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The
"Energy" Cash Flow Alarm Is Back: Chesapeake Suspends Dividends,
Stock Plunges To 12 Year Low - (www.zerohedge.com) Back
in January, the panic surrounding the energy space and specifically the
collapse in industry cash flows as a result of the collapse in oil prices,
peaked when one after another company announced they would halt dividend
payments and all other distributions to shareholders to conserve cash,
culminating with the dramatic announcement on January 30 when one of the giants in the
space, energy major Chevron, suspended its stock buybacks. Subsequently, oil
experienced a brief oily (but dead) cat bounce, with WTI and Brent both making
it briefly into the $60 price range and have since resumed their decline with
WTI sliding back under $50 yesterday, and as a result all the attention is once
again back on energy companies. And as if to confirm just that, earlier today
one of Icahn's favorite energy names (you won't find him tweeting about this
one much thought) Chesapeake Energy, the second-largest US natural gas
producer, announced it too is now scrambling to conserve cash (in this case
$240 million per year) by suspending its $0.35/share dividend payment.
U.S. banks prepare for oil and gas company
loans to worsen - (www.reuters.com) U.S. banks are setting aside more money to
cover bad loans to energy companies after oil prices plunged over the last
year, raising the possibility that deteriorating loans could start to weigh on
their earnings, some analysts said. Loan credit quality for U.S. banks has been
improving since the financial crisis. In the first quarter, 2.49 percent of
loans on banks' books were delinquent, the lowest level since the fourth
quarter of 2007, according to the Federal Reserve, which hasn't released second
quarter data. The rate peaked at 7.4 percent in the first quarter of 2010. Weakness
among energy company loans could be a sign that overall credit quality among
U.S. banks has little room to improve, analysts said. Executives from
both JPMorgan Chase & Co. and Wells Fargo & Co. told investors
last week, when posting earnings, that they were increasingly concerned about
loans to oil and gas companies.
Toshiba Executives Resign Over $1.2 Billion
Accounting Scandal - (www.bloomberg.com) Toshiba Corp. President Hisao Tanaka and his
two predecessors quit after investigators found that the Japanese conglomerate
inflated earnings by at least $1.2 billion since the global financial crisis. Along
with Tanaka, Vice Chairman Norio Sasaki and adviser Atsutoshi Nishida also
resigned to take responsibility for accounting irregularities that occurred
under their watch. The Tokyo-based company said Tuesday it will correct
earnings by at least 152 billion yen, based on the results of an independent investigation
of its books stretching back about six years. “For the company to rebuild there
needs to be a renewal of the management structure,” Tanaka, a 42-year veteran,
said during a briefing in which he, Chairman Masashi Muromachi and Vice
President Keizo Maeda all bowed in apology.
Wall Street Lenders Growing Impatient With U.S.
Shale Revolution - (www.bloomberg.com) Halcon Resources Corp. almost ran into trouble
with its banks in June 2013. And again in March 2014. And in February 2015. Each
time, the shale driller came close to violating debt limits set by its lenders,
endangering a credit line that provided as much as $1.05 billion in much-needed
cash. Each time, Halcon’s banks, led by JPMorgan Chase & Co. and Wells
Fargo & Co., loosened their restrictions, allowing Halcon to keep
borrowing. That kind of patience may be coming to an end. Bank regulators have
issued warningson
the risks involved in lending to U.S. drillers, threatening a cash crunch in an
industry that’s more dependent than ever on other people’s money. Wall Street
has been one of the biggest allies of the shale revolution, bankrolling
thousands of wells from Texas to North Dakota. The question is how that will
change with oil prices down by half since last year to about $50.64 a barrel. “Lenders
in general are increasing pressure on oil companies either to raise more equity
or do some sort of transaction to pay down their credit lines and free up extra
cash,” said Jimmy Vallee, a partner in the energy mergers and acquisitions
practice at law firm Paul Hastings LLP in Houston.
Commodity Rout Extends Toward 13-Year Low as
Gold Shunned on Fed - (www.bloomberg.com) The
rout in commodities deepened with prices touching the lowest since 2002 as the
prospect of higher U.S. interest rates sent gold tumbling. Raw materials are
losing favor with investors as the dollar gains amid signals from Federal
Reserve Chair Janet Yellen that the central bank may raise rates this year on
the back of an improving U.S. economy. Higher borrowing costs curb the
attractiveness of commodities such as gold, which doesn’t pay interest or give
returns like assets including bonds and equities. The Bloomberg Commodity Index
dropped as much as 1.4 percent, falling for a fifth day in the longest stretch
of declines since March. Gold futures sank to the weakest in more than five
years while industrial metals, grains, Brent crude and U.S. natural gas also
slid as a measure of the dollar climbed to the highest since April 13.
