In Case You Missed It: Business News Round-Up

Contributed by Beth Collinge of CTG – a division of ILX Group plc.

This week’s financial news was dominated by the following Europe’s debt crisis entering a new phase when EU finance ministers agreed an €85bn bail-out for Ireland and the outline of a permanent mechanism to deal with future debt crises; ECB bond buying steadying the euro markets; and mixed US data dampening recovery hopes.

Economic Backdrop

At the beginning of the week, Eurozone ministers announced plans to replace the current €440bn rescue fund, the European Financial Stability Facility (EFSF), which was agreed after the Greek debt crisis, with a permanent European Stability Mechanism (ESM). The ESM will be similar to the EFSF, except that private creditors could be involved in future debt relief or restructuring. Eurozone bonds issued after June 2013 will contain “collective action clauses”, which will enable a majority of creditors to pass legally binding decisions to change terms of payment, such as an extension of the maturity of bonds and “haircuts”, or discounts, on the price paid. The mechanism distinguishes a “solvency” crisis from a “liquidity” one, with bondholders in insolvent countries expected to share in the losses.
At the same time the EU agreed the Irish bail-out, using the €750bn emergency funding system established after the Greek debt crisis in May. The Irish package totals €85bn, to which the IMF will contribute €22.5bn, Ireland will contribute €17.5bn and Europe will contribute €45bn. The latter will come from both the European Financial Stability Mechanism, a fund overseen by the commission and backed by the EU budget, and from the European Financial Stability Facility, backed by the 16 members of the eurozone. Bilateral loans have been promised by Sweden, Denmark and the UK. The UK will provide €3.84bn in bilateral loans, and will also contribute €3.1bn to the EFSM money, since British banks, particularly RBS, which is now largely state-owned, have very significant exposure to Ireland.
The €85bn will be split: €50bn will provide funding for the Irish state and €35bn will go into the banking system. The initial capital injection into the banks will be €8bn, most of which will be divided up between the two largest banks: Allied Irish Banks and Bank of Ireland. They will also have access to €2bn of funds that will be used for loan portfolio protection, taking the total upfront support to €10bn. The banks will have a further €25bn of contingent capital that they can use to cover future losses on loans, to ensure their core tier one capital ratio remains above 10.5%.
The European Central Bank (ECB) left its benchmark interest rate unchanged at its regular policy meeting, as expected, and announced an extension of its full allotment of refinancing facilities until April next year. However, the central bank stopped short of announcing a major increase in its programme of unsterilised purchases of eurozone government bonds, as many in the markets had hoped for.
Eurozone retail sales rose by 0.5% in October compared to the previous month. The highest monthly increase was logged in Germany, up 2.3%, with the highest annual improvement among all European Union states coming in Poland, which jumped by 12.8%.
Unemployment across the eurozone crept up to 10.1% in October, according to Eurostat, as inflation held firm at 1.9% in November. The rise in the unemployment rate reflected an estimated 80,000 more people out of work in October. The highest rate, 20.7%, was seen in Spain, which the markets fear may soon need external financial assistance.
Spain announced a number of measures to restore confidence in its solvency: it said it is on track to cut the budget deficit from 11.1% of gross domestic product in 2009 to 9.3% this year and 6% in 2011. Spain has raised tobacco tax, reduced wind power subsidies and brought forward pension reform. It will cut its new sovereign debt issuance by about a third next year compared with its original plans, and will privatise parts of the state lottery system and the airports authority.
In the US the jobless rate rose to 9.8%, the highest since April, as only 39,000 jobs were added in November, far worse than forecast, and not fast enough to keep up with population growth. Though private sector employment rose by 50,000, there was a drop of 28,000 in the retail sector, and an 11,000 fall in government jobs. Average hourly earnings and the average work week – both important indicators of future hiring – were flat compared with October. Although the population continues to grow, the percentage of adult Americans with jobs fell to 58.2%, compared with pre-recession levels of about 63%. Payroll data are important because they give an up-to-date reading on what is happening in the labour market. The number of Americans with jobs and how much they are paid is a guide to how much they will consume, which, in turn, is an indication of how much the economy will grow. Orders placed with U.S. factories fell in October for the first time in four months, as demand for durable goods also slowed.
Growth in UK service sector activity fell slightly in November, indicating a slowdown in overall fourth-quarter economic output and hence no change to monetary policy in the near future. Overall, the survey suggests the services sector is not expanding as quickly as the manufacturing sector, where activity picked up at its fastest pace in 16 years in November due in part to strong exports.
Oil prices rose to their highest in more than two years as a result of very cold weather increasing demand, as consumers and electricity producers consume more oil. There is also increased demand in China, due to residents using diesel to generate power, in an unintended consequence of efforts to meet national energy and environmental targets.
Commodity prices were higher across the board: copper neared record levels, and during the week gold rose above $1,400 an ounce, close to November’s nominal record high of $1,424.10.

