|Bid||145.52 x 900|
|Ask||0.00 x 900|
|Day's range||145.00 - 149.57|
|52-week range||130.85 - 250.46|
|Beta (5Y monthly)||1.36|
|PE ratio (TTM)||6.91|
|Earnings date||14 Apr 2020|
|Forward dividend & yield||5.00 (3.44%)|
|Ex-dividend date||27 Feb 2020|
|1y target est||228.31|
(Bloomberg Opinion) -- Don’t hold your breath. Massive Chinese stimulus isn’t coming to shore up the world.As China tries to get back on its feet from Covid-19, policy makers are announcing more fiscal help to deal with the worst economic hit in decades. This has included plans to spend trillions of yuan on standard measures from the Beijing playbook, such as issuing infrastructure bonds to boost activity, lower lending rates to help struggling companies, and cheap credit for small banks to support them.One measure from recent days stands out: Special central government bonds, a tool authorities have pulled out only twice before, in moments of dire financial pressure. This signals both seriousness and, ominously as the rest of the world looks for China to join in the rescue, that the country is being pushed into a corner. China’s economic engine, long a driver of global demand, may not rev up. Though China has been first-in and somewhat first-out on the virus, the measures laid out so far still amount to only 1.6% of gross domestic product on-budget and 1.7% off-budget. Compare that to Australia and South Korea, where off-budget measures already amount to 5.2% of GDP in addition to budgetary help, according to Credit Suisse Group AG analysts. Beijing is relying more on monetary policy to flush the system with liquidity and boost credit, unlike some countries where fiscal measures are playing a larger role. This reflects the reality that China is running out of effective tools. The special treasury bonds are therefore notable. They have only been deployed previously when things just had to get done. In 1998, Beijing used them out to recapitalize banks as the financial crisis pummeled Asia. In 2007, they were marshaled to set up sovereign wealth fund China Investment Corp. and strengthen foreign-exchange reserve management. They don’t end up on the government’s balance sheet and are earmarked for specific, targeted policy goals. This time, the bonds could directly fund China Inc. or recapitalize banks so they’ll have more room to lend. Nomura Holdings Inc. analysts estimate that almost 2 trillion yuan to 4 trillion yuan ($282 billion to $563 billion) of these long-maturity obligations could be issued to fill the gap between the official and actual fiscal deficit targets. Unlike regular central government bonds, these need to be put to spending that has returns, which could force some discipline.China doesn’t have the fiscal space of a decade ago, when it unleashed a 4 trillion yuan package to shore up what was then a much smaller economy and the rest of the world with it. Revenues plunged almost 10% in January and February from last year; those from land sales fell 16.4%. That’s only an early blow. At the local government level, revenue last year grew at the slowest pace in a decade. Property prices are dropping across several cities. With the need for expenditure and leverage rising, the ability to service borrowings has become difficult.There aren’t many places left to add more debt. China’s overall burden as a portion of its GDP is among the world’s highest. Local government debt has dominated in recent years as almost all of the 2.15 trillion yuan quota of municipal off-books bonds for specific projects was issued. Meanwhile, years of using state-backed enterprises’ balance sheets to boost economic growth has leveraged them to the hilt. Households are also strained.The special treasury bonds represent something of a last stand. They’re going to indirectly lean on China’s banks, which have other problems. Herein lies the risk. Banks are currently staring into a credit down-cycle made worse by the virus shock, which will amount to billions in yuan of non-performing assets, rising credit costs and slower profit growth. Jitters in the sector last year have hit confidence. Rounds of monetary-policy easing have pushed them to lend to the weakest borrowers. As Goldman Sachs Group Inc. analysts put it, issuing these bonds signals “a new round of loosening, monetizing fiscal stimulus via the central banking system, leveraging on banks to ramp credit growth.”Much of this will mean that prudent policies to unwind the leverage buried in China’s labyrinthine financial system will be thrown aside. More debt, on or off the books or contingent liabilities, will pile up. The type of stimulus China really needs — for consumers — won’t arrive.This time, China has limits that it has rarely faced in the past. As Beijing is constrained to turn inward, it’s no wonder that other countries are coming out with far more aggressive measures. This column does not necessarily reflect the opinion of Bloomberg LP and its owners.Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal. 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.
(Bloomberg) -- Apple Inc. and Goldman Sachs Group Inc. are letting Apple Card users defer April payments without incurring interest to ease financial pressure from economic disruption caused by the Covid-19 pandemic.The card, backed by Goldman, offered the same program for March payments. Apple Card users need to opt in to the program by messaging a support representative via the Wallet app on an Apple device.“We understand that the Covid-19 situation poses unique challenges for everyone and some customers may have difficulty making their monthly payments,” Apple wrote in an email to card customers. “If you previously enrolled in the Customer Assistance Program in March, you will need to enroll again.”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.
(Bloomberg) -- Coronavirus deaths continued to climb sharply in New York and New Jersey, the nation’s epicenter of the coronavirus outbreak, with governors of both states releasing data showing a doubling of fatalities in the past three days.New York reported a 25% one-day increase in fatalities on Wednesday and New Jersey reported a 33% increase, with nearly 500 people in the two states dying in a single day.New York’s death toll reached almost 2,000 victims, while New Jersey -- where infections spread more slowly and in smaller numbers at first but are now rapidly increasing -- has recorded more than 350 deaths. As of Sunday, the two states had a combined death toll of about 1,000.The rise in deaths has coincided with an uptick in the mortality rates of the disease in both states. After trailing the national mortality rate of 2.2%, both have risen as of Wednesday, with 2.3% of New York cases ending in death and 1.5% of New Jersey cases.New Jersey’s governor, Phil Murphy, warned that the state would soon need more space to store deceased victims, and that it may resort to using refrigerated trucks.The stark statistics came as evidence mounted that the region’s health care system was reaching its limits. New York moved patients from overtaxed hospitals in the New York City area to upstate facilities in Albany for the first time, and New Jersey temporarily approached the ceiling of its hospital capacity and began using converted anesthesia machines as ventilators.Even after New York gets past the apex of the crisis in late April, Cuomo said, the state is likely to have an elevated death rate into July. He also said that patients whose conditions became so severe that they require ventilator support don’t face strong chances of survival. By one model provided by a unit of the Gates Foundation, there could be 16,000 deaths in New York -- and 93,000 nationwide.“That means you’re going to have tens of thousands of deaths outside of New York. So to the extent people watch their nightly news in Kansas and say, ‘Well, this is a New York problem,’ no, that means right now it’s a New York problem. Tomorrow it’s a Kansas problem,” Cuomo said. “Look at our numbers today and see yourself tomorrow.New Jersey has the second-highest number of virus cases after New York. Both states have issued stay-at-home orders, closing schools and nonessential businesses.Murphy’s top priority this week has been securing ventilators ahead of an expected surge in Covid-19 hospitalizations. On Wednesday, he said the federal government had committed to sending another 350 ventilators, for 850 total. He said that he was grateful for the equipment but that it was far fewer than the 2,300 ventilators the state had requested. He also said the state had spent “tens and tens of millions of dollars” for millions of masks, gloves and other disposable medical goods.In an interview with Bloomberg Television, Murphy said he was also looking to recruit more health-care workers. On Wednesday, he signed an executive order for license waivers and other exceptions to admit out-of-state medical professionals.“We need to bolster their ranks,” Murphy said.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.
