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Treasury
Considers Radical Plan to Help Puerto Rico - (www.nytimes.com) The
proposal calls for the federal government to help Puerto Rico collect and
account for local tax revenues from the island's businesses and residents,
according to people briefed on the matter who spoke on the condition of
anonymity because they were not authorized to publicly discuss the proposal. An
inability to collect all the taxes owed is widely seen as contributing to
Puerto Rico's debt crisis. The tax proceeds would be placed in a
"lockbox" overseen by the Treasury and eventually paid out by the
Treasury to the holders of the new bonds that Puerto Rico would issue in the
proposed exchange. Since the Treasury would effectively become the paying agent
for the new bonds, they would be more attractive than the bonds that creditors
now hold.'' ... [But] ... "Right now, Puerto Ricans don't even like to pay
taxes to their own government," said one person with knowledge of the
discussions. If the I.R.S. were to suddenly replace the local tax authorities
and try to gather up the money for debt service, "people would say, `Go to
hell. I'm not paying the U.S. government.' "
How Banks Funded the U.S. Oil Boom and (So Far)
Escaped the Bust - (www.bloomberg.com) When
Whiting Petroleum needed cash earlier this year as oil prices plummeted,
JPMorgan Chase, its lead lender, found investors willing to step in. The bank
helped Whiting sell $3.1 billion in stocks and bonds in March. Whiting
used almost all the money to repay the $2.9 billion it owed JPMorgan and
its 25 other lenders. The proceeds also covered the $45 million in fees
Whiting paid to get the deal done, regulatory filings show. Analysts expect
Whiting, one of the largest producers in North Dakota’s Bakken shale basin, to
spend almost $1 billion more than it earns from oil and gas this year. The
company has sold $300 million in assets, reduced the number of rigs
drilling for oil to eight from a high of 24, and announced plans to cut
spending by $1 billion next year. Eric Hagen, a Whiting spokesman, says the
company has “demonstrated that it is taking appropriate steps to manage within
the current oil price environment.” Whiting has said it will be in a position
next year to have its capital spending of $1 billion equal its cash flows with
an oil price of $50 a barrel.
'Bear
claw' will strike the market again: Yamada - (www.cnbc.com) "What we are seeing now is leadership in a
lot of depressed stocks," said Yamada. Energy,
which has been the worst-performing sector on the year, has suddenly emerged as
a winner this quarter. The sector is up nearly 13 percent since Oct. 1 and is
the best performer in the S&P 500 during that period. "While we're
rallying we're seeing deterioration in some of the [former] leaders," she
added. "One would suggest those rallies are not sustainable." For
Yamada, it's only a matter of time before the S&P 500 hits the next level
of resistance, and investors should be prepared for what could be the start of
sharp selling. "A lot of these rallies tend to bring us to a place of
complacency before the bear claw may come out again to strike," she
warned. "We are skeptical of this rally."
Corporate
America's Epic Debt Binge Leaves $119 Billion Hangover - (www.bloomberg.com) The Federal
Reserve’s historically low borrowing rate isn’t benefiting corporate America
like it used to. It’s more expensive for even the most creditworthy companies
to borrow or refinance even as the Fed has kept its benchmark at near-zero
the last seven years. Companies have loaded up on debt. They owe more in
interest than they ever have, while their ability to service what they owe, a
metric called interest coverage, is at its lowest since 2009, according to data
compiled by Bloomberg. The deterioration of balance-sheet health is
“increasingly alarming” and will only worsen if earnings growth continues to
stall amid a global economic slowdown, according to Goldman Sachs Group
Inc. credit strategists led by Lotfi Karoui. Since corporate credit
contraction can lead to recession, high debt loads will be a drag on the
economy if investors rein in lending, said Deutsche Bank AG analysts led
by Oleg Melentyev, the bank’s U.S. credit strategy chief. “The benefit of
lower yields for corporate issuers is fading,” said Eric Beinstein,
JPMorgan Chase & Co.’s head of U.S. high-grade strategy.
