TheChek News Flow

TPG head David Bonderman stirring up $80B bank battle

Billionaire private equity mogul David Bonderman crashed a rival’s party on Tuesday — stopping an alleged sweetheart deal in the $80 billion middle-market lending sector.

In an upset, Bonderman’s TPG Global convinced shareholders of one embattled lender to reject the sale of its management arm to Jonathan Nelson’s Providence Equity Partners — even though leading shareholder proxy service ISS recommended they OK the deal.

The management arm, TICC Management, is a highly profitable piece of the lender, pocketing hedge fund-like fees of 2 percent of assets and 20 percent of profits. With $1 billion in loans, that comes to about $20 million a year.

Bonderman, 73, blasted TICC’s officers for the “abysmal returns” they have afforded the shareholders of the lender, TICC Capital.

TPG Global’s TPG Specialty Lending has offered $7.50 a share for TICC Capital — ensuring Bonderman will get his hands on the management fees, which totaled $127 million over the past 12 years.

His firm has said it will charge fees that are a little lower than what TICC Management charges.

TICC Management works for the lender based on a short-term contract. It had a deal to sell 75 percent of itself to Providence for up to $10 million.

TICC, part of the so-called shadow banking business, operates in the little-known backwaters of the financial services world that services middle-sized business that have been left behind by banks.

Known as business development corporations (BDCs), these lenders have, in moderate numbers, come under fire for straying from their bread-and-butter business of lending to businesses.

TICC has invested in much riskier collateralized loan obligations (CLOs), which have decreased in value.

TICC buys pieces of syndicated loans, including ones to tax giant Jackson Hewitt, and invests in the equity portions of CLOs, including those managed by Ares Capital.

With many CLOs heavily invested in energy, the CLO investments have depreciated in value.

“For [the fat fees the management arm gets], you want them to add value and not just pick credits,” a BDC expert said.

“Shareholders are complaining. You are getting paid when fair market value is falling?” the the BDC expert added.

TICC shares have fallen 20 percent this year, and closed Tuesday at $5.99 — and shareholders have become angry at its management arm.

Profitable due to the fat fees paid by the BDCs, the management arms have become the focus of PE titans.

The fat fees are useful for financial firms looking, perhaps, to go public.

In the TICC battle, shareholders held a vote Tuesday to approve the Providence deal.

Partners, the lender said.

In addition to TPG Capital, a credit manager, Highland Capital Management, has made overtures to TICC, which is based in Greenwich, Conn., and run by Jonathan Cohen.

Glacier Lake Capital consultant Patrick Daugherty, speaking generally of BDCs, said, “The fees need to be brought in line and the focus needs to be changed to stressed and distressed corporate credit.”

Kazakhstan’s $55 billion sovereign-wealth fund helped pull the country through the global financial crisis and offered funding for the country’s bid to host the 2022 Winter Olympics.

But the collapse in oil prices has hit Kazakhstan and its fund, Samruk-Kazyna JSC, hard. In October, the fund borrowed $1.5 billion in its first syndicated loan to help a cash-strapped subsidiary saddled with a troubled oil-field investment.

“Our oil company lost lots of its revenues,” says the fund’s chief executive, Umirzak Shukeyev. “Currently, we are trying to adjust to the situation.”

Funds like Samruk are at a critical juncture. For years, sovereign-wealth funds—financial vehicles owned by governments—swelled in size and number, fueled by rising oil prices and leaders’ aspirations to increase economic growth, invest abroad and boost political influence. A new wave of sovereign funds came from African countries like Ghana and Angola. Asian nations joined in with funds like 1Malaysia Development Bhd., or 1MDB.

The world’s sovereign-wealth funds together have assets of $7.2 trillion, according to the Sovereign Wealth Fund Institute, which studies them. That is twice their size in 2007, and more than is managed by all the world’s hedge funds and private-equity funds combined, according to J.P. Morgan Asset Management. The number of funds tracked by the Institute of International Finance is up 44% to 79 since the end of 2007. Nearly 60% of sovereign-wealth-fund assets are in funds dependent on energy exports.

