Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Banks

Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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Property

Zoopla wins back customers from online property rival

Zoopla chief executive Alex Chesterman has branded rival OnTheMarket “a failed experiment”, and said that his property site was winning back customers at a record rate. OnTheMarket was set up last year, aiming to compete with Zoopla and Rightmove, the UK’s two biggest property portals. It allowed estate agents to list their properties more cheaply […]

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Financial

Hard-hit online lender CAN Capital makes executive changes

The biggest online lender to small businesses in the US has pulled down the shutters and put its top managers on a leave of absence, in the latest blow to an industry grappling with mounting fears over credit quality. Atlanta-based CAN Capital said on Tuesday that it had replaced a trio of senior executives, after […]

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Banks

BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Archive | November, 2016

Hastings gears up for £1bn autumn float

Posted on 27 August 2015 by

Hastings Direct motor vehicle Insurance website

Hastings is preparing for an autumn flotation that could value it at about £1bn after the Goldman Sachs-backed motor insurer appeared to brush aside the sector’s competitive pressures to report upbeat half-year results.

Gary Hoffman, the former Northern Rock chief who runs Hastings, argued the numbers showed the company had its “eye on the ball” even as rivals had warned about rising claims costs.

    Hastings disclosed a rise in pre-tax profits from £19m to £29m as it prepared to join competitors Direct Line, Admiral and Esure on the London stock market. No firm decision has been taken on whether to proceed.

    The group, which underwrites from a base in Gibraltar, will need to overcome questions from prospective investors about the sector’s mixed record.

    In particular, the post-float performance of Esure has disappointed. Since listing at 290p two years ago, its shares have fallen to 242p. This month Esure warned of a surge in injury claims by accident victims.

    Mr Hoffman agreed claims costs had risen, but said careful risk selection helped Hastings cap the rise at less than 3 per cent. The insurer managed to compensate for the higher bill by increasing premium levels by about 5 per cent on average.

    The group, which sells home insurance as well as car, van and motorbike cover, has taken on another 300,000 customers in the past year, bringing the total to almost 2m.

    Adjusted for one-off accounting items, first-half earnings before interest, taxes, depreciation, and amortisation rose almost a fifth from a year ago to £60m. Revenue increased 16 per cent to £223m.

    “The prove of the pudding is in the results,” said Mr Hoffman, who declined to comment directly on the potential float beyond saying the company was considering it.

    “The pitch to investors would absolutely be about growth, and dividend. We are delivering that, and investing for the future.”

    Hastings’ net debt has fallen over the past year from £401m to £365m, equivalent to 3.1 times its earnings.

    This summer it appointed Michael Fairey, former deputy chief executive of Lloyds Banking Group, as its chairman as well as four other non-executive directors including Malcolm Le May, who previously sat on the board of RSA.

    Goldman and Credit Suisse are advising Hastings on the prospective listing.

    Use of covenants wanes in debt markets

    Posted on 27 August 2015 by

    Old stock share certificates from 1950s-1970s©iStock

    Just two or three beers will give most drinkers enough Dutch courage to take risks they would avoid sober. But after seven years at the Federal Reserve’s open bar, a lingering thirst for yield among lenders has stoked concern they are not taking out enough protection on the loans they make.

    Covenants, which give lenders a level of control over corporate borrowers, have steadily weakened since the financial crisis, with certain investment grade loan protections at their weakest since 2006, according to Thomson Reuters LPC, when risky lending was at its height. Restraints on high yield bonds are loosening to an extent not seen in at least four years.

      “You have this false bravado [in the market],” says Evan Friedman, senior covenant officer at Moody’s, who warns the hangover of declining covenant quality will hit investors as default rates rise and a new refinancing cycle begins in 2018.

      “Borrowers will see a lot of flexibility to take action at the expense of bondholders,” he warns.

      Covenants typically alert investors to a company’s deteriorating performance and give them some control over a company’s actions. For example, covenants may cap the amount of debt a company may raise, or require a minimum amount of interest cover. Mr Friedman describes loan covenants as “early warning signals” and bond covenants as “speed bumps”.