Walmart's
entire business model is crumbling – (www.businessinsider.com) This
week, Walmart's shares crashed after the company reported a disappointing
profit outlook. Profits will fall 6%
to 12% next year, the company said. And the retailer's situation is likely to
get worse rather than better, according to many analysts. Until now, Walmart
has been able to make huge profits by keeping worker wages low and using its
size to negotiate cheaper prices than competitors, Brian Sozzi at The Street writes. But the retail landscape is
changing, and Walmart is increasingly irrelevant. "New guidance reflects
that Walmart's competitive edge — historically largely assortment and price —
has faded relative to purveyors of extreme value (warehouse clubs, hard
discounters) or extreme convenience (dollar stores, hard discounters), as
e-commerce has neutralized the impact of selection," Goldman Sachs analyst
Matthew Fassler wrote in a note to clients.
Puerto Rico, Treasury in Talks to Restructure
Island’s Debt - (online.wsj.com) Under
plan, commonwealth would issue ‘superbond’ administered by Treasury or third
party that would help restructure $72 billion of debt. Puerto Rico and U.S.
officials are discussing the issuance of a “superbond” possibly administered by
the U.S. Treasury Department that would help restructure the
commonwealth’s $72
billion of debt, people familiar with the plan said. Under the plan, the
Treasury or a designated third party would administer an account holding at
least some of the island’s tax collections. Funds in the account would be used
to pay holders of the superbond, which would be issued to existing Puerto Rico
bondholders in exchange for outstanding debt at a negotiated ratio. Investors
would receive less debt, likely taking an effective “haircut” on the value of
their holdings, but would have higher expectations for getting repaid.
Latest Symptom of Brazil's Misery: Once-Great
IPO Market Is Dead - (www.bloomberg.com) Brazil’s
IPO market is dead. Once the hottest emerging market for initial public
offerings after China, Latin America’s biggest economy isn’t even in the top 15
anymore. The nation’s lone IPO this year -- FPC Par Corretora de Seguros
SA -- brought in just $229 million. That’s less than the amount raised in
markets like Poland or Trinidad & Tobago and it’s not even 1 percent of the
total from 2007, the very peak of Brazil’s go-go days. Three other would-be
issuers -- all of them state-backed -- have scrapped their plans to go public
in 2015. It’s a dramatic turnaround for a country that was once the place to be
for foreign investors seeking to take advantage of massive oil
discoveries, surging agricultural exports and an up-and-coming consumer base
that’s the second largest in the Americas. These days, Brazilian companies are
more likely to de-list than go public as a sweeping corruption scandal, a
crippling recession and political turmoil wipe out $290 billion in market value
this year alone.
Companies Eyeing Public Offerings Reckon With
Inhospitable Market - (www.nytimes.com) One
highly anticipated initial public offering came up short of expectations on
Wednesday while another was delayed, illustrating how challenging the market
has become for stock debutants. Other planned offerings have been delayed or
canceled outright in recent weeks. While the I.P.O. plans of the fast-growing
mobile payments company Square and the sports car maker Ferrari have generated
interest in the market, the troubled offerings raise questions about the
reception they and others prepared to go public will receive. Given its large
size, First Data, another payments company, has been seen as a bellwether for
the current I.P.O. market. The company, owned by theprivate equity firm Kohlberg
Kravis Roberts,
had been seeking to raise as much as $3.2 billion. But Wednesday evening, First
Data priced its offering at $16 a share — well below its expected price range
of $18 to $20. Also on Wednesday, the supermarket chain Albertsons decided to
delay pricing its stock sale, people briefed on the matter said.
World's Biggest Leveraged ETF Halts Orders on
Liquidity Concern - (www.bloomberg.com) The world’s largest leveraged exchange-traded fund
is getting too big for the market it was designed to track. Nomura Asset
Management Co. will halt subscription orders for its Next Funds Nikkei 225
Leveraged Index ETF and two other funds from Friday, it said in a statement on
its website. The money manager, which relies on the futures market to deliver
two times the daily return of Japan’s most famous stock index, said liquidity
isn’t deep enough to ensure it can meet that target. Surging inflows from
individual investors have made the Nikkei 225 ETF one of the biggest players in
Japan’s futures market, sparking concern among some analysts that the fund’s
trades are exacerbating price swings. Assets under management have doubled in
just five months to 734 billion yen ($6.16 billion), even as the benchmark
index fell 13 percent from this year’s peak in June.