Now, some funds are shrinking or are being tapped by governments as oil revenues fall. That is forcing them to borrow or sell investments, potentially pressuring global markets just as other investors are pulling back from risk. Saudi Arabia’s central bank, which functions in some ways like a sovereign-wealth fund as it holds significant reserves that are invested widely, has sold billions in assets this year. Norway says it plans to tap its fund, the world’s largest, for the first time in 2016.

The stress from low energy prices comes at a sensitive time. At least two funds are embroiled in controversy. 1MDB, which amassed $11 billion in debt, is the subject of at least nine investigations at home and abroad. One of its main financial backers was an Abu Dhabi fund. The head of South Korea’s fund stepped down in the wake of a public outcry over his plan to invest in the Los Angeles Dodgers baseball team.

Officials at 1MDB declined to comment. Previously, they said they would cooperate with all investigations.

Uncertainty

Adnan Mazarei, deputy director of the International Monetary Fund’s Middle East and Central Asia Department, says the worry is sovereign-wealth funds will be forced to sell during a period of already turbulent markets. “A withdrawal of assets by sovereign-wealth funds against the background of liquidity concerns could lead to large price movements,” he says. “Nobody knows how much or when but the concern is there.”

Uncertainty is stoked by the fact that many of the funds don’t disclose their size, holdings or investment strategies, making it hard to gauge what risk, if any, they pose to the global financial system. While others provide clear disclosure and have good governance, sovereign-wealth funds constitute a large blind spot in the markets, analysts say.

Global financial regulators are investigating “potential vulnerabilities” of sovereign-wealth funds that could affect world markets, the Basel-based Financial Stability Board said in September. An FSB spokesman says it is too soon to comment on the analysis.

Sovereign-wealth funds are largely funded by commodity revenue and foreign-exchange reserves. Their ranks can include government pension plans and economic development funds like Malaysia’s 1MDB and Samruk, which was established in 2008 to hold Kazakhstan’s state companies with an eye to selling them off and investing the proceeds.

As emerging markets grew wealthier, many countries started sovereign-wealth funds. More than three-quarters of assets are in funds from emerging markets, with many of the biggest based in the Middle East and Asia. The latest wave comes from Africa.

“In the old days you built armies,” says Jayne Bok, head of sovereign advisory in Asia for consulting firm Towers Watson. “Now you build a sovereign-wealth fund.”

Many have kept funds in low-risk, highly liquid investments. ​ But as assets grew and global yields tumbled, some invested more in less-liquid assets. They bought real estate, took big stakes in companies and made other hard-to-trade investments.

Government investment funds have borrowed roughly $100 billion since 2007, according to figures reported to Dealogic and analyzed by The Wall Street Journal. About two-thirds of that borrowing has come from net oil exporters such as Bahrain and Kazakhstan.

Selling is picking up. Sovereign-wealth funds yanked roughly $100 billion from asset managers in the six months to Sept. 30, according to Morgan Stanley. “The countries that have accumulated these vast reserves over the last 20 years will be dipping into those reserves,” Martin Gilbert, chief executive of $430 billion Aberdeen Asset Management, told reporters in November. “It could be a difficult 2016.”

The Saudi Arabian Monetary Agency sold​close to $2 billion of European shares this year through November, according to Nasdaq. Its reserves have fallen 13% to $647 billion in the 12 months through the end of October. The agency didn’t respond to inquiries.

In South Korea, where the government tracks foreign ownership of stocks, Saudi state-owned investment funds have sold local stocks for six months straight totaling roughly 3.6 trillion won ($3.1 billion), according to people familiar with the matter and official regulatory data.

The International Monetary Fund, examining the fallout of low oil prices, said in October that a large-scale liquidation of government funds’ extensive bondholdings could drive up interest rates. “A substantial change in the path of asset accumulation by sovereign wealth funds,” it said, “will likely have a direct effect on financial markets.”

