholesale administrations and bankruptcies, but if prices fall beyond that, there is certainly a risk.”

However, he says developers are likely to be forced to slow their pace of building or convert more units into the private rented sector, where there is strong demand and support from institutional capital.

Developers will also face a number of fresh challenges in the coming months. From April buyers of UK properties must pay a 3 per cent surcharge if it is not their first home, even if their other residence is overseas.

Sentiment may also be affected by June’s vote on the UK’s membership in the EU, although weakness in sterling ahead of the referendum could make UK property look more affordable again.

Even so, the situation has not reached crisis point yet.

“No one seems to be panicking yet,” says Mr Scarisbrick. “We are seeing adjustments in prices but not to spectacular levels.”

With ridged sides intended to resemble a cascading waterfall, a 24-foot aquarium and a yoga studio, One57 West 57th Street epitomised New York’s luxury building boom, writes Anna Nicolaou. But after selling half its units in the first six months, and a record $100.5m condos last year, sales have “slowed considerably”, says Andy Gerringer of Marketing Directors, which specialises in luxury property.

“Everyone had this herd mentality, and then you get a glut. A lot of those projects have stalled now. There are only so many people that can afford to buy $20m apartments,” says Mr Gerringer.

In New York as in London, the lure of Asian and Russian money led to the construction of a series of “tall skinny” towers catering for demand among overseas buyers seeking second or third homes.

But sales have slowed from the buying frenzy of 2013 and 2014: in Manhattan 71 homes were sold for between $10m and $20m in 2015, down from 100 in 2014, while 39 homes were sold for more than $20m, compared with 50 the year before, according to RealtyTrac.

One57 is now 80 per cent sold, says Gary Barnett, president of Extell, the tower’s developer.

Michael Stoler of Madison Realty Capital, a property investor, says: “There is no question that developers are worried.”

Banks are “very cautious”, he says, and not looking to finance these deals unless there is a lot of equity, leaving hedge funds and private equity to fund them.

Developers have more skin in the game than in previous building booms, says Mr Gerringer, because they are putting in 30 to 50 per cent equity for a project, compared with 5 to 10 per cent in 2008.

This leaves them vulnerable to an equity wipeout, while mezzanine lenders will fight to preserve their capital, says Mr Gerringer. “Someone will probably go bust, but it’s too early to tell.”

Beijing has mothballed two pioneering outbound investment schemes, according to people with knowledge of the situation, in its latest bid to stem capital outflows and shore up the renminbi.

The halt in the allotment of quotas reflects fears over the massive amount of cash — some economists estimate up to $1tn last year — that has left the country through official and unofficial channels as economic growth slows and the renminbi continues to depreciate.

The schemes were part of liberalisation moves designed to facilitate overseas investment in China and allow domestic funds to buy foreign securities. But last August’s renminbi devaluation and subsequent capital flight has triggered a spate of reversals and watering-down of schemes that enable China’s currency to leave the country.

The casualties include the so-called Qualified Domestic Limited Partner scheme, designed to allow foreign asset managers — including the likes of BlackRock and Aberdeen Asset Management — in Shanghai’s free trade zone to sell overseas investment products directly to wealthy Chinese clients.

The two asset managers were among global groups that received licences last year but have waited in some cases more than six months for quotas.

The State Administration of Foreign Exchange has also delayed the launch of an updated programme for domestic investors to invest in equities abroad, known as the Qualified Domestic Institutional Investor 2 scheme, or QDII2.

According to one person familiar with the matter, the suspension was clear but not an official measure. It was “part of Safe’s effort to monitor capital flows”, he said.

Another person familiar with the scheme said Safe was in prolonged negotiations with the asset managers on how to salvage the licences in a fresh format.

Seven global asset managers were issued licences starting in July last year but none of them have been issued the quota necessary to launch the business, data compiled by Shanghai-based consultancy Z-Ben Advisors show.

The QDLP programme was originally launched in 2013 and allowed hedge funds to raise capital onshore for investment offshore. Since then, 10 foreign asset managers with wholly owned companies in Shanghai’s free trade zone have received licences and upwards of $1bn in quotas to raise onshore capital for other alternative asset classes such as property and infrastructure.

But conflicting regulation of the scheme meant that, while asset managers in the QDLP pilot secured licences from China’s securities regulator and a local bureau called the Shanghai Finance Office, they were stymied by Safe withholding quota approval.

Safe’s efforts to stem capital flows have seen it halt foreign exchange businesses at three foreign banks in recent months. Domestic asset managers have also reported that Safe stopped issuing new quotas for the Qualified Domestic Institutional Investor (QDII) licence, allowing local companies to invest abroad.

“I think the quota suspension is a result of a broader regulatory push for capital controls,” said Chris Powers, a senior consultant at Z-Ben. “The same rationale can be applied to the . . . QDII2 programme, which likely has been suspended due to Safe’s reluctance to open additional outbound channels.”

When announced last year, the new QDLP scheme was hailed as a breakthrough for traditional asset managers looking for direct access to mainland wealth. It was also seen as a strong competitor to cross-border investment channels based in Hong Kong.

BlackRock declined to comment on the allotment of quota but a spokesperson said: “BlackRock continues to work closely with the authorities in connection with the QDLP programme.”