Germany Sells Notes at Sub-Zero Yields as
Mizuho Eyes ECB Limits - (www.bloomberg.com) Germany
sold five-year government debt with a negative yield for the first time
since April amid speculation that the Bundesbank may reach its limit on some
bond purchases months before the intended completion of the European Central
Bank’s stimulus plan. Benchmark German 10-year bunds advanced along with their
euro-area peers as European stocks fell for a third day, boosting demand
for fixed-interest assets. The ECB tweaked its 1.1 trillion-euro ($1.3
trillion) quantitative-easing program last month by raising its cap on
some of the bonds it can buy to 33 percent per security from 25
percent, President Mario Draghi said on
Sept. 3. The increase was applied to those bonds not bound by collective-action
clauses, or CACs.
Illinois Will Delay Pension Payment Because of
Cash Shortage - (www.bloomberg.com) Illinois
will delay payments to its pension fund as a prolonged budget impasse causes a
cash shortage, Comptroller Leslie Geissler Munger said. The spending standoff
between Republican Governor Bruce Rauner and Democratic legislative leaders has
extended into its fourth month with no signs of ending. Munger said her office
will postpone a $560 million retirement-fund payment next month, and may make
the December contribution late. “This decision is choosing the least of a
number of bad options,” Munger told reporters in Chicago on Wednesday. “For all
intents and purposes, we are out of money now.” Munger said the pension systems
will be paid in full by the end of the fiscal year in June. The state still is
making bond payments, and retirees are receiving checks, she said.
Obama
Administration Hits Back at Student Debtors Seeking Relief - (www.bloomberg.com) On a day when Democratic presidential
candidates sparred in a national debate over who would do more to help indebted
students, the U.S. government launched a new attack on student debtors seeking
loan relief. On Tuesday, the Department of Education intervened in the case of Robert Murphy, an unemployed 65-year-old who has waged a
three-year legal battle to erase his student loans in bankruptcy. Unlike
almost every single form of consumer debt, student loans can be erased only in
very rare circumstances. Murphy’s case, which is currently being heard in a
federal court in Boston, could make things a little easier for certain
borrowers. A win for Murphy would relieve him of $246,500 in debt and could
loosen the standard used to determine how desperate someone needs to be to
qualify for relief. The court asked the Education Department to weigh in on the
matter. In a document submitted to the court on Tuesday, government
lawyers urged the federal judges not to cede any ground to borrowers who
say they are in dire financial straits. Doing so would imperil “the fiscal
stability of the loan program” that has existed for half a century. The
Department of Education did not immediately respond to requests for
comment.
The Next China Default Could Be Days Away as
Steel Firms Suffer - (www.bloomberg.com) Another week, another Chinese debt guessing
game. This time it’s the steel industry’s turn, as investors wonder if a
potential bond default by Sinosteel Co. is an omen of things to come amid
slowing demand for the metal used in everything from cars to construction. The
state-owned steel trader, whose parent warned of financial stress last year,
may have to honor 2 billion yuan ($315 million) of principal next Tuesday
when bondholders can exercise an option forcing the notes’ redemption two years
before they mature. If that should happen, China Merchants Securities Co.
thinks the firm will struggle to repay. A default would be the first by a
Chinese steel company in the local bond market, which has had five missed
payments this year, according to China International Capital
Corp. Premier Li Keqiang is allowing more defaults to weed out the weakest
firms as he seeks to rebalance a slowing economy. Steel issuers’ revenue
fell about 20 percent in the first half from a year earlier and over half of
the firms suffered losses, according to China Investment Securities Co.
Goldman Said Struggling to Sell Concordia Debt
Amid Pharma Rout - (www.bloomberg.com)
Goldman Sachs Group Inc. is facing an uphill battle in selling almost
$2.8 billion of debt for Concordia Healthcare Corp. amid a drug-pricing
controversy in the pharmaceutical industry, according to people with knowledge
of the matter. The Canadian company is trying to finance the purchase of drugmaker Amdipharm
Mercury Ltd. Underwriters led by Goldman Sachs are finding tepid demand for a
$1.1 billion term loan and a 500 million-pound ($762 million) loan
they are marketing to back the takeover, said the people, who asked not to be
identified because the information isn’t public. They also plan to issue as
much as $950 million of bonds. Concordia, whose banks have committed to
the financing, intends to complete the acquisition
next week. Marija Mandic, a Concordia spokeswoman and Michael DuVally, a
spokesman for Goldman Sachs, declined to comment.