U.S. Federal Reserve economists have estimated that five-year Treasury rates would rise by about 0.40 to 0.60 percentage point if foreign official inflows into U.S. Treasurys were to decrease by $100 billion in any given month. That would push rates to their highest level since 2011.

Predicting a sovereign-fund selloff’s impact is difficult because many funds disclose almost nothing. “The problem with sovereign wealth funds is that too often they prove to be ‘black boxes’ into which funds are deposited in a non-transparent fashion,” says Sarah Chayes, a former special adviser to the chairman of the U.S. Joint Chiefs of Staff and a senior associate at the Carnegie Endowment for International Peace, where she researches corruption.

There is a push to get funds to adhere to a voluntary code of conduct known as the Santiago Principles, which calls for annual reporting, clear governance rules and effective risk management, among other things. The chairman of the International Forum of Sovereign Wealth Funds, Adrian Orr, has said he wants members to adopt the highest standards of transparency and governance.

“Not doing so bankrupts the principles, leaving them worthless for all,” Mr. Orr said in September. He also runs New Zealand’s Super Fund, which invests government money to fund future pension payments.

But Mr. Orr has little power to get funds to comply, as membership in the forum doesn’t require funds to implement the high standards he is urging. At least five of the 29 forum members don’t publish public annual reports. At least four don’t disclose their asset size.

Singapore’s GIC and the Qatar Investment Authority were named to the forum’s board in September. While both have signed up to the Santiago Principles, GIC is only partially compliant and Qatar is noncompliant, according to analysis by GeoEconomica, a Swiss political-risk advisory firm. Neither discloses how much money it manages. Qatar doesn’t publish an annual report.

“We do not report on investment specifics, to safeguard our competitive edge,” says a GIC spokeswoman. The GIC takes the Santiago Principles seriously, she says. The Qatar fund said last year it would publish an annual report, which its website says is “coming soon.” A fund spokesman declined to comment. “It is not part of IFSWF’s mandate to comment on member practices,” Mr. Orr says in an interview.

The case of 1MDB

The situations at Malaysia’s 1MDB and Abu Dhabi’s International Petroleum Investment Co., or IPIC, are examples of exploitation of weak oversight at government investment funds, says Ms. Chayes, the former U.S. special adviser.

Executives at 1MDB are selling assets to repay debt. The new management at IPIC is now trying to determine how the fund guaranteed bonds and investments by 1MDB valued at more than $7 billion, say people familiar with the matter.

IPIC and U.A.E. spokesmen declined to comment for this article.

The deals between IPIC and 1MDB began in 2009 with a public promise by Abu Dhabi to invest $1 billion in projects alongside the newly formed 1MDB. It is unclear how the commitment transformed into guarantees for 1MDB. Those include $3.5 billion of bonds, about $1.5 billion of interest on those loans over their lifetime and $2.3 billion of investments with a Cayman Islands-registered fund, according to company documents and people familiar with the deals.

The transactions occurred under IPIC’s managing director, Khadem Al Qubaisi, who took over in 2007. Under Mr. Al Qubaisi, the fund’s net debt grew almost tenfold to $24.6 billion.

Executives now digging into IPIC’s operations also found a subsidiary of the fund bought shares of a publicly listed construction company from an associate of Mr. Al Qubaisi’s and bought large amounts of land from the private investment vehicle of the fund’s chairman, Sheikh Mansour Bin Zayed Al Nahyan, say people familiar with the matter. Sheikh Mansour didn’t respond to inquiries.

In a rare presidential decree in April, Mr. Al Qubaisi was replaced at IPIC. A London-based representative of Mr. Al Qubaisi says he declined to comment. The new managing director, Suhail Al Mazrouei—he is also the country’s energy minister—ordered a review of the company with a view to returning to its original mandate of investing in oil and gas projects. Mr. Al Mazrouei didn’t respond to inquiries.