Mergers and Acquisitions

BP disposed of its stake in an Argentine oil company for $7.1 billion, to help raise its target of $30 billion to help meet its financial obligations resulting from the spill.
Gazprom and Royal Dutch Shell signed an agreement “to pursue broader co-operation”, such as giving Russia’s state-backed gas company access to Shell’s upstream assets outside Russia. The companies have worked together in recent years but in 2006 were involved in a dispute over the Sakhalin 2 liquefied-gas project in Russia’s far east.
Fitch put its rating for Del Monte on negative watch after the company, which produces food for pets as well as humans, agreed to a $4 billion buy-out from an investor group led by Kohlberg Kravis Roberts. The ratings agency is worried that the deal will increase Del Monte’s debt.

Retail

Wal-Mart the world’s largest retailer by sales, offered 16.5 billion rand ($2.3 billion) for a 51% stake in Massmart, the South African retailer.
Wal-mart is also increasing its effort to move into China, using the compact store model which has worked well for it in Latin America. Wal-mart already has 300 hypermarket stores in China, Carrefour has 170 hypermarkets, and Tesco has 58.
Premier Foods, maker of Hovis bread and Branston pickle, has confirmed it is in advanced talks with bidders for its Quorn meat-free business. Any deal would have to deliver shareholder value and speed up the reduction of Premier’s net debt to EBITDA ratio as it continues to struggle to reduce its debt pile and pension burden.

Credit

The European Central Bank launched its most aggressive intervention in government bond markets for seven months buying Portuguese and Irish bonds in €100m tranches – four times bigger than previously.
The premium demanded by investors to hold Italian rather than German debt reached the highest since the introduction of the euro. Italy, which has outstanding government debt of €1,800bn and is Europe’s biggest bond borrower, is expected to issue about €340bn bonds next year. According to analysis of the most recent Bank for International Settlements data on overseas loan exposures, Irish banks together are the fifth-largest lender in the world to Italy, with total outstanding credit of $40.9bn. The data highlight concerns that the interrelationship between the troubled nations of Europe is more deep-seated than many have realised, suggesting that the risk of contagion is high.
Belgium’s 10-year yield reached the highest level in nine months.
Next month will be a landmark moment for Europe’s debt markets when the eurozone issues its first bond as a group of nations. The European Financial Stability Facility (EFSF), the rescue fund backed by eurozone member states, will raise €5bn to €8bn in top-rated triple-A bonds to go towards the €85bn bail-out of Ireland. Many investors now expect Portugal will follow Ireland, needing an estimated €10bn from the EFSF with Spain also possibly needing emergency money – although the €440bn the fund has at its disposal would not be enough to include Madrid. The first bond is expected to be a syndicated issue of between three to 10-years in maturity.
American International Group returned to the bond market for the first time since its bail-out, raising $2 billion.