      Since the financial crisis, protections have eroded as the huge demand of investors searching for yield has allowed borrowers to issue less restrictive debt on shareholder-friendly terms. “The search for yield allowed the issuers to get away with a lot. There’s a long way we’ve got to go to get the balance back in the market,” says Jack Flaherty, investment director at GAM.

      While covenant quality shows signs of stabilising in high yield loans, the weakness has worsened in investment grade loans and high yield bonds. The amount of debt companies are allowed to raise against their earnings has reached 3.85 times in investment grade loans, according to Thomson Reuters LPC — close to the high of 3.9 reached in 2006.

      In North American high yield bonds, covenant quality hit a new record low in July, according to Moody’s Investors Service. Average covenant quality was 4.6, on a 5-point scale where 1 means strong protection and 5 means weak, its lowest level since January 2011, when Moody’s began measuring covenant quality.

      Cov-lite-chart-1

      Anthony Canale, head of high yield research at Covenant Review, a research firm, says private-equity backed borrowers are becoming more aggressive in pushing back against covenants like those that restrict payments in the event of default. “I don’t think it’s quite as bad as 2008, right at the top of the LBO market, but I think it’s close,” he says.

      A “particularly egregious” example was the $525m bond issued in March to fund the takeover of Riverbed Technology by private equity firm Thoma Bravo and the Ontario Teachers’ Pension Plan, he says. His review of the preliminary documents found “numerous loopholes” that “seriously” undermined covenants.

      The pushback against covenants has been bolstered by evidence from the recent downturn that indicated that debts with fewer covenants were less likely to default.

      Research from S&P, the rating agency, published last year found the default rate for BB-rated loans between 2007 and 2013 was zero for “cov-lite” debts, but 6.7 per cent for debts with traditional covenants. For B-rated loans, the cov-lite default rate was 13 per cent, 5.4 percentage points lower than other debts.

      “They ended up having better flexibility to manoeuvre through the dislocation that occurred in capital markets,” said David Tesher, credit analyst at S&P. Cov-lite debts that did default, however, had a lower recovery rate.

      Cov-lite-chart-2

      It is an argument some find unpersuasive. “It’s more luck than anything. What would you rather have, more control or less control as an investor?” says Stephen Antczak, head of Citigroup’s US credit strategy team.

      The Fed now looks likely to keep its bar open beyond September, extending a cycle Mr Friedman of Moody’s warns has bedded down norms that will be hard to shake. “The traditional [speculative] grade investor will be left holding the bag here. It will be difficult for them to swing the pendulum back towards stronger covenants.”

      Others are more sanguine. “Whenever there’s a correction of some kind you’ll see it pull back,” says Kevin Campbell, managing director of DuPont Capital Management’s private markets group.

      “Companies and private equity firms know that too, which is why they’re getting while the getting’s good.”

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      Japan Post eyes freebies for IPO delivery

      Posted on 27 August 2015 by

      A man walks past a post office in Tokyo, Thursday 6 July 2006. Japan Post and Rakuten Inc., operator of a major virtual shopping mall, plan to jointly enter the Internet auction business, sources close to the matter said Thursday. Starting in September, the state-run postal firm's Yu-Pack parcel service will be used to deliver goods bought via an auction system that allows both buyers and sellers to remain anonymous.
Japan Post hopes the partnership will boost its Yu-Pack business.

      Preparations for the IPO of Japan Post — an estimated Y1.5tn ($12bn) listing set to dwarf all others in the country’s history — remain deadlocked on a question of national interest: will there be gifts for the new army of shareholders?

      According to people familiar with the IPO plans, the gift debate, which invokes a cherished tradition of corporate Japan, has become a bigger issue as brokerage firms fret over how to make an unwieldy, low-growth behemoth attractive to potential investors.

        If freebies are to be forthcoming, the company must decide what would be appropriate for a former state-owned postal service to offer a market where the tradition of kabunushi yutai (annual shareholder perks) is deeply entrenched and corporate handouts range from prize melons, spa treatments and doughnuts to miniature gold bars, railway passes and illuminated walking sticks.

        Japan Post’s internal debate on the gifts remains unresolved as the group approaches the expected listing date of November 4.

