- The MoneyFitt Morning
- ☀️☕️ EverGrande-Slammed
📊 Also: … Yet HK up; US record; Roomba hits Wall; Fed Wed; BlackRockBull; Europe 2yr high; Holcim’s US infra play 🎓 Bad Banks! AMCs and bad debts
📊 In the Markets
… Yet HK up; US record; Roomba hits Wall; Fed Wed; BlackRockBull; Europe 2yr high;
Holcim’s US infra play
📖 MoneyFitt Explains
🎓️ Bad Banks! AMCs and bad debts
💸 Personal Finance Corner
A Hong Kong court ordered China Evergrande's liquidation after overseas creditors failed to finalise a restructuring deal on how to restructure the company's massive debts, marking a pivotal phase in the collapse of the world’s most indebted property developer. Following the liquidation order, Evergrande's Hong Kong-listed shares plunged by a fifth and were then halted.
Despite a once-dominant market presence, Evergrande's market value at the time of the halt was under $300mn, down 99.5% from its 2017 high, and now pales in comparison to more than $300 billion in liabilities. The liquidation process is expected to be lengthy, with limited assets available for the (repeat: overseas) creditors, potentially leading to minimal recoveries.
The fallout extends beyond creditors, impacting China's financial system and shadow banking sector, amplifying concerns about broader market repercussions.
..... ▷ The liquidator will now attempt to take control of Evergrande assets outside China.
However, most of Evergrande's remaining assets are located in mainland China, so despite the "one country, two systems" slogan for the functioning of the HK Special Administrative Region within the PRC, there are some thorny jurisdictional issues to manage, to say the least.
There actually is an agreement between the courts of China and Hong Kong to recognise the appointment of liquidators but without an orderly legal process, it’s been patchily applied thus far, and taking control of Evergrande’s subsidiaries in mainland China could take months or years.
Some commentators suggest that the likelihood of Evergrande shareholders in Hong Kong getting anything out of the winding up process may be “very low”, not least because of the Variable Interest Entity (VIE) structure in which owners of those shares don’t actually own the company that has issued those shares.
Beijing may also be keen to keep developers sort-of-afloat for macroeconomic and domestic consumer and homeowner sentiment reasons.
..... ▷ Unhelpfully for real estate companies and their long-suffering shareholders and customers (and for the central government), a former Chinese official said in the middle of last year that China has enough vacant properties to house more than its entire population of 1.4 billion.
Possibly much more. Perhaps the entire population of India more.
..... ▷ Meanwhile, purely by coincidence, China has plans to merge three of its largest bad debt managers, Cinda, China Orient and China Great Wall, into the sovereign wealth fund China Investment Corp (CIC). However, the announcement was removed from state owned media by Monday afternoon.
Founded in 2007, CIC is one of the world’s largest sovereign wealth funds and is charged with investing China’s foreign exchange reserves.
Four state-owned asset management companies (AMCs) were established in 1999 to manage and dispose of the non-performing assets of China’s state-owned banks i.e. to deal with the bad loans made by Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China (rather than to invest investors’ assets, as one might assume from the name.) Such AMCs are often called bad banks🎓 (which seems unfair.)
But these Chinese AMCs expanded outside of their original roles and started becoming risk factors themselves. China Huarong, the fourth of the AMCs set up at that time, was excluded from the merger, as it had already been bailed out to the tune of $6.6bn by state-owned CITIC Group and is now known as China CITIC Financial Asset Management.
Its former chairman was arrested in 2018 on charges of taking $280 million (1.8 billion yuan) in bribes over a 10-year period and executed after being found guilty of corruption.
(Both Huarong and Cinda are listed in HK, and are down 78% and 62% over the last 5 years.)
🇸🇬 Singapore: Let’s Get MoneyFitt!
📊 In the Markets
Trading of Evergrande's shares were halted shortly after 10am on Monday. Hong Kong's high court ordered the liquidation of the troubled Chinese property developer after overseas creditors failed to finalise a restructuring deal and after an 18-month long hearing.
The property developer was suspended after suffering a 20% plunge (above), taking its losses over the last 5 years to a stomach-churning 99.5%. Listed subsidiaries Evergrande Property Services and Evergrande New Energy Vehicle Group also asked for trading halts.
And yet Hong Kong's Hang Seng index rose by 0.71% anyway, while its Properties subindex managed a 0.6% gain.
On the other hand, China's CSI 300 index fell 0.9%, driven by weakness in Shenzhen-listed shares despite new restrictions over the weekend on short selling Shanghai and Shenzhen stocks (in which strategic investors are now forbidden from lending out those shares for short selling during an initial lock-up period) and new, loosened property measures in Guangzhou.
