Nomura rounds up markets’ biggest misses in 2016

Forecasting markets a year in advance is never easy, but with “year-ahead investment themes” season well underway, Nomura has provided a handy reminder of quite how difficult it is, with an overview of markets’ biggest hits and misses (OK, mostly misses) from the start of 2016. The biggest miss among analysts, according to Nomura’s Sam […]

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Spanish construction rebuilds after market collapse

Property developer Olivier Crambade founded Therus Invest in Madrid in 2004 to build offices and retail space. For five years business went quite well, and Therus developed and sold more than €300m of properties. Then Spain’s economy imploded, taking property with it, and Mr Crambade spent six years tending to Dhamma Energy, a solar energy […]

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Euro suffers worst month against the pound since financial crisis

Political risks are still all the rage in the currency markets. The euro has suffered its worst slump against the pound since 2009 in November, as investors hone in on a series of looming battles between eurosceptic populists and establishment parties at the ballot box. The single currency has shed 4.5 per cent against sterling […]

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RBS falls 2% after failing BoE stress test

Royal Bank of Scotland shares have slipped 2 per cent in early trading this morning, after the state-controlled lender emerged as the biggest loser in the Bank of England’s latest round of annual stress tests. The lender has now given regulators a plan to bulk up its capital levels by cutting costs and selling assets, […]

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China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Archive | November, 2016

Deutsche Bank shores up balance sheet

Posted on 30 April 2013 by

Anshu Jain declared the end of Deutsche Bank’s “hunger march” after it concluded a long slog to shore up its balance sheet by bringing in €3bn in fresh equity.

Investors rewarded the co-chief executive of Germany’s largest bank by assets for yielding on his reluctance to bring in new capital. After a quickly carried out capital raising Deutsche’s shares rose 6.1 per cent on Tuesday, despite an issue that dilutes shareholders by almost 10 per cent. Some analysts upgraded Deutsche’s prospects.

    However Mr Jain’s belief that the bank’s problems with a lack of capital were now “off the table” – and that the bank could even turn towards raising dividends for its hard-pressed shareholders – is not unanimously shared.

    Deutsche “is not out of the woods yet”, wrote Kian Abouhossein, an analyst at JPMorgan. “However [it] has the cushion to take some unexpected hits … Deutsche Bank is finally starting to address its capital issues.”

    Deutsche’s capital and funding issues “far outweigh a mere €2.8bn capital increase”, said analysts at Espirito Santo. “Our concern is that the admission of the need for capital merely raises scrutiny that the bank needs even more.”

    The bank has leapt up the ranks of its peers in terms of the balance sheet strength they will be able to claim under incoming Basel III bank rules. These are set to take effect in 2019 but are already viewed as a benchmark. Deutsche’s ratio of more than 9.5 per cent under those rules after Tuesday’s equity raising puts it ahead of almost every other big global investment bank.

    With Deutsche reporting a ratio under 6 per cent by the same rules less than 18 months ago, “resolving the capital issue had to be our top priority”, Mr Jain admitted.

    But the timing and size of the current equity call caused puzzlement, especially given the bank’s previous resistance to the idea of going direct to investors.

    Mr Jain’s argument is that an earlier capital raising could not have been done at a scale that would have had much impact and said Deutsche needed a “launch pad” from which to first improve the balance sheet by trimming risks and retaining earnings. Over the past nine months those measures amounted to the equivalent of more than €10bn in capital, he said on Tuesday – moving the bank to the point where the relatively small cash call could take it within touching distance of its targets “in one fell swoop”.

    For many analysts, regulatory factors will have also played a part in the capital raising – in spite of Mr Jain’s insistence that regulators have not had a “gun to our head”.

    One key capital demand looming for Deutsche is the threat by the US Federal Reserve to force foreign banks to recapitalise and increase standalone funding of their subsidiaries. The plan, lobbied vigorously against by European and some US banks, would impact Deutsche the most given that 37 per cent of its group assets are in the US.

    On this issue, Deutsche’s capital plans – including €2bn in junior capital issuance over the next 12 months – should help ease investors’ concerns about the Fed’s plan. Huw van Steenis, analyst at Morgan Stanley, said they could meet 85 per cent of the estimated capital deficit in the bank’s US subsidiaries.

    One analyst said the equity raising – which makes Deutsche better capitalised than JPMorgan and Citigroup – gave it better arguments to push back the Fed’s funding proposals. “They are losing the battle to win the war [on funding],” he said.