Long-running concerns about sovereign-wealth funds have centered on the idea that they don’t behave like traditional institutional investors, which typically invest only to produce returns. Sovereign funds often answer to top government officials and may invest not only to produce returns but also to further government initiatives, usually focused on economic development or diplomacy.

Those concerns peaked before the financial crisis when the funds were seen as “agents of the state executing ‘checkbook’ foreign policy strategies,” said the sovereign-wealth forum’s Mr. Orr in September.

But after the financial crisis hit, political concerns faded, says Jukka Pihlman, head of central banks and sovereign-wealth funds at Standard Chartered PLC. “Many countries just wanted the capital,” Mr. Pihlman says. “The tables turned quite significantly.”

Other countries’ sovereign-wealth funds quickly came to the aid of the Russian Direct Investment Fund, or RDIF, when U.S. and European sanctions restricted business between the fund and Western companies. The fund is on the U.S. sanctions list drawn up to punish Moscow for annexing Crimea last year.

In June, Russian President Vladimir Putin hosted his annual dinner for foreign investors in a seaside palace built for Peter the Great. Around the table were officials of sovereign-wealth funds who together manage trillions in assets, according to RDIF, which organized the gathering. Representatives of funds from China, Abu Dhabi, Qatar, Bahrain, South Korea, Iran, France and Italy attended the conference during which the meeting was held, according to a Russian-language statement on the Kremlin’s website.

Korea Investment Corp., the Abu Dhabi Investment Authority and Bahrain’s Mumtalakat fund confirmed their officials attended the conference. The Qatari and Kuwaiti funds declined to comment. The Chinese, Italian and French funds didn’t respond to inquiries.

One important new guest: Prince Mohammed bin Salman, the 30-year-old Saudi Arabian defense minister and second in line to the throne. He agreed the next month to invest $10 billion in Russia. A few months later, a Kuwaiti sovereign fund pledged $500 million, raising its total commitment to $1 billion.

“The headline may seem political, but, in fact, it is not a blank check,” a Saudi official says, adding that Russian investments offer among the highest yields in the world. Kuwait Investment Authority executive director Ahmad Bastaki declined to comment.

​“For us, it’s about finding additional money to invest in Russia,” says Kirill Dmitriev, the Russian fund’s chief executive. The fund is “nonpolitical” and focused on returns, he says. “Those sanctions really do not affect our work much.” ​​

The forecasts, contained in the group’s World Oil Outlook, echo recent comments by senior officials in Saudi Arabia who have emphasised the dangers of future supply shortages as the oil industry has slashed investment in new projects in the face of sharply lower prices, writes Neil Hume, Commodities Editor.

They emphasise the delicate balancing act facing Opec and its most powerful member as they persist with a strategy that puts long-term exports and market share over short-term financial gain.

“If the right signals are not forthcoming, there is a possibility that the market could find that there is not enough new capacity and infrastructure in place to meet future rising demand levels, and this would obviously have a knock-on impact on prices,” said Abdalla El-Badri, secretary-general of Opec, said in the report.

Oil prices has halved to less than $40 since Opec decided a year ago that it would no longer prop up the oil market, with Saudi Arabia saying it was tired of cutting output to guarantee $100 a barrel for high-cost rivals.

Major oil companies and producer nations have responded to the rout in prices – Brent crude dropped to its lowest level in more than a decade on Monday, surpassing lows reached in the depths of the financial crisis – by slashing hundreds of billions of dollars of investment in new projects.

This has raised concerns that investment will not keep pace with growing oil demand, potentially leading to a supply crunch in the future. The International Energy Agency, the West’s energy watchdog, has also expressed concerns about the impact of investment cuts.

It the report, Opec states $400bn of oil related investments will be needed every year between now and 2040 to cover future demand, which it sees increasing by more than 18m barrels a day to 109.8m b/d by the end of the forecast period.

That figure is 1.3m b/d lower than in last year’s report and reflects improvements in energy efficient and carbon emission policies. But it is higher than a forecast from the IEA which sees oil demand reaching 103.5m b/d.