(Bloomberg Opinion) -- Small businesses are in trouble. As the coronavirus spreads and more states close up restaurants, cafes, theaters, clothing stores, beauty salons and similar shops, small businesses are desperate for funds to avoid laying off their workers. Fortunately, the relief package signed by President Donald Trump last Friday is set to provide businesses some of the help they need.But the law’s passage isn’t the end of the story. Now, it needs to be put into effect in a way that encourages its use.Only half of U.S. small businesses have enough cash reserves to cover 15 days of operating expenses. Four in 10 small businesses have a three-week cash buffer. In Miami, the median firm has 11.8 cash-buffer days. In San Francisco, the median firm has 17.9 days. These statistics come from a 2019 report by the JPMorgan Chase Institute, which analyzes data on businesses that have deposit accounts with the bank.As of Monday evening, roughly three in four Americans are being told to stay home. Thirty-one states, 18 cities and the District of Columbia have issued shelter-in-place orders. This has already added millions of workers to the unemployment insurance rolls; 3.3 million new filers were added in the week ending March 21 alone. The previous weekly record, set in 1982, was 695,000. Economists at Goldman Sachs are currently forecasting that the unemployment rate will hit 15% — a 50% increase over the peak following the 2008 financial crisis.To do what it can to prevent soaring unemployment and mass business closures, Congress passed the Paycheck Protection Program as part of its $2 trillion dollar economic recovery package.The program lets a small-business owner go to a local bank and take out a loan that is guaranteed by the government. The business can borrow up to 2.5 times its monthly payroll costs, not to exceed $10 million. The amount of the loan spent on payroll, rent, utilities and similar operating expenses during the eight-week period after taking out the loan will be forgiven provided that the business does not lay off workers or cut wages by more than 25%. Businesses that lay off workers after receiving a loan would have a smaller amount of their loan forgiven. For businesses that have already had layoffs, provisions are made to extend grants to them if they rehire workers.To qualify for a forgivable loan, a business or nonprofit organization must typically have fewer than 500 employees, or be a sole proprietor or independent contractor. To get money out the door quickly, lenders don’t need proof of actual economic harm, but can rely instead on good-faith certifications that the business needs the money to avoid layoffs or continue operating, and that the business intends to use the money for payroll and other operating expenses.The program has several additional provisions designed to swiftly put cash in the hands of business owners. It delegates authority to lenders to make determinations on borrower eligibility and creditworthiness so that businesses don’t have to go through the usual government process. Lenders do not need to assess the ability of borrowers to repay the loan or conduct a credit-elsewhere test, and no collateral or personal guarantee is required.This is a good deal for banks, which can charge generous fees and interest for these loans, despite the fact that they are guaranteed by the government, have a zero weight in the bank’s capital requirements and come with a ready customer base.To protect lenders, the law has a “hold harmless” provision shielding them from any penalties imposed by the government as long as they receive documentation certifying that borrowers used the loan proceeds to prevent layoffs.The Treasury Department hopes to have the program operational this week. To make it as effective as possible, four things should happen.First, some banks are concerned that they may be on the hook if borrowers misrepresent their situations or go bankrupt a week or two after taking out the loan. Regulators must assure banks that this will not happen. The legislation envisions banks as a conduit to pass along what are essentially government grants. The regulations currently being written need to treat banks as such by offering ironclad guarantees that the hold-harmless provisions will be strictly enforced by government agencies.In addition, the government should send the message that more money will be provided to the program if needed. Congress allocated $349 billion, but Columbia University economist Glenn Hubbard and I estimate that the demand could easily rise above $1 trillion. Lenders want to know how those limited funds will be allocated if more are needed.Third, the government needs to work with banks to understand their technology and processing needs. A large number of loans will need to be made, and it will be hard for government systems to keep up with the demand. The government needs to make processing as easy as possible for banks, engaging with private firms for help and advice.Finally, all levels of government need to engage in an active program of public messaging to encourage both lenders and small businesses to participate, making sure businesses know that the program offers grants for payroll and operating expenses, not just loans.In my home state of Virginia, the big news on Monday was Governor Ralph Northam’s decision to extend the coronavirus lockdown to June 10. He said, “It is clear more people need to hear this basic message: Stay home.” Northam should have used this opportunity to send a second basic message: Don’t lay off your workers, payroll grants will be available very soon.At the federal level, Senator Marco Rubio of Florida, the chief author of the program, did exactly this on Twitter on Monday, the day after Trump extended social distancing guidelines to April 30. But where is Trump himself? He should be urging businesses every day to hold on to their workers until the grant program comes online later this week.Congress has taken an important step toward propping up the U.S. small-business ecosystem that will be crucial to the post-pandemic recovery. But this vital task is far from complete.This column does not necessarily reflect the opinion of Bloomberg LP and its owners.Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”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.
(Bloomberg) -- Saudi Arabia showed no sign of bowing to pressure from U.S. President Donald Trump to dial back its oil-price war with Russia. Instead, the kingdom pushed crude supply to record levels.Trump said Tuesday night that he’d spoken to both President Vladimir Putin and Crown Prince Mohammed bin Salman in an effort to broker a truce between the world’s two largest oil exporters. While Russia made some conciliatory noises, Saudi Arabia showed nothing but defiance.The kingdom started the month by boosting supply to more than 12 million barrels a day, the most ever, according to an industry official familiar with the kingdom’s operations. In an apparent show of force, Aramco was loading a record 15 tankers with 18.8 million barrels of oil on a single day earlier this week, according to another official and a tweet from the company.That social media post, boasting how the kingdom will “rise to supply energy,” appeared to be a riposte to U.S. Secretary State Michael Pompeo, who last week urged the Saudis to “rise to the occasion” by dialing back their plan to flood the market.So far, Riyadh has insisted that it will only back away from a decision to flood the global market if all the world’s leading producers -- including the U.S. -- agree to cut output. Russia has struck a more conciliatory tone, saying it would hold back from a major production increase, but hasn’t offered any concrete proposals to end hostilities with its former OPEC+ ally.Trump’s decision to wade into oil diplomacy is driven by the catastrophic impact of the price crash on the American shale industry, largely based in Texas and other Republican-leaning states. But his mission to rein in global supply is overshadowed by the unprecedented loss of demand -- possibly as much as 30% -- caused by the fight against the coronavirus.“Signs of policy discussions are multiplying and we believe such an outcome should no longer be dismissed,” analysts at Goldman Sachs Group Inc. said in a note. Even so, after such a huge drop in consumption it’s questionable “whether policy coordination by OPEC+, the U.S., and oil producers more broadly can save this market.”Read: Trump and Putin Are All Talk on Oil Price Plunge: Julian LeeA senior Russian official said that while they hadn’t spoken to Saudi Arabia yet, Moscow had no plans to increase production given the current market situation. He gave no indication that Russia was willing to consider output cuts, however. It was Russia’s refusal to join Saudi Arabia and other members of the Organization of Petroleum Exporting Countries in deeper reductions that kicked off the price war in early March.“The Russian side traditionally welcomes mutual dialog and cooperation in order to stabilize energy markets,” Kremlin spokesman Dmitry Peskov told reporters on conference call on Tuesday. Putin has no immediate plans to speak with the Saudi king or crown prince, but such contacts can be easily arranged, he said.Demand HitWorld oil demand, normally around 100 million barrels a day, will likely be down by 30 millions barrels a day in April and has yet to bottom out as lockdowns due to the virus continue, Chris Bake, an executive committee member at trader Vitol said on Tuesday.The Russian official said it made no sense for producers to boost output in the current situation. Energy Minister Alexander Novak said last month that the country can raise production by 200,000 to 300,000 barrels a day in the short term, and by as much as 500,000 barrels a day in the near future. That’s a fraction of the additional 2 million barrels a day that Saudi Arabia has pledged to pump.“The sharp drop of oil prices has made the bulk of new Russian oil drilling uneconomic, the industry will need to look for ways to optimize” output, said Darya Kozlova, head of oil and gas regulation services at Moscow-based Vygon Consulting.However, even if production is flat, Russia may hike its oil exports to offset falling domestic demand for crude as its own economy goes into shutdown to slow the spread of the coronavirus, Kozlova said.Trump MediationOn Tuesday evening in Washington, Trump said the U.S. would meet with Saudi Arabia and Russia with the goal of staunching the historic plunge in oil prices, and has raised the issue directly with the countries’ rulers.“They’re going to get together and we’re all going to get together and we’re going to see what we can do,” he said. “The two countries are discussing it. And I am joining at the appropriate time, if need be.”U.S. Energy Secretary Dan Brouillette had a “productive discussion” with Novak on Tuesday and agreed to “continue dialog among major energy producers and consumers, including through the G20,” the Department of Energy said in a statement. The two men agreed that an oil oversupply hurts the global economy, the Russian Energy Ministry said separately.Neither side detailed any steps they are considering to stem the downturn.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.