    Despite the increase of Deutsche’s core tier one capital ratio to a level that beats most global banks apart from Swiss rival UBS, some analysts also remain worried about the German lender’s high leverage.

    Leverage ratios measure a bank’s total assets – rather than its risk-weighted assets – related to its capital, and are another closely watched indicator. Basel rules will also bring in a leverage ratio of 3 per cent that banks must meet.

    James Chappell, analyst at Berenberg, said that, even after this week’s capital raising, Deutsche’s leverage ratio would still be about 2 per cent. “This still requires over four years’ worth of profits to get above the 3 per cent level required in 2019 and, in our mind, delays dividends,” he wrote.

    Crowds line up for a bite of Apple’s big bond

    Posted on 30 April 2013 by

    They may not be labelled iBonds, but investors have again fallen for the famed “buzz” of an Apple product launch.

    Like the hordes of consumers who line up for hours at Apple stores seeking a new iPhone or iPad, so US and global money managers are flocking for a slice of the company’s mammoth $17bn bond offering.

      The amount of orders for the debt sale reached $52bn, and Apple entered the record books with the largest corporate bond sale in history, with a $14bn offering of fixed rate and $3bn of floating rate debt. Final pricing for the six-part deal, offering maturities from three to 30 years came late on Tuesday, with the some of the tranches coming in at tighter levels than initially anticipated.

      The iPhone maker’s blockbuster US debt sale is perfectly timed to take advantage of ultra low interest rates and strong demand from investors eager to own top quality credit in a world where defensive strategies are highly popular.

      As a new arrival in the world of US investment grade credit, Apple is generating plenty of favourable attention among money managers. With its high double-A rating, Apple will sell its bonds at low yields, but for investors what matters is that a marquee name has entered their universe.

      “Apple is a high-quality debt issuer and it’s a significant deal in terms of size,” says Jay Mueller, portfolio manager at Wells Capital. “When investors see a new name in the corporate bond market with the status of Apple, they jump on it. Portfolio managers can often have high exposure to other quality names, so a new name helps diversify their investments.”

      “This sale is guaranteed to get a lot of attention and may even bring new people to the bond market,” says Lon Erickson, managing director at Thornburg Investment Management.

      Investors are also looking beyond a usually troubling motivation on the part of Apple to sell debt, namely funding shareholder friendly activities that over time can weaken a balance sheet.

      “Certainly in the case of Apple, and other companies, debt issuance is being used to return cash to shareholders, beyond funding operations,” says Mr Mueller. “Bond investors always worry about shareholder friendly activities, but Apple has lots of cash flow, a strong balance sheet and high margins.”

      Apple is selling debt for the first time since the 1990s to finance a $100bn return of cash to shareholders over the next three years. This comes after pressure from investors, who have watched the company’s stock price drop 40 per cent from its $702.10 high last September to below $400 earlier this month. The stock climbed 2.9 per cent to $442.78 on Tuesday.

      Apple stands apart in many ways, notably with its cash pile of $145bn. Issuing debt when a company sits on such a massive amount of money may appear odd, but two-thirds of Apple’s stash sits overseas. Bringing that money home to fund buybacks and dividend payments stands to incur a US tax charge of up to 35 per cent. Issuing bonds helps Apple avoid a large tax bill, and take advantage of tax-deductible interest payments.

      “What Apple is doing is saving cash instead of getting hit by heavy taxes if they decide to repatriate the money,” says Paul Hickey, co-founder of the Bespoke Investment Group.

      It’s a theme that resonates across other large US multinational companies, particularly in the technology sector where Oracle, Microsoft and Google are debt issuers.

      “For managers who already own Microsoft, for example, this gives them a very good opportunity to add exposure to the tech sector via another credit,” says Mr Erickson.

      Mr Hickey says: “Apple is not setting up a trend here. If anything, Apple is arriving to this party late rather than early.”

      It may be tardy, but Apple is capping a huge month for investment grade issuance in the US, with April’s sales north of $100bn, the largest since 2008. For many companies, the combination of cheap borrowing costs and solid appetite for debt from investors is too hard to ignore, with the proceeds going towards buybacks and boosting dividends.

      “Corporations are really coming out of the woodwork after earnings season to sell debt and buy back stock,” says Michael Kastner, principal at Halyard Asset Management.