Financial Institutions

Bank of America shares fell last week amid rumours that it will be the next target of Julian Assange’s Wikileaks website. Wikileaks struggled to stay online Friday as corporations and governments moved to cut its access to the Internet. Legal pressure increased on the site’s founder, Julian Assange, who appeared to move closer to arrest in a sex-crime case, after Swedish authorities refiled a European arrest warrant.
Deutsche Bank completed its takeover of domestic rival Deutsche Postbank, overtaking Commerzbank to become Germany’s biggest private sector bank.
The Financial Services Authority said that it was closing its 17-month probe of the events leading up to Royal Bank of Scotland (RBS)’s government rescue without bringing formal charges against Sir Fred Goodwin and other former top directors. The regulator and outside investigators from PwC concluded that while bad decisions were made, there were no grounds to take regulatory action. The probe covered the bank’s 2007 takeover of part of ABN Amro as well as its 2008 capital raisings. The FSA made clear that former RBS directors would face tough regulatory hurdles if they sought to take another job in the UK financial sector.
Chongqing Rural Commercial Bank, one of China’s largest lenders to farmers and small businesses, plans to raise up to US$1.78bn in an initial public offering in Hong Kong in what is expected to be the first in a wave of listings by smaller rural-focused Chinese banks.
Three of the six most important German Landesbanken have reported pre-tax losses during the first nine months of the year. WestLB, the last of the group to reveal its quarterly results, announced a net loss of €53m in the year to the end of September compared with a profit of €184m in the same period last year.
HSBC’s Asian private equity arm has been bought by its management and renamed Headland Capital Partners. This is the first of five planned management buy-outs of HSBC’s private equity businesses. It is also in talks about management buy-outs of its private equity units in the UK, US, Canada and Middle East.

Other

European regulators have proposed new rules on the trading of shares, bonds and derivatives in a response to the financial crisis. This follows similar US action to clamp down on over-the-counter derivatives (OTC) markets, via the Dodd-Frank Act, and tighten controls over equity markets in the wake of May’s “flash crash” on Wall Street, when automated trading triggered wild swings in share prices. Private trading systems run by banks would have to be redesigned as formal trading venues, with prices posted publicly at the end of each day, according to the European Commission proposals for reforming the Markets in Financial Instruments Directive (Mifid). OTC derivatives should largely be traded on exchanges.
Due to a clause in the Dodd-Frank financial reform act, the Federal Reserve was obliged to reveal details of more than 21,000 transactions with banks. These transactions were carried out through half a dozen special financing programmes starting in 2007, including through the Primary Dealer Credit Facility (PDCF) for overnight funding of investment banks and the Term Auction Facility (TAF) for one- to three-month loans. It was revealed that Barclays, the UK bank which bought the US operations of Lehman Brothers out of bankruptcy in September 2008, borrowed a cumulative $232bn from the TAF through various subsidiaries.
It was also revealed that more than 36% of the cumulative collateral pledged to the US central bank in return for overnight funding under the Primary Dealer Credit Facility was equities or bonds ranked below investment grade. Previously, the Fed had fiercely resisted publishing this information.
Another clause in the Dodd-Frank bill calls for the creation of an “Office of Financial Research”: a body with a mandate to watch aspects of the financial system, including cross-border financial flows and shadow banks.
Bloomberg, the global media group, has agreed to build a large headquarters in the City of London. A building will be constructed for the group next to Bank station on the former Bucklersbury House site, which is at present being demolished to make way for the development.
International talks on climate change are being held during a two-week conference in Cancún, Mexico. Poor countries want a continuation of the 1997 Kyoto pact as a condition for discussions on a new treaty that would encompass the US – which never ratified Kyoto – and also want to impose obligations on major emerging economies, which were not required to curb emissions under the original treaty. However, the richer nations disagree and this is threatening any chance of measurable progress being made at the talks.

Note: The details contained in this article have been drawn from a daily review of the Financial Times and The Economist.