        The IPO, which will create three listed companies with an expected combined market capitalisation of more than Y10tn, is a strut of the faltering Abenomics growth programme. The Japan Post IPO, say bankers, represents a rare opportunity to convince large numbers of ordinary Japanese — many still cautious after the bursting of the 1989 bubble — to become stock investors.

        Japan Post to shake up sales pitch ahead of IPO

        The Japan Post Holdings Co. headquarters stands in Tokyo, Japan, on Wednesday, April 1, 2015. Japan Post Holdings Co. plans to spend a further 180 billion yen ($1.5 billion) on mergers and acquisitions over the next three years after it agreed to purchase Australia's Toll Holdings Ltd. Photographer: Tomohiro Ohsumi/Bloomberg

        Japan Post will present itself to potential investors as an “aggressive” asset manager of its $1.7tn investment portfolio as the country’s largest bank, insurance company and employer readies for a massive share offering this year. People familiar with preparations of the initial public offering said the state-owned company had to rethink the way it would market itself after a “sense of crisis” took hold in early April.

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        “We are currently studying the necessity or not [of offering gifts],” said a Japan Post spokesman. “At this moment, nothing has yet been decided”.

        The quality and value of the kabunushi yutai on offer from the various corners of corporate Japan is subject of close scrutiny. Dedicated books, magazines and websites track the annual gifts on offer from each company, correlating their monetary value with current stock prices, dividend yields and price-to-book ratios. Rankings are then produced to help arbitrage corporate generosity and assess which companies are supplying the best-value handouts.

        The latest copy of the Kabunushi Yutai Handbook (September edition) highlights the appeal of three companies offering Y5,000 worth of crab, a pair of collagen face masks and a selection of bathroom cleaning products.

        With its approval ratings looking fragile, according to analysts, the government of Shinzo Abe is heavily staked on the success of the Japan Post listing and nervous about the market volatility emanating from China.

        “I think that we are going to see a lot of market support coming from the government pension fund and other levers being pulled in the weeks leading up to this IPO,” said one banker. “Everyone wants to get the environment looking attractive again, because I think it is unlikely the government will want to postpone the IPO at this stage.”

        The autumn flotation of Japan Post Holdings and its two financial units — respectively Japan’s largest bank and largest insurance company — will be the first of what is expected to be three rounds of offerings.

        House price growth slows in August

        Posted on 27 August 2015 by

        Estate agent's "For Sale," "Sold," and "Let By" signs stand in the grounds of a residential apartment block in the Catford district of London, U.K., on Tuesday, Jan. 6, 2015. Demand for U.K. mortgages fell the most since 2008 in the fourth quarter, according to the Bank of England, as more stringent lending criteria made it harder for homebuyers to get loans. Photographer: Simon Dawson/Bloomberg©Bloomberg

        The pace of UK house price growth slowed in August, but experts warn prices could start to rise steeply again unless the number of properties on the market increases.

        Data from the Nationwide Building Society, based on its own mortgage book, showed annual growth slowed to 3.2 per cent in August, down from 3.5 per cent in July and the weakest figure for two years. Compared with last month, the average house increased in price by 0.3 per cent.

          Of the major indices, Nationwide currently records the lowest rate of annual house price growth, with rival Halifax putting the figure at 7.9 per cent.

          The annual figure is the slowest pace of growth recorded by the index since June 2013, but Nationwide noted price growth was particularly strong last August, making it a high base for comparison.

          Robert Gardner, Nationwide’s chief economist, said the data offered “further evidence that annual house price growth may be stabilising close to the pace of earnings growth, which has historically been around 4 per cent”.

          The latest official data show that annual regular pay grew at 2.8 per cent in the three months to June which, coupled with zero inflation, gave UK consumers the biggest real-terms boost to their spending power since 2007.

          But he added that because UK house building is still well below the level of expected demand, “a significant increase in construction activity is required if affordability is not to become stretched in the years ahead”.

          The Royal Institution of Chartered Surveyors reported this month that the average number of properties for sale per surveyor had fallen to a record low, leading it to forecast that price growth would accelerate over the next year.

          Jeremy Duncombe, director of Legal & General Mortgage Club, said the supply shortage “has created a backlog of people looking to buy, resulting in greater demand in months that typically see a reduction in prospective buyers”.