Uber
just threw down the gauntlet - (www.businessinsider.com) De Blasio and the city council have proposed a
freeze on growth for for-hire vehicle companies, including Uber and Lyft. The
city is conducting a study about congestion, traffic, and pollution, which it
says Uber may be contributing to. If it were to become a law, the measure could
stunt Uber's growth in New York. This could significantly hurt the company as
New York is one of the company's largest and most mature markets and the
company is generating hundreds of millions of dollars of revenue there. Under the proposed bill, for-hire
vehicle companies that have bases with 500 cars or more — which includes Uber — would only be able to increase their number of vehicles by 1%
every year.
For Uber, this would mean adding just 201 new drivers for the next year. In a
city where Uber says it's adding 25,000 new users every week, it's easy to see
how this could affect Uber.
Puerto Rico Says Services Come Before Agency
Debt Payment - (www.bloomberg.com) Puerto
Rico’s budget director ratcheted up the risk of a default on some agency
securities, saying cash from the commonwealth’s operating budget won’t be
redirected to make debt payments due next month. The comments from Luis Cruz,
director of the Office of Management and Budget, come as Standard & Poor’s
slashed its rating on the Public Finance Corp.’s bonds to CC from CCC-, calling
an Aug. 1 default on the securities a “virtual certainty.” Puerto Rico said
last week the agency failed to transfer $36.3 million to a trustee to cover the
Aug. 1 debt payment because the legislature didn’t appropriate the funds.
Governor Alejandro Garcia Padilla last month directed island officials to
create a debt-restructuring plan by Aug. 30, saying the commonwealth can’t sustain
its $72 billion debt burden. “We all know the difficult situation we are facing
in terms of cash flow,” Cruz said during a press conference Monday in San Juan.
“And we have to decide how we handle that cash flow and our priority is to
provide services to citizens: health, safety, education.”
Uber's
nightmare scenario: Here's what a huge, expensive pain it would be to turn
thousands of drivers into employees - (www.businessinsider.com) Last month, the California Labor
Commission made a ruling against Uber that could have big implications for the
$50 billion ride-hailing company. A San Francisco driver, Barbara Ann Berwick,
filed a federal class-action claim against Uber saying she should be considered
an Uber employee, not a contract worker. The California Labor Commission
agreed with Berwick because it deemed Uber drivers are "involved in every
aspect of the operation." Uber argues that the class-action part of the suit should be dropped and is appealing the
ruling. But if Uber doesn't get its way, the lawsuit could seriously impact
Uber's business model. In a worst-case scenario for Uber, it would have to
reclassify all of its California drivers as W-2 employees, as opposed to
independent contractors, which would be expensive.
Puerto Rico on the Brink Owes Investors $5
Billion in Next Year - (www.bloomberg.com) Puerto
Rico faces $5.4 billion of bond payments over the next 12 months, showing the
pressure on the Caribbean island as it moves closer toward defaulting on its
debt. Puerto Rico and its agencies are on the hook for $635 million in August,
the largest monthly bill for the rest of 2015, JPMorgan Chase & Co. said in
a July 17 report, citing data from Bloomberg and Standard & Poor’s. That
includes a $36.3 million payment due Aug. 1 from the Public Finance Corp., which
may not be made because the legislature failed to appropriate the funds. The
schedule illustrates the costs ahead for the cash-strapped commonwealth, where
Governor Alejandro Garcia Padilla is pushing to restructure a $72 billion debt
load he says the island can’t afford. The payments approach $1 billion in
January and about $2 billion in July 2016, JPMorgan said. Puerto Rico has a $9.8 billion budget
for the year through next June. “If we use dollars to make debt payments, we
may not have the cash to pay for government services,” Luis Cruz, the
commonwealth’s budget director, told reporters Monday in San Juan. He said
officials are looking at “all options” for honoring its obligations.
Commodities
crash could turn Australia into a new Greece – (www.telegraph.co.uk) The
commodities boom made Australia the lucky country but rising debt and a slump
in Chinese demand for resources signal tough times ahead Down Under. Last month
Gina Rinehart, Australia’s richest woman and matriarch of Perth’s Hancock
mining dynasty delivered an unwelcome shock to her workers in Western
Australia: accept a possible 10pc pay cut or face the risk of future
redundancies. Ms Rinehart, whose family have accumulated vast wealth from iron
ore mining, has seen her fortune dwindle since commodity prices began their
inexorable slide last year. The Australian mining mogul has seen her estimated
wealth collapse to around $11bn (£7bn) from a fortune that was thought to be
worth around $30bn just three years ago. This colossal collapse in wealth is
symptomatic of the wider economic problem now facing Australia, which for years has been known as the lucky
country due to its preponderance in natural resources such as iron ore, coal
and gold. During the boom years of the so-called commodities “super cycle” when
China couldn’t buy enough of everything that Australia dug out of the ground,
the country’s economy resembled oil-rich Saudi Arabia.