(Bloomberg Opinion) -- Corporations that receive aid from the federal government as part of the coronavirus legislation passed by Congress and signed into law by President Donald Trump last week are banned from purchasing their own shares until a year after they’ve paid taxpayers back. This isn’t quite the end to buybacks that some have called for in recent years, but it is a notable development for a practice that has since the early 1980s become a pretty major use of corporate cash.How major? Since 2010, buybacks have consumed about half the free cash flow of the companies in the Standard & Poor’s 500 Index. For all U.S. nonfinancial corporations, they’ve averaged a little over 2% of gross domestic product during that period.Corporations did not always spend this kind of money buying back their own shares. The next chart shows net share purchases by nonfinancial corporations, so it includes mergers and acquisitions as well as buybacks, but it gives a good indication that something major changed starting in 1984 — which happens to have been not long after the Securities and Exchange Commission altered its rules in November 1982 to make buybacks a lot easier to do.The reason buybacks weren’t easy to do before 1982 was because of concerns that companies would use them to manipulate their share prices to nefarious end — something that has definitely happened from time to time. Most of the great market corners and other such manipulations of the 1800s and early 1900s seem to have involved buying and selling by financiers who were the controlling shareholders of corporations, not the corporations themselves. But there was at least one notable case, recounted in John Kenneth Galbraith’s “The Great Crash 1929” and a 1939 SEC report, of a corporation that bought huge quantities of its own shares in 1929, both driving up the price at the time and making those shares worth less than they would have otherwise been after the market crashed.This was the Goldman Sachs Trading Corp., an investment company — what today would be called a closed-end mutual fund — set up by the partners of the eponymous brokerage firm and traded on the New York Curb Exchange (what later became the American Stock Exchange, now NYSE American). Its managers channeled the bulk of its cash in February and March 1929 into buying back shares, helping drive the price from $136.50 to $222.50 over the course of a few weeks. As the market began to slide in September, they engaged in another buying frenzy, accounting for 64% of trading volume in the stock that month, but could not halt its decline. Three years later, the shares were selling for $1.75 apiece.The SEC was created in 1934 to police such behavior, which it did in subsequent decades. One key case involved lumber products maker Georgia-Pacific. As finance scholars Douglas O. Cook, Laurie Krigman and J. Chris Leach described in a 2003 paper: Between 1961 and 1966, Georgia-Pacific acquired other companies using its common stock as payment. The number of shares to be exchanged in these transactions was contingent on the price level reached during a specified trading period. The SEC charged that Georgia-Pacific had used open market repurchases to manipulate (increase) the reference sale price, thereby reducing the number of shares needed to effect the acquisitions.The SEC won in court, and in 1968 Congress updated the Securities and Exchange Act to make it explicit that buybacks were illegal if “fraudulent, deceptive, or manipulative,” leaving it up to the SEC to define what that meant. The commission came up with its first set of proposed rules for buybacks in 1967, before the legislation was passed, and revised them several times over the next decade. In an Oct, 27, 1980, rule-making proposal that was meant to clear up uncertainties, the SEC described four main reasons buybacks might be deemed out-of-bounds:If they were “designed to support or raise the market price of the issuer’s securities for the purpose of making exchange ratios appear more favorable to target company security holders” before a merger or acquisition. If they supported the share price after a merger or acquisition “for the purpose of reducing the number of shares required to be issued pursuant to contingent obligations owed to former shareholders of the target company.” If they supported the price to “assist insiders in disposing of their holdings.” If they supported the price to “maintain the value of securities pledged by insiders as collateral for bank loans.”Eight days later, Ronald Reagan was elected president, and two years later the new majority he appointed to the SEC, led by Chairman John Shad, a former head of investment banking at E.F. Hutton, swept all this aside. The commission instead granted “safe harbor” from liability for most repurchases, arguing that “issuer repurchase programs are seldom undertaken with improper intent” and “may frequently be of substantial economic benefit to investors.” The new rule still contained limitations on buybacks — the safe harbor disappeared during mergers, for example, and you couldn’t do any buybacks during the last half-hour of a trading day — but the disclosure requirements were so lax that it would be hard to tell if a company were violating them (these were beefed up somewhat in 2003). Buybacks had been unleashed.They were also starting to become fashionable, thanks to an electrical-engineer-turned-corporate-executive named Henry Singleton. During the stock market go-go years of the 1960s, Singleton had built a small electronics company into a sprawling but well-managed conglomerate. Stock in his Teledyne Corp. seemed to him to be priced quite richly relative to his preferred metric of profit, free cash flow, so he kept issuing more and more of it to buy other companies — 130 of them from 1961 to 1969.(1) When the stock market slumped after that, and the conglomerate Singleton had assembled kept churning out cash, he decided to stop issuing stock and start retiring it. “I think we can earn a better return buying our shares at these levels than by doing almost anything else,” he told one of Teledyne’s board members, the venture capitalist Arthur Rock, in 1972. “I’d like to announce a tender — what do you think?”A tender is a public offer to buy a certain amount of shares at a set price, a transaction transparent enough to avoid any SEC suspicions of market manipulation. Rock and the rest of the board agreed to Singleton’s plan, and “between 1972 and 1984, in eight separate tender offers, he bought back an astonishing 90 percent of Teledyne’s outstanding shares,” wrote private equity investor Will Thorndike in “The Outsiders,” the 2012 book from which my account of Singleton here is taken. “Singleton bought extremely well, generating an incredible 42 percent compound annual return for Teledyne’s shareholders across the tenders.”Those who sold in the tender offers didn’t share in those returns, of course, but they did get cash, on which they paid tax at capital-gains rates rather than the higher tax rates to which dividends — traditionally the chief means of conveying excess corporate cash to shareholders — were subjected. Other financially savvy corporate managers began to follow Teledyne’s example, with Warren Buffett endorsing buybacks in his 1978 Berkshire Hathaway shareholder letter as “often by far the most attractive option for capital utilization.” By 1985, Buffett’s friend and bridge partner Carol Loomis was reporting in Fortune that corporations that voluntarily bought significant amounts of their own common stock from 1974 through 1983 had as a group outperformed the Standard & Poor’s 500 Index by 8.5 percentage points a year. And buying back shares had, thanks to the SEC, just become a lot easier to do.In the 1980s, a lot of the net share purchases apparent in the above chart were due to leveraged buyouts and mergers that removed shares from circulation. Others were opportunistic buybacks of the sort pioneered by Singleton, with repurchases spiking in the months after the 1987 stock market crash as executives bet correctly that markets would recover. In the 1990s, though, buybacks began to be something that companies just did, year in, year out. Their apparent success as a means of delivering higher shareholder returns — several studies in the 1990s backed up Loomis’s early findings — was one reason, but in her 1995 Massachusetts Institute of Technology doctoral dissertation, economist Christine Jolls proposed another. As she wrote in a subsequent paper:The increased use of repurchases coincided with an increasing reliance on stock options to compensate top managers, and stock options encourage managers to choose repurchases over conventional dividend payments because repurchases, unlike dividends, do not dilute the per-share value of the stock. Consistent with the stock option hypothesis, I find that firms which rely heavily on stock-option-based compensation are significantly more likely to repurchase their stock than firms which rely less heavily on stock options to compensate their top executives.Companies were giving out more and more stock options to their executives as compensation, and using buybacks to keep those grants from inflating shares outstanding, which would dilute earnings per share and thus presumably put downward pressure on stock prices. It wasn’t exactly what the SEC had in mind back in 1980 when it said buybacks were fraudulent if used to “assist insiders in disposing of their holdings,” but it was kinda-sorta in the ballpark. In recent years, corporate insiders have been twice as likely to sell stock in the eight days after their company announces a buyback as at other times, SEC Commissioner Robert Jackson reported in 2018. That sure seems like a hint that companies are often buying back shares for reasons other than that management truly believes it is “the most attractive option for capital utilization.”In keeping with this impression, some recent studies show the shareholder-return advantage once enjoyed by buyback companies to have largely evaporated. This is partly just because buybacks are so widespread that it would be really hard for buyback companies to beat the average, given that they now more or less are the average. There is some evidence, though, that a predilection for buybacks may now foreshadow trouble ahead. Buybacks go hand in hand with decreased capital investment (although there are questions about the direction of causation), while the banks that spent the most on buybacks in the run-up to the 2008 financial crisis were the most likely to need bailouts during it. Plus, the simple fact that buybacks hit their all-time high as a share of GDP in mid-2007, right as things began to unravel, is pretty damning on its own. I’m still not quite ready to buy into University of Massachusetts at Lowell economist William Lazonick’s increasingly influential argument that buybacks, and the SEC’s 1982 rule change in particular, are responsible for pretty much everything bad that’s happened to the U.S. economy since.(2) But I can’t entirely dismiss it either.The role of buybacks in the coronavirus-induced crisis does seem somewhat secondary. Yes, it looks terrible that the five biggest U.S. airlines spent 96% of their free cash flow on buybacks from 2010 through 2019, as Bloomberg’s Brandon Kochkodin reported in March. Buybacks didn’t cause the pandemic, though, and I’m not sure we really ought to expect corporations to have balance sheets that can withstand the consequences of having their industry virtually shut down worldwide for months. Banning buybacks until government aid is repaid does make sense, as does banning common-stock dividends for that period — which the legislation also does. That doesn’t mean either should be banned forever, although I guess it does indicate that one or the other conceivably could be.A simple three-page bill introduced by Wisconsin U.S. Senator Tammy Baldwin and several other Democratic lawmakers in 2018 and 2019 would ban open-market repurchases, while still allowing the tender offers that made Teledyne great. There are legitimate reasons to do open-market buybacks, though, so I wonder whether a better if messier approach might be something like what Congress did in 1968, charging the SEC with redefining what constitutes a “fraudulent, deceptive, or manipulative” buyback in the context of stock-based executive-compensation programs. The reasoning offered by Shad’s SEC for mostly abandoning this effort in 1982 — that buybacks are “seldom undertaken with improper intent” — seems in retrospect either spectacularly naive or spectacularly cynical.(1) Of the 130 acquisitions, 128 were done using only stock.(2) Disclosures (or maybe it's just name-dropping): I was tangentially involved in the editing of the Harvard Business Review article by Lazonick that is linked to here, as well as that of Thorndike's book, which was published by the Harvard Business Review Press. Carol Loomis was a colleague of mine at Fortune, and I know Christine Jolls because our kids were middle-school classmates. Also, in the late 1990s, I pocketed a modest Time Warner employee-stock-options windfall that may have been enabled in part by buybacks.This column does not necessarily reflect the opinion of Bloomberg LP and its owners.Justin Fox is a Bloomberg Opinion columnist covering business. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”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.
