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  • Saudis Defend Oil Recovery With Warning for Shorts, OPEC+ Cheats
    Bloomberg

    Saudis Defend Oil Recovery With Warning for Shorts, OPEC+ Cheats

    (Bloomberg) -- Saudi Arabia showed its determination to protect the oil recovery, warning short sellers not to challenge its resolve and delivering a rare public rebuke to a close ally that had been over-producing.After a meeting with fellow OPEC+ ministers on Thursday, Saudi Energy Minister Prince Abdulaziz bin Salman dropped clear hints that there could be a change of direction in production policy before the group’s next ministerial meeting in December.As the rebound in oil prices falters, the prince invoked his hero, former Federal Reserve Chairman Alan Greenspan, with an attempt to bend global markets to his will.“We will never leave this market unattended,” he said. “I want the guys in the trading floors to be as jumpy as possible. I’m going to make sure whoever gambles on this market will be ouching like hell.”Brent crude, the international benchmark, dipped below $40 a barrel last week for the first time since June. There are growing signs that the second wave of the coronavirus pandemic is hurting demand once again, as people and businesses around the world face tightening restrictions on their activities.In response, the Organization of Petroleum Exporting Countries and its allies will be “proactive and preemptive,” according to the communique from the Joint Ministerial Monitoring Committee, which oversees the cartel‘s production cuts. The panel “recommended that participating countries take further necessary measures when needed.”Brent futures rose 2.7% to 43.47 as of 7 p.m. in London, the highest since Sept. 4.Prince Abdulaziz confronted the challenge of a weakening oil market with a bluntness rarely seen inside the coalition of 23 producers.He opened Thursday’s teleconference with a forceful condemnation of members that try to get away with pumping too much crude. While the prince didn’t name any specific offenders, sitting in silence alongside him was UAE Energy Minister Suhail al Mazrouei, who had made a rare post-pandemic trip from Abu Dhabi to Riyadh to atone for exceeding his output target.The UAE has become one of the worst quota-breakers in OPEC+, making just 10% of its pledged cuts in August, according to the International Energy Agency.“Using tactics to over-produce and hide non-compliance have been tried many times in the past, and always end in failure,” Prince Abdulaziz said at the opening session of the OPEC+ committee that monitors the output cuts. “They achieve nothing and bring harm to our reputation and credibility.”While Mazrouei had previously admitted to a small excess in production, tanker-tracking data revealed the country was exporting far in excess of its output limit.“Attempts to outsmart the market will not succeed and are counterproductive when we have the eyes, and the technology, of the world upon us,” said Prince Abdulaziz.Compensation CutsThe UAE’s over-production was about 520,000 barrels a day in August, according to the IEA. The country will meet its output target in full this month and make additional cuts in October and November to compensate for previous shortcomings, Mazrouei said after the meeting.Since he became Saudi oil minister a year ago, Prince Abdulaziz has applied intense pressure to any country cheating on its quota. He introduced the notion of compensation cuts as a new means of ensuring compliance.The strategy has largely paid off. Even though the demands for compensation impose an onerous burden on countries that has scarcely been fulfilled — with the deadline for implementation extended again on Thursday to the end of the year — overall compliance has been higher than ever.Habitual laggards Iraq and Nigeria implemented more than 100% of their required cuts last month, according to the IEA, a level unseen in previous rounds of cuts. This has given OPEC+ greater credibility and created more space for the group to begin the planned easing of its cuts from 9.7 million barrels a day from May to July to 7.7 million in August.”You have to hand it to Prince Abdulaziz,” said Harry Tchilinguirian, head of commodities strategy at BNP Paribas SA. “Since he became Saudi oil minister, the kingdom has kept OPEC+ in line through his diplomatic and compelling powers of influence.”But the focus on compliance can only go so far in a market where the balance between supply and demand is deteriorating. OPEC+ didn’t discuss the possibility of restoring some of their output cuts at Thursday’s meeting. Yet, as central bankers around the world have learned over the last several weeks, the market can turn against them and force their hand.“We see how difficult the recovery to the pre-crisis levels is, the outlooks for recovery of the global GDP and oil demand are being revised,” Russian Energy Minister Alexander Novak said in his opening speech. “These are the trends we need to discuss today and take into account in our future actions.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.

