Financing capital goods: Keeping the grease

THE headlines focused on the fact that GE, a big industrial conglomerate, is beginning to sell off its $500 billion finance arm in small chunks. This week it put a $40 billion portfolio of corporate loans up for sale. But not all of GE Capital will end up on the block: GE is keeping the $90 billion division that finances purchases of medical equipment, power-generation gear and aeroplanes, or leases them to users. In part, that is because those fields are critical to GE: it makes all or part of the products being financed or leased. But it is also because the financing of old-fashioned capital goods is a booming business.

 
 

The gear GE sells is expensive; would-be buyers often lack the capital to buy it outright. For GE, therefore, the financial engineering that underpins the use of its wares is as important as the mechanical engineering that created them. Many hospitals, for instance, do not buy expensive scanners from GE, but lease them instead. When it develops improved versions, it helps the hospitals swap the new generation for the old, by passing the outmoded gear to another, thriftier institution, and so on down a long chain. By the same token, the sale of a plane that appears to be from Boeing to an airline may in fact be a sale to GE and a lease to the airline. In 85% of these cases, the plane will have engines made by GE or a joint venture.

Manufacturers have financed purchases of their own products for a long time, with mixed results. General Motors started its own finance operation, General Motors Acceptance Corporation (GMAC), in 1919, which helped it to expand its customer base and thus boosted its profits for decades. Eventually, and disastrously, GMAC expanded into mortgages. Just before the crisis, GM sold half of GMAC to raise money. Its subsequent collapse and nationalisation contributed to GM’s own bankruptcy in 2009.

Yet in 2010, shortly after GM had emerged from bankruptcy and while it was still under government control, it spent $3.5 billion in cash—a vast amount given its straitened circumstances—to purchase AmeriCredit, a Texan subprime auto lender. The company has since been renamed GM Financial. Its assets have grown from $11 billion to $49 billion in five years, an astonishing rate for a financial institution in recent years. China, where car-buyers are beginning to rely more on credit instead of buying with cash, is one area where it is growing fast.

Toyota continues to own a bank in America to help customers finance car purchases. BMW does as well. Car loans, after all, proved much more resilient during the crash than other forms of credit. For companies that do not have such financing arms, often because they use all the capital they can raise cheaply in their core business, a relationship with a finance firm is vital. This is all the more true, says Vincent Caintic of Macquarie, a bank, as ever stricter regulation makes it increasingly expensive for banks to offer car loans and the like.

Element Financial, a Canadian firm, has carved out a lucrative niche financing specific items, such as the railcars produced by Trinity Industries, an American conglomerate, and the small diggers made by Bobcat, part of a South Korean one. It went public in 2011 and its shares are up fourfold since (see chart). Over the same period, the S&P index of North American firms in financial services has not even doubled.

Source: http://www.economist.com/news/finance-and-economics/21653674-why-ge-retaining-one-bit-its-finance-arm-keeping-grease

Chinese insurer emulates ‘Buffett model’ with Waldorf purchase

The previously obscure Chinese insurance company whose global shopping spree has raised eyebrows in the investment world is pursuing a Warren Buffett-like strategy in which investment returns drive growth and insurance plays only a minor role.

This month alone, Beijing-based Anbang Insurance Group announced the purchase of Manhattan’s Waldorf Astoria hotel for $1.95bn and Belgian insurer Fidea for an undisclosed price. South Korean media have also reported that Anbang is considering acquiring a controlling stake in state-run Woori Bank.

Such ambitious investment may seem strange for a company that ranks eighth among Chinese life assurers with only a 3.6 per cent market share, far below leaders China Life and Ping An, which control 25 and 14 per cent, respectively. 

Yet a look at Anbang’s business model suggests the company is more like a private equity fund with a side business in insurance. Rather than profiting from the excess of premiums over claims, analysts say Anbang aims to generate earnings through investment returns.

Chinese entrepreneurs have expressed admiration for the “Warren Buffett model” in which insurance premiums provide cheap funding for far-flung equity investments.

Fosun founder Guo Guangchang has frequently cited the example of Mr Buffett in outlining intentions to transform his industrial conglomerate into a strategic investment group.

In China, however, the strategy of using insurance as a platform for unrelated investments is riskier, since the core insurance business is less profitable than in the west.

Roughly 70 per cent of “life assurance” products in China are more akin to certificates of deposit. The customer pays a premium only once, and the insurer guarantees the return of principal plus interest after five to 15 years.

Insurers earn razor-thin margins on such products, which are sold mainly through banks and must compete for funds with lenders’ own high-yielding wealth management products.

Protection-type products, which only pay out in the event of an accident, illness or untimely death, deliver higher margins because the insurer doesn’t pay out on every policy, but still comprise only a small fraction of China’s overall insurance market.

Privately held Anbang collected Rmb33bn ($5.4bn) in life assurance premiums in the first eight months of 2014 versus only Rmb3.4bn in property and casualty fees, government data show.
Its profitability has been further compromised by its rapid growth strategy. Premiums have grown from Rmb1bn in 2005, the year after Anbang’s founding, to Rmb36bn so far this year. That has required big spending on hiring sales agents and paying commissions to banks that champion their policies.