(Bloomberg) -- Apple Inc.’s most important manufacturing partner has reassured investors it can still get the latest 5G-enabled iPhones ready for an autumn launch despite global Covid-19 upheaval.Hon Hai Precision Industry Co., which makes most of the world’s iPhones, told investors it’s lost time to travel restrictions and other disruptions caused by the coronavirus pandemic. But with months to go before the first trial assembly lines start up in June, Hon Hai can still make the deadline, investor relations chief Alex Yang said on a private conference call hosted by Goldman Sachs.Hon Hai, known also as Foxconn, struggled through much of February after the Covid-19 outbreak delayed the return of the hundreds of thousands of workers it needed to assemble iPhones and other electronics. While it’s since resumed normal operations, the month-long hiatus cast Apple’s carefully calibrated product launch schedule in doubt. Much now depends on the course of the pandemic and a postponement remained very much on the cards though the new iPhones should emerge in time to catch the crucial holiday season, Yang said.“We and the customer’s engineers are trying to catch up the missing gap, after we lost some days due to travel ban. There’s opportunity and possibility that we might catch up,” Yang said. “But if there’s a further delay in the next few weeks, months, then you probably have to reconsider launching time. It’s still possible.”Foxconn said in a statement Wednesday’s conference call was intended to communicate its thoughts on the latest developments affecting the consumer electronics industry and not focused on any specific products or customer.Read more: Apple’s Supply Chain Woes Linger Even as China RecoversThe next iteration of Apple’s signature device may well be one of its most important in years -- an iPhone that can make full use of the fifth-generation wireless networks that promise much faster video and gaming. The U.S. company is already a step behind Samsung Electronics Co. and Huawei Technologies Co., which began selling 5G devices last year.Covid-19 is now jeopardizing Apple’s plans. Mass assembly is only one part of the iPhone maker’s supply chain, which encompasses hundreds of suppliers. Apple and its many partners spend months or even years sourcing individual components that are assembled into final products. Any disruptions to that complex network could slow the introduction of future devices. Trial assembly typically begins in early June and -- once finalized -- mass production commences in August, Yang outlined.As China’s largest employer and manufacturer of a plethora of electronics brands, Hon Hai encapsulates how the outbreak disrupted the global supply of made-in-China electronics. Apple scrapped its revenue guidance for the March quarter after the contagion disrupted its production chain: Hon Hai was forced to postpone the reopening of its “iPhone City” mega-complex in the central city of Zhengzhou while it imposed strict quarantine measures on thousands of laborers. But Foxconn has since sharply raised signing bonuses to attract new workers and said it reached full seasonal staffing level earlier than an original target of late March.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.
Oil expert and Pulitzer Prize-winning author Daniel Yergin told Goldman Sachs that demand could fall by 20 million barrels per day in April, or even more, referring to the "biggest demand drop in modern times" while Saudi Arabia and Russia engage in a price war. Oil prices are now in the $20s, having slumped in March after a deal on supply curbs between the Organization of the Petroleum Exporting Countries, Russia and other producers, known as OPEC+, fell apart. "If efforts to control the pandemic are successful within the next three-four months, and we start to rebound in the summer, then we could see a surge in demand growth in 2021," Ross said.
(Bloomberg Opinion) -- Well there’s a surprise. During a telephone conversation on Monday, Presidents Donald Trump and Vladimir Putin “agreed on the importance of stability in global energy markets.” However, it’s very unlikely either will go beyond extolling stability and waiting for (or pressuring) somebody else to do something about it.Trump, speaking at the White House Tuesday, talked of many meetings that are going to put this all right. He said Putin and Saudi Crown Prince Mohammed bin Salman are “going to get together and we’re all going to get together and we’re going to see what we can do.” Then he added that “the two countries are discussing it. And I am joining at the appropriate time, if need be.” But there’s no evidence that Russia and Saudi Arabia are talking and, even if the three leaders do get together, don’t expect a meeting to lead anywhere. Neither president, nor the crown prince, is renowned for his statesmanship or flexibility.Putin’s most recent diplomatic “successes” include the annexation of Crimea and sending troops to support Bashar al-Assad’s regime in Syria. Trump has become the master of the empty photo-op, most notably with North Korea’s Kim Jong Un. MBS, as the de facto Saudi leader is known, led his country into a protracted conflict in Yemen and a blockade of Qatar, neither of which shows signs of bringing results.In the energy sector, points of contention between Trump and Putin include Russia’s role in Venezuela’s oil export trade; U.S. sanctions on Russia’s oil and gas industries, including those targeting the second Nord Stream gas pipeline from Russia to Germany and others that have prevented foreign investment in Arctic oil and gas projects; and Russia’s own nascent shale sector. U.S. Energy Secretary Dan Brouillette and Russian Energy Minister Alexander Novak had a “ productive discussion” by phone on Tuesday and agreed to “continue dialogue among major energy producers and consumers, including through the G20,” the Department of Energy said in a statement.Putin has no interest in throwing another lifeline to the U.S. shale sector. Trump still seems to see the problem as being caused by Russia and Saudi Arabia both going “crazy” and launching a price war.Let’s get one thing straight. The collapse in oil demand as a result of the worldwide response to the Covid-19 virus is a much, much bigger problem than the additional barrels threatened by Saudi Arabia and Russia — none of which has arrived yet. As airplanes stop flying and drivers stop driving, they are going to struggle to find buyers for their oil, just like everyone else. Saudi Arabia is already threatening to boost its exports by a further 600,000 barrels a day in May because its own refineries don’t want the crude. This is simply more stranded oil trying to find a buyer.Goldman Sachs estimates that global oil demand this week is down by 26 million barrels a day, or 25%. That’s more than the combined consumption of the U.S., Canada, Mexico, Central America and the entire Caribbean.Sadly, the loudest voices in America still seem to be those calling for the use of bully-boy tactics against the world’s other heavyweights. A letter sent to Secretary of State Mike Pompeo last week from six Republican senators, including Lisa Murkowski from Alaska and John Hoeven from North Dakota, characterizes the Saudi and Russian decisions to end output restriction as “economic warfare against the United States.” The lawmakers argue that “Saudi Arabia must change course,” when what they really mean is that the kingdom led by Crown Prince Mohammed bin Salman must return to its previous course, and they name-check the whole gamut of pressure tactics the U.S. has at its disposal to get it to do so, from the threat of “tariffs and other trade restrictions to investigations, safeguard actions, sanctions, and much else.”I get that senators from oil-producing states want someone else to cut back to keep the oil price high enough so that their local fossil-fuel industries can keep functioning. But the Saudis might well argue that the current situation would be easier to deal with had the U.S. not doubled its oil production in less than a decade.Targeting Saudi Arabia and Russia for behaving as American leaders have always urged them to behave — by removing “artificial” restrictions on their oil production — will not solve the crisis faced by oil producers everywhere. As I wrote Sunday, we are now getting the free-market in oil. The demand destruction caused by the collapse in oil demand as a result of responses to the Covid-19 virus will not be solved by sanctions or tariffs.The world’s Big 3 oil producers might have had a chance to get together to organize a global response to the temporary loss of oil buyers, but they squandered it. As things stand, the companies (and countries) that bear the brunt will be those who can’t find buyers or storage tanks for their oil. No amount of bullying, or half-hearted diplomacy, can change that now.(Adds comments by Trump and the energy department in second and fifth paragraphs.)This column does not necessarily reflect the opinion of Bloomberg LP and its owners.Julian Lee is an oil strategist for Bloomberg. Previously he worked as a senior analyst at the Centre for Global Energy Studies.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.