  • Drahi Offers $3 Billion to Take Europe Phone Empire Private
    Bloomberg

    Drahi Offers $3 Billion to Take Europe Phone Empire Private

    (Bloomberg) -- Billionaire Patrick Drahi is offering 2.5 billion euros ($3 billion) to take Altice Europe NV private after a roller-coaster ride for the French phone company’s equity investors.Altice’s founder and largest shareholder will pay 4.11 euros a share through his Next Private vehicle, the companies said in a statement Friday, valuing the entire company at 4.9 billion euros. The offer represents a 24% premium over Thursday’s closing price, and the shares jumped as high as 4.22 euros on Friday.The offer “undervalues the company materially -- and so we would recommend that shareholders do not accept the offer,” Russell Waller, an analyst at New Street Research, said in a note. “But we do have some sympathy” with Drahi’s plans given the depressed share price, he added.Altice’s 29 billion-euro debt pile has meant the shares have swung wildly with its changing fortunes. The company said this volatility partly explained the decision to delist. While performance has improved at its biggest unit, France’s SFR, Altice is under heavy pressure to invest in fiber broadband and 5G wireless networks and still reduce leverage.The move may also allow him to focus more on his fast-growing U.S. business. Drahi bought Suddenlink in 2015 and Cablevision in 2016 with a plan to create another U.S. cable giant. Last week, Altice USA offered $7.8 billion to buy Canadian cable company Cogeco Inc.’s U.S. assets and sell the rest to Rogers Communications Inc.Altice Europe hasn’t paid a dividend on its common stock since it was created in 2018 through a spin-off of the U.S. assets. Taking it private allows the company to avoid forking out for stock buybacks it has promised once it reaches a leverage reduction target.Next Private said it will support the group’s deleveraging strategy, and will use “commercially reasonable efforts” to prevent damage to the group’s credit ratings. Altice Europe is rated B at Standard & Poor’s, and is one of the continent’s biggest issuers of high-yield debt. The rating is five levels below investment grade and has a negative outlook, indicating it could fall further.Bonds from Altice Europe borrowing vehicle Altice Finco due in January 2028 dropped 1.2 cents on the euro to 93 cents, the lowest since July, according to CBBT data at 11.10 a.m. in London. Other notes issued by the company also dropped around 1 cent on the euro.The statement said the purchase price will be covered with a term loan provided by BNP Paribas SA, although it didn’t indicate how much of his own money Drahi would contribute.A mass of leverage has never been a problem for the debt king, whose business mantra has long been to buy everything on credit. In the 1990s he used a student loan of 50,000 francs to set up his first cable business in a tiny Provencal town, and through a series of deals amassed the communications empire he runs today.The stock is down about 42% since the start of the year, more than the 17% drop in the Stoxx Telecommunications index. It is unclear whether shareholders will agree to a premium below recent levels -- Altice was trading at over 6.5 euros a share in early February.The delisting highlights the pressure Europe’s phone companies face in rolling out the latest communications technology while facing a squeeze on revenue from regulation and the pandemic. Share price slumps at Orange SA and Telefonica SA have forced both industry giants out of benchmark indexes.The European telecom sector has lost more than 40% of its equity market value in the last five years, and other companies have been pulling back from public markets. The owner of French rival Iliad SA, Xavier Niel, has used buybacks to cement his control. Spanish phone company Masmovil Ibercom SA is being bought by a group of private equity firms.Drahi’s move also represents the second time this month that a major European TMT company has discussed delisting from public markets. Germany’s startup factory Rocket Internet SE said on Sept. 1 it would withdraw its shares from the Frankfurt and Luxembourg stock exchanges.The depressed valuations have boosted European telecom deal activity in the third quarter after a slow start to the year, with more than $17 billion announced before today, according to data compiled by Bloomberg.(Updates with context on dividends, buybacks in fifth paragraph)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.

  • Paris Bank Traders Go on a Ruinous Losing Streak
    Bloomberg

    Paris Bank Traders Go on a Ruinous Losing Streak

    (Bloomberg Opinion) -- France’s biggest banks have lost their savoir faire at one of the worst possible times. Bets that went awry on equity derivatives — once a craft in which the French firms excelled — have cost BNP Paribas SA, Societe Generale SA and Natixis SA hundreds of millions of dollars in income this year. They’ve also cost several top executives their jobs.Of the three banks, only BNP will get past this relatively unscathed, and that serves as a cautionary tale to others. Relying too much on a hugely volatile, risky activity such as stock derivatives is a dangerous strategy reminiscent of pre-financial crisis times. The companies’ boards and regulators should have seen this coming.BNP, the biggest of the three lenders, expects profit to fall by no more than 20% this year, in part thanks to a surge in fixed-income trading that helped it offset the dismal performance in equities. In the midst of a global pandemic, a dent in income of this relatively small magnitude would be an achievement, helped too by comparatively low provisions for bad loans.The news wasn’t so good at SocGen. The Paris-based bank posted its biggest quarterly loss in a dozen years in the three months to June as revenue from equity derivatives plummeted. After downsizing its fixed-income business last year, SocGen was even more exposed to complex trades, which made up a fifth of the revenue at its market unit last year. Stock derivatives are financial instruments that let traders speculate on movements in equities and indexes, while hedging some of the risks. They can be lucrative trades if things go well, but that isn’t always the case — as the French banks have demonstrated.Within hours of reporting the dismal results, SocGen revamped its management, axing two deputies to Chief Executive Officer Frederic Oudea. In the top job for more than a decade, Oudea is now counting on cutting costs across the investment bank, retreating from some structured products and redeploying capital to where he can eke out bigger profits. As I’ve argued before, the firm is paying the price of Oudea’s over-reliance on trading.At Natixis, the derivatives blunder has been just as costly. The bank posted a loss in the three-month period, its second consecutive quarter in the red, and ousted its CEO Francois Riahi. Concerns about the running of one of its affiliates, H20 Asset Management, which over-invested in thinly traded bonds, had already raised concerns about the company’s risk management and controls. Riahi had rebuilt Natixis by betting on yet more speculative trades.The three banks have one thing in common: They all focused on structured products that are more susceptible to market swings, and they were exposed to derivative bets on corporate dividends, which backfired when the pandemic struck and companies halted shareholder payouts to preserve cash. The three made almost 40% of their equities revenue from structured products last year. That’s three times as much as their competitors.How they emerge from the setback could set them further apart. Natixis and SocGen — minnows compared to BNP — are both working on new strategic plans to be presented next year. Oudea told analysts on Monday that he will remained focused on costs. He let one of the departing deputies explain whether the firm should keep bothering with investment banking if returns remain low. That doesn’t bode well for the division’s future. Taking outsized risks in a hugely competitive market wasn’t a winning strategy, as shareholders have learned painfully. SocGen and Natixis have little option but to keep cutting, and hope for a white knight suitor to emerge.This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.

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