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Joseph Cotterill

Joseph Cotterill

Joseph is the FT’s Southern Africa correspondent based in Johannesburg, after previous stints as private equity correspondent and on the Lex column. But he still writes for Alphaville, which he joined way back in March 2010 — right in the middle of the Greek bailout crisis. He has been very interested in all things credit and sovereign debt ever since…

Articles by Joseph Cotterill

In Memoriam, Libor (1986-2021)

July 27, 2017

“Libor to End in 2021 as FCA Says Bank Benchmark Is Untenable” – Bloomberg News, 27/7/2017So. Farewell ThenLibor.You were theLondon InterbankOffered Rate.Three hundred and fiftyTrillionDollars, pounds, yenThat’s how muchMoney they sayYou benchmarked.But reallyNo one traded you.Not good for aBenchmarkIs it?You were a fraudLike tradersWho committedFraud using you.(Allegedly.)It was done for youBig Boy.But now youAre done for.J.A. Cotterill (30½)Related link:E.J. Thribb – Wiki

Copyright The Financial Times Limited 2017.

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Global Britain Plc – ‘Project Brexit’ transaction, investor call transcript

January 17, 2017

Participants: Theresa May, chief executive; Philip Hammond, chief financial officer; David Davis, chief operating officerOperator: Ladies and gentlemen, following the chief executive’s remarks, if you wish to ask a question, please press star one on your phone. Again, for audio questions at this time, please press star one to begin. Our first question comes from the line of Alf Aville with Befuddled Securities. Please proceed.Alf Aville: Hi! Great quarter, guys. Great quarter. Hi Theresa – thanks very much for the colour on the call about the transaction to exit the stake in European United (GmbH). Love the ‘Global’ rebranding, plus the simultaneous ‘take back control’’ and ‘profoundly internationalist’ slogans for the quarter. Deft messaging in terms of ex-Europe market share opportunities, guys. (Will you be reviving the old ‘East India Company’ brand?)Impressed also with your attack on “every stray word and hyped-up media report”. That always scares the short-sellers. It really shows that the company definitely isn’t rattled, at all, about the guys saying you don’t have a plan for the demerger.Yeah, the demerger. Could have appreciated some commentary on the company’s chronic productivity problems, its lack of capital spend and the balance-sheet concentration in the finance and real estate portfolio, especially as the stock is down a fifth since you became CEO.

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The outlook for sanctions against Russia under Trump: stronger or weaker?

December 7, 2016

Who knows — a mystery.(Although when it comes to the outlook for old-fashioned Russian expropriation risk, Glencore’s actual equity in Rosneft will be 0.54 per cent — or €300m, paid to underpin a five-year, 220,000 barrels a day off-take agreement.)Related link:A “very good result” (Putin) – FT

Copyright The Financial Times Limited 2016. All rights reserved. You may share using our article tools. Please don’t cut articles from and redistribute by email or post to the web.

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The United States’ first emerging-market president: frontier market implications

November 9, 2016

Short everything — everything — east of the Oder until the Russian border, go long whatever the Russian elite will buy when sanctions end, don’t buy Cemex (too easy) — buy European defence contractors — and get out of the Korean won, Saudi riyal and Philippine peso before those countries start being charged for US protection.
What else?
Here’s more from Exotix, the brokerage, country by country, with a more frontier market bent:
BrazilThe lower rates we expect to see with the dovish monetary policy we expect from a Trump Presidency is marginally positive for the sovereign (given the low sovereign dollar debt to GDP), but will have more of an impact in the corporate sector which has borrowed offshore and will face refinancing. A weaker US dollar can hurt the country’s industrial exports but is positive for Petrobras. Stronger commodities are positive for Brazil’s exports and economic activity. Trump’s win raises the risks of increased trade restrictions, with the US being Brazil’s second-largest export destination.
IraqWith Trump in charge, American support for Iraq can potentially weaken. The benefit of higher commodity prices for Iraq is therefore balanced against the risk of weaker support from America – and potentially from its DFI partners as well.