      Apple cleans up with $17bn US bond issue

      Posted on 30 April 2013 by


      Apple sold bonds worth $17bn on Tuesday, the world’s largest corporate debt sale, as the iPhone maker raised capital to finance a $100bn cash return to shareholders.

      People close to the blockbuster deal said demand for the bond sale reached $52bn as investors from around the world scrambled to take a slice of Apple’s first debt offering since 1996.

        Apple has set several corporate records. It recently regained its position as the world’s most valuable company when it overtook ExxonMobil. Apple’s return of cash, which the bond issue will finance, includes the largest share buyback in history, worth $60bn. And last year it joined an elite group of companies whose market value made up more than 4 per cent of the S&P 500.

        Apple, which had no debt before Tuesday’s sale, has taken advantage of low interest rates to fund its return of $100bn to shareholders over the next three years. The cash splurge is designed to appease investors concerned about slowing sales growth and comes a week after Apple reported its first year-over-year drop in net income in almost a decade.

        While Apple has $145bn of cash on its balance sheet, only $45bn is held in the US and repatriating foreign reserves would be costly due to tax implications.

        “This bond is being pitched to the globe,” said Adrian Miller, director of fixed income strategy at GMP Securities. “With several tranches, including a floating-rate component, and with the high credit ratings, this bond caters to absolutely every fund manager.”

        The biggest global corporate bond offering previously was the Roche Holding’s $16.5bn sale in 2009, followed by France Telecom with a $16.4bn deal in 2001.

        Apple’s issue also surpassed Abbvie, the pharmaceutical group, which completed an offering of $14.7bn last November.

        “Investors are always looking for names which they don’t already have exposure to. When you see a new high-quality issuer like Apple, that gets people’s attention.” Jay Mueller, portfolio manager at Wells Capital.

        “As a bond investor you don’t want to buy debt which is being used to fund share buybacks, but in the case of Apple, it’s a drop in the ocean compared to the size of their overall cash holdings,” said Michael Kastner, principal at Halyard Asset Management.

        The six-part offering from Apple included benchmark maturities of three-year, five-year, 10-year and 30-year fixed rate bonds, along with three-year and five-year floating rate notes.

        The three-year fixed tranche priced at 20 basis points over the benchmark Treasury yield, with the five-year bond at 40bp, the 10-year at 75bp, and the 30-year at 100bp. All fixed tranches came in tighter than levels where bankers were pitching the bonds earlier on Tuesday. The 3- and 5-year floating rate tranches were sold at 5bp and 25bp over the London Interbank Offered Rate, respectively.

        Apple’s debt offering will push the total level of investment grade issuance for April beyond $100bn, making it the strongest April for debt sales since 2008, and the second largest since January’s $137bn in offerings.

        “April has exceeded expectations in the IG new issue market with many news worthy transactions, large transactions and Yankee names,” said Edward Marrinan, head of macro credit strategy at RBS Securities. “We anticipate this week to close out the month and start May off with solid issuance of $25bn. The total volume for the month of May is estimated to be in the context of $100bn plus.”

        Osborne warns BoE against curbing growth

        Posted on 30 April 2013 by

        George Osborne urged the Bank of England not to undermine recovery through an overzealous focus on banking stability, in an attempt to put growth at the heart of the new governor’s mandate.

        The chancellor told the bank’s Financial Policy Committee to give “due weight to the impact of its actions on the near-term economic recovery” when carrying out its primary job of maintaining financial stability.

          Mr Osborne noted the “short-term trade-offs” that the FPC faces: between strengthening the banking system and making sure that banks are able to increase lending into the economy.

          His letter to Sir Mervyn King, departing bank governor, said the committee should be particularly attentive to its secondary objective of sustaining economic growth “at this stage in the cycle”.

          The chancellor set out the remit for the FPC, which formally took on its new powers in April, in a five-page memorandum. The committee will guide the work of Mark Carney, who will chair the committee when he takes up his post as governor in July.

          The remit reflects Mr Osborne’s concern that an excessive focus on making the banking system shockproof could create “the financial stability of a graveyard”.

          The emphasis on growth echoes Mr Osborne’s earlier guidance to the bank’s Monetary Policy Committee, which clarified that policy makers could prioritise growth when setting interest rates, provided that inflation remained under control.

          Mr Osborne’s focus on growth was reflected in his decision in March not to appoint two outspoken advocates of tough bank regulation, Michael Cohrs and Robert Jenkins, to the permanent FPC.