          In depth

          UK housing market

          For sale signs uk

          Price indices have presented contrasting pictures of the health of the housing market — for some the boom is back, while for others the slump staggers on

          Further reading

          The number of new homes granted planning permission by councils in England hit its highest level since the financial crisis in the first quarter of this year, but the construction industry is still catching up after years when building failed to keep pace with population growth.

          Matthew Pointon, a property economist at Capital Economics, said another factor in the shortage of homes for sale was that current homeowners were reluctant to move or to sell.

          “Record low interest rates appear to be a key factor. By reducing the returns available on other assets and boosting house prices and price expectations, some movers have decided to rent out their old home rather than sell it,” he said.

          Aldermore profits surge on strong lending

          Posted on 27 August 2015 by

          Aldermore has more than doubled pre-tax profits by increasing lending to small businesses and homeowners, but warned of rising competition in the mortgage market.

          The UK-based specialist lender, which is backed by private equity company AnaCap, said on Thursday that underlying pre-tax profit increased to £44m in the first half, up 109 per cent from the same period last year.

            The surge in profit, which beat analysts’ expectations, was driven by a 13 per cent increase in net loans to customers.

            Phillip Monks, chief executive, said he was “very confident” of hitting net loan growth of £1.4bn this year, although he did not rule out potential portfolio acquisitions.

            “We’d never say never, but the key part of our plans is we have both strong market positions and distribution, so we don’t need M&A,” he said.

            However, he warned there was “increased competition” with new entrants in the asset and invoice finance market, while mortgage lenders were more keenly targeting the buy-to-let sector.

            Aldermore’s invoice finance division posted a 6 per cent decrease in net lending growth to customers, with £171m of net loans at the end of June compared with £181m at the end of last year.

            The bank said that new lending through its residential mortgages division was up 12 per cent to £536m, evenly spread between buy-to-let and owner-occupier mortgages.

            Mr Monks said he did not believe that tax changes outlined in the summer Budget, which restrict relief on mortgage interest for individual buy-to-let landlords, would have a significant impact on demand.

            “The UK is experiencing a demographic shift, with around 26 per cent of households expected to be renting within the private sector by 2022, which is expected to generate further growth,” he said.

            The bank reduced its cost-to-income ratio by 11 percentage points to 53 per cent, and is targeting 40 per cent by the end of 2017.

            Although costs increased, income rose further. Net interest income was up 50 per cent to £92m, while net interest margin — the difference between the company’s lending income and the cost of funding — widened to 3.6 per cent.

            Analysts at Numis said: “We continue to believe that Aldermore will see a significant further improvement in its operating efficiency, which is expected to drive strong earnings growth.”

            Return on equity — a key measure of profitability — increased to 18.6 per cent, while its capital buffer strengthened to 12 per cent, up from 10.4 per cent.

            Dalian Wanda buys Ironman triathlon group

            Posted on 27 August 2015 by

            Winner Guilherme Valenza from Brazil crosses the finish line of the Ironman Copenhagen 2015 in Copenhagen on August 23, 2015. AFP PHOTO / Scanpix Denmark / NIKOLAI LINARES DENMARK OUT (Photo credit should read Nikolai Linares/AFP/Getty Images)©AFP

              With a cavalier disregard for China’s slowing economy, the country’s richest man inked a $650m deal for a US sports company — a move that he described as a big bet on the emerging Chinese middle class.

              Dalian Wanda, owned by Wang Jianlin, a property and entertainment industry tycoon with close ties to the Chinese regime, on Thursday held the formal signing for 100 per cent of the World Triathlon Corporation, which runs the Ironman triathlon event.

              Wanda has expanded outside of its core areas of property development for the past few years, and in 2012 it bought AMC Theatres in the US, part of a push into entertainment.

              Mr Wang said the WTC deal represented a further transition away from being “a traditional property company”. It is the third major investment in the sports industry he has made following Infront Sports & Media, and football club Atlético Madrid.

              With China’s stock markets battered, and the economy appearing to be slowing faster than many observers predicted, Mr Wang — whose fortune is estimated by Forbes at $26bn and number one in China — said he was not overly concerned.