“I can’t see how they’re making a profit, with all the reserves they have to put away and all the acquisition costs. I would be stunned,” says Sam Radwan, co-founder of Enhance, a management consultancy that advises China’s insurance industry.

Premiums at Anbang’s life assurance unit amounted to only 8 per cent of assets by end the of 2013, compared to 16 per cent at China Life. That suggests Anbang is using equity capital, rather than premiums, to finance its purchases.

China Life and Ping An have both ventured into foreign real estate over the past year, following regulations enacted in 2012 permitting such investments by insurers. But their core businesses are more diverse and profitable than Anbang, meaning investment returns are icing on the insurance cake.

Still, in other respects Anbang seems well-suited to the Buffett model given the proven ability of founder and chairman Wu Xiaohui, son-in-law of late paramount leader Deng Xiaoping, to raise funds from China’s elite state-owned companies. 

Anbang raised its registered capital to Rmb30bn in April this year, up from Rmb12bn in 2011 and more than the Rmb28bn in registered capital at rival China Life.

A complete shareholder list is not publicly available, but the company has wooed investors including state-owned oil refiner Sinopec and SAIC Motor, China’s largest carmaker, according to state media. Anbang could not be reached for comment.

If it succeeds in efforts to emulate Mr Buffett, the danger is that Anbang ends up resigning itself to unprofitability in its core business and basing its strategy solely on high-risk investments.

“If you’re playing the asset game and pushing your yield, you can get yourself into a lot of trouble,” says Mr Radwan.

Source: http://www.ft.com/intl/cms/s/0/9b6f1036-5424-11e4-80db-00144feab7de.html

After the Boom in Natural Gas

THE crew of workers fought off the blistering Louisiana sun, jerking their wrenches to tighten the fat hoses that would connect their cement trucks to the Chesapeake Energy drill rig — one of the last two rigs the company is still using to drill for natural gas here in the Haynesville Shale. 

At its peak, Chesapeake ran 38 rigs in the region. All told, it has sunk more than 1,200 wells into the Haynesville, a gas-rich vein of dense rock that straddles Louisiana and Texas. Fed by a gold-rush mentality and easy money from Wall Street, Chesapeake and its competitors have done the same in other shale fields from Oklahoma to Pennsylvania. 

For most of the country, the result has been cheaper energy. The nation is awash in so much natural gas that electric utilities, which burn the fuel in many generating plants, have curbed rate increases and switched more capacity to gas from coal, a dirtier fossil fuel. 

Companies and municipalities are deploying thousands of new gas-powered trucks and buses, curbing noxious diesel fumes and reducing the nation’s reliance on imported oil. 

And companies like fertilizer and chemical makers, which use gas as a raw material, are suddenly finding that the United States is an attractive place to put new factories, compared with, say, Asia, where gas is four times the price. Dow Chemical, which uses natural gas as a material for producing plastics, has assembled a list of 91 new manufacturing projects, representing $70 billion in potential investment and up to three million jobs, that various companies have proposed or begun because of cheap gas. 

“The country has stumbled into a windfall on the backs of these entrepreneurs,” said Edward Hirs, a finance professor at the University of Houston who contributed to a report that estimated that the nation’s economy benefited by more than $100 billion last year alone from the lower gas prices. 

But while the gas rush has benefited most Americans, it’s been a money loser so far for many of the gas exploration companies and their tens of thousands of investors. 

The drillers punched so many holes and extracted so much gas through hydraulic fracturing that they have driven the price of natural gas to near-record lows. And because of the intricate financial deals and leasing arrangements that many of them struck during the boom, they were unable to pull their foot off the accelerator fast enough to avoid a crash in the price of natural gas, which is down more than 60 percent since the summer of 2008. 

Although the bankers made a lot of money from the deal making and a handful of energy companies made fortunes by exiting at the market’s peak, most of the industry has been bloodied — forced to sell assets, take huge write-offs and shift as many drill rigs as possible from gas exploration to oil, whose price has held up much better. 

Rex W. Tillerson, the chief executive of Exxon Mobil, which spent $41 billion to buy XTO Energy, a giant natural gas company, in 2010, when gas prices were almost double what they are today, minced no words about the industry’s plight during an appearance in New York this summer. 

“We are all losing our shirts today,” Mr. Tillerson said. “We’re making no money. It’s all in the red.”

Like the recent credit bubble, the boom and bust in gas were driven in large part by tens of billions of dollars in creative financing engineered by investment banks like Goldman Sachs, Barclays and Jefferies & Company. 

After the financial crisis, the natural gas rush was one of the few major profit centers for Wall Street deal makers, who found willing takers among energy companies and foreign financial investors.

Big companies like Chesapeake and lesser-known outfits like Quicksilver Resources and Exco Resources were able to supercharge their growth with the global financing, transforming the face of energy in this country. In all, the top 50 oil and gas companies raised and spent an annual average of $126 billion over the last six years on drilling, land acquisition and other capital costs within the United States, double their capital spending as of 2005, according to an analysis by Ernst & Young. 