Greek Banks to Open Monday as Tsipras Prepares
for Another Vote - (www.bloomberg.com) Greek
banks will reopen for basic services on Monday, three weeks after they were
shut to prevent their collapse, as Prime Minister Alexis Tsipras prepares for a
second parliamentary vote crucial to securing a bailout. Greeks will regain
banking services including the ability to deposit checks and access safe deposit
boxes, the government said in a decree yesterday. Although customers will
continue to face restrictions on cash withdrawals, the daily limit of 60 euros
($65) will be replaced by a cumulative maximum of 420 euros a week. The Athens
Stock Exchange, also closed during the month-long confrontation between Greece
and its creditors, will stay shut on Monday, as “further regulation is needed,”
a spokeswoman for the bourse said in a text message.
Pension
Funds Burn Cities as $1 Trillion Shortfall Set to Grow - (www.bloomberg.com) The
cost to American cities for their cash-strapped pension funds is starting to
look a lot worse, and it’s not because the stock-market rally may be losing
steam. Houston was warned by Moody’s Investors Service this month that it may
be downgraded because of mounting retirement bills, the latest municipality put
on notice as the company ignores bookkeeping gimmicks that let cities mask the
size of their debt for years. The approach foreshadows accounting rules for
even top-rated issuers that are poised to cause pension shortfalls to swell as
new financial reports are released. “If you’re AAA or AA rated and you’ve got
significant and visible unfunded pension obligations, you’ve only got one
direction to go in terms of rating, and that’s potentially down,” said Jeff
Lipton, head of municipal research in New York at Oppenheimer & Co. “It’s
the presentation on the balance sheet that is now going to drive urgency.”
Caving
to Government Pressure, Visa and MasterCard Shut Down Payments to Backpage.com - (www.infowars.com) Visa and MasterCard confirmed that they have cut off payment services
for Backpage.com, an online platform for people to advertise goods and services.
This was in response to public pressure from Cook County Sheriff Tom Dart, who
wrote to executives at both of the payment processors urging them to cut off
transactions to Backpage’s adult services. The two companies responded by
quickly shutting down payments for the entire site. Backpage hasn’t violated
the law, and so Sheriff Dart can’t use the law to take down the website.
Instead he’s using a tactic we’ve seen before, getting major financial services companies to
put a chokehold on controversial online content producers like WikiLeaks
and independent book publisher Smashwords. We don’t need Visa and MasterCard to play
nanny for online speech. Payment processors and banks shouldn’t be in the
position of deciding what type of online content is criminal or enforcing
morality for the rest of society. For one thing, their businesses haven’t been
designed to analyze the legal and societal issues at play in various forms of
online expression. Second, these businesses will almost always err on the side
of shutting down controversial speech—thereby eliminating a nuisance or public
affairs problem—rather than taking a principled stance in support of unpopular
speech. That’s why courts, not companies, should determine what type of speech
is legal on the Internet.
China’s
hunt for short-sellers tests legal boundaries - (www.ft.com) In
the wake of the Chinese stock market’s dramatic fall early this month, police
and securities regulators announced they had launched an investigation into
“malicious short selling” in the equity futures market. The announcement was
part of measures intended
to stabilise the market after it fell 30 per cent from its peak in mid-June,
but it also raised the question: What makes short selling “malicious”? The
lurid terminology, coupled with a lack of detail on what behaviour is being
targeted, has led critics to suspect that the investigation is an extralegal
attempt to intimidate would-be sellers. But lawyers say that bearish bets can
be illegal if they are based on inside information or made with the intent to
influence prices.
Record Leverage in Property Bonds Gives Moody’s
Crisis Flashback - (www.bloomberg.com) Bond
buyers have been warned, again. Moody’s Investors Service is
cautioning for at least the second time this year that investors are at risk
from potential defaults in newly issued
U.S. commercial mortgage bonds, as record real-estate prices
push a measure of leverage in the market past a pre-financial-crisis high. One
problem is that loan originators’ appraisals don’t take into account peaking
commercial property prices, Tad Philipp, the rating company’s head CMBS
analyst, wrote in a note Thursday. That echoes the way lenders measured
loan-to-value ratios in the run-up to the collapse of Lehman Brothers Holdings
Inc. in 2007. “This history has largely been repeated,” Philipp said via
e-mail. That method of underwriting masks risks, which now necessitate a
“significant cushion” to protect against potential losses in new bonds, Moody’s
said. It was joined by Fitch Ratings last month in warning that slipping
standards in new deals aren’t being matched with corresponding rises in credit
protection. Both bond graders have strongly suggested that newer rating companies are being too
lenient in their criteria.