              “Wanda’s operations will be unaffected,” he said, though he did not answer a question about whether the slowdown would affect plans for a domestic stock market listing by Wanda.

              The company last year listed its property arm, Dalian Wanda Commercial Properties, on the Hong Kong stock exchange, and after reaching a peak of HK$77 in June, its stock has fallen to HK$46.

              Mr Wang said the share price drop would not affect the company’s operations, and Wanda was on track to exceed its targets for 2015 annual financial metrics such as revenue.

              Lex: Wanda why?

              Lex

              Chinese billionaire is obviously in it for the long run

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              Mr Wang described predictions of a severe slowdown in the Chinese economy as “pessimistic” but added that the economy had taken a hit recently.

              “There used to be three drivers of the Chinese economy, and one of those drivers has disappeared,” he said. “We used to have exports, investment, and consumption as driving growth, and exports have fallen away. We will need to bring up consumption to be a bigger driver of our growth.”

              Mr Wang said the acquisition of WTC, which operates more than triathlon events around the world each year, was both a good financial move but also a savvy bet on China’s emerging middle class.

              Wang Jianlin, chairman of Dalian Wanda Group, touches his face during an interview at his office in the company's headquarters in Beijing in this December 3, 2012 file photo. Chinese property developer Dalian Wanda Group says it can afford to spend as much as $5 billion every year to buy foreign firms or assets, underscoring the rising clout of the firm as it expands abroad. To match Interview CHINA-WANDA/ REUTERS/Suzie Wong/Files (CHINA - Tags: BUSINESS PROFILE HEADSHOT REAL ESTATE CONSTRUCTION)©Reuters

              Wang Jianlin, China’s richest man

              Triathlons, especially the famous Ironman triathlon in Hawaii every year, are a gruelling extreme sport where participants swim 3.9km (2.4 miles), cycle 180km (112 miles) and run 42km (26.2 miles). Since the first Ironman on Oahu Island in 1978, more participants join every year to test the limits of their endurance.

              Mr Wang said that the sport has yet to catch on in China, but added that he had no doubts it would. “The middle class, the managers at the top 500 companies, these are people that have enough money, and now they are looking for something spiritual.”

              Barclays and US exchanges win HFT case

              Posted on 26 August 2015 by

              LONDON, ENGLAND - MAY 08: A Barclays sign outside a Barclays Plc bank branch on May 8, 2014 in London, England. Barclays announced yesterday that they will cut 14,000 jobs this year across the investment part of their company as part of a new strategy. (Photo by Dan Kitwood/Getty Images)©Getty

              A district court judge in the US has thrown out investor lawsuits against Barclays and a host of exchanges, dismissing claims that the bank rigged its “dark pool” trading venue in favour of high-frequency traders.

              The multi-district litigation was part of a litany of claims set off by Flash Boys: A Wall Street Revolt, Michael Lewis’s best-selling book published last year. In it, Mr Lewis argued that high-frequency traders were able to gain an unfair advantage because stock exchanges and “dark pools” — broker-run trading venues that allow buyers and sellers to swap shares with greater anonymity — had enabled those traders to obtain and trade on market data faster than other investors.

                But judge Jesse Furman of the Southern District of New York said on Wednesday that the plaintiffs did not allege any actions that met the definition of “manipulative acts”, or how those actions could have affected the price at which securities traded in the dark pool.

                In a statement, Barclays said it was “pleased with the court’s thorough and well-reasoned decision dismissing all the allegations in the complaints . . . and concluding that the plaintiffs were unable to identify any materially false or misleading statements by Barclays”.

                The ruling is a boost for the British bank, which has been hit by a number of big legal settlements in recent years, including a $2.4bn penalty in May for manipulating foreign exchange rates.

                Barclays may now be emboldened to take a harder line in a dispute with the New York attorney-general, who sued it last June on similar grounds. Eric Schneiderman accused the British bank of engaging “in a persistent pattern of fraud and deceit”, duping investors in marketing materials about the level of protection they would receive in its dark pool from high-frequency traders aiming to profit from being able to trade more quickly than other investors.