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Uber in ‘minicab company’ shocker

October 28, 2016

Labour got one back at capital on Friday, after an employment tribunal in London found that Uber’s circa 30,000 drivers in the city are actually its workers after all, and accordingly deserve employment protection.
With potentially epic consequences for its costs, its tax bill, and the entire gig economy, that would mean Uber is no longer a mere intermediary platform.
At least in the tribunal’s eyes. The ruling might not bind other courts, and of course Uber is going to appeal.
Still, on the other hand, there’s another interesting thread in the judgment: what Uber claims to be, and how that stands up in court.
The next time someone says Uber isn’t a taxi or transportation company, but something much more wonderful — justifying its considerable valuation and explaining why Saudi Arabia is pouring money into it — you might now direct them to paragraphs 85 onwards of the reasoning for the ruling, as written by Judge Snelson and members of the tribunal.

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Maputo Confidential

October 25, 2016

A ‘confidential’ presentation by Mozambique’s government to nervous bondholders in London on Tuesday that it is in “debt distress,” and that they should lawyer-up for a restructuring, turns out to have been… not quite so confidential:

Click above for the full presentation, which was posted publicly on the ministry of finance’s website.
The presentation notes that on every one of five indicators used by the IMF to test the level of debt and capacity to service debts (against GDP, exports and so on), Mozambique is highly distressed. It wants a loan from the IMF early next year though, so:
Mozambique would welcome formation of one (or several) representative creditors’ committee(s) to engage in discussions with the Ministry of Economy and Finance and its advisors…
Mozambique has appointed Lazard Frères (financial advisor) and White & Case LLP (legal advisor) as its exclusive advisors to support the debt solution process.

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A joke

October 4, 2016

Business leaders are failing to recognize that the new prime minister has a different view of the City of London from Cameron, the people said. May does not simply accept what the City says in the way that Cameron and his former chancellor, George Osborne, tended to do, according to one person. That realization will be a shock to some in the City, the person said.
Financial-services firms risk damaging their relationship with lawmakers by repeatedly complaining about the impact of Brexit on their businesses and threatening to move their offices out of the U.K., one senior figure said, dismissing as a joke the idea that London-based financial-service companies would all move to Frankfurt, Paris or Dublin.
— Bloomberg story on “three senior figures in May’s administration” promising “no special favours” for the City in Brexit negotiations, October 2nd
Following the UK referendum, there is the potential for a material increase in the number of applications for authorisation by the Central Bank due to the possible loss of passporting rights of UK-authorised entities.
We will in general want to see that the Board and the management of the entity are located here such that that the business is run from here. We will want to be satisfied that the mind and will of the entity are located here; that the decision-making happens here.

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It’s 1998 all over again, all over again

July 19, 2016

It’s 1998 again in emerging markets, and it’s good:
The best parallel with recent events – major shock (this time, the UK vote), DM central bank liquidity reassurance and market surge – is, in our view, the collapse of Long-Term Capital Management (LTCM) in September 1998. In addition to a bailout for LTCM, the Fed ‘turned on a dime’ then and cut rates by 75bp in two months; risk markets took off. While MSCI GEMs fell much more before Sept. 1998 (Asia and Russian crises) than recently, EM rose by 31% in two months after LTCM and by 120% by March 2000. As usual, the USD played a role; after a four-year 34% rally to August 1998, the $ TWI fell by 11% after LTCM. The extremes will be hard to repeat, but the earlier episode confirms how liquidity is a ‘great healer’…
UBS analysts on Tuesday, on the 26 per cent rally in the MSCI index of emerging-market stocks since January. There is the small matter of the Fed not actually cutting rates so far this year — and that in 1998 far more markets were pegged to a dollar that had been rising for much longer.

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Barroso, now offering lessons from nobody

July 8, 2016

This crisis originated in North America. Many of our financial sector were contaminated by… how can I put it… unorthodox practice from some sectors of the financial market. But we are not putting the blame on our partners… Frankly, we are not coming here to receive lessons in terms of democracy… we are certainly not coming here to receive lessons from nobody.
– José Manuel Barroso, then President of the European Commission, speaking at the G20 summit in Los Cabos, Mexico in 2012, at the height of the eurozone debt crisis.
José Manuel brings immense insights and experience to Goldman Sachs, including a deep understanding of Europe. We look forward to working with him as we continue to help our clients navigate the challenging and uncertain economic and market environment.
– Michael Sherwood and Richard Gnodde, co-CEOs of Goldman Sachs International, on the appointment of Mr Barroso (also a former prime minister of Portugal) as GSI’s non-executive chairman.
“His perspective, judgment and counsel will add great value to our GSI Board of Directors, Goldman Sachs, our shareholders and our people,” Goldman added.