Oil Sands Boom Dries Up in Alberta, Taking
Thousands of Jobs With it - (www.nytimes.com) At
a camp for oil workers here, a collection of 16
three-story buildings that once housed 2,000 workers sits empty. A parking lot
at a neighboring camp is now dotted with abandoned cars. Withoil prices falling precipitously,
capital-intensive projects rooted in the heavy crude mined from Alberta’s oil sands are losing money, contributing to the
loss of about 35,000 energy industry jobs across the province. Yet Alberta
Highway 63, the major artery connecting Northern Alberta’s oil sands with the rest of the country, still
buzzes with traffic. Tractor-trailers hauling loads that resemble rolling
petrochemical plants parade past fleets of buses used to shuttle workers. Most
vehicles carry “buggy whips” — bright orange pennants attached to tall spring-loaded
wands — to help prevent them from being run over by the 1.6-million-pound dump
trucks used in the oil sands mines. Despite a severe economic downturn in a
region whose growth once seemed limitless, many energy companies have too much
invested in the oil sands to slow down or turn off the taps. In addition to the
continued operation of existing plants, construction persists on projects that
began before the price fell, largely because billions of dollars have already
been spent on them. Oil sands projects are based on 40-year investment time
frames, so their owners are being forced to wait out slumps.
Fed officials seem ready to deploy negative
rates in next crisis - (www.marketwatch.com) Federal Reserve officials now seem open to
deploying negative interest rates to combat the next serious recession even
though they rejected that option during the darkest days of the financial
crisis in 2009 and 2010. “Some of the experiences [in Europe] suggest maybe can
we use negative interest rates and the costs aren’t as great as you
anticipate,” said William Dudley, the president of the New York Fed, in an
interview on CNBC on Friday. The Fed under former chairman Ben Bernanke
considered using negative rates during the financial crisis, but rejected the
idea. “We decided — even during the period where the economy was doing the
poorest and we were pretty far from our objectives — not to move to negative
interest rates because of some concern that the costs might outweigh the
benefits,” said Dudley.
Investment firm Fortress to shutter its macro
hedge fund - (www.reuters.com) Oct
12 Fortress Investment Group is planning to close its global macro hedge fund
after suffering heavy losses and Michael Novogratz, the fund's portfolio
manager, is expected to leave the hedge fund and private equity company, two
people familiar with the matter said on Monday. The news comes just three
months after Fortress reshuffled the senior ranks at its macro fund, making
Novogratz, 50, the sole chief investment officer. The Fortress fund is the
latest in a series of macro hedge funds - which bet on interest rates, currencies, commodities, fixed income and stocks -
to shut down lately. Bain Capital and Armored Wolf also announced last week
that they would be returning outside capital. Fortress' stock price fell 5.3 percent
to $5.15 in after-hours trading on the news.
If You're Young, The Job Outlook Is Grim No
Matter Where You Live - (www.bloomberg.com) The World Bank has
an unsettling message for young people around the globe: Whether you're
male or female, live in Tunisia or the U.S., you will struggle to find a
job. Across regions and continents, people 15 to 29 years old are at least
twice as likely as adults to be unemployed. The world will have to create 600
million jobs over the next 10 years, or 5 million a month, just to prevent the
situation from getting worse, the Washington-based lender said in a report it
released Tuesday with coalition partners such as the International Labor
Organization. The youngest workers have been hit hardest by the financial
crisis and the global recession of the last decade because they often held
the temporary jobs, which offer less protection. The youth
unemployment rate is projected to be 13.1 percent in 2015, compared with 4.5
percent for adults, according to the ILO.
Renewable Energy Financing Hits a Snag - (www.nytimes.com) Only
a few months ago, it seemed that the renewable energy sector could do little
wrong: Stock prices were soaring and money was pouring in as investors flocked
to get in on the action. That is no longer the case. Low oil and gas prices
have roiled the energy markets, and the specter of rising interest rates has
rattled investors’ confidence in the industry’s returns. Although energy and
financial experts say that the basics of the business remain sound, the lofty
stock prices have tumbled, leading renewable energy companies to scramble for
new approaches to their businesses. Nowhere has the retrenchment been more
acute than in a newfangled financing mechanism called a yieldco. Yieldcos,
public companies conceived by renewable energy companies as a way to raise
cheaper capital for project development, have attracted billions in new
investments. The yieldcos buy and operate power plants, mainly those that their
parent companies develop. The yieldcos then collect the contracted electricity
fees and pay the bulk of them out as dividends. With investors hungry for
stable returns, energy yieldcos were greeted with enthusiasm through initial
public offerings of their stocks over the last year and a half.