Now the gas companies are committed to spending far more to produce gas than they can earn selling it. Their stock prices and debt ratings have been hammered. 

“We just killed more meat than we could drag back to the cave and eat,” said Maynard Holt, co-president of Tudor Pickering Holt & Company, a Houston investment bank that has handled dozens of shale deals in the last four years. “Now we have a problem.” 

A Master Salesman

Aubrey K. McClendon, chief executive of Chesapeake Energy, had a secret, and he was anxious to share it.

He called Ralph Eads III, a fraternity buddy from Duke who had become his go-to banker. Mr. McClendon explained that he had quietly acquired leases on hundreds of thousands of acres somewhere in the southern United States — he would not say exactly where — that could become one of the world’s biggest natural gas fields. 

But to develop the wells, he needed billions of dollars. 

“I can get the assets,” Mr. McClendon told Mr. Eads, a vice chairman of Jefferies, according to three people who participated in that call, nearly five years ago. “You have to get the money.” 

Get it he did. Mr. Eads, a pitch artist who projects the unrestrained enthusiasm of a college football coach, traveled the world, ultimately raising an extraordinary $28 billion for Mr. McClendon’s “secret” venture in the Haynesville Shale, as well as other Chesapeake drilling projects. 

Other bankers working in the glass office towers of downtown Houston were equally busy. While the skyscrapers are home to global giants like Chevron and lesser-known companies like Plains Exploration and Production, they also house storefronts for Wall Street deal makers who play a vital, though less visible, role in the nation’s surging energy production. 

Mr. Eads, 53, a Texas native, is a prince of this world. His financial innovations helped feed the gas drilling boom, and he has participated in $159 billion worth of oil and gas deals since 2007. 

A Sigma Alpha Epsilon fraternity brother of Mr. McClendon, he headed to Wall Street directly after Duke. He first earned a national profile in 2001, while working for the El Paso Corporation, a natural gas pipeline operator. Regulators accused El Paso of creating an artificial gas shortage in California in the previous year, contributing to a power crisis in the state. Although El Paso eventually settled the complaints for $1.7 billion, Mr. Eads said El Paso was guilty of nothing more than coming up with creative financial transactions.

“I wake up every day thinking about how to finance big things,” he said. 

His tall, lanky frame and bellowing voice make him hard to miss, even in a large crowd. And his deal radar is never off, as he works the room at dinner parties and charity events. 

That is how he met Jim Flores, the chief executive of Plains Exploration, who eventually invited him on a duck hunt. 

After Mr. McClendon’s urgent request for money, Mr. Eads put in a call to Mr. Flores to see if he might be willing to finance part of Chesapeake’s Haynesville project. 

“Aubrey and I have calculated it, and it might be the largest gas field in the world,” Mr. Eads said he told Mr. Flores, noting early results from a single well that showed unprecedented gas flows. 

The type of deal he pitched, nicknamed “cash and carry,” was certainly aggressive and innovative. Plains would pay Chesapeake $1.7 billion to gain ownership of about one-third of the drilling rights that Chesapeake had leased in the Haynesville. Plains would also commit to paying out another $1.7 billion to cover half of Chesapeake’s drilling costs, in return for part of the future profits. 

“It’s going to be a great investment,” Mr. Flores said on the day the deal was announced in July 2008.

But the deal, like others later struck by Chesapeake, benefited Mr. Eads and Mr. McClendon and their companies far more than the people writing the big checks. 

Chesapeake spent an average of $7,100 an acre on the drilling sites it had leased in the Haynesville. Plains paid Chesapeake the equivalent of $30,000 an acre. 

Jefferies and the other firms involved in arranging the deal made an estimated $23 million on this transaction.

Much of the money that Mr. Eads raised for American gas drillers came from overseas oil and gas companies, like Total of France and Cnooc, the China National Offshore Oil Corporation. He told them the American shale revolution was an opportunity they simply could not afford to pass by. 

“This is like owning the Empire State Building,” Mr. Eads said, recalling one of his favorite lines. “It’s not going to be repeated. You miss the boat, you miss the boat.” 

In China, he was in awe at just how much money was available to invest. One senior executive at a major Chinese oil company that Mr. Eads declined to identify, citing the confidential nature of the negotiations, explained that the country wanted to move as much as $750 billion from United States Treasury bonds into the North American energy business. 

Mr. Eads was only happy to oblige, helping to secure $3.4 billion from the Chinese for Chesapeake through two deals. 

Not everyone believed the story line of endless profits and opportunity. Mr. Eads said one oil company executive whom he would not identify had rejected his pitch, complaining, “The reason for the glut is you guys.” The executive said he expected natural gas prices to plummet. 

In private, Mr. Eads acknowledged that his pitches involved a bit of bluster. 