“It all means that investments remain huge,” said Mr El-Badri in the report, adding:

In the current market environment what this underlines is the delicate balance between prices, the cost of the marginal barrel and future supply. This balance is essential in making sure the necessary future investments are made.

Over the medium term, the report sees demand increasing by 1m b/d, from 92.8m b/d in 2015 to 97.4m b/d by 2020.

The report assumesoil prices will stay below $100 a barrel in the long-term but gradually recover from their current depressed levels as supply growth slows and the market rebalances. OPEC reference basket, which measures the average price of crude produced by its members, is seen rising to $70 a barrel by 2020 and $95 by 2020. That compares with $31.15 for the basket on Tuesday.

The price assumptions, which exclude the impact of inflation, are lower than last year’s World Oil Outlook when they were $95.4 and $101.6 a barrel respectively. On Wednesday morning, Brent was trading at $36.44 a barrel.

On the supply side, production from outside Opec is seen rising from 57.4m b/d this year to 61.5m b/d in 2025 before declining to 59.7m b/d by 2040. That estimate has been reduced by 2.2m b/d since last year’s publication.

Opec crude is seen rising by 10m b/d to a level of 40.7m b/d by 2040 and 9m b/d more than the cartel’s current estimated production of 31.7m b/d .

Announced an agreement to pursue acquisitions and investment opportunities by establishing an integrated entity to provide asset management services to the oil and gas industry globally. The platform will be led by Founder and Executive Chairman Deepak Munganahalli, who brings more than 20 years of global oil and gas experience to the company. He will be based in Dubai.

Over the past year China has put its mark on the world economy as never before.

Not only did the Chinese economic slowdown inflict considerable pain on energy and commodity producers. It acted as a serious restraint on growth in the rest of the developing world as well as holding back global economic growth. Equally striking was the way the Chinese stock market collapse and mismanaged devaluation in the summer caused the US Federal Reserve to postpone an interest rate rise in September.

No central bank is less prone to respond to external influences when making policy. The Fed’s unexpected sensitivity on this score was a measure of how the world has changed as a result of China’s rise. And finally China succeeded in its ambition to have the renminbi included in the International Monetary Fund’s basket of reserve currencies.

In 2016 China will once again be hugely important in determining the path of the world economy and the direction of capital flows. But this time the story will not be about a slowing economy. As recent industrial production numbers indicate, measures to stimulate the economy are having an impact. Investment is picking up in response to stronger infrastructure investment, especially from local governments, reflecting the easing of financing constraints on them. State-owned enterprises have also been investing more heavily.

This represents a return to the old investment- and export-led growth model from which Beijing was trying to escape. When confronted with a slowdown earlier this year that far exceeded their expectations Communist party officials changed course, no doubt fearing that high unemployment in older industries would lead to social unrest that could pose a threat to the party’s grip on power.

Next year will provide conclusive evidence on whether plans to rebalance the economy towards consumption and continue with financial liberalisation have gone out of the window. If they have, China will pay a higher price later on for perpetuating a hugely costly misallocation of resources.

The rest of the world also stands to pay a price. A malign external outcome of China’s unsustainable growth model is that returns in many industries have been depressed because of the Chinese contribution to global excess capacity. That is an undermentioned factor in the low levels of investment by industry in the US and much of Europe since the financial crisis.

One of the biggest questions posed by China relates to currency wars. Chinese industry has been struggling with an uncompetitive exchange rate. That problem has been exacerbated by the renminbi peg to a soaring dollar. The decision earlier this month to switch to managing the renminbi relative to a basket of currencies ostensibly helps the transition to a more market-determined exchange rate. But it also provides a smokescreen for the People’s Bank of China to bring about a depreciation of the renminbi. At the same time a sharp fall in producer prices is contributing further to the real depreciation of the currency.