(Bloomberg) -- President Donald Trump said the U.S. would meet with Saudi Arabia and Russia with the goal of stanching an historic plunge in oil prices.Trump, speaking at the White House Tuesday, said he’s raised the issue in conversations with Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman. “They’re going to get together and we’re all going to get together and we’re going to see what we can do,” he said. “The two countries are discussing it. And I am joining at the appropriate time, if need be.”If it happens, it would be the first meeting between Saudi Arabia and Russia since the collapse of the OPEC+ coalition in early March. Since then, both countries have vowed to flood the market with millions of excess barrels of oil in an acrimonious battle over market share. Despite the president’s remarks, neither nation has backed down from their price war, with Saudi Arabia having already loaded several supertankers with crude headed for Europe.Trump’s intervention comes as April shapes up to be a calamitous month for the oil market. Saudi Arabia plans to boost its supply to a record 12.3 million barrels a day, up from about 9.7 million in February. At the same time, fuel consumption is poised to plummet by 15 million to 22 million barrels as coronavirus-related lockdowns halt transit in much of the world.Worst QuarterThe global benchmark crude has already plunged to record lows, posting the worst quarter in history on Tuesday.“It’s not even feasible what’s going on,” Trump said, adding that the price meltdown was harming the oil industry. “You don’t want to lose an industry -- you’re going to lose an industry over it.”Still, he celebrated the low gasoline prices brought about by the market downturn, calling them “the greatest tax cut we’ve ever given.”“People are going to be paying 99 cents for a gallon of gasoline,” he said. “It’s incredible in a lot of ways.”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.
(Bloomberg Opinion) -- What’s more important: a roof over your head or a car in your driveway? With unemployment rising as the coronavirus shuts down parts of the U.S. economy, the decision made by borrowers as their payments come due will determine how securities backed by auto loans and leases perform.Families will start to struggle as Covid-19 deepens its grip and job losses rise. Of the $14 trillion of consumer debt, mortgages account for $9 trillion and cars $1.3 trillion; however, more Americans have auto loans. When social distancing becomes the norm, cars seem more likely to fall down the priority list behind payments for homes, Netflix bills, phones and credit cards. With lockdowns spreading, many people aren’t going anywhere right now. That means the default risk is rising. Rating agencies are reassessing portfolios of loans and leases linked to asset-backed securities, or ABS, using loss levels from the 2008 financial crisis to calculate risk.When these car-related debts start going bad, the impact on the bonds they back is severe. The spread of auto ABS over Treasuries widened sharply in recent weeks, more so than on card-backed debt. The current dislocations in credit markets show that while auto-loan defaults may not be the center of a financial crisis like mortgage-backed securities, they could well set off wider panic as consumer confidence crumbles, household balance sheets deteriorate and big issuers – car companies – struggle.This market has grown rapidly since the last financial crisis. Already this year, almost $30 billion of auto asset-backed bonds have been issued in the U.S., following $118 billion in 2019. As of the third quarter last year, $250 billion was outstanding. At year-end, annualized loss rates on subprime auto ABS were around 9%, close to financial-crisis levels, while average interest rates have been even higher at 19%, according to Goldman Sachs Group Inc.Two factors will determine how these bonds perform: unemployment and the value of used cars, because cash flows come directly from borrowers. In the aftermath of a natural disaster, used-car prices rise because property has been damaged or destroyed. In this crisis, they’re likely to fall due to strain on consumer wallets. That reduces the worth of the collateral and lowers the residual value of leases that back some of these securities. Cars are, after all, a depreciating asset.What does this mean for the securitized bonds? Lenders and originators package pools of loans and leases in a special-purpose vehicle that then issues debt to investors. The interest and principal payments are structured into classes. Broadly, the more senior tiers have first claim on all cash flows and assets, while the junior take the first hit on losses but have higher yields. The lowest tranche, also known as the equity or first-loss pieces, is typically held by the issuer: auto companies’ financing arms and other lenders. When loans default and the asset pool can’t make up for the payments due to investors, the holders of the lower tranches absorb the loss.It will be yet another blow for the finance companies of already-struggling carmakers that issue ABS to finance leases and sales. They’ll take the first hit through the equity. Funding costs will surge and in turn squeeze sales, reminiscent of 2008.(3)As sales showed signs of reaching a plateau last year, auto giants, dealers and finance companies were pushing excessive financing with looser underwriting standards and conditions, such as longer terms and incentives. The weighted average credit score for non-prime loan pool borrowers was 590 last year, lower than 597 in 2008.Household balance sheets were strong overall going into this crisis, but varied greatly across income levels. The bottom 20% of American households are far more leveraged — more than 25% — than the higher income brackets on a debt-to-assets basis. Around a third of auto ABS are typically made up of subprime loans, where the ability to pay drops off sharply and suddenly.That doesn’t bode well. Companies like Ally Financial Inc. have already offered relief packages for consumers and dealers. Payments can be deferred for six months without late fees. New customers will be allowed to defer for three months. The Federal Reserve has brought back a financial crisis-era lending facility that’s meant to support the asset-backed securities market, where auto loans and leases are among the eligible collateral.The troubles will go further: There are other auto sector-related ABS, like those backed by rental cars and dealer-floor financing plans that are even more directly dependent on automakers’ health.Sure, structures have changed since 2008 to help lower the risk for investors on these bonds. But the underlying issues remain the same: consumers’ buying and borrowing behavior.Investors are busy thinking about mortgage-backed securities, given their large size and potentially deeper and more immediate impact on the financial system. But it’s important to consider recent consumer trends: Delinquencies as a portion of outstanding loans have been on the way down for mortgages. They’re rising for autos, especially among subprime borrowers, as are past-due loans. America has always been a nation of drivers and the appeal of cars has a way of pushing consumers to stretch their budgets in a way houses don’t. But the stay-in-place strategies to fight this pandemic may change that calculus in a way investors aren’t prepared for: Driving behavior could change.(1) Unable to secure affordable financing, the financing arms severely curtailed lending and leasing activity. This caused vehicle sales volumes to plummet and hastened the Chapter 11 bankruptcy filings of Chrysler on April 30, 2009, and General Motors Inc. on June 1, 2009, according to S&P Global Ratings.This column does not necessarily reflect the opinion of Bloomberg LP and its owners.Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal. 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.