“Typically, we represent sellers, so I want to persuade buyers that gas prices are going to be as high as possible,” Mr. Eads said. “The buyers are big boys — they are giant companies with thousands of gas economists who know way more than I know. Caveat emptor.” 

Investment banking revenue at Jefferies reached $1.1 billion in 2011, a record for the firm, up from $750 million in 2007. Energy deals were cited among the biggest drivers of that surge, which came despite major problems at the firm because of its exposure to European sovereign debt. 

Mr. Eads would not say how much he had been compensated for this bonanza. But Dealogic, a firm that tracks Wall Street transactions, estimated that Jefferies collected at least $124 million in fees from Chesapeake since 2007, a large share of its overall revenue on oil and gas deals, which ranged between $390 million and $700 million during the same period, according to two different industry estimates. 

Even before the recent round of deals, Mr. Eads was a wealthy man. He lives in a sprawling, 11,000-square-foot lakefront mansion in Houston and has a wine cellar with 6,500 bottles. In 2010, he bought an $8.2 million home in the exclusive West End of Aspen, Colo., whose other homeowners have included Jack Nicholson and Mariah Carey. 

Mr. Eads’s success has produced no shortage of jealousy in Houston. 

“A lot of people don’t like him because he got ahead of everyone else,” said Chip Johnson, chief executive of Carrizo Oil and Gas, who made two big deals in which Mr. Eads was involved. “He got the reputation for overselling, but I have a hard time believing you can fool the big companies.” 

“Without him,” Mr. Johnson added, “the country would not have had the huge gas supply as quickly as we did.” 

Others have been more critical. 

“He is like the bartender serving drinks for people who can’t handle it,” said Fadel Gheit, a managing director at Oppenheimer & Company, about Mr. Eads. “And the whole gas industry has gotten a rude awakening, a hangover, with gas prices plummeting. The investment bankers were happy to help with a smile and get their cut.” 

A Train Without Brakes

“Quit drilling,” T. Boone Pickens, the Texas oilman, barked to his fellow board members at Exco Resources, a small, independent drilling company based in Dallas that, like Chesapeake, had made a big bet in the Haynesville. “Shut her down.” 

Mr. Pickens, 84, made billions of dollars as a hedge fund manager and wildcatter drilling for oil and gas. He borrowed heavily to build up the oil and gas reserves of Mesa Inc. in the late 1980s before losing the company during its financial difficulties a decade later, when drooping gas prices hurt its ability to repay debts and pay dividends. He wanted Exco to avoid a similar fate. 

There was only one problem: under the contracts that Exco signed, it couldn’t stop drilling. 

The company followed Chesapeake’s lead and struck its own $1.3 billion cash-and-carry deal with the BG Group, a British gas company. BG paid Exco $655 million in cash upfront and agreed to foot 75 percent of the bill for future drilling in the Haynesville in return for a share in future profits on the gas produced. 

When the arrangement was made, it seemed like a winner all around. Exco had more than 53,000 acres of leases in the Haynesville, but like Chesapeake, it lacked the money it needed to drill on all the land. BG’s financing helped Exco to increase the number of rigs it had working in the Haynesville to 22 from four. 

Nevertheless, the agreement, negotiated by Goldman Sachs, came with some important strings attached: Exco had to keep all 22 rigs drilling for gas, even as the price was dropping. BG wanted to reach certain targets for drilling wells and producing gas in the United States, and it was intent on sticking with the plan, even if its partner now insisted that it made no economic sense. 

“They are great partners, but they have their pedal down around the world, and we are part of that,” Douglas H. Miller, Exco’s chief executive, explained to Wall Street analysts last year.

Mr. Pickens was furious. “We are stupid to drill these wells,” he said in a recent interview. 

But Exco was not alone. Many of its fellow gas companies — including Chesapeake and Petrohawk — had little choice through last year but to keep drilling, no matter how low the price fell or how big a glut was forming. 

It wasn’t just the cash-and-carry deals that were forcing them to drill. 

The land that the natural gas companies had leased, in most cases, came with “use it or lose it” clauses that required them to start drilling within three years and begin paying royalties to the landowners or lose the leases. 

Exco, Chesapeake and others initially boasted about how many acres they had managed to lock up. But after paying bonuses of up to $20,000 an acre to the landowners, the companies could not afford to lose the leases, even if the low price of natural gas meant that drilling more wells was a losing proposition. 

The industry was also driven to keep drilling because of the perverse way that Wall Street values oil and gas companies. Analysts rate drillers on their so-called proven reserves, an estimate of how much oil and gas they have in the ground. Simply by drilling a single well, they could then count as part of their reserves nearby future well sites. In this case, higher reserves generally led to a higher stock price, even though some of the companies were losing money each quarter and piling up billions of dollars in debt. 

Just as in the earlier real estate bubble, the main players publicly predicted success even as, privately, their doubts were growing, court documents show. 

Mr. McClendon suggested in August 2008 to Wall Street analysts that he had fundamentally transformed the once-risky, century-old oil and gas business into something with the reliability of an assembly line.