Pension Funds Burn Cities as $1 Trillion
Shortfall Set to Grow - (www.bloomberg.com) The
cost to American cities for their cash-strapped pension funds is starting to
look a lot worse, and it’s not because the stock-market rally may be losing
steam. Houston was warned by Moody’s Investors Service this month that it may
be downgraded because of mounting retirement bills, the latest municipality put
on notice as the company ignores bookkeeping gimmicks that let cities mask the
size of their debt for years. The approach foreshadows accounting rules for
even top-rated issuers that are poised to cause pension shortfalls to swell as
new financial reports are released. “If you’re AAA or AA rated and you’ve got
significant and visible unfunded pension obligations, you’ve only got one
direction to go in terms of rating, and that’s potentially down,” said Jeff
Lipton, head of municipal research in New York at Oppenheimer & Co. “It’s
the presentation on the balance sheet that is now going to drive urgency.” Cities
that shortchanged pensions for years are under growing pressure to boost their
contributions, even after windfalls from a stock market that’s tripled since
early 2009. Janney Montgomery Scott has said growing retirement costs are “the
largest cloud overhanging” the $3.6 trillion municipal-bond market, where
investors are demanding higher yields from borrowers under the greatest strain.
China’s
biggest state banks recruited into stock market rescue - (www.ft.com) The
Shanghai Composite index lost more than a third of its value in roughly three weeks, dropping from a
seven-year high in mid-June to hit a low point on July 9. Markets have since
rebounded, recovering by 17 per cent. But the magnitude of state support casts
doubt on whether the rally is sustainable without government support. According
to the latest revelations, the big state-owned banks have lent a combined
Rmb1.3tn ($209bn) in recent weeks to the China Securities Finance Corp, for lending on to brokerages to finance their
investment in shares and to purchase mutual funds directly. The operation
echoes a move by the Hong Kong authorities in 1998 to prop up the local stock
market by buying 11 per cent of the Hang Seng, funded by drawing on foreign
currency reserves. The CSF was established in 2011 to lend to securities
brokerages to support margin lending to stock investors. Amid the tumble in
equities, however, the government has deployed CSF as a conduit for injecting
rescue funds into the stock market. The
latest reports reveal that the country’s big commercial lenders have been a
major funding source for CSF.
California
reduces lawn size for new construction - (www.dailynews.com) California
extended its drought-inspired purge of idyllic emerald lawns from new developments,
with state officials voting Wednesday to adopt more stringent water limits on
landscapes for new homes and businesses. The rules approved by the California
Water Commission would essentially eliminate grass from new office and
commercial buildings and reduce turf at new homes from a third of landscaped
area to a quarter. The rest of the landscapes can feature rocks, shrubs or low
water-using plants such as lavender and jasmine. The Department of Water
Resources estimates future residential and commercial lawns will use nearly a
third less water under the new standards. New subdivisions and homes won’t
necessarily be devoid of lawns, however. Developers of traditional-looking
landscapes can comply if the homes or businesses are hooked up to recycled water
from showers and toilets. Californians won’t have to rip out existing lawns
unless they are going through major home renovation that requires government
permits.
China Unleashes $483 Billion to Stem the Market
Rout - (www.bloomberg.com) China
has created what amounts to a state-run margin trader with $483 billion of
firepower, its latest effort to end a stock-market rout that threatens to drag
down economic growth and erode confidence in President Xi Jinping’s government.
China Securities Finance Corp. can access as much as 3 trillion yuan of
borrowed funds from sources including the central bank and commercial lenders,
according to people familiar with the matter. The money may be used to buy
shares and provide liquidity to brokerages, the people said, asking not to be
named because the information wasn’t public. While it’s unclear how much CSF
will ultimately deploy into China’s $6.6 trillion equity market, the financing
is up to 25 times bigger than the support fund started by Chinese brokerages
earlier this month. That’s probably enough to restore confidence among China’s
90 million individual investors, says Bocom International Holdings Co. The
Shanghai Composite Index jumped 3.5 percent on Friday, capping a two-week rally
that’s turned it into one of the world’s best-performing equity gauges.