(Bloomberg) -- Oil posted the worst quarter on record after the coronavirus crushed demand and raised fears about overflowing storage tanks amid a price war that has flooded the market with extra supply.Futures in New York edged higher on Tuesday but still ended the quarter down more than 66%. While Brent and West Texas Intermediate futures held above $20 a barrel, the underlying, physical market flashed signs of distress. The gap between paper market trades and real barrels has widened to multi-decade highs in some cases, suggesting financial flows are supporting the futures market.“The prices of the physical barrels are showing a lot more distress than the paper benchmarks,” said Roger Diwan, oil analyst at IHS Markit Ltd.With demand weakening by the day and producers slow to cut output, Dated Brent, the benchmark for about two-thirds of the world’s physical oil, was assessed at $17.79 a barrel on Monday, the lowest since 2002. Across major shale regions in Texas and North Dakota, oil remains below $10 a barrel, while some lesser known grades have posted negative prices.Read: Key U.S. Crude Oil Grade Has Never Been Cheaper in Modern EraU.S. crude stockpiles were said to have ballooned by 10.5 million barrels last week, according to traders citing the American Petroleum Institute report, with a 2.93 million-barrel gain in Cushing, Oklahoma, the delivery point of the U.S. crude futures contract. If confirmed by the U.S. Energy Information Administration data, the nationwide crude build will be the biggest since February 2017. The market was little changed after the report.From shuttering and reduced throughput at refiners from South Africa to Canada, to major consuming countries like India pulling back, the additional oil supply and lower demand has reverberated around the globe. Saudi Arabia is unleashing a flood of oil to Europe and traders expect Aramco to slash prices for Asia further. To make matters worse, space to store the huge oversupply is quickly running out.Goldman Sachs’s Jeff Currie said on Bloomberg TV that even Russia is “extremely vulnerable” to oil storage and infrastructure limits because its fields require thousands of miles of pipelines to get to buyers.Oil tanks around the world could fill in six weeks, a move that will likely force significant production shut-downs, Standard Chartered analysts including Emily Ashford wrote in a report.“Huge inventory builds, potentially exhausting spare storage capacity, will mean that market balance requires an unprecedented output shutdown by producers,” they wrote.Brent futures are signaling a historic glut is emerging. The May contract traded at a discount of $13.66 a barrel to November, a more bearish super-contango than the market saw even in the depths of the 2008-09 global financial crisis. The WTI equivalent discount is at $12.43 a barrel.The pressure on U.S. producers and drillers is growing as the rout has caused firms to cut capital spending budgets, accelerate restructuring and lay off workers. Now, even Texas oil buyers have been asking for large production cuts as crude flows overwhelm pipelines and storage, according to Pioneer Natural Resources Co. Senators are asking President Donald Trump to take action, after he agreed with Russian President Vladimir Putin that current prices do not suit the interest of either country.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.
(Bloomberg Opinion) -- Carnival Corp.’s planned $3 billion bond sale on April 1 is bound to make a fool out of someone. It’s just not clear whether it will be the investors buying the cruise-line operator’s debt or the company.The case for investors looking foolish: Carnival’s ships are grounded, which of course cuts off its dominant source of revenue. The company’s share price has tumbled from $51 at the start of the year to about $14 as it expects a loss in 2020. Even if it manages to raise $6 billion through bond and stock sales as planned, analysts say that only gives Carnival an 18.5-month liquidity cushion to wait out the coronavirus-induced halt. That’s not much comfort, given that the bonds mature in twice that time and it’s anyone’s guess when — or if — the cruise business returns to normal.The company, on the other hand, is on the verge of paying vastly more to borrow than its triple-B credit rating would indicate. Bloomberg News reported Tuesday that Carnival’s three-year dollar bonds are being marketed with a 12.5% coupon and most likely will come at a discount, bringing the yield up to 13%. In early February, a triple-C rated company, Husky, issued debt at a similarly high rate. Obviously, it feels as if the entire world has changed since then, but even the average single-B bond yields just 9.35%, and the index never topped 12%, even in the height of the sell-off.Effectively, Carnival is investment grade in rating only — markets consider it seriously distressed. Bloomberg News even reported that the deal is running off of JPMorgan Chase & Co.’s high-yield syndicate desk, citing people familiar with the matter.Every once in a while, a single corporate-bond sale takes on outsized meaning about the state-of-play in credit markets and investor sentiment about the outlook going forward. Carnival’s offering will almost certainly be such a deal. Carnival, quite contrary to its jovial name, made headlines earlier this year because its ships were basically what much of America has now become, only with virtually no refuge. As my Bloomberg Opinion colleague Timothy L. O'Brien reminds us about the Zaandam, a vessel run by Carnival subsidiary Holland America that’s been called a “death ship”:Although the cruise ship is no stranger to viral outbreaks (two years ago, 73 passengers contracted a norovirus on a trip off the coast of Alaska), the Zaandam and other Holland America and Carnival ships have received high marks in recent sanitation inspections by the Centers for Disease Control and Prevention. Yet reports have popped up regularly about other Carnival ships that don’t pass muster. (The parent company manages several brands, and the Princess lines have particularly weak health and sanitation records.) So how well prepared was Carnival for something as cataclysmic as the coronavirus?Moreover, why did the Zaandam set sail on March 7? Well before then, two other Carnival ships had already become poster children for the coronavirus. On Feb. 4, the Diamond Princess was quarantined at a Japanese port after a former passenger tested positive for the virus. A subsequent test administered to that ship’s 3,700 passengers and crew turned up 700 infections; several of those people later died. As early as March 3, it was reported that passengers aboard a Grand Princess cruise in February had tested positive. That Carnival ship, returning from Hawaii, was then detained off the California coast for several days before docking on March 9 to prevent a further spread.That doesn’t scream a company worth investing in, especially without signs of federal assistance. But notably, bond traders aren’t necessarily banking entirely on a quick rebound in the cruise industry. Carnival’s new notes will be secured by a first-priority claim on its assets, which should provide some ballpark estimates of a worst-case recovery rate. Still, it’s a tough sell to hinge an offering on liquidation value for a company operating in one of the industries facing the greatest amount of uncertainty.Usually, this is how a deal with such a finger-to-the-wind yield level goes: Investors swarm to the offering and the yield comes down by 50 or 100 basis points, maybe even more. JPMorgan, Goldman Sachs Group Inc. and Bank of America Corp., which are managing the bond sale, have little incentive to float a coupon rate that was too low to easily clear the market. They want to drum up demand and showcase an oversubscribed order book.These are not ordinary times, though. While I seriously doubt that Carnival would be willing to pay a yield even higher than 13%, it’s possible that the market just isn’t as receptive to hard-hit businesses as it appears. In that case, the offering could be delayed or downsized a bit. It’s issuing in both dollars and euros, potentially to reach a broader swath of investors and avoid such an outcome.Unfortunately for Carnival, it needs the cash quickly. That’s hardly an ideal time to be borrowing. And it’s why 13% might be just the right yield for the company and investors alike to let go of their inhibitions.This column does not necessarily reflect the opinion of Bloomberg LP and its owners.Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.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.
In a gloomier outlook for the U.S. economy, the Wall Street forecaster recast its second-quarter real GDP forecast to an annualized drop of 34% versus a previous negative 24% reading.