          Mr Osborne’s comments in the remit may be part of his long running battle over efforts by some regulators and MPs to force banks to conform to tougher leverage requirements, which the chancellor fears could constrain lending.

          The FPC suggested last year that banks could use liquidity buffers, held in excess of regulatory guidance, to support extra lending.

          Mr Osborne’s letter to Sir Mervyn also urged FPC members to co-ordinate their speeches and opinions. He said confidence in financial markets would be boosted by “consistent messages about the planned regulatory response to financial stability risks”.

          The move to assert discipline concerned Andrew Tyrie, Commons Treasury committee chairman, who said the FPC’s accountability to parliament and the public would be “enhanced, where possible by open debate, not by concealment”.

          ENRC faced 11th-hour hitch over listing

          Posted on 30 April 2013 by

          The controversial London flotation of Eurasian Natural Resources Corporation in 2007 faced an 11th hour hurdle after lawyers and auditors found evidence that financial records at the Kazakhstan-based miner had been falsified or destroyed, according to people familiar with the matter.

          At least one director of the FTSE 100 company was so concerned about the revelations that they considered whether the 2007 initial public offering should be put on hold, one person familiar with the matter said. Another person involved with ENRC at the time added: “There was a question over whether we should go ahead.”

            The Kazakh miner is now the subject of a criminal investigation by the Serious Fraud Office, primarily over whistleblowing allegations made since then amid criticism of the standards of London listing rules.

            A few weeks before its December 7 2007 float, ENRC received a report commissioned from Herbert Smith into a network of sales intermediaries in Russia. This set out evidence the law firm said was uncovered by PwC, ENRC’s auditors, of the falsification of audit data in Russia and the destruction of records relating to cash payments to the three Central Asian oligarchs who still have big stakes in ENRC.

            An adviser involved with ENRC at the time of the listing said the problems with Russian trading were considered by UK Listing Authority while vetting the oligarchs – Alexander Mashkevich, Patokh Chodiev and Alijan Ibragimov – as directors of the company. He said this had been seen as a last-minute hitch to the deal.

            “They [the UKLA] saw a lot of red flags,” he said. The other person familiar with the float said: “[Directors] were told by PwC and the banks that there might be a problem.”

            The Herbert Smith report, part of which has been seen by the FT, stated that Russian sales intermediaries sold $870m of minerals in 2004-2006. It said sales agents collected part of each payment in cash to pass on to the three oligarchs who still have big stakes in ENRC. An employee who collected this money first told Herbert Smith investigators that he had destroyed related records, and later that he had kept none.

            On the issue of audit data, the law firm stated that confirmations of sales figures sent to PwC, supposedly from 32 different businesses, all arrived on the same day, bearing addresses written in the same handwriting and having all been posted at roughly the same time in Moscow.

            According to the report, PwC contacted two purchasers of ENRC commodities that had purportedly sent audit confirmations for 2006. Neither knew anything about it, Herbert Smith concluded.

            Moreover, large volumes of data were wiped from computers in the Moscow office of ENRC, states the report, dated September 25 2007. According to one named witness, a manager “asked employees to leave their computers switched on . . . so that information could be deleted due to the impending IPO”.

            This week, ENRC said the Russian sales network was “thoroughly investigated prior to the IPO, the investigation was closed and all allegations of wrongdoing were dismissed”.

            Deutsche Bank, which advised the company on the float, Herbert Smith, PwC and the UK Listings Authority all declined to comment.

            Herbert Smith found no evidence that ENRC or its management knew about the false audit confirmations or to suggest that, excepting one named employee, “reliance [could] not be placed upon the representations for audit purposes of current management”.

            The flotation went ahead after PwC signed off financial data in the prospectus as “true and fair”. The “historic” Russian sales system is described in detail on page 16, among other “risk factors”. The falsification of audit confirmations is disclosed separately in a single paragraph on page 217 in “Part XIII: Additional Information”, which also states “much” of the deleted data were recovered.

            UK Treasury fears £9bn bank crisis fund

            Posted on 30 April 2013 by

            British Chancellor of the Exchequer George Osborne©Getty

            George Osborne faces being forced to set aside up to £9bn for a standalone bank crisis fund, as the UK chancellor is once again cornered in Brussels over a flagship EU financial reform.

            EU member states are approaching the final stages of talks on national rules to wind up troubled banks, with Britain isolated in opposing the creation of mandatory, pre-financed national funds to pay for bank resolution costs.