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“The profit share finally bites hard”

June 28, 2016

Looking beyond the Article 50 kabuki, beyond the evaporation of British bank and homebuilder equity, beyond the fantasy diplomacy by one country about which shade of EEA it might decide to accept from 27 others…
A bracing thought for the broader backdrop, which you might have missed from Credit Suisse’s European credit team on Monday (emphasis ours):
The main explanation as we see it is the profit share. This is a global phenomenon leading to political impacts in the UK and to the extent a political reaction is necessary, as we suspect it is, this will be terrible news for financial assets, including credit.
The explanation is not confined to “Brexit” but in our view can be applied to the popularity of Donald Trump as well; we think that understanding what is driving these events is central to understanding their implications. We see them as symptoms, essentially.
Our view is that we are finally seeing the political effects of the profit share having been unsustainably high for too long. It now seems at least possible that it now needs to come down as a political imperative. Driven to a large extent by globalization, this high profit share has concentrated such income gains as there have been in recent years on capital at the expense of labour, with the political results we are seeing.

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Banks — the Brexit reckoning

June 24, 2016

RBS: -34%LLOYDS: -29%BARCLAYS: -30%HSBC: -5.1%STANCHART: -7.8%
Prices at pixel time. A reminder of the Bank of England statement from earlier:
The Bank of England is monitoring developments closely. It has undertaken extensive contingency planning and is working closely with HM Treasury, other domestic authorities and overseas central banks. The Bank of England will take all necessary steps to meet its responsibilities for monetary and financial stability.
Related link:The world’s most complex divorce begins – FT

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Some sort of house of cards

June 21, 2016

Mr. Musk said it is “important that there not be some sort of house of cards that crumbles if one element of the pyramid of Tesla, SolarCity and SpaceX falters.”
He said his loans [backed by Tesla and SolarCity stock] aren’t risky to shareholders because they add up to less than 5% of his total net worth, which exceeds $10 billion. That figure doesn’t include Mr. Musk’s large stake in SpaceX, which is private. He said he could easily put up more SpaceX or Tesla shares as collateral if needed.
“The odds that a margin call cannot be addressed are almost zero,” Mr. Musk said in the interview.
Elon Musk, the corporate financier, to the WSJ in April.

On Tuesday, Tesla offered to buy SolarCity.
Culturally, this is a great fit. Both companies are driven by a mission of sustainability, innovation, and overcoming any challenges that stand in the way of progress.
Culturally, they are also a great fit in the sense of neither having positive cash-flow.
The deal is all in stock — $1.7bn of Tesla’s being very fresh stock indeed.
Related link:This is Tesla.

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A Knight Bachelor of the Realm

June 15, 2016

Would you mind not looking at me like that all the time. It’s really disturbing.
Your lady here is sort of suggesting here I should remember about a board meeting in 20-whatever it was.
You are asking me questions that are impossible for me to answer, sorry.
I need to get back to work. I’ve been out of work for four weeks.
You must have been a mind reader in your previous life.
I’m sorry, are we in the same room? I’m not sure we are.
Which bit of don’t remember is difficult for you listen to?
The wit and words of Sir Philip Green, renowned for his gift for “mental arithmetic, instant assessment of value, fast decision making and simplification of complex business dilemmas… his mastery of detail“, as he was being questioned by a select committee of MPs about the BHS pension deficit on Wednesday.
Sir Philip was knighted “for services to the retail industry” in 2006.
“We are acclimatising ourselves to a different image of you,” said Frank Field, the only MP in the room whose name Sir Philip appeared capable of remembering.