(Bloomberg Opinion) -- “Investing in distressed debt is a struggle today. … The economy is too good, the capital markets are too generous. It’s hard for a company to get into trouble.”Howard Marks, the co-founder of Oaktree Capital Group and a legendary distressed-debt buyer, said this in mid-September. He was very much speaking to the widespread frustration among his peers in the industry at the time. The Federal Reserve had swooped in and starting cutting interest rates to offset any damage from the U.S.-China trade war. Stocks shrugged off a brief decline in August. The yield pickup on speculative-grade corporate bonds had again retreated toward post-2008 lows. Indeed, distress was virtually nowhere to be found.It’s remarkable to consider just how much has changed. Junk-bond spreads have more than tripled since Marks’s interview, hitting as high as 1,100 basis points last week compared with about 350 basis points in September. The amount of debt trading at a distressed level reached almost $1 trillion. Suddenly, the economy is not “too good” but rather headed into a short recession at best and a depression at worst. Capital markets have been frozen for weeks for all but the highest-quality companies. Credit-rating firms are contemplating default scenarios more severe than the last downturn.Given this shift, it comes as little surprise that hedge funds are making headlines daily with plans to capitalize on this rapid shift in the outlook, contending the market presents a once-in-a-lifetime opportunity. Just to name a few in the past week (credit to Bloomberg’s Katherine Doherty for the reporting):Highbridge Capital Management is preparing to launch two credit-dislocation funds totaling $2.5 billion, expecting to complete fundraising in mid-April. Knighthead Capital Management wants up to $450 million in additional cash for its distressed-debt fund. Silverback Asset Management is preparing to start a $200 million credit fund, aiming to wrap up fundraising sometime in April.Make no mistake, it’s still relatively early days in the coronavirus outbreak, particularly in the U.S. The lasting damage to the world’s largest economy remains very much a guessing game at this point. And yet, despite all of that, it’s starting to feel as if even waiting a few weeks to round up cash might cause some opportunistic funds to miss out on the biggest bargains.For one, the ICE Bank of America Merrill Lynch distressed-debt index gained for four consecutive days through the end of last week, the longest rally since the start of the year. It’s still down more than 40% in just three months, so the market is hardly back to the halcyon days of the recent past, but the semblance of a floor provides at least some optimism that the precipitous drops are winding down. High-yield spreads broadly have tightened to 921 basis points from the aforementioned 1,100.The steep March sell-off has been enough to excite some large traditional fixed-income managers. Ashish Shah, co-chief investment officer of fixed income at Goldman Sachs Asset Management, told Bloomberg’s Gowri Gurumurthy that speculative-grade bonds will gain 20% in 2020 and potentially 30% in the next 18 months. Scott Roberts at Invesco Ltd. declared the chance to scoop up cheap debt will be “gone way before the fear subsides.”Meanwhile, distressed-debt funds have been sitting on cash for years waiting for a moment like this. Preqin collects data on this so-called dry powder, and when I checked in on Monday, the firm estimated that the funds had $63.6 billion to invest as of this month. That might not be enough to buy all debt now trading at a distressed level — but it’s certainly enough to pick through the wreckage for companies with the best chance of survival.Centerbridge Partners LP, for instance, last week activated $3 billion of capital it raised way back in 2016, while Sixth Street Partners plans to activate a $3.1 billion contingency fund raised mostly in 2018, Bloomberg’s Gillian Tan reported. Centerbridge’s cash reserve is tied to two funds focused on opportunistic investments in senior loans and high-yield bonds. Sixth Street will have more than $10 billion of dry powder to invest once the TAO Contingent Fund is activated on Wednesday.Then there’s Marathon Asset Management, which managed to draw $500 million into its opportunistic and distressed credit funds in just a week, Bloomberg’s Eliza Ronalds-Hannon reported on Monday. Bruce Richards, co-founder and chief investment officer of the firm, called this the “greatest dislocation in credit we’ve seen since 2008” and said last week that he was first looking for bonds with coupons between 5% to 7% that were trading at full value earlier this year but have since fallen to about 70 cents. That might sound picky, but with money to invest right now, Richards can afford to be selective.“Historically speaking, when you get to these spread levels, it’s never been a bad place to enter and in a two-year window of time it’s a good buying opportunity,” Jim Schaeffer, global head of leveraged finance at Aegon Asset Management, which manages $390 billion of assets, told me in an interview. And firms that can call capital on funds have “got to start calling them now — if not now, when? What are you waiting for?”It still feels like a tough market for risky credit, but the tide may be turning. Notably, Yum! Brands Inc. brought the first U.S. high-yield offering since March 4 and the deal was upsized to $600 million from $500 million after receiving $3 billion of orders. Yum is far from a distressed company, of course, with double-B credit ratings from Moody’s Investors Service and S&P Global Ratings. But last week, bonds in that rating tier yielded on average 865 basis points more than U.S. Treasuries, compared with 162 basis points in December. That’s not quite distressed, but it’s certainly dislocated.By no means does one deal indicate that credit has bounced back from rock-bottom. But it’s another box checked on the road to recovery, along with tightening spreads in the secondary market and big-name investors getting more vocal about wading back into risky assets (which could be a tell that they’ve already placed their bets).If we’ve learned one thing about financial markets in the age of coronavirus, it’s that they can move at breakneck speed and that those with cash on hand at a moment’s notice are in the driver’s seat. Investors looking to seize on the distressed-debt opportunities of today may want to turbocharge their fundraising efforts accordingly.This column does not necessarily reflect the opinion of Bloomberg LP and its owners.Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.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.
(Bloomberg) -- Oil tumbled to an 18-year low as coronavirus lockdowns cascaded through the world’s largest economies, leaving the market overwhelmed by cratering demand and a ballooning surplus.Futures in London plunged by 9% to the lowest level since March 2002, while New York crude dipped below $20 a barrel before settling just above that level. While U.S. President Donald Trump spoke with Russian counterpart Vladimir Putin Monday to discuss the importance of stable energy markets, that did little to stanch the decline.A huge oversupply is further collapsing the oil market’s structure, and there may be more weakness to come as the world quickly runs out of storage capacity. The slump in demand has shut refineries from South Africa to Canada, leading to excess barrels in the market.At the key storage hub of Cushing, Oklahoma, inventories are said to have ballooned by more than 4 million barrels last week, according to traders with knowledge of Genscape data, raising fears about storage capacity limits being reached.“We’re grinding lower here and we’ll continue to get lower as runs get cut globally,” said John Kilduff, a partner at Again Capital LLC, a New York hedge fund focused on energy. “As we see specific points like Cushing near its limits, it’s just going to put greater and greater pressure on the price till we get to a clearing point.”Prices are on track for the worst quarter on record. Goldman Sachs Group Inc. estimates consumption will drop by 26 million barrels a day this week as measures to contain the coronavirus hurt global GDP. Consultant FGE estimated that refinery operating rates have been cut by over 5 million barrels a day worldwide, and could bottom out at between 15 million and 20 million lower.Meanwhile, Riyadh and Moscow are showing no signs of a detente in their supply battle as Saudi Arabia announced plans to increase its oil exports in the coming months.In the market for physical barrels of crude, prices are already far below those of futures benchmarks. Oil from Canada touched a record low of $3.82, while many other key grades are trading below $10 a barrel, with some as low as just $3.It’s a similar picture in Europe, where Kazakh crude was offered at a 10-year low. The six-month contango on the global Brent benchmark has grown bigger than in the financial crisis, at more than $13 a barrel. The equivalent six-month contango for WTI is about $12.The plunge in prices has caused distress in some OPEC nations. Algeria, which holds the cartel’s rotating presidency, urged the secretariat to convene a panel but the call has failed to gather the majority backing necessary to go ahead. Riyadh is among those opposing the idea.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.