                Barclays moved to have that case dismissed, but was denied in February.

                Barclays and Credit Suisse are the biggest operators of dark pools in the US, according to Tabb Group, a market-research firm. Such venues were created as a way for institutional investors to place large orders in the $23tn US stock market without disadvantaging themselves by signalling any potentially price-moving trades.

                The venues have come under increasingly heavy regulatory scrutiny in recent years. Earlier this month ITG, the agency brokerage, said it would pay a record fine of about $20m to settle charges by the Securities and Exchange Commission that it operated a “secret trading desk” and misused information of its dark-pool customers.

                In his ruling on Wednesday, judge Furman said Mr Lewis’s book “may well highlight inequalities in the structure of the nation’s financial system and the desirability for, or necessity of, reform. For the most part, however, those questions are not for the courts, but for commentators, private and semi-public entities (including the stock exchanges), and the political branches of government.”

                Republicans line up for potshots at China

                Posted on 26 August 2015 by

                CLEVELAND, OH - AUGUST 06: Republican presidential candidates Wisconsin Gov. Scott Walker (L) and Donald Trump participate in the first prime-time presidential debate hosted by FOX News and Facebook at the Quicken Loans Arena August 6, 2015 in Cleveland, Ohio. The top-ten GOP candidates were selected to participate in the debate based on their rank in an average of the five most recent national political polls. (Photo by Scott Olson/Getty Images)©Getty

                Republican presidential candidates Scott Walker, left, and Donald Trump have criticised China over its economic management

                When Chinese President Xi Jinping arrives in Washington next month for his first state visit to the US, he will be jumping into the kind of political cauldron the Communist party does not tolerate in China. 

                As Beijing struggles to contain the market crash, Republican presidential contenders are taking potshots at the Chinese leader. Scott Walker, the Wisconsin governor, this week urged President Barack Obama to rescind his invitation to Mr Xi. 

                  “Americans are struggling to cope with the fall in today’s markets, driven in part by China’s slowing economy and the fact that they actively manipulate their economy,” Mr Walker said.

                  “Rather than honouring Chinese President Xi Jinping with an official state visit . . . President Obama should focus on holding China accountable over its increasing attempts to undermine US interests.”  

                  Mr Walker was following on the heels of Donald Trump, the bombastic real estate magnate leading the Republican polls, who took a break from attacking illegal immigrants to aim his wrath at China. 

                  In addition to saying he would serve Mr Xi a Big Mac to protest against the recent Chinese currency devaluation, Mr Trump tweeted: “Markets are crashing — all caused by poor planning and allowing China and Asia to dictate the agenda.”

                  China has long served as a bogeyman in US presidential elections. Whether Bill Clinton referring to the “butchers of Beijing” in reference to the Tiananmen Square massacre, George W Bush attacking Mr Clinton for being soft on China or Mr Obama touting the need for alliances to challenge Beijing, US presidential contenders have long lambasted China while vowing to take a tougher stance than the White House incumbent if elected president. 

                  But some analysts say China is sparking a different degree of anger now for several reasons: its growth as an economic power, its assertive actions in the South China Sea, rampant cyber attacks, theft of intellectual property rights and the creation of a climate that is less welcoming to foreign business. 

                  Frank Jannuzi, president of the Mansfield Foundation, which promotes US-Asia relations, said there had been a bipartisan consensus since Richard Nixon went to China in 1972 that the US would profit by engaging the country. But he said the consensus had almost unravelled because companies had become “increasingly disenchanted” with China.

                  Trump throws out reporter and the rule book

                  Republican presidential candidate Donald Trump gestures during the first Republican presidential debate at the Quicken Loans Arena Thursday, Aug. 6, 2015, in Cleveland. (AP Photo/John Minchillo)

                  When Donald Trump evicted an influential Latino reporter from a press conference on the campaign trail in Iowa, it fuelled concerns that his perceived war on Hispanics is damaging the Republican party’s chances of reclaiming the White House in 2016.

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                  “In Washington there has always been a debate between the China hawks and the Panda-huggers. The balance keepers used to be business,” said Mr Jannuzi, who advised Joe Biden in his 2008 run to be the Democrats’ nominee for president.