Bond predators humbled by distressed bets - (www.ft.com) The cleverest predators of the bond market have
suffered a humbling this year, after a heap of high profile bets have gone
awry. So-called distressed debt funds seek lucrative opportunities in
parts of the credit market where many other investors fear to tread, snapping
up the bonds or loans of borrowers either nearing or who have filed for
bankruptcy. Sometimes, the bet is that a company only needs more time and money
to get on an even keel or the distressed debt fund steps in and takes it over
in a restructuring. Usually, it is simply that the price of a company’s debts
have been pushed below their fair value — based on the expected recovery value
of assets — by panicky traditional investors, who flee at the slightest whiff
of danger. This somewhat dangerous way to make money is the domain of some of
the most respected money managers in the finance industry. But an unhappy
confluence of market-wide challenges and idiosyncratic issues has proven
exceptionally painful this year. “It’s been humbling for most folks,” says
Edwin Tai, a distressed debt portfolio manager at Newfleet Asset Management.
“Seven years of easy money has made even the most disciplined investors stretch
a little.”
Market turmoil taking toll on once-invincible
IPO market - (www.cnbc.com) The
IPO market is painting a cold-blooded picture of the toll this summer's market
turmoil has taken on innovation and growth: The number of IPOs this year could
drop by as many as 20 below what was expected as recently as last month. The
market is likely to see as few as 180 initial public offerings in the U.S. by
the end of the year, down from an estimate of 200 in September and 275 deals
last year, said Kathleen Smith, president of Renaissance Capital, a research
and investment firm focused on IPOs. If the pace holds, it would represent a 35
percent decline from last year's deal flow. The toll has been even tougher for
technology companies: Only 17 tech companies have gone public this year,
Renaissance analyst Nick Einhorn said. Digicel, the cellphone provider serving
the Caribbean, withdrew its IPO last week, one of 65 deals canceled this year.
That's the most since 2012.
China Sausage Maker Says May Miss Bond Payment
as Defaults Mount - (www.bloomberg.com) A
Chinese sausage maker said it’s not sure if it can repay a bond after its
director was put under house arrest, the latest case in China mixing
corporate governance and debt problems. Based in the eastern province of
Jiangsu, Nanjing Yurun Foods Co. is suffering cash shortages and great
risks in its finances and operations, it said in a statement posted on the
Chinamoney website. The company, which sold 1.3 billion yuan ($206
million) ofbonds at a yield of 5.49 percent in 2012, must repay 1.37 billion
yuan in principal and interest due Oct. 18, according to the statement. As
that’s a Sunday, the effective due date is the following day, it says. Investors are
growing alarmed as slowing economic growth and a fight against corruption
compound strains in China’s 42.2 trillion yuan bond market. There have been
four defaults this year, including one by China National Erzhong Group Co.,
according to China International Capital Corp. Kaisa Group Holdings Ltd. became
the first Chinese developer to renege on a debt obligation in the offshore bond
market in April after founder Kwok Ying Shing resigned amid a corruption probe.
Petrobras Isn't Only State-Run Company Unloved
by Bond Traders - (www.bloomberg.com) State-run
companies are realizing government backing isn’t what it used to be. Tumbling
commodities, a corruption scandal ensnaring Petroleo Brasileiro SA and
slowing global growth are sapping demand for so-called quasi-sovereign debt
across emerging markets, with state-backed companies in Brazil, South Africa,
Colombia and Mexico faring the worst. Investors were demanding 1.09 percentage
points more than sovereign debt to own the bonds of 200 state-run issuers this
month, up from 0.63 percent in December, according to Barclays Plc, whose indexes
include $556 billion in quasi-sovereigns. The debt from state-backed oil
producers, utilities and banks across emerging markets have been among the
hardest hit securities in the recent global selloff of higher-yielding
securities. It’s a dramatic shift for many of the bonds, which are seen as less
risky than those from similar companies without state sponsorship because of an
implicit government guarantee. Faced with mounting losses, investors have
started to question how firm the sovereign support really is, according to Bank
of Nova Scotia.