An orderly depreciation might be a manageable proposition for the rest of the world, given that the advanced economies suffer from deficient demand. Cheaper imports from China would be a useful spur to increased consumption, coming on top of a decline in the oil price that has boosted consumer incomes.

A more precipitate depreciation, perhaps prompted by further resort to competitive devaluation by Japan, might be another matter, especially if it unleashes a protectionist impulse in the US in a presidential election year. The US tradeable goods sector is small in relation to the overall economy, but US exporters have considerable lobbying power on Capitol Hill. That said, the existence of global supply chains means that protectionist rhetoric may be more muted than in pre-globalisation days.

Should Chinese officials regain their appetite for financial reforms, another kind of shock may be felt outside China. As I have pointed out here before, a move to full capital account liberalisation would free the vast pool of savings in the household and corporate sectors to head for foreign markets. The temptation to diversify into investments in countries with more secure property rights and stable governance would be overwhelming. That would lead to bubbles, especially in the relatively narrow markets of the developing world, but also in the rich countries. Worse things can happen to an economy.

Noble Group, the commodity trader fighting allegations of aggressive accounting, has raised $750m from the sale of its stake in an agricultural joint venture with Cofco, China’s state-backed grain trader.

Shares in the company, which is listed in Singapore, rose as much as 5.7 per cent on Wednesday morning following the news.

The Hong Kong-based company has been scrambling to raise cash to avoid losing its investment grade credit rating, which is crucial to the profitability of its core business of moving millions of tonnes of raw materials around the world.

Noble had been given until early next year by rating agencies Moody’s and Standard & Poor’s to raise at least $500m in cash or face being cut to junk status.

“After completion of this transaction, Noble Group’s financial metrics will be well in excess of those required for an investment grade credit,” the company said in a statement on Tuesday.

However, the company will be forced to book a $546m loss on the sale of its stake in Noble Agri, which was valued on its balance sheet at $1.34bn. This will “materially” affect its profits for the year to December, the company said.

Noble Agri employs about 12,000 people in 25 countries, and includes operations ranging from oilseed crushing plants in China to sugar mills in Brazil. In May it hired Matthew Jansen of Archer Daniels Midland as its chief executive.

The business has been a drag on Noble Group’s earnings this year, which have fallen in spite of a strong performance in its North American oil business.

It operated at a loss in the nine months to September, hit by weak sugar prices and rain which affected the harvest in Brazil.

Proceeds from the sale could rise a further $200m if Noble Agri is sold or listed on a stock market by Cofco. Noble will also be released from guarantees over a $2.55bn borrowing facility.

Cofco paid $1.5bn for its 51 per cent stake in Noble Agri last year. It subsequently placed the holding, along with its stake in Dutch grains trader Nidera, into a new company with China Investment Corp, the sovereign wealth fund.

This was part of a plan to create an integrated international agricultural trader with the muscle and reach to compete with the agricultural “ABCDs” — Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus Commodities.

At an FT conference in Switzerland earlier this year, Ning Gaoning, Cofco’s chairman, laid out plans to turn the company into a publicly listed global powerhouse.

He said he wanted Cofco to be an international company, adding that he planned to expand in North America, a big surplus grain producer.

“I have said since we acquired our initial stake in Noble Agri that we have every confidence in its vision and its new leadership,” Mr Ning said.

“In terms of our expectations in the critical global agribusiness sector, I trust our decision to acquire 100 per cent speaks for itself.”

For Noble the sale brings to a close a difficult year in which its share price has fallen 61 per cent, reducing its market value to $2.1bn, because of questions over its accounting practices and its inability to generate cash consistently.

A group called Iceberg Research — which Noble claims is the work of a disgruntled former employee — alleged that the company inflated asset values and booked profits on deals long before receiving any cash from them.

Noble has defended itself against the accusations and had PwC review how it accounted for its long-term commodity deals. The auditor concluded the deals fell within international standards.

“We are delighted to have been able to enhance our liquidity significantly while also delivering on our commitments,” said Noble’s chief executive Yusuf Alireza.