                  “You are going to see many presidential candidates view China’s moment of economic turmoil as an opportunity to push them . . . because they can combine the anxiety of the American people about the way China’s economy could hit their retirement accounts with the anxiety that has long been there in elite policy circles about China’s international policy behaviour.” 

                  Chris Johnson, a former top China analyst at the CIA, said the rhetoric on China was “different from the standard stuff” because Beijing refused to address US concerns on issues such as cyber security.

                  “The comments from Walker and the others are irresponsible,” said Mr Johnson. “But it does put the administration on the defensive . . . because they will have to go hard on these issues.” 

                  Mr Johnson added that China had become a victim of its own success and could not rely on the “hide your strength, bide your time” strategy promoted by Deng Xiaoping. “Suddenly these guys who were doing well, but doing well invisibly, are out there in a way that they weren’t before. They’re an easy target.”

                  The China-bashing has implications for Mr Obama, who spent much of this year deflecting demands from Capitol Hill to include binding provisions to prevent currency manipulation in a Pacific Rim trade deal known as the Trans-Pacific Partnership.

                  Helped by Republicans, the administration saw off legislation to impose trade sanctions on any country deemed to be manipulating its currency for economic gain. But a major component of the White House argument was the perceived success of its economic diplomacy with China as signalled by the appreciation of the renminbi in recent years.

                  You are going to see many presidential candidates view China’s moment of economic turmoil as an opportunity to push them

                  – Frank Jannuzi, Mansfield Foundation

                  Beijing has undermined that argument with its devaluation. Moreover, while China is not in the TPP, its move prompted Vietnam, a TPP member, to follow suit, helping critics to bring the question of currencies back to the fore. 

                  “The force of the issue is much stronger now that China has devalued and Vietnam has followed,” said Gary Hufbauer, a former US Treasury official now at the Peterson Institute for International Economics. “It makes the going much, much harder.” 

                  Mr Obama has been selling the TPP as the economic backbone of the US “pivot” to Asia and its geopolitical response to the rise of China. With its currency move, China has complicated the path for a US-led trade zone in its backyard that would cover 40 per cent of global economic output and could, by virtue of size, complicate Beijing’s regional ambitions. 

                  Mr Xi will probably hear a cacophony of complaints during his US visit. Mr Jannuzi said that while China was usually capable of ignoring what leaders understand is red meat for political campaigns, the delicate domestic situation may make it more difficult for Beijing to turn a blind eye to the criticism.

                  “At a time of economic weakness when they might be prone to bolster their own nationalistic behaviour . . . there is a risk that China may take some of this rhetoric more seriously, as it might serve their own domestic purposes.”

                  @DimiSevastopulo

                  demetri.sevastopulo@ft.com

                  Private equity ‘secondaries’ evolve

                  Posted on 26 August 2015 by

                  A private equity firm has allowed its existing backers to sell to new investors at the same time in a single transaction, in a sign of the industry’s maturing “secondary” market.

                  Palamon Capital Partners, a UK-based group, said on Wednesday that it had completed the sale of stakes in two funds after an auction arranged by Credit Suisse. The firm’s five new backers include the private equity arms of Goldman Sachs and Morgan Stanley, and the Dutch pension fund PGGM.

                    The deal shows how it is becoming simpler for investors to trade in and out of what has historically been an illiquid and long-term asset class.

                    Backers of private equity have predominantly invested when funds are raised, locking up capital for several years over the fund’s life. Leaving early requires the agreement of the private equity fund manager, or “general partner”.

                    Selling stakes on the secondary market has often been legally cumbersome and conducted between investors, frequently with specialist funds as buyers, seeking to value the illiquid equities in a fund.

                    But with this deal, “Palamon mandated us to run the process on behalf of all of its investors,” said Mark McDonald, head of secondaries at Credit Suisse.

                    The bank derived pricing for the entirety of investor interests in the two funds under the auction, allowing those who wished to sell to do so. More than a quarter of the funds’ net asset value was traded.

                    With this type of process, “buyers could do much more due diligence, and get much more colour” on assets in the funds than they would in a traditional secondary sale, Mr McDonald said, while also being able to complete the deal faster.

