TheChek News Flow

- Vessel market is less active and pricing is softer than 12 months ago; not surprisingly, given weak oil markets there are fewer vessel purchases out there. Have still been able to sell some vessels in recent months.

- stacked 23 more vessels in Q3

- Q&A: cost reduction on active vessel has included cutting crew wages, not much more we can do to cut costs on active vessels

Finally, Bill Ackman has some insightful comments about the “bubble” in indexing. Given the lousy performance of active managers over the past decade, it’s easy to see why investors continue to flock to index funds. They are cheaper in terms of fees, more tax efficient and have had better returns of late.

But here’s the problem. Indexing only works when their are a sufficient number of active managers to make the market at least semi-efficient. If everyone becomes a passive indexer, then the returns of the major indexes will start to lag in a major way as the stocks in the index become overowned and overpriced.

But there are other considerations too. Passive ownership essentially gives management a free pass and allows lousy management teams to stay entrenched.

As Ackman writes,

As index fund ownership grows as a percentage of shares outstanding, the voting power of index fund managers increases. While on the one hand, one might believe this is good for America as these “permanent” owners should think very long term compared with the many investors whose average holding period is less than one year.

On the other hand, there are significant drawbacks… While index fund managers are, of course, fiduciaries for their investors, the job of overseeing the governance of the tens of thousands of companies for which they are major shareholders is an incredibly burdensome and almost impossible job. Imagine having to read 20,000 proxy statements which arrive in February and March and having to vote them by May when you have not likely read the annual report, spent little time, if any, with the management or board members, and haven’t been schooled in the industries which comprise the index…

Of course, this is impossible. Index managers are passive and will generally toe the line for management. Ackman points out some very significant long-term effects of this, asking the proverbial question of what happens when index funds effectively control corporate America:

If the index fund trend continues, and it looks likely to do so, what happens when index funds control Corporate America? Courts have often deemed shareholders to be in control of a corporation with as little as 20% of the ownership of a company. At current rates of asset inflows, it will not be long before index funds effectively control Corporate America and the corporations of many foreign countries.

The Japanese system of cross corporate ownership, the keiretsu, has been blamed for decades of Japanese corporate underperformance and economic malaise. Large passive ownership of Corporate America by index funds risks a similar outcome without the counterbalancing force of large active investors…

The thought of corporate America turning Japanese should be enough to make even the biggest proponent of indexing pause for a moment.

Ackman says that the “greatest threat to index fund asset accumulation is deteriorating absolute returns and underperformance versus actively managed funds” because money flows into these funds with no consideration of value. I agree, and would add that this was the major rationale for the “smart beta” movement.

But perhaps the greatest takeaway here is simply to not give up on active management. When you invest outside of the mainstream, you will have returns that are outside of the mainstream. That means that there will be plenty of years when you underperform.

But if you’re a good investor, it also means that there will be years where you massive outperform. So keep your chin up. Even hedge fund masters of the universe lose money some years.

So called contingent convertible, or coco bonds, are written down or converted to equity when a bank’s capital falls to a certain level, reports Thomas Hale in London.

These bonds, which were introduced to transfer banking risk to investors and away from the state, pay a hefty coupon.

The high yields on the overall asset class made it one of the best performing over last year. But investors appetite for these bonds has proved be more muted so far this year.

A €1.75bn Deutsche coco with a 6 per cent coupon is now trading at just over 80 cents on the euro, its lowest ever level. Another bond with a 7.5 per cent coupon is at 87.1 cents on the dollar. The bonds have lost 13 and 10 per cent of their value respectively since the start of January.

The problem is not limited to Deutsche. A Santander coco bond is also trading at its lowest ever level, below 90 cents on the euro.

The low prices reflect in part complex risks that have emerged across Europe’s €95bn market for additional tier 1 bonds (AT1), the main type of coco.