(Bloomberg) -- President Donald Trump said he’s concerned oil prices have fallen too far and called Vladimir Putin on Monday to discuss Russia’s oil-price war with Saudi Arabia.The leaders, who also talked about the spread of the coronavirus, agreed to discussions on oil between energy officials in the two countries, according to the Kremlin. Both leaders “agreed on the importance of stability in global energy markets,” the White House said in a statement.The U.S. president said earlier he doesn’t want to see the American energy sector “wiped out” after Russia and Saudi Arabia “both went crazy” and launched into a conflict that depressed oil prices.“I never thought I’d be saying that maybe we have to have an oil increase, because we do. The price is so low,” Trump said in an interview on “Fox & Friends.”Crude oil futures tumbled as much as 7.7% in New York, touching an 18-year low.The Trump-Putin call came at the request of the U.S. and was “prolonged,” according to the Kremlin. Neither the White House or Kremlin statements said specifically how long the two leaders talked.Trump’s view on the oil dispute marks a shift from earlier this month, when he likened the plunge in oil prices to a “tax cut” for Americans. The U.S. president spoke to Saudi Crown Prince Mohammed bin Salman on March 9 about the price war.Trump has long argued that improving relations between Washington and Moscow could help solve international disputes. The president said he wanted to discuss trade with Putin, though he said he expected the Russian president to raise objections to U.S. sanctions. State-run Tass quoted Kremlin spokesman Dmitry Peskov as saying that Putin didn’t ask Trump for sanctions relief on the call.Oil tumbled earlier to its lowest point in nearly two decades, heading for the worst quarter on record as coronavirus lockdowns cascaded through the world’s largest economies, leaving the market overwhelmed by cratering demand and a ballooning surplus. The slump in demand has shut refineries from South Africa to Canada.Goldman Sachs Group Inc. estimates consumption will drop by 26 million barrels a day this week. Meanwhile, Riyadh and Moscow are showing no signs of a detente in their supply battle as Saudi Arabia announced plans to increase its oil exports in the coming months, despite U.S. warnings against flooding the market.Some analysts argue Russia’s motivations extend well beyond oil and are complicated by the federation’s anger over U.S. sanctions and opposition to the Nord Stream 2 pipeline linking Russia to Germany. And the price for getting Russia to back down could be too high.“Russia’s concerns with the U.S. go beyond market share. Putin is frustrated with sanctions and may be more interested in punishing the U.S. than Saudi Arabia,” said Dan Eberhart, a Trump donor and chief executive of drilling services company Canary LLC. “If Trump wants an agreement with Putin, he may have to promise to ease up on sanctions. I am not sure he can deliver without the backing of congress.”Rosneft PJSC over the weekend sold its assets in Venezuela to the Russian government, a move that shields the Russian oil giant from further U.S. sanctions while keeping Moscow behind the regime of Nicolas Maduro. Fears of broader sanctions have grown after the U.S. in recent months slapped restrictions on Rosneft trading companies for handling business with Venezuela.In the call, the White House said Trump “reiterated that the situation in Venezuela is dire, and we all have an interest in seeing a democratic transition to end theongoing crisis.” The statement didn’t say how Putin responded.Talks between members of the Organization of Petroleum Exporting Countries and its allies broke down in early March as Russia refused to sign on to larger production cuts proposed by Saudi Arabia. The failure to reach an agreement prompted the Saudis to unleash a price war which, combined with the devastating effect of the virus pandemic, caused the market to crash.Global demand is slumping by as much as 20 million barrels a day, about 20%, as billions of people go into lockdown to slow the spread of the virus. The outlook remains dire, with traders, banks and analysts forecasting a huge oversupply as governments effectively shut their economies.Oil industry leaders, trade groups and some Republican senators have pressed the Trump administration to seek a diplomatic solution with Saudi Arabia. Six senators from oil-producing states last week urged Secretary of State Michael Pompeo to take a tougher stance against Saudi Arabia, while highlighting several “powerful tools at our disposal,” including sanctions, tariffs and other trade restrictions.“Trump would have better success pressing Saudi Arabia than Russia since they are dependent on the U.S. for protection, intelligence and arms sales,” Eberhart said.On the coronavirus outbreak, the two sides expressed concern about the scale of its spread, according to the Kremlin. The leaders discussed steps they were taking to fight the virus and potential areas of cooperation.The White House said in its statement that “the two leaders agreed to work closely together through the G-20 to drive the international campaign to defeat the virus and reinvigorate the global economy.”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.
With the approval of increasing their stake in respective securities JV, Morgan Stanley (MS) and Goldman (GS) are set to further diversify their revenues.
West Texas Intermediate, the New York-traded benchmark for U.S. crude prices, was down $1.51, or 7%, at $20 per barrel by 1:32 PM ET (17:32 GMT). “With the lockdowns extending geographically to India, the U.S. (and) now Russia, as well as extending in time in other regions, the focus has entirely shifted to demand destruction,” said Olivier Jakob of Zug, Switzerland-based oil risk consultancy Petromatrix.
(Bloomberg Opinion) -- At the point we’re now at, postponing the oil-price war won’t make a lot of difference for an industry that’s already breaking down under the weight of demand destruction. With prices hitting a 17-year low on Monday, it’s too late to use diplomacy and artful negotiations to share the burden of output cuts that are now inevitable.The pumping free-for-all unleashed by Saudi Arabia and Russia is important for the long-term shape of the oil industry, but, as my colleague Javier Blas pointed out here, it’s a sideshow to the havoc being wrought by the lockdowns crippling economies worldwide in response to the coronavirus pandemic. Forecasts of a catastrophic drop in oil demand abound, with estimates of a whopping 20% year-on-year reduction in global consumption in April becoming more common. That’s 20 million barrels a day, equivalent to the entire consumption of the United States. And even those gloomy views may be too optimistic, according to Goldman Sachs.It would be impossible for any small group of producers to mitigate that kind of impact by reducing output, unless Saudi Arabia and Russia were both to slash their production to almost zero. And that’s not going to happen. On Wednesday, U.S. Secretary of State Mike Pompeo called on Saudi Arabia’s Crown Prince Mohammed bin Salman to take the lead as his country prepared to host a meeting of the Group of 20 nations. Pompeo urged the kingdom “to rise to the occasion and reassure global energy and financial markets.” That’s a reasonable request. Somebody has to show leadership and it doesn’t look like it’s going to be President Donald Trump.The trouble is that I suspect what Pompeo meant is for Saudi Arabia to cut its production unilaterally, rather than trying to bring together a short-term “coalition of the willing,” including the U.S., to work together to confront a global problem. After all, that’s always what’s happened in the past.Take for example the response to the Asian financial crisis. In February 1999, then President Bill Clinton’s energy secretary, Bill Richardson, expressed U.S. concerns over oil prices that had fallen below $10 a barrel. Two months later the Organization of Petroleum Exporting Countries agreed to its third successive output cut and by the end of the year Brent crude had recovered to $25 a barrel.It’s no surprise that Saudi Arabia was willing to take the lead back then, and to bear the bulk of the output cuts. It, too, wanted higher oil prices. Those were the days when oil was regarded as a depleting asset whose value would only rise in the future, as demand outstripped available supply. Cutting production would leave oil in the ground that would appreciate in value.But that was a long time ago. That view no longer holds sway — battered both by the tsunami of crude extracted from shale rocks and the growing awareness of the need to reduce carbon dioxide emissions that has seen concerns about peak oil production replaced with worries (for producers) of peak oil demand. Oil left in the ground now is at risk of never being produced at all.Of course back in 1999, it would have been unreasonable to expect America to join in the output reduction effort. The U.S. was pumping a little over 6 million barrels a day — less than half its current production — and the gas-guzzling nation imported about 10 million barrels a day more crude and refined products than it exported.But 2020 is not 1999. The U.S. is now the world’s biggest crude producer, pumping 13 million barrels a day — more even than Saudi Arabia can supply if it opens its taps fully. And so far this year it has exported more oil than it has imported.Yet a lack of leadership — from Riyadh and Washington — means that it’s now too late to make a coordinated response to the collapse in demand.As it stands at the moment, OPEC is not due to meet until early June, and whether the cartel’s external allies including Russia join them in an enlarged OPEC+ shindig remains to be seen. No matter, any action agreed then wouldn’t have an impact until July, at the earliest. Even an agreement reached tomorrow would have little impact until May, with April crude sales now largely completed.By then storage tanks around the globe will be close to capacity; ships full of unwanted oil will be floating in safe anchorages; and producers will be forced to shut wells because they have simply run out places to put any crude they pump out of the ground.Without output cuts, production shut-ins are inevitable. Consultants IHS Markit see a surplus of 1.8 billion barrels of crude building up during the first half of 2020, and yet there’s only 1.6 billion barrels of storage capacity available.The window to distribute those cuts in an orderly manner between producers has closed. OPEC had its last chance in March and America’s leaders subsequently squandered their chance at leadership. As it now stands, production cuts will be distributed by the market on the basis of who has access to storage tanks and who is losing money by pumping. Welcome to the free market.(Adds oil price decline and new Goldman Sachs outlook in first two paragraphs.)This column does not necessarily reflect the opinion of Bloomberg LP and its owners.Julian Lee is an oil strategist for Bloomberg. Previously he worked as a senior analyst at the Centre for Global Energy Studies.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.
AT 9 AM ET (1300 GMT), U.S. crude futures traded 4.4% lower at $20.55 a barrel, having dropped below $20 earlier Monday, while the international benchmark Brent contract fell 5.4% to $26.46, hitting the lowest level in 17 years. Late Sunday President Donald Trump extended the current guidance on social distancing to the end of April, after the U.S.’s top infectious disease expert said deaths there may reach 200,000. Trump had earlier said he wanted the economy to return to near normality by Easter.