                    “It’s really a ‘tick the box if you want to take the price’ process,” he added.

                    Palamon’s latest backers reflect the growing presence of large institutional investors in the secondary market, using it to pare back or add to their private equity holdings without waiting for fundraisings.

                    “It’s really important for a [general partner] to understand the needs of our constituents,” said Louis Elson, managing partner at Palamon.

                    Secondary sales led by private equity firms “have the benefits of increasing transparency, and therefore pricing — and for the [general partner], of finding new investors without going through the protracted process of fundraising,” Mr Elson added.

                    Founded in 1999 by former Warburg Pincus partners to invest in ‘growth’ private equity in Europe, the transaction will allow Palamon to pursue more deals.

                    It has added long-term backers to funds originally raised in 1999 and 2006 which contain investments it believes have further to run — such as Towry, a fast-expanding wealth manager in the UK.

                    Just over $16bn of private equity secondary stakes were traded in the first half of the year, according to Setter Capital, an advisory firm.

                    “We do need to blur the lines between primary and secondary . . . we shouldn’t talk about it as the secondary market, but as just the market,” Mr Elson said.

                    Groups race to offload pension liabilities

                    Posted on 26 August 2015 by

                    old age pensioners oaps elderly people relaxing by seafront in sun©Chris Batson

                    Companies are racing to do megadeals with insurers to offload their pension scheme obligations, as a looming overhaul of financial safety standards threatens to push up the costs, consultants have cautioned.

                    Advisers at PwC warned companies face having to pay as much as 10 per cent more to transfer their final salary scheme liabilities when new regulations for insurers kick in next year.

                      The warning is a sign of how the EU’s forthcoming Solvency II capital requirements could have implications beyond the insurance industry — with potential knock-on effects for business and consumers.

                      “There’s lots of paddling to try and get there quicker,” said Jerome Melcer, PwC pensions director. “I’d expect there to be a surge in deals towards the end of this calendar year.”

                      Others in the industry questioned the forecast. Clive Wellsteed, partner at Lane Clark & Peacock, said it was too early to say what the impact on pricing would be, but did not expect rises to be any greater than 3 per cent.

                      Pharmaceuticals group GlaxoSmithKline, retailer Alliance Boots and music business EMI are among the companies to have struck “bulk annuity” deals, which relieve them of pension headaches in return for a premium.

                      The insurance industry took on £13bn worth of defined benefit retirement liabilities in 2014 and another £5bn so far this year.

                      Insurers want do more of the bulk deals, especially after UK chancellor George Osborne’s new pension freedoms have caused sales of lucrative individual annuities — sold to savers in defined contribution schemes — to collapse.

                      But Solvency II, a complex set of risk-based requirements designed to better match insurers’ assets and liabilities, presents a potential barrier.

                      Most big insurers have said the new regime, which begins in January, should be manageable for their businesses overall and UK regulators have sought to reassure the sector about the impact.

                      Sam Woods, the Prudential Regulation Authority’s director of insurance supervision, said in a speech last month that the watchdog had no plan to use the new rules to force the industry to raise capital.

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                      Even so, consultants cautioned that bulk annuities were among the particular lines of insurance business that could be hit, partly because the obligations run so far into the future.

                      To satisfy regulators under Solvency II, insurers may need to set aside more funds to back bulk annuity liabilities, said Mr Melcer, adding the industry was likely to pass on the costs to companies through higher premiums.

                      He said the expected price rise would most affect deals known as full buyouts, which involve pension schemes with large numbers of members still in work.

                      Such transactions present greater uncertainty for insurers than those that involve scheme members who have already retired. Bigger risks mean higher capital requirements under Solvency II.

                      As a result of “grandfathering” concessions from Brussels, insurance policies that are written in January will enjoy considerable relief from the new requirements.

                      Still, Mr Melcer cautioned that negotiators may struggle to rush the deals through. Bulk annuity transactions are complex and typically take several months to arrange.

                      Mr Wellsteed said that companies already in talks with insurers would be “well advised” to try to get the deals done before the end of the year. However, he added he had “not seen much evidence” that companies not already in negotiations were accelerating the process because of Solvency II.