In Case You Missed It: Business News Round-Up
Contributed by Beth Collinge of CTG – a division of ILX Group plc.
More weak economic data out of the US increased fear of a slower recovery. China overtook Japan to become the world’s second-largest economy. US and UK bond yields sank to record lows.
Overview
- Another round of weak economic data out of the US this week increased fears of a deeper slowdown. There were weak manufacturing reports in the New York and Philadelphia regions and initial jobless claims hit 500,000 again for the first time since November 2009.
- At the start of the week it was also revealed that Japan’s economy had expanded by much less than expected in the second quarter of the year. It grew by just 0.1% – 0.4% on an annualised basis. Economists expect that China, whose Q2 GDP grew by 10.3%, will permanently overtake the Japan by the end of this year, to become the world’s second-largest economy. This was on top of news that the European Central Bank would delay its exit from loose monetary policy, and that the Federal Reserve might consider further quantitative easing. Yields on benchmark US, UK, German and Japanese sovereign debt all sank to record or multi-month lows: In the USA, the 10-year Treasury yield fell to a 16-month low, of 2.58%, while gold rose to $1,227 as nervous investors moved away from equities, industrial commodities and the euro. The euro fell to $1.2664, its lowest level since mid-July.
Mergers and Acquisitions
- BHP Billiton launched a hostile bid for PotashCorp, the world’s largest fertiliser producer, taking its $39bn offer directly to the shareholders. Chinese people are eating more meat, and cows eat a lot of grain, therefore BHP believes there will be increased demand for fertiliser. There is speculation that PotashCorp will seek to block the bid.
- Blackstone announced it would pay $543m to take Dynegy, an American energy company, private. As part of the deal, Blackstone will be selling four Dynegy natural-gas plants to NRG, another energy company, for $1.4 billion.
- Vedanta Resources, the mining group, confirmed that it was acquiring a majority stake in Cairn India, part of Cairn Energy, a British oil explorer. The cash deal, valued at around $9 billion, will supplement Vedanta’s existing businesses in copper, zinc, aluminium and iron ores.
- Intel announced the acquisition of McAfee, the US security software group, for $7.6bn, in a move prompted by the rising threat from viruses as the internet spreads to more mobile devices.
- General Motors filed for an initial public offering that is intended to repay part of the $50-billion bail-out it has received from the American government since late 2008. The Treasury will sell part of its 61% stake in the carmaker.
Financial Institutions
- Barclays has agreed to pay $298m (£190m) to US authorities to settle investigations relating to payments that the bank facilitated to countries facing government sanctions.
- US district judge Emmet Sullivan approved the settlement but questioned the justice department’s decision to negotiate a so-called deferred prosecution with the UK bank, which in effect allows Barclays to be on probation for two years without pleading guilty to the charges.
- Royal Bank of Scotland, the UK state-backed bank on Tuesday said it had sold a €1.4bn portfolio of European loans – 10 per cent of its leveraged loan portfolio –- to the FTSE 250 investment firm Intermediate Capital Group, freeing the bank of any liabilities linked to the loans. The bank said the move was in line with its strategy to reduce its funded balance sheet and exposure to its existing leveraged loan book. The portfolio was repackaged into a collateralised loan obligation. The move highlights a return by banks to boom time securitisation techniques to derisk their balance sheets or raise funding.
Credit
- Ireland had to pay high yields in an auction of four and ten-year government bonds, as investors became increasingly concerned about the total cost of bailing out the country’s banks. Anglo Irish Bank, which was nationalised in 2009, will require capital injections of up to €25 billion ($32 billion). This is more than twice the amount originally estimated and will exacerbate the country’s debt problem.
- McDonalds has become the first foreign corporate to issue a renminbi-denominated bond twenty years after opening its first outlet in Shenzhen. The issue of RMB 200 million 3% notes due September 2013, was targeted at institutional investors. Rmb200m ($29m) is equivalent to one-twentieth of shareholders’ dividends last quarter. The bond offering generated good investor interest for its high credit quality, name recognition and rarity value.
- The Minutes of the last meeting of the Bank of England’s Monetary Policy Committee meeting were released, showing that 8 members had overruled Andrew Sentance’s third call for a 0.25% rise in interest rates, keeping the cost of borrowing at 0.5% and asset purchases at £200bn.
- In Europe, Axel Weber, the Bundesbank president and possible candidate to succeed Mr. Trichet as ECB president in October 2011, stated publically that he believed the EBC should continue providing unlimited liquidity until at least the start of 2011. The ECB’s governing council, with 22 members, will meet on 2 September.
Other
- The People’s Bank of China, the central bank, said on Tuesday that it had launched a pilot project to allow more foreign access to its largely closed domestic interbank bond market to “encourage cross-border renminbi trade settlement” and “broaden investment channels for renminbi to flow back to China”. Foreign central banks, lenders in Hong Kong and Macao that already conduct renminbi clearing and overseas banks involved in renminbi cross-border trade settlement will be allowed to participate in the Rmb19,500bn ($2,870bn) interbank bond market.
- Beijing is trying to encourage use of the renminbi for trade as part of a long-term plan to promote it as a reserve currency and reduce China’s exposure to the US dollar, now used for most Chinese trade.
- The Basel Committee for Banking Supervision and the Financial Stability Board released two reports on the economic impact of Basel 3, a new set of more stringent rules for banks’ capital and liquidity. The reports suggested that the long-term effects of the measures will be clearly positive, since they will make financial crises less likely. The final measures will be presented in November at the G20 summit in South Korea.
- A radical overhaul of lease accounting has been announced by the International Accounting Standards Board and the US’s Financial Accounting Standards Board.
- Under the new rules, the liabilities of many companies would increase as they are forced to move rented assets such as aircraft, ships, shops and even photocopiers on to their balance sheets.
- Current rules allow some leases to be classed as operating leases, in which the underlying asset and liability stay off the balance sheet. Others are logged as finance – or capital – leases, which do show up on the balance sheet.
- Under the new proposal, the IASB and FASB said they were committed to abolishing the dual system as operating leases understated leverage. Instead, they favour a unified approach in which lessees recorded an asset on their balance sheets based on their right to use the leased item. A liability reflecting future rental payments would also be posted.
- A successor to Sir David Tweedie, chairman of the International Accounting Standards Board, which sets accounting rules for most of the world outside the US, was to be announced this summer, ahead of Sir David’s retirement in June 2011. But Michel Barnier, the European Internal Market Commissioner who sits on the Monitoring Board which oversees the IASB standard setter and its trustees, is said to be unhappy with what he considers to be a lack of transparency in the process.
- Mervyn King, Governor of the Bank of England, was obliged to write to the chancellor for a second time to explain why inflation, at 3.1%, is still above the Bank’s target.
Note: The details contained in this article have been drawn from a daily review of the Financial Times and The Economist.