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Mr Clippy the LBO machine

June 13, 2016

Microsoft has $105bn in cash.
In its last reported quarter, the company cranked out about $125m in free cash flow per day. Whatever else you can say about endlessly outpouring some of the world’s most annoying software to businesses that just cannot stop buying it — sorry, being the world’s leading professional cloud — it spits out cash for Microsoft.
It is, however, issuing $26bn in debt to buy LinkedIn, according to the offer announced on Monday, paying $196 for each of the shares of the world’s most annoying business media company.
This is different to the last round of tech deals. It’s not like Mark Zuckerberg, for example, throwing around more of the expensive stock that is under his complete control as the currency for another Lex Luthor-style acquisition.
And that is the most revealing thing this acquisition says about the rather mad state of today’s debt markets.
You could quibble all day about the 50 per cent premium to LinkedIn’s stock price last week (it’s also a 10 per cent discount to the price this time last year), or the valuation of 12 times LinkedIn’s sales, or what Microsoft actually, strategically proposes to do with the company that will be different to previous acquisitions/shareholder value bonfires like Nokia.

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Mr Putin’s proceeds (and his bond plumbing)

May 23, 2016

When sovereign debtors issue bonds, the “use of proceeds” clause tends to be mere boilerplate.
“General budgetary purposes” usually covers it — although bondholders (those who bother to read the contract) will sometimes just have to hope that means something like servicing existing debts, rather than servicing the president’s daughter’s limo.
Similarly, the “general corporate purposes” line in a state enterprise’s government-guaranteed debt will usually be taken to mean just that, and not something worryingly niche, like arming a small navy. (It happens.)
They’re sovereigns. You’re not supposed to be too insistent about what they do with the money.
Times have changed though. Or at least they have for Russia.

In a new international bond issue announced on Monday — a rather rare opportunity these days to lend to Putin’s Russia, at a targeted yield of less than 5 per cent – the use of proceeds clause is unusually specific:

The net proceeds of the issue will be credited to the US dollar account of the Federal Treasury (Treasury of Russia) in the Bank of Russia, which is used to cover US dollar expenses (such as interest and principal due on foreign debt. Any proceeds not retained in the Federal Treasury Account would be sold to the Bank of Russia, where they would become part of the Bank of Russia’s foreign exchange reserves.

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The Prince, the Firm, and the Fund

April 26, 2016

Because if his Royal Highness the prince wants the world’s largest sovereign wealth fund — then who’s to say no?

As for the Arab and Islamic depth, we have the Qiblah of Muslims. We have Medina. We have a very rich Islamic heritage.
We have great Arab depth. The Arabian Peninsula forms the basis of Arabism. The kingdom constitutes a large part of it. That issue has not been exploited in full.
We have a pioneer investment power at the level of the world. Today, you see that many statements are being made, including statements indicating that the Saudi Sovereign Fund will be the largest fund in the world by far, compared to the other funds.
That will be the main engine for the whole world and not only the region. There will be no investment, movement or development in any region of the world without the vote of the Saudi Sovereign Fund.

If the Saudi Sovereign Fund said that the projects of this state would not succeed and that we would not invest in it, this would of course, [would] have a direct effect and vice versa.
The Kingdom of Saudi Arabia will be an investment power through its sovereign fund, through the other state-owned funds, and through the most important profession, i.e. the Saudi businessmen.
Yes, we have many businessmen in different industries, but most of the businessmen are in investment companies. The Saudi mentality is an investment one.

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The clause that wouldn’t die

April 19, 2016

You won’t find a certain Latin phrase anywhere on it. Still, just for the record, here’s evidence that Argentina did learn at least one thing from the pari passu saga.
Presenting the new pari passu clause, from the prospectus for the gargantuan $16.5bn bond which Argentina is issuing to pay off holdouts and place that saga behind it:

Click to enlarge.
The entire prospectus runs to 266 pages incidentally, but this little tidbit has an interesting history.
For any of the investors proposing to lend to Argentina who will actually care to look — almost none will — it probably seems like any other sovereign promise to treat creditors equally. However, there has been a small but important rewriting. It disavows a promise to treat them ratably.
That means Argentina’s new clause will exorcise the old one attached to its pre-default debt. This didn’t rule out paying each creditor what they were owed in lockstep, a mistake which made the saga possible in the first place. It let US judges decide it was fair to impose an injunction on Argentina to pay its holdouts alongside everyone else for as long as it was “recalcitrant” about doing a deal.
That injunction was only just lifted in the nick of time last week to allow this bond issue to go ahead.