              The latest compromise under discussion in Brussels, seen by the Financial Times, would require Mr Osborne to tap industry for a resolution and deposit insurance fund matching at least 1 per cent of covered deposits.

              Given that Britain introduced a temporary “bank levy” on balance sheets, which raises at least £2.5bn a year and goes toward reducing the annual deficit, it is likely the money would need to be borrowed, or raised through an extra charge on lenders.

              The dispute over the fund will add to Britain’s long list of troubles in Brussels on financial regulation and comes on the heels of its defeat over bank bonuses, which saw Mr Osborne overruled by his counterparts.

              Diplomats say a compromise is still possible before a meeting of finance ministers in May, which could mean more flexibility or reduce the minimum amount of the fund.

              But London is facing headwinds: Germany and natural UK allies such as Sweden agree with the principle of establishing national resolution funds, or already have them in place. “The Brits are alone and no one is running to help,” said a diplomat involved.

              The fund is one element of a wider European Commission overhaul of bank governance, which establishes resolution authorities with summary powers to writedown creditors in failed banks, so the burden largely falls on private investors rather than taxpayers. Ambassadors discuss the reforms on Thursday.

              One outstanding issue is the level of flexibility national authorities are given to exempt certain creditors, such as uninsured deposit holders, when a so-called “bail-in” is triggered.

              Some countries, in the wake of the Cyprus bailout, are pressing for broad protection for even deposits over €100,000, which are unprotected by deposit guarantee schemes.

              As an alternative, Ireland, which holds the rotating presidency of the EU council, is suggesting a “depositor preference” arrangement. That means uninsured depositors can be written down in a crisis, but only as a last resort after other creditors absorb loses. The option is backed by the European Central Bank.

              New FT ebook

              Britain and the EU

              Britain and the EU

              FT writers explain Britain’s ambivalent attitude to the European Union ever since it joined 40 years ago, and what is at stake in the UK’s debate on whether to stay or go

              Under the Irish compromise on resolution funds, the minimum level of financing must be reached within the next 10 years, with half dedicated for bank resolution and the remainder to deposit insurance.

              The UK Treasury objects to pre-funding resolution schemes because the unused pot of money would act as a drag on growth, create moral hazard for banks and reduce the credibility of the bail-in tools.

              Britain is unconvinced the funds would prove worthwhile during a serious bank crisis, which would require interventions that far outstrip the levels of cash likely to be available in the resolution fund.

              As well as the bank levy paid to the Treasury, British lenders will pay £285m this year towards the Financial Services Compensation Scheme, which provides UK deposit insurance.

              Meeting EU targets for a standalone resolution and deposit fund would require a big increase in the levy – which the industry complains is already too onerous – or force the Treasury to divert revenues from the levy on bank balance sheets.

              The Irish papers preparing for the meeting of ambassadors do not even suggest there should be a discussion on the principle of pre-funding – a clear indication that the UK is heavily outnumbered.

              Some member states are even pushing for the fund target to be set as a proportion of total bank liabilities, which is a benchmark that would put a far greater burden on London.

              Spain’s bankers reap pension jackpot

              Posted on 30 April 2013 by


              The departure of Alfredo Sáenz as chief executive of Banco Santander has shone a spotlight on a quirky remuneration detail – quite how generous the pension arrangements for Spain’s top bankers are compared with the norm in the rest of the world.

              Chief executives’ pensions have traditionally attracted relatively little interest from investors or the general public – in stark contrast to the attention paid to the annual allocation of bonuses.

              Yet, the most generous pensions can leave bonus awards looking pale by comparison.

              As was pointed out on Monday when Mr Sáenz announced his departure from Santander, the 70-year-old will hardly miss his pay cheque, given the €88.2m pension pot he has to fall back on.

                But such arrangements are far from universal. Compare Mr Sáenz with the man who is generally acknowledged to be the best paid bank chief in the world – Goldman Sachs’s Lloyd Blankfein – and the stark differences between the structure of top bankers’ pay around the world is clear. While Mr Blankfein received $21m in salary and bonuses for 2012, his pension pot is minuscule – worth less than $34,000.

                In some ways Santander is a special case. Mr Sáenz’s pension, while the biggest publicly disclosed by a large bank, is echoed by similar arrangements for some of his top colleagues. The bank’s patriarchal chairman Emilio Botín is sitting on a pot worth €25.6m, while other members of the Santander board such as his daughter Ana Botín (with €34.9m) and risk chief Matías Rodríguez Inciarte (with €45.5m) could also claim their spots among any future pensioner rich list.