One problem is that the high coupon on the bonds can be cancelled when the bank runs into trouble and its capital falls. Exactly when this cancellation arises is the subject of some debate. Regulators have recently suggested payments might be stopped earlier than suggested for European banks, because of the way capital is calculated.

Deutsche’s chief executive, John Cryan, said in October the bank will prioritise coco coupon payments. And on January 28, Marcus Schenck, CFO said: “We believe we have sufficient general reserves available to cover any shortfall.”

Another problem is that the bonds are perpetual but come with a call date, when the bank can redeem the bond and re-issue.

If bonds trading below par are called, the investor receives the upside on the cash price, as well as a high coupon in between. But if they not called, they are less valuable to investors because that profit is not realised. For this reason, market expectations around whether a call will happen can drive prices up and down.

And then there are regulatory issues. Regulators have power over whether bonds are called, and also have influence over when coupons are halted. For bonds trading below par, it does not directly make economic sense for banks to call them only to re-issue with a higher coupon.

Concerns extend beyond technical market issues. Deutsche has recently grappled with problems in its investment banking business and the impact of low interest rates on its already low-returning retail bank. Globally, financial stocks have endured a tough start to the year, with the FTSE All-Share Banks index is down 15.7 per cent so far this year.

--> not sure of this website, hearing putting some pressure on MON US...stock stil up on the day +0.34%

Lending banks will be keen to back China National Chemical Corporation (ChemChina)'s estimated USD 43bn bid for Syngenta [VTX:SYNN] despite the debt burden the deal will place on the acquisitive state-owned group’s stretched balance sheet, according to bankers and a source familiar with the SOE.

The deal is being financed with a combination of debt and equity, and will be refinanced over time, one person close to the situation said. According to the person, ChemChina’s CEO said there was strong interest in the investment from both Chinese and International banks, and more information on the financing structure will be disclosed in due course.

One Hong Kong-based lender expected a deal to be largely debt funded providing the combined ChemChina/Syngenta net debt/EBITDA above 10x.But, banks will take comfort in the fact ChemChina is a state-owned enterprise backed by the Chinese government and will likely be keen to participate in the financing, he said. He estimated at least 20 banks will be needed to finance the deal .

As of 31 December 2014, ChemChina had a Net Debt/ EBITDA of 6.72x based on a reported net debt of CNY 116.72bn (USD 17.73bn) and EBITDA of CNY 17.38bn (USD 2.64bn), according to the prospectus for the CNY 2.5bn medium term notes released in Nov 2015.

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Since then the Chinese SOE has taken on a reported USD 7.3bn in bridge financing from JPMorgan for the (USD 7.9bn) acquisition of Italy’s Pirelli. ChemChina also took part in an agreed consortium bid to buy German machinery company, Krauss Maffee, for USD 1bn and bought a 12% stake in Swiss energy trader, Mercuria, for an undisclosed sum.

As of 31 Dec 2014, Pirelli had net debt of EUR 980m (USD 1.07bn) and a group EBITDA (before restructuring costs) of EUR 1.17bn (USD 1.27bn).

As of 31 Dec 2015, Syngenta reported net debt of USD 2.586bn and EBITDA of USD 2.777bn.

Assuming an offer price of CHF 475 per share (CHF 480 less the CHF 5 special dividend), based on the above latest available figures and the estimated CHF 44.15bn (USD 43.4bn) equity cost of acquiring 100% of Syngenta at CHF 475 per share, the combined group would have a net debt/ebitda ratio of around 10.86x, according to Dealreporter analytics.

ChemChina has been trying to build a financing consortium for a while, according to a Europe-based banker.

The offer price implies an equity value of CHF 44.15bn (USD 43.4bn) and values Syngenta at 16.51x EV/EBITDA. At that price, ChemChina is paying away most of the synergies, the Europe-based banker argued.

But cost synergies are not really what Chinese companies are after, the first lender said. The attraction to the Chinese is market share, new markets, products and technology, he said. Reports have highlighted how the potential deal is in line with the Chinese President Xi Jinping’s attempts to maintain self-sufficiency by ramping agricultural output.