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A Mozambican bond offer so good, it’s bad

March 17, 2016

What’s the biggest coupon you can get lending US dollars to an African government south of the Sahara these days?
Ghana’s bond due 2030 of course. It will pay 10.75 per cent starting from its first coupon date next month.
And what will investors get for agreeing to swap Mozambique’s government-guaranteed tuna debt for its own sovereign paper?
Ever so slightly less. The new bonds, to replace $850m of notes issued by Ematum, the state-backed fishery with a sideline in seriously tooled-up maritime security, will have a 10.5 per cent coupon, according to pricing terms on Thursday.
It’s almost like the Mozambican government doesn’t want to be seen as the riskiest credit on the continent.
In any case, the size of the coupon means something pretty interesting. Ematum’s creditors may well get away without losing money in economic terms. Remember the new bonds would be issued at a price of 80 cents (which is about where Ematum notes are priced in the market now). If the market priced them at a yield of 14 per cent or less after issue, then, per this chart compiled by Exotix this week, the bondholders avoid a haircut to the present value of their claim.

(Click to enlarge)
So what’s the problem? (Even if bondholders really wanted 12.

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So long, and thanks for all the tuna bonds

March 11, 2016

When Zambia issued its first international bond, in 2012, investors could knock themselves out reading a 106-page prospectus of disclosure regarding the southern African sovereign’s finances.
If they had knocked themselves out, in place of buying it, they might have been better off. Issued at 5 per cent, the $750m bond due in 2022 yields 12 per cent in today’s markets. It changes hands for 70 cents in the dollar, another casualty of the bust in commodities and African currencies.
At least Zambia’s bondholders could read about what they were in for.
One year later, buyers of a $850m bond issued by Mozambique’s newly-founded state-owned tuna fishing company (alias Ematum, alias Mematu) had rather less reading material to work with.
Three pages of paper explained to investors (or, more precisely, did not explain) what a country with a grand total of one national-flagged tuna vessel, plus 2,800 miles of coastlines, planned to spend on with Ematum.
Since the bond technically comprised loan participation notes, which packaged bank loans to Ematum from Credit Suisse and Russia’s VTB, it could disclose relatively little about this to investors versus a full sovereign Eurobond.
A subsequent contract with a French shipmaker to build 24 fishing boats – but also, 3 HSI32 interceptor vessels and 3 Ocean Eagle patrol trimarans – clued them in later on.

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It’s been emotional

February 29, 2016

It gives me greatest pleasure to announce that the 15-year pitched battle between the Republic of Argentina and Elliott Management, led by Paul E. Singer, is now well on its way to being resolved…
– Daniel Pollack, Special Master in the pari passu deal negotiations

Could it be? Is it over?
The $4.6bn deal (in principle) announced on Monday involves four big pari passu holdouts, including Elliott’s NML.
They have reached agreement days after Judge Thomas Griesa said he would lift his injunction on Argentina to pay holdouts alongside restructured bondholders, which had set off this saga and (along the way) an Argentine sovereign default.
The holdouts would get 75 per cent of their claims on Argentina. Its offer this month, made both to holdouts with judgments on defautled bonds and those building up hefty post-dated interest on pre-judgment debts, had been 70 per cent. (It also paid another holdout 100 per cent of his claim to settle, of course.)
The difference is likely to be more than 5 per cent as Argentina’s specific treatment of that post-dated interest had been a big issue. Argentina will also be paying the holdouts back certain legal fees which, in a litigation which has taken the best part of a quarter of a century, may not be minuscule. Under a deal, Argentina would have to repeal a law against paying holdouts, and issue bonds to raise cash for payment.

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The CoCo that popped

February 9, 2016

Let’s go back in time — to May 2014. Deutsche Bank was in the market to raise capital, including at least €1.5bn of additional Tier 1 capital securities. Or CoCo (short for contingent convertible) bonds.
Deutsche ended up issuing €3.5bn, on €25bn of demand. Quite a few investors must have liked the sound of the bonds’ 6 per cent coupon.
Hopefully they came to that conclusion after perusing the prospectus. Especially this bit, on deferring coupon payments if the accounting-related amount available for distributing them (not the same as Deutsche’s overall capital or liquidity) isn’t enough.
(This is before looking at write-down / conversion, in the event of the bank’s capital ratio being too low. This feature is why we’re using the CoCo term for the bonds as well as AT1. Blast us in comments if you’d see them differently.)