The Japanese broad market Topix index rebounded 1.27% after Friday's loss of almost the same amount, while South Korea's Kospi finished up 0.89%.
In the US, Amazon and iRobot, the maker of the Roomba robot vacuum cleaner, scrapped their $1.4bn merger after being blocked by the EU (and the US FTC) on smart HOM device antitrust concerns. This now forces iRobot into a restructuring strategy involving 350 job losses, about 31% of its workforce. Founder Colin Angle stepped down as CEO and the stock fell 8.8%.
Amazon+iRobot deal heading for the exit - Image credit: National Geographic via Tenor
The Nasdaq led gains, while the S&P 500 hit another record high ahead of upcoming megacap earnings, jobs data and the Fed's monetary policy decision. Google and Microsoft (the world’s most valuable company) both report after the close.
The Federal Open Markets Committee began its meeting and is expected to keep rates unchanged.
Robust recent economic data reports have tempered recession fears but dampened hopes for March rate cuts. Last Friday, the Fed’s key inflation measure, the core personal consumption expenditures (PCE) index, was released, rising 0.2% in December vs November, and 2.9% vs December a year ago.
Economists in a Dow Jones poll had been expecting slightly higher, but not by so much that anyone changed their expectations for the Fed decision tomorrow, with the focus remaining solidly on Fed Chair Jay Powell’s commentary.
And the world's largest asset manager, BlackRock, is going bullish on US stocks, upgrading them to overweight from neutral ahead of a "soft landing" for the US economy. But this doesn’t mean all their fund managers will have to start buying from tomorrow onwards, or at all - it’s just a view from their research department, and as much for their clients’ consumption as their own.
European stocks crept up to a two-year high, driven by increasing confidence that rate cuts will start in April, and by news of the breakup of its largest building materials conglomerate.
Shares in Holcim, the giant $42bn Swiss cement and concrete multinational, popped up 5.5% on Sunday’s reports that the new CEO would completely spin off its North American building materials business into a separate listing in the US.
..... ▷ This would help it capitalise on the Biden administration’s industrial policies, which are spurring an infrastructure building boom.
Besides that, The American Society of Civil Engineers has projected that the US needs $2.6 trillion over the next decade to repair failing bridges, crumbling roads and ageing dams.
..... ▷ But how would spinning this huge business off add value to Holcim Group shareholders?
Though 40% of Holcim Group’s revenues, a higher valuation for the LafargeHolcim North American business in the US could be hugely beneficial for its shareholders whether floated off entirely for cash or partially distributed “in specie” to Holcim shareholders, and could fetch a valuation in the “ballpark” of $30bn because of the much higher valuations for peers listed in the US.
LafargeHolcim is the largest cement company in the US by production capacity. It is larger than the US-listed CRH, the world’s largest building materials group, which trades on a P/E of 18x. CRH last year moved its primary listing from London to New York and has rallied 50% since.
LafargeHolcim is also larger than cement peers Vulcan (VMC) which trades at 36x, James Hardie (JHX) at 33x and Cemex (CX) 23x but at the group level trades 11x on the Swiss market. Better than Buzzi Unicem, also a large US cement producer, listed only in Europe and trades at 7x in Italy.
..... ▷ Holcim Group was formed in a 2015 deal that created the world’s largest cement company from the merger of France’s Lafarge, founded in 1833, with Switzerland’s Holcim (combining HOLderbank & CIMent), which was founded in 1912.
Its production capacity is even larger than China’s cement champion, Anhui Conch’s, and is a key player in major infrastructure projects around the world, including those involving roads, mines, ports, dams, data centres, stadiums, wind farms and electric power plants.
📖 MoneyFitt Explains
🎓️ Bad Banks! AMCs and bad debts
"Bad banks" (bad loan asset managers, or Asset Reconstruction Companies) work by buying the bad loans and other illiquid holdings off another financial institution.
1. The bad bank buys non-performing loans (NPLs) from the original financial institution, usually at “market price" - which is well below the face value of the original and now non-performing (“bad”) loan. This allows the original institution to clear these assets (since loans are assets to a bank) off its balance sheet, although it will still be forced to take write-downs.
2. Once the bad bank has acquired these assets, it focuses on maximising their value by restructuring the debt, selling the assets or recovering as much as possible from the debtor (who technically still owes the whole face value, but now to the new owner of the asset, the “bad bank.”)
3. The ultimate goal is to resolve the NPLs, either by getting the debtor to start making payments again or by writing off the debt entirely.
The creation and use of AMC/bad banks can obviously lead to moral hazard, as it might encourage the management of banks to take undue risks, knowing that poor decisions could lead to a bailout by an AMC/ bad bank (even if at a loss to the original bank), but the potentially very large upside is theirs (the original bank and therefore its management) to keep.
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