                Mr Botín has always argued that such generous schemes are a crucial retention tool, ensuring the longstanding loyalty of senior executives, although that theory was tested when António Horta-Osório, now chief executive of Lloyds Banking Group in the UK, walked away from a pension entitlement, reputed to be worth a prospective €30m-plus.

                There are also tax benefits, helping to make generous pensions a broader feature of remuneration across Spanish banking.

                “From the 1980s, companies in Spain have had to provide specific external funding for any pension promises,” says Paul Kelly, an international pensions expert at consultancy Towers Watson. “But there was an exception for the banks. That has given them relative tax flexibility.”

                The anomaly has tended to mean that bonuses for top Spanish bankers have been relatively low compared with foreign rivals, particularly in the US. However, critics make the point that some top executives have had the best of both worlds. Last year, Mr Sáenz received a bonus of €7.2m.

                Seniority rules for the señores

                Even though Alfredo Sáenz resigned this week from Banco Santander at the age of 70, in the world of Spanish business the outgoing chief executive is classed a relatively young man, writes Miles Johnson.

                It is still customary for many of Spain’s largest companies to be dominated by men who serve well past the country’s retirement age of 67. Out of the country’s Ibex 35 index almost half of its corporate leaders are aged over 65, with several approaching 80.

                Of these the oldest is the 82-year-old Juan Miguel Villar Mir, head and founder of builder OHL and former Spanish finance minister in the first government after the death of dictator Francisco Franco in 1975.

                On Monday, he was named an independent director at Santander.

                Mr Villar Mir will share a board room table with Emilio Botín, the lender’s executive chairman, who at 78 has shown no sign of stepping down from the bank his father, Emilio Snr, ran until he was 83.

                Other senior citizens of the Ibex include Gas Natural president Salvador Gabarró, 78, and José Lladó, the 79-year-old chairman and founder of engineering group Técnicas Reunidas who was also a minister in one of the governments following Franco’s death.

                Younger leading business figures who are still old enough to claim state pensions include the country’s two other powerful banking chiefs aside from Mr Botín: Francisco González of BBVA, 69, and Isidro Fainé of Caixabank, 71.

                Elsewhere, César Alierta, executive chairman of Telefónica, the former state telecoms monopoly, is 69, Salvador Alemany of Abertis, the Catalan infrastructure operator, is 70, and Red Electrica’s José Folgado is 69.

                But the change at the top of Santander is a possible sign that gerontocracy may be coming to an end, with Javier Marín, Mr Sáenz’s successor at Santander, a youthful 46, being the same age as many top executives’ children.

                BBVA awarded a less fulsome cash-and-shares bonus currently worth €2.1m to its chief executive, Francisco González, last year. But when it froze additional contributions to his pension when he hit age 65 a few years ago, the pot was already worth €79.8m.

                Underpinning some of Spain’s generosity to its elite bankers is the broad European tradition of protecting workers in retirement. While mainstream employees in markets such as Spain, France and Germany have found that protection through state-funded social security systems, top executives have benefited from employer-funded schemes.

                The former chief executive of Deutsche Bank, Josef Ackermann, left the bank with a pension pot of nearly €19m.

                But a shift away from such schemes is well under way. Anshu Jain, now Deutsche’s co-chief executive but earlier a trader and one of the group’s best paid staff, has a pension of barely €400,000. Similarly Frédéric Oudéa, head of Société Générale, has no legacy benefits and now accumulates a flat €300,000 a year. The advent of a new generation of bank chiefs from outside their new employers at the likes of Royal Bank of Scotland, Lloyds, UBS and Morgan Stanley, has contained pension costs, too.

                The moves are underpinned by government restrictions on tax breaks. France, for example, recently doubled the tax rate on defined benefit schemes which guarantee payouts on the basis of salary, while in the UK there has been a steady erosion of DB schemes in favour of defined contribution arrangements where investment risk is born by the employee.

                For top executives in the UK caps imposed a decade ago on both tax-free annual contributions and the size of total pension pots have led to a shift away from CEO participation in company-sponsored schemes. Instead, all of the big four banks now make cash contributions to their CEOs and other top executives in lieu of pension payments.

                The generosity of executive DB schemes in the UK was highlighted recently when Sir James Crosby, the former head of collapsed bank HBOS, volunteered to forgo a third of his £580,000 annual pension entitlement.