The first lender believed the SOE would likely debt finance most of the deal. ChemChina’s internal cash won’t make a dent on the deal value and is needed for subsidiary operations, he said. Chemchina had cash of USD 3.1bn as of 31 December, according to the bond prospectus. The European banker was also skeptical over the ability to partially equity finance the deal.

This deal will involve Chinese state-backed money as it is doubtful ChemChina can support this deal on its own balance sheet, a third source familiar with ChemChina said.

ChemChina declined to comment on details beyond today's official announcement of the deal. Syngenta also declined to comment.

Lending banks will be keen to back China National Chemical Corporation (ChemChina)'s estimated USD 43bn bid for Syngenta [VTX:SYNN] despite the debt burden the deal will place on the acquisitive state-owned group’s stretched balance sheet, according to bankers and a source familiar with the SOE.

The deal is being financed with a combination of debt and equity, and will be refinanced over time, one person close to the situation said. According to the person, ChemChina’s CEO said there was strong interest in the investment from both Chinese and International banks, and more information on the financing structure will be disclosed in due course.

One Hong Kong-based lender expected a deal to be largely debt funded providing the combined ChemChina/Syngenta net debt/EBITDA above 10x.But, banks will take comfort in the fact ChemChina is a state-owned enterprise backed by the Chinese government and will likely be keen to participate in the financing, he said. He estimated at least 20 banks will be needed to finance the deal .

As of 31 December 2014, ChemChina had a Net Debt/ EBITDA of 6.72x based on a reported net debt of CNY 116.72bn (USD 17.73bn) and EBITDA of CNY 17.38bn (USD 2.64bn), according to the prospectus for the CNY 2.5bn medium term notes released in Nov 2015.

Since then the Chinese SOE has taken on a reported USD 7.3bn in bridge financing from JPMorgan for the (USD 7.9bn) acquisition of Italy’s Pirelli. ChemChina also took part in an agreed consortium bid to buy German machinery company, Krauss Maffee, for USD 1bn and bought a 12% stake in Swiss energy trader, Mercuria, for an undisclosed sum.

As of 31 Dec 2014, Pirelli had net debt of EUR 980m (USD 1.07bn) and a group EBITDA (before restructuring costs) of EUR 1.17bn (USD 1.27bn).

As of 31 Dec 2015, Syngenta reported net debt of USD 2.586bn and EBITDA of USD 2.777bn.

Assuming an offer price of CHF 475 per share (CHF 480 less the CHF 5 special dividend), based on the above latest available figures and the estimated CHF 44.15bn (USD 43.4bn) equity cost of acquiring 100% of Syngenta at CHF 475 per share, the combined group would have a net debt/ebitda ratio of around 10.86x, according to Dealreporter analytics.

ChemChina has been trying to build a financing consortium for a while, according to a Europe-based banker.

The offer price implies an equity value of CHF 44.15bn (USD 43.4bn) and values Syngenta at 16.51x EV/EBITDA. At that price, ChemChina is paying away most of the synergies, the Europe-based banker argued.

But cost synergies are not really what Chinese companies are after, the first lender said. The attraction to the Chinese is market share, new markets, products and technology, he said. Reports have highlighted how the potential deal is in line with the Chinese President Xi Jinping’s attempts to maintain self-sufficiency by ramping agricultural output.

The first lender believed the SOE would likely debt finance most of the deal. ChemChina’s internal cash won’t make a dent on the deal value and is needed for subsidiary operations, he said. Chemchina had cash of USD 3.1bn as of 31 December, according to the bond prospectus. The European banker was also skeptical over the ability to partially equity finance the deal.

This deal will involve Chinese state-backed money as it is doubtful ChemChina can support this deal on its own balance sheet, a third source familiar with ChemChina said.

ChemChina declined to comment on details beyond today's official announcement of the deal. Syngenta also declined to comment.