Of course, you’ll probably know AT1 bonds like these better for having left the market agape in the last couple of days.

On Monday for example, they were being marked at 70 to 75 cents on the euro. That seems to price in Deutsche (or its “competent supervisory authority”) not authorising a coupon payment this year nor for some time to come, which seems pretty extreme.
For want of liquidity in what they actually bought, some investors even bought protection on Deutsche’s senior bonds.

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Lay off Tim Geithner, yeah?

February 8, 2016

For a writer about skin in the game, here’s someone who seems not to like Tim Geithner putting more of his skin in the game of private equity investing.

The Obama era is one of crony capitalism: Geithner blocked the punishment of JP Morgan, now paid for it. No!
— NassimNicholasTaleb (@nntaleb) February 8, 2016

That’s after this Bloomberg story about the former US Treasury Secretary, now president of Warburg Pincus:

Geithner, 54, secured a credit line with JPMorgan, one of the largest banks he oversaw during the financial crisis, to finance personal investments in funds started by his current employer, Warburg Pincus, according to a filing with the New York Department of State. He is borrowing money to invest in a $12 billion private equity fund that the firm raised in November, its first main fund since he joined almost two years ago, a person familiar with the situation said.

Here’s the filing incidentally.
It’s good of Bloomberg to highlight this feature of private equity fundraising by illustrating it with a well-known name in finance.
It highlights a point potentially lost on critics here.
This happens all over the private equity industry. And presumably, we want it to.
There was a period before the financial crisis when buyout funds got bigger and bigger.

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Pari passu: the force awakens

December 10, 2015

After a long hiatus, a convoluted saga gets a new cast of characters.
Although has the basic plot changed very much?
Daniel Pollack, Judge Griesa’s ‘special master’ for negotiating an end to the pari passu litigation between Argentina and its debt holdouts, met the country’s new administration in New York on Wednesday:

The meeting took place at the request of Mr. Caputo and was introductory in nature. Mr. Pollack also confirmed that he had met at the end of last week with representatives of the Bondholders who hold approximately $10 billion of judgments against Argentina. No substantive negotiations to resolve the outstanding debt litigation occurred in either meeting. Mr. Caputo expressed to Mr. Pollack the intention of the new Administration to commence such negotiations promptly after they are sworn into office on Thursday, December 10. No specific date has been set for such talks.

Mr Caputo is Luis Caputo, who will be President Macri’s finance secretary.
This is our first official glimpse of the 12-year saga after the Kirchner era, and maybe its end. Argentina’s bonds (restructured and held out) have been anticipating it for some time: they’ve rocketed in price this year despite remaining in default.
Mr Macri may be a little busy to begin talks right away.

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A history of leverage and the mining industry, 2010-2015

September 28, 2015

Or, in chart form via Investec…

How taking on cheap debt to build fancy holes in the ground (to feed Chinese demand) blew up shareholder value in the world’s biggest miners. Click to enlarge. As Investec notes (emphasis ours):

It is the rising percentage of debt that makes this cyclical downturn so toxic for equity holders. Strangely enough, BHP Billiton, Rio Tinto and Anglo American started this century with not dissimilar gearing ratios (defined here as net debt to market capitalisation), ranging between 15% (Anglo American) and 27% (BHP Billiton)…
As we progressed into the Supercycle, shareholders began to own a greater proportion of the overall enterprise value of the company, with average gearing (net debt:equity) falling to 8% in FY05/06. The adoption of debt-based growth strategies in recent years, especially after the GFC, has led to profound changes within the sector. The ready availability of low-cost debt encouraged companies to take on additional gearing to finance the race to grow production, with iron ore development and expansions being the key culprits. The recent fall in commodity prices has compounded the proportion of earnings consumed by debt service – both interest and repayments.