                The broad shift away from specific company-sponsored promises has been particularly strong among investment banks, says Marc Hommel, pensions partner at PwC. “There is a real difference between retail and investment banks that explains a lot of the contrast between [pension practices in] Europe and the US. In the 1980s, US investment banks were among the first to move from DB to DC schemes.”

                The trend has been reinforced by investment bankers’ own preference for running their financial affairs themselves rather than relying on company schemes whose tax benefits are severely limited.

                That explanation might be one factor behind the revelation that Brian Moynihan, the commercial banker who runs Bank of America, is the only one of the US big global bank bosses with a big pension entitlement – his near $8m pot is more than 16 times the next biggest, JPMorgan’s Jamie Dimon.

                Even top US bankers, though, appear quaintly attached to that symbol of the American free market, the 401k self-administered pension, accepting company contributions capped at just $10,000 towards their schemes.

                Portugal unveils plan to extend austerity

                Posted on 30 April 2013 by

                Lisbon is to squeeze government spending by €6bn – the equivalent of 3.6 per cent of national output – over the next four years, extending tough austerity measures long after Portugal’s planned exit from a €78bn bailout programme.

                The plan, announced on Tuesday, implies severe cuts in government spending on health, education and social security and is expected to meet resistance from opposition parties and trade unions.

                  Portugal’s next €2bn instalment of bailout funds is contingent on international lenders approving the strategy.

                  Vítor Gaspar, finance minister, excluded further tax increases, saying fiscal tightening to the end of 2016 would focus almost exclusively on spending cuts.

                  His fiscal consolidation plan includes an additional €1.3bn in spending cuts this year to replace planned austerity measures that a Portuguese court ruled unconstitutional. The minister said €2.8bn in cuts would be introduced next year, followed by €700m in 2015 and €1.2bn in 2016.

                  Lisbon is due to exit its three-year bailout programme in mid-2014, although economists have questioned whether Portugal will be able to avert the need for a second bailout by regaining full access to debt markets by next year.

                  Pedro Passos Coelho, the prime minister, said on Tuesday that Portugal would have “little room for error” after the scheduled conclusion of the adjustment programme. The post-bailout period would require “discipline, rationality and long-term vision”, he told a Lisbon conference. Barriers to economic growth would have to be “definitively removed”.

                  Announcing the government’s medium-term budget strategy, Mr Gaspar forecast the economy would begin to recover in 2014 from three consecutive years of recession, with national output increasing by 0.6 per cent next year after an expected contraction of 2.3 per cent this year.

                  Unemployment was expected to climb to a record 18.2 per cent this year and 18.5 per cent in 2014, he added. Mr Gaspar is to announce in the coming days details of where spending would be cut.

                  However, he ruled out further tax increases after introducing what the government itself described as “enormous” rises in January. “The state cannot be any bigger than citizens are prepared to pay for,” he said.

                  Under the bailout programme, Lisbon is committed to making “permanent” cuts in state spending totalling €4bn by the end of 2015. The €6bn fiscal tightening package announced on Tuesday extends to the end of 2016 and allows for additional cuts required because of the constitutional court ruling.

                  Mr Gaspar said the plan was aimed at cutting the structural budget deficit, which excludes interest payments, to 0.5 per cent of gross domestic product by 2017.

                  Empire State investors lose legal challenge

                  Posted on 30 April 2013 by

                  A New York judge has ruled in favour of the group that controls the Empire State Building, thwarting a legal challenge by dissident investors keen to scupper a controversial $1bn public stock offering.

                  Malkin Holdings seeks to create a real estate investment trust traded on the New York Stock Exchange, by bringing together the landmark skyscraper and other New York-area properties in its portfolio.

                    But a cluster of investors have been reluctant to give up the sentimental value of owning part of the Empire State Building, and argue the proposal may result in a loss of income.

                    Six of these opponents failed to convince Justice Peter Sherwood in the New York State Supreme Court that the plan’s buyout provision, for those investors who fail to consent to the transaction, was illegal.

                    Malkin said on April 3 that 75 per cent of the skyscraper’s 3,300 ownership units whose consent is needed had voted in favour of the consolidation. Eighty per cent have to grant approval for the offering to move forward. An IPO would likely be executed within two months following the approvals, people with knowledge of the matter have said.