Aberdeen did not respond to questions concerning its quota. Safe declined to comment.

Investors need to become more discriminating when investing in start-up technology start-ups, following recent “over-enthusiasm” in Silicon Valley, according to Bill Gates.

The Microsoft co-founder said he would bet on valuations of so-called “unicorns” — the 150 or so private companies that have been valued at more than $1bn — falling over the next two years, but that venture capital remains an attractive long-term asset class in an era of ultra-low interest rates.

“There is some sorting out that is taking place,” Mr Gates said. “It never should be a case of closing your eyes and saying ‘Oh, it’s a tech company, just throw money at it’. That strategy worked for about two years; now you actually have to open your eyes and look at the company.”

The valuations of unicorns have come under pressure after disappointing stock market flotations by some of their number, including payments company Square and Box, a cloud storage company. CB Insights, the research group, has identified seven unicorns that are now worth less than their peak valuation. That, plus wider concerns about the global economy, has led to a sense of a Silicon Valley boom cooling.

“If you gave me a basket of unicorns, I wouldn’t know right now whether to go long or short,” Mr Gates said. “I might go short in the two-year timeframe, but not in the longer timeframe because all it takes is for one or two of those to join the pantheon and your short would make you go bankrupt.”

He added: “Something that has a chance of 10 per cent-plus returns, even if it comes with a lot of variance, is very attractive in a period where the German long bond has a 1.2 per cent return.”

Mr Gates’s comments, in an interview with the Financial Times, come as he and fellow billionaires prepare to launch a wave of investments in energy start-ups, in an effort to find solutions to climate change. At last year’s climate talks in Paris, Mr Gates, Mark Zuckerberg, Jack Ma, Mukesh Ambani, Ray Dalio and others committed to funding high-risk ventures that might otherwise fall between government funding and traditional venture capital.

Energy start-ups, Mr Gates said, had not enjoyed the same frothiness in valuations as IT companies, largely because of the much larger sums needed before a company can prove that the technology works.

The need for an “energy miracle” was the theme of the annual letter from Mr Gates’s charitable organisation, the Bill and Melinda Gates Foundation, released last Monday. In it, he envisioned batteries the size of swimming pools and solar power that could be used to produce fuels. The letter was aimed at teenagers, with the hope of inspiring them to pursue a career in science and to tackle the world’s biggest problems.

“It will probably be people in their 20s that make the energy breakthrough,” he said. “It is those teenagers that will be out there at least making some of the wild-eyed suggestions and being willing to take on risky things that are often where the big breakthrough lies.”

Sanofi is open to acquisitions in the market for rare disease treatments in a sign of confidence that the high prices commanded by so-called orphan drugs are sustainable.

David Meeker, head of Sanofi’s Genzyme specialty care business, said rare disease assets were among the French group’s potential targets as it hunted growth. Acquisitions were possible “up to the size of Genzyme”, which Sanofi bought for $20bn in 2011, he added.

Mr Meeker would not be drawn on the identity of potential targets. There are numerous small and midsized drug developers focused on rare diseases, mostly in the US, and their valuations have fallen since a bull run in the sector ended last summer.

This has fuelled expectations that big pharmaceuticals groups could go bargain-hunting, but Mr Meeker insisted Sanofi would remain disciplined. “Valuations have come down but from high levels,” he said. “There is a certain resetting of valuations.”

Genzyme was Sanofi’s last big deal until an €18bn asset swap with Boehringer Ingelheim in December and the group’s new chief executive, Olivier Brandicourt, has indicated there will be more ahead.

He recently appointed Alban de La Sabliere, a former Morgan Stanley banker, as head of mergers and acquisitions, and said Sanofi was “very active in evaluating and looking at opportunities”.

“We have a pretty clean balance sheet, so using leverage should help us,” Mr Brandicourt said recently.

Mr Meeker said Sanofi was keen to expand in speciality medicines of the kind made by Genzyme, which has become one of its strongest sources of growth when it is facing pressure from the decline of its best-selling Lantus insulin for diabetics.

He said rare, or “orphan” diseases — defined in Europe as conditions affecting fewer than 1 in 2,000 people — remained an area with high, unmet medical need. Less than 10 per cent of the roughly 7,000 known rare diseases have an effective treatment.

Orphan drugs command the biggest margins in the sector because of the small number of patients from which manufacturers can make a return on investment. Prices of up to several hundred thousand dollars per patient often stir controversy but Mr Meeker said that, without strong pricing, companies would have no incentive to invest in the high-risk field.

High drug prices are facing mounting political scrutiny in the US but Mr Meeker felt that rare disease treatments were “relatively protected from the discussion” because of their unique economics.

Mr Brandicourt has moved to deepen integration of Genzyme into the parent group, renaming it Sanofi Genzyme and giving it responsibility for all of Sanofi’s speciality medicines. The Massachusetts-based unit reported a 29.5 per cent increase in revenues last year to $3.7bn — a tenth of total group sales — with multiple sclerosis drugs driving growth.

UK-listed Shire has said it will overtake Genzyme to become the largest maker of rare disease drugs after its $32bn takeover of Baxalta, a specialist in haemophilia, last month.

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