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August 27, 2015

All those San Francisco meetings paid off.
Franklin Templeton and other private creditors will agree to swallow a writedown on their Ukrainian bonds. Cutting a fifth off bond principal, it’s much less than many expected. Bond prices were rallying hard at pixel time.
Then there is the issue of Moscow. Since Russia’s said no about restructuring its own Ukrainian bond.
Ukraine will get $11.5bn in debt relief over the next four years by extending dates on which it has to pay principal, 2015 to 2023, beyond 2019 toward 2027. This is a big part of meeting the conditions of its IMF loans, including coming back to debt markets again by 2017. Much more from the FT’s Elaine Moore here.
Ukraine also gets $3.6bn in immediate relief from the 20 per cent haircut: filleting around $19bn of debt into $15.5bn.
That seems to assume that Ukraine will not be sending $3bn out the door this December to pay Russia’s bond in full.
This is awkward, because as Bloomberg reported, Russia said no to Ukraine’s invitation to tender into the restructuring, within minutes of it hitting the wires.
Russia, as we’ve written, could use a few legal tricks up its sleeve to turn into an especially ferocious holdout, if Ukraine defaults on it (quite apart from the army it has parked on the border), if it sees good policy in doing so. Ukraine may have one or two of its own, however.

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DIY private equity

August 19, 2015

Or, a coda to our recent post on hacking the world’s most expensive asset class.
If investors locking up their money in leveraged buyout funds really could have gotten the same aggregate return all along simply by buying the right, leveraged stocks in the public market — then there’s an interesting implication.
Why isn’t everyone already doing it?
Or in other words: what’s private equity still being paid for these days?
After all, according to Preqin there is about $450bn sitting in LBO funds but yet to be invested. A record amount. If this dry powder was all invested tomorrow, it would be entering a market where the average buyout target changes hands for over 10 times its earnings. Again, a record.
In other words, it’s the kind of market in which the average private equity manager most probably is at high risk of overpaying for assets.
If there’s a decent way to replicate the same performance in public markets, then — without fees — there is no better time to try it.
More philosophically, there’s also this problem.

Click the graphic to enlarge (via Cambridge Associates). As pension funds and other big pools of capital allocated more and more of their portfolios to private markets over the last two decades, of course, it made larger and larger buyouts possible.
It also dragged down returns.

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Someone didn’t read Santiago Principle No. 14…

August 18, 2015

That would be the Santiago Principles signed up to by sovereign wealth funds in 2008, regarding good governance — including via-a-vis the custodians of SWFs’ often-plentiful assets.
While it was BNY Mellon who paid nearly $15m on Tuesday to settle SEC charges that it handed out internships to the family of a SWF client’s official, in order to retain the fund’s business…

In February 2010, at the conclusion of a business meeting, Official X made a personal and discreet request that BNY Mellon provide internships to two of his relatives: his son, Intern A, and nephew, Intern B…
In June 2010, an employee of BNY Mellon with primary responsibility for the Asset Management relationship with the Middle Eastern Sovereign Wealth Fund wrote of the internships for Interns A and B: “I want more money for this. I expect more for this. . . . We’re doing [Official X] a favor…”
In February 2010, around the same time that Official X made his initial internship request, Official Y asked through a subordinate European Office employee that BNY Mellon provide an internship to the official’s son, Intern C…
The relationship manager wrote: “Its [sic] silly things like this that help influence who ends up with more assets / retaining dominant position.”

…it should be the unnamed Middle Eastern Sovereign Wealth Fund that’s in the frame here.

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How does that bail-in instrument work again?

August 17, 2015

Following the results of the Asset Quality Review and Stress Tests before the end of the year, the bail in instrument will apply for senior debt bondholders whereas bail in of depositors is excluded.
– Eurogroup statement on Greece, August 14th

Which ‘instrument’ might that be for wiping the senior bonds of under-capitalised Greek banks?
Is it:
a) The bail-in tool used under Article 43 of the EU’s Bank Resolution and Recovery Directive? In which case the banks would have to undergo resolution by the authorities first, before the instrument was applied to senior debt.
That resolution may be an arduous process to undertake in the present, somewhat delicate circumstances of Greece’s financial system. It may also depend on stress tests, and on how badly the summer’s Grexit near-miss damaged non-performing loans.
b) Some other instrument that would somehow apply as soon as Greek banks tapped recapitalisation funds? Which would be an interesting extension of the bail-in ethos but not, as far as we can tell, part of the BRRD procedure.
Because at pixel time on Monday, some of these bonds had dropped a third in price (admittedly in a less than liquid market).
A Piraeus Bank bond due next year, for example, fell from 53 cents on the euro to 40 cents.

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