                    “We are pleased by the court’s ruling and are proceeding with our solicitation with the intention of closing as soon as we reach the approval threshold. The fact is that far more investors support this transaction than oppose it. We are focused on delivering the majority what they want as quickly as possible,” a spokesperson for Malkin said.

                    Under the terms of the Malkin proposal, investors who fail to consent within 10 days of an 80 per cent majority vote approving the transaction will be bought out at a nominal value – $100 for every $10,000 originally invested.

                    Empire State Realty Trust, as the new company would be called, consists of 12 office properties and six standalone retail properties, of which the Empire State Building is its largest revenue earner. Malkin argues the IPO would give investors liquidity and greater growth opportunities.

                    Malkin estimates that the costs of the IPO will be $75m.

                    Alongside foreign and institutional investors, who have long coveted high quality New York City buildings as a more defensive investment strategy, an offering would also allow retail investors to get a slice of one of the world’s most famous buildings.

                    The 102-floor midtown Manhattan skyscraper has been at the centre of bitter wrangling between Malkin and dissident investors for more than a year.

                    Opponents filed five class actions, or group lawsuits, in New York state court last year, accusing the trust and Malkin – which took over day-to-day management of the tower in 2002 and gained full control in 2010 – of breaching its fiduciary duty. The trust announced a $55m settlement of the cases in November.

                    Malkin, which is calling holdouts one-by-one to garner the remaining votes, said they would leave the voting open at least until Justice Sherwood’s final hearing on the settlement on May 2.

                    Richie Edelman, whose grandparents purchased a stake in 1962, said: “I hope the Meister law firm and six investors who brought case win on appeal. But our plan has never been to have the courts win the votes for us.

                    “The owners of the Empire State Building did not approve the proposal after the initial 60-day voting period even after 90 days, they have not got the votes,” he said.

                    McGraw-Hill reveals $77m S&P settlement

                    Posted on 30 April 2013 by

                    Standard & Poor’s paid almost one month’s operating profit to settle legal claims that it gave inflated credit ratings to two structured investment vehicles on the eve of the credit crisis, its parent company, McGraw-Hill, has revealed.

                    The $77m payment was disclosed in McGraw-Hill’s latest quarterly earnings, which showed the controversy over S&P’s pre-crisis ratings had not held back the rating agency’s ability to win new business.

                      The division recorded a 20 per cent rise in revenues and a 39 per cent surge in operating profit to $259m for the first quarter.

                      S&P, with co-defendants Moody’s and Morgan Stanley, settled lawsuits over the Cheyne and Rhinebridge structured investment vehicles last week, lifting the threat of a potentially damaging trial.

                      Harold McGraw, chief executive of McGraw-Hill, said the settlement was “very reasonable” as a result of the strength of S&P’s defence. “We are very pleased these have gone away now, and it lightens the burden.”

                      S&P is still fighting a dozen lawsuits over pre-crisis ratings, including a $5bn damages claim from the US Department of Justice over what the government claims was S&P’s manipulation of financial models to generate inflated ratings, so as to win business. The company has filed a motion to dismiss the suit.

                      “We have a solid record of defending the company and we will continue to do so aggressively,” Mr McGraw said.

                      Quarterly earnings highlighted the return of structured finance business as a key driver of revenue growth at S&P. Rating these complex instruments is more lucrative than producing other kinds of credit ratings and the growth of quarterly revenue to $561m came despite a decline in investment-grade corporate debt issuance.

                      Overall, McGraw-Hill revenues were up 14 per cent to $1.18bn, while net income was $735m. The bottom line was boosted by a $612m gain on the sale of its education business to Apollo Global Management, completed last month. Adjusted earnings per share of 80 cents were ahead of analysts’ expectations of 73 cents. The company made no changes to its earnings guidance for the rest of the year.

                      McGraw-Hill shares, which had risen 2.8 per cent on Monday on news of the latest legal settlements, closed up a further 1.2 per cent on Tuesday.

                      Shareholders will vote on Wednesday to rename the company as McGraw Hill Financial.

                      The group’s other continuing businesses include S&P Dow Jones indices; S&P Capital IQ, a financial data firm; Platts, the commodities information business; and JD Power & Associates, a market researcher. JD Power was the only division to post a decline in revenue in the quarter.

                      “McGraw Hill Financial is focused on providing clients with the essential intelligence they need to make better informed decisions,” said Mr McGraw, chief executive. “Our mission is to be the foremost provider of ratings, benchmarks and analytics in the global capital and commodity markets.”