“We consider ourselves to be in the gas manufacturing business, and that requires four inputs in our opinion — those inputs are land, people, science and, of course, capital,” Mr. McClendon told the analysts. “We think that’s pretty impressive and hope you do as well.” 

But soon after, he told some Chesapeake employees that the company might have made some big mistakes. “What was a fair price 90 days ago for a lease is now overpriced by a factor of at least 2x given the dramatic worsening of the natural gas and financial markets,” Mr. McClendon wrote in an October 2008 e-mail that has since become public in a lawsuit against Chesapeake. 

And as with so many other shale gas players, Chesapeake struck so many complicated financial deals that it couldn’t stop ramping up the gas factory. 

“At least half and probably two-thirds or three-quarters of our gas drilling is what I would call involuntary,” Mr. McClendon acknowledged at one point. 

For him, the drilling binge had some significant financial consequences. During the good times, Chesapeake paid him handsomely in cash and perks. He achieved a net worth of over $1 billion, and he made it to the Forbes list of the 400 wealthiest Americans. He bought homes in Bermuda, Colorado and Hawaii, as well as a stake in the Oklahoma City Thunder basketball team. 

An unusual company program also allowed Mr. McClendon to buy a small personal stake in Chesapeake’s wells. That is expected to reap more than $400 million for him over the 15- to 20-year life of the wells, although it has strained his personal finances for now. An investigation by Reuters detailed how Mr. McClendon had borrowed heavily from Chesapeake business partners to help finance his share of the wells’ costs. That and other issues drew the scrutiny of the Securities and Exchange Commission, shook investor confidence in him and prompted a shake-up of Chesapeake’s board that included the removal of Mr. McClendon as chairman. 

(Mr. McClendon refused requests to be interviewed for this article, and he did not respond to a list of questions.) 

Mr. Eads appears to have fared better. He had seen the coming crash, and, as any master salesman would, found a way to play both sides. He continued to persuade new investors of the great potential in shale while telling his longtime clients to cash out. 

“It is a great time to sell,” Mr. Eads recalled telling Terry Pegula, the founder of East Resources, who had built up his own operation in the Marcellus region of Pennsylvania from one well to 75 over the course of one year. “With all these new plays popping up, I had a real concern gas prices would weaken.”

Mr. Eads then helped arrange what will go down as one of the great early paydays of the shale revolution: the 2010 sale of East Resources, which Mr. Pegula had started with $7,500 borrowed from family and friends, to Royal Dutch Shell for $4.7 billion. 

There were a handful of other such profit takers, including the Houston businessman Floyd Wilson, who created a company in 2003 called Petrohawk Energy with the intention from the start of selling it. Petrohawk drilled its first Haynesville well in 2008. Last year, it sold itself to an Australian energy conglomerate, BHP Billiton, in a $15 billion deal that brought Mr. Wilson and other executives a payout worth at least $304 million. 

But for many gas drillers, there has been only pain. 

Exco, whose production of natural gas was still rising in the Haynesville as of early this year, saw its credit rating downgraded in May. It reported a loss of nearly $780 million for the first half of the year, before write-offs and other adjustments, even after it reduced its work force and rig count. BG, its joint venture partner, reported in July that it was taking a $1.3 billion write-down on its shale gas investments in the United States, including the Haynesville deal with Exco. 

Plains Exploration, which celebrated its first deal with Chesapeake back in 2008, reported a loss for the first quarter this year, but has since shifted heavily away from gas to oil production and is making money again. Warm weather last winter exacerbated the glut to historic levels, reducing prices even further, since so little gas was needed to heat homes in many parts of the nation. 

Chesapeake’s stock price sank this year after it was revealed that Mr. McClendon had taken a personal stake in Chesapeake wells and then used those investments as collateral for up to $1.1 billion in loans used mostly to pay for his share of the cost of drilling those wells. The company is trying to raise $14 billion this year by shedding assets, a goal it has almost reached with huge recent sales of West Texas oil and gas fields and pipelines to Royal Dutch Shell and Chevron. 

To help the company through this difficult patch, Mr. McClendon turned to his old friend, Mr. Eads. Jefferies & Company, joined by Goldman Sachs, offered Chesapeake an emergency $4 billion unsecured bridge loan, at 8.5 percent interest, to give the company a lifeline until it could sell enough assets to keep afloat. (The company says it intends to pay back the entire loan this year from recent sales.) 

In hindsight, it should have been clear to everyone that a bust was likely to occur, with so many new wells being drilled and so much money financing them. 

But everyone was too busy working out new deals to pay much heed. 

The bust has certainly hit the Haynesville hard. Some local landowners, having spent their initial lease bonuses, are now deeply in debt. Local restaurants and other businesses are suffering steep losses now that so many drillers have left town. 

“At this point we’re struggling,” said Shelby Spurlock, co-owner of Cafe 171 in the town of Mansfield. The restaurant is decorated with wall collages of drill worker uniforms from companies that are leaving the area. Once open from 4 a.m. to 10 p.m. and employing four servers, the restaurant has cut its hours and is down to two servers. “Our very existence is in danger,” she sighed. 

Mr. Eads, ever the deal maker, is unfazed. He tells anyone who will listen that the price of natural gas will eventually recover. He is making money, meanwhile, helping struggling companies and opportunistic investors strike deals at the new, lower prices. 

“These shale assets are forever,” he said. “They are going to produce for a hundred years.” 

Source: http://www.nytimes.com/2012/10/21/business/energy-environment/in-a-natural-gas-glut-big-winners-and-losers.html?gwh=4EF02441B478F83613CC96156951883F&pagewanted=all

M&A Bất động sản là tâm điểm của thị trường năm 2012

Tâm điểm của thị trường bất động sản năm 2012 được nhiều chuyên gia dự báo sẽ là hoạt động M&A, chuyển nhượng dự án diễn ra mạnh.

Năm 2011 khởi đầu cho “làn sóng” chuyển nhượng dự án

Năm 2011 ghi nhận là một năm đầy khó khăn thách thức của thị trường bất động sản, dẫn đến tâm lý khách hàng là chờ đợi. Chính vì vậy, một loạt dự án bị khó khăn “kép”. Thứ nhất, là khó khăn tiếp cận nguồn vốn ngân hàng của các dự án, hàng loạt các dự án bị dừng giải ngân. Thứ hai khó khăn ở đầu ra, nhiều dự án đã xây dựng nên không bán được hàng. Thị trường hiện nay rất căng thẳng về thanh khoản.

Khó khăn của nhiều chủ dự án là không có tiền phát triển tiếp dự án, rất nhiều dự án xây dựng dở dang, trong khi tiền nợ các ngân hàng, nhà thầu ngày càng tăng lên.

Một số dự án cũng có cam kết tiến độ với khách hàng và họ cũng phải nỗ lực huy động vốn để thực hiện nhưng cũng rất khó khăn.

Trong bối cảnh như vậy, một số chủ đầu tư có nhu cầu chuyển nhượng dự án bất động sản. Có những dự án đã hoàn thành thủ tục pháp lý, làm xong hạ tầng nhưng thiếu tiền thì phải mời gọi đối tác hợp tác cùng chia sẻlợi nhuận để phát triển dự án sau này, thông qua chuyển nhượng vốn cổ phần (M&A). Có những dự án phải chuyển nhượng toàn bộ dự án…

Nhiều thương vụ chuyển nhượng dự án đã ra tăng từ giữa năm 2011, đặc biệt tại Tp.HCM. Trong khoảng tháng 7/2011, tại Tp.HCM đã có 2 thương vụ lớn như chuyển nhượng dự án tại khu dân cư Tân Tạo A và dự án Peninsula.

CTCP Đầu tư và địa ốc Khang An đã chuyển nhượng 80% tại khu dân cư Tân Tạo A cho Dacin Holdings của Singapore, và đã thanh lý hợp đầu tư hợp tác đầu tư với Vạn Phát Hưng 60% cổ phần trị giá 68 tỷ đồng và 14 tỷ đồng tiền phạt. Như vậy, dự án Tân Tạo A hiện có 3 đối tác Dacin 80%, Khang An 10%, và Phước Thành 10%.

Quỹ đầu tư JSM Indochina đã chuyển nhượng dự án Peninsula cho công ty Sao Sáng Saigon – công ty thành viên của ngân hàng Nam Á– với giá khoảng 228 tỷ đồng (11 triệu USD, lỗ 8 triệu USD so với giá quỹ này mua vào trước đó).

CapitaValue Homes Limited, một đơn vị trực thuộc Tập đoàn CapitaLand, đã thông qua công ty con là CVH Sparkle Pte. Ltd mua lại 65% cổphần của Công ty TNHH Quốc Cường Sài. Trước đó, CapitaValue Homes Limited đã được thực hiện mua lại 70% cổ phần của một dự án chung cư tại phường Bình TrưngĐông, quận 2-TPHCM của Công ty Khang Điền Sài Gòn

Tập đoàn Hoa Sen (HSG) cũng đã thông qua chủ trương sẽ chuyển nhượng hàng loạt dự án như: Căn hộ Hoa Sen Phước Long B và Hoa Sen Riverside (quận 9 - TPHCM), chuyển nhượng quyền sử dụng đất tại 123 Trần Não, phường Bình An, quận 2. Đồng thời chuyển nhượng 45% phần vốn góp tại dự án cảng quốc tế Hoa Sen -Gemadept...

Mới đây, Tama Global Investment Pte.Ltd.., đã mua lại 20% cổ phần của Công ty cổ phần Đầu tư và phát triển nhà đất Cotec (COTECLAND).

CTCP Xây dựng và Kinh doanh Địa ốc Hòa Bình cũng đã lên kế hoạch chuyển nhượng nhiều dự án như khu công nghiệp, khu nghỉ dưỡng, du lịch…

Ông Phan Xuân Cần- Chủ tịch Công ty BĐS SohoVietnam cho biết, nhiều dự án đang gặp rất nhiều khó khăn về vốn, để có thể phát triển tiếp dự án chủ đầu tư bắt buộc phải tìm kiếm đối tác, hoặc bán cả dự án cho đối tác khác. M&A trong lĩnh vực bất động sản đang “nóng” lên từng ngày, khi áp lực siết nợ của ngân hàng ngày càng tăng.

Các dự án chuyển nhượng chủ yếu tập trung tại Tp.HCM. Tại Hà Nội nhiều dự án cũng đã huy động

Ông Phan Thành Mai: "thị trường M&A bất động sản năm 2012 chắc chắn sẽ khó phát triển vượt bậc nếu các dự án BĐS tiếp tục thiếu vốn."

được vốn trước từ khách hàng trước đây, cho nên khó khăn về vốn đối với các chủ đầu tư ở HN ít hơn.

Một số dự án đang xây dựng nhưng lại khó khăn về đầu ra như văn phòng, khách sạn, tổ hợp …đều có như cầu chuyển nhượng. Chẳng hạn như tòa nhà văn phòng ở quận 7 cao hơn 20 tầng đang có nhu cầu chuyển nhượng với tổng giá trị hơn 700 tỷ đồng.

Còn theo số liệu thống kê của Stoxplus, bất động sản là lĩnh vực đứng thứ 3 về hoạt động M&A sau lĩnh vực hàng tiêu dùng và tài chính. Tổng giá trị về M&A trong 9 tháng 2011 đạt khoảng 2,67 tỷ USD, trongđó lĩnh vực hàng tiêu dùng chiếm hơn 1 tỷ USD, tài chính 453 triệu USD và bất động sản 251 triệu USD.

Năm 2012: Sẽ “nóng” M&A bất động sản

Dự báo của nhiều chuyên gia bất động sản, hoạt động M&A sẽ gia tăng mạnh mẽ trong năm 2012- 2013 đó là hệ quả tất yếu của vấn đềtái cấu trúc thị trường, sau một vài năm tăng trưởng nóng.

Trong Diễn đàn “Doanh nghiệp Việt Nam – Singapore” được tổ chức mới đây, ông Phan Thành Mai- Tổng thư ký Hiệp hội BĐS Việt Nam nhận định,thị trường M&A bất động sản năm 2012 chắc chắn sẽ khó phát triển vượt bậc nếu các dự án BĐS tiếp tục thiếu vốn. Nếu các công cụ tài chính mới phi ngân hàng được triển khai, đồng thời có chính sách tín dụng nới lỏng linh hoạt thì thị trường sẽ có dấu hiệu tích cực vào cuối năm 2012, nếu không có chuyển biến gì mới về chính sách tín dụng thì thị trường sẽ tiếp tục giai đoạn trầm lắng kéo dài.

Ông Phan Xuân Cần: "Năm 2012 sẽ là năm có nhiều thương vụ M&A liên quan đến bất động sản, nếu thị trường tiếp tục không có đầu ra."

Ông Phan Xuân Cần cho biết, đã có nhiều thương vụchuyển nhượng dự án trước đây Soho Việt Nam đã thực hiện như Hòa Bình Tower 12 triệu USD, Vitex Tower tại 63A Võ Văn Tần, Tp.HCM với giá 135 tỷ đồng, dự án Sukura Tower 47 Vũ Trọng Phụng tại Hà Nội của CTCP Hùng Tiến Kim Sơn chuyển nhượng 100% cho một số cổ đông trong đó cổ đông chính là Vinaconex Anphanam. Nhiều thương vụ khác về chuyển nhượng bất động sản lớn mới đây như VinaCapital chuyển nhượng 70% vốn tại khách sạn Hilton cho Seabank, FPT chuyển nhượng dự án tại Láng Hạ cho VPbank trị giá 400 tỷ đồng…

Hiện SohoVietnam đã tiếp nhận khoảng 80 dự án đang có nhu cầu chuyển nhượng chủ yếu tại Tp.HCM, Hà Nội và Đà Nẵng, có những dự án có trị giá hàng trăm tỷ đồng. Không chỉ giá bất động sản giảm mạnh trong năm qua, mà giá chuyển nhượng dự án cũng theo đó mà giảm khá sâu, trung bình khoảng 30% so với năm 2010.

Ông Cần khẳng định, chắc chắn năm 2012 có nhiều dự án bất động sản sẽ phải bán. Nói chung các dự án hiện nay đã cầm cự trong năm vừa rồi và cấu trúc lại nguồn vốn nhưng sẽ còn rất nhiều khoản tài chính của họ đáo hạn vào quý 1, quý 2 năm 2012, điều đó sẽ là áp lực cho chủ đầu tư dự án buộc phải bán đi dự án hoặc hợp tác đầu tư. Năm 2012 sẽ là năm có nhiều thương vụ M&A liên quan đến bất động sản, nếu thị trường tiếp tục không có đầu ra.

Source: http://land.cafef.vn/20111227100038439CA43/ma-bat-dong-san-la-tam-diem-cua-thi-truong-nam-2012.chn

How investors can get more out of infrastructure

Rarely have investments in global infrastructure—everything from roads, bridges, and tunnels to schools, hospitals, and power plants—held the spotlight as they do now. Governments around the world are increasingly comfortable using private money to finance such projects, while investors have poured large sums into specialist funds in hopes of obtaining attractive inflation-adjusted returns. From 2006 to mid-2007, we estimate, private investment funds raised $105 billion for infrastructure projects.

All of this interest heightens competition and creates a problem for fund managers and investors seeking profitable infrastructure opportunities. If funds follow the crowd, bidding to operate existing assets under a business-as-usual model, they run a double risk because of the sheer volume of dollars now chasing deals and driving up prices: either they lose out to more audacious competitors, or they risk overpaying and achieve suboptimal returns. Yet funds are under growing pressure to invest the money they raised. They can’t sit on the cash indefinitely.

So infrastructure investors must raise their game in two ways. First, they should become better at extracting value from projects by improving their operational capabilities. Second, they ought to use this more sophisticated operational perspective to assess the risks of nontraditional infrastructure deals—such as those that involve complex operations, emerging markets, or new assets.

If this story sounds familiar, it should: private-equity firms followed a similar path over the past decade. Leading ones evolved their business models to create value from not only financial engineering but also managerial and operational improvements; at the same time, they gained the confidence to invest in more and more complex businesses. By learning the same lessons—and understanding best practice from industries, such as oil and gas, that routinely face the same sort of complexity in unfamiliar locations—infrastructure funds should produce returns that will keep investors happy.

The money is here—what about the deals?

During the past two years, the flood of money into infrastructure funds has been astonishing: the world’s 20 largest now have nearly $130 billion under management, 77 percent of it raised in 2006 and 2007 and about 63 percent from new entrants. Taking into account leverage, a billion dollars of equity funding could, in some situations, pay for up to $10 billion in projects.

Where will all the money go? The value of infrastructure buyout deals has already grown from roughly $20 billion in both 2003 and 2004 to $106 billion last year. The volume of the developed world’s remaining traditional brownfield opportunities—those in existing infrastructure, such as owning and operating a toll road—won’t satisfy investor demand over the next three to four years. Bidding for these deals is already intense,¹ which has pushed up price-to-earnings multiples. The multiple of 9 achieved by Italy’s Aeroporti di Roma when it was sold in 2002, for example, is dwarfed by the multiple of 27 that investors paid for the UK’s London City Airport in early 2007; in the ports sector, the multiple of 9 paid for Hesse-Noord Natie in 2002 was less than half the multiple of 20 achieved by Orient Overseas in 2006. Meanwhile, in North America the competition for road projects has become increasingly heated —as seen in the multiples commanded by the Indiana Toll Road and Chicago Skyway deals. High valuations mean that funds must work much harder to generate satisfactory returns.

Investors hoping to avoid these sky-high valuations can target more attractive deals if they are willing to look beyond existing infrastructure in developed economies and consider the following:

• projects in emerging markets—which, we estimate, will require more than $1 trillion in capital over the next ten years
• complex brownfield deals, which typically have a substantial construction element because of the upgrade and refurbishment work involved
• wholly private infrastructure opportunities, such as private industrial rail lines and power plants or the full privatization of infrastructure providers

Exhibit 1 shows what this approach might mean for the global transport sector. Of the $360 billion of transport-related projects we have identified from now until 2010, around $305 billion are either located outside the Organisation for Economic Co-operation and Development (OECD) countries or lack established income streams.

New types of deals, of course, expose investors to a large number of new risks, many of them difficult to quantify. If not managed, such risks open fund managers to the charge that they are straying into projects that look more like traditional equities than like infrastructure. But managers who don’t consider nontraditional projects will shut themselves out of the lion’s share of the opportunities in coming years.

In this more bracing environment, funds need a new approach. Most investors have typically created value through financial engineering and rising user demand. They have acted less aggressively to improve operations; indeed, many financial investors still leave such issues to contractors and focus their governance efforts on financial metrics.

The old business model is ill suited to capturing the opportunities in today’s competitive market. Infrastructure investors must not only spot ways to improve operating cash flows before committing their capital but also ensure that they have the knowledge and expertise to enhance the value of a highly priced asset once they own it. Moreover, they have to anticipate and assess the operational complexity of any nontraditional project in order to understand and manage the risks of bidding for it.

For funds that can master infrastructure operations, the prize is twofold: a better chance of winning traditional deals and making them profitable, as well as the ability to bid for more operationally complex and less competitive types of infrastructure. These strengths also give investors the confidence to walk away from overpriced deals.

The devil’s in the operations

One key attraction of infrastructure investments is the prospect of reasonably straightforward operations: there is less scope for management discretion in running a bridge, for example, than a global retail chain or a software house—not, of course, that such investments leave no room for operational improvement or can’t create significant value. This straightforwardness is a characteristic not only of the roads sector, traditionally seen as one of the most operationally undemanding categories of infrastructure, but also of more complex categories, such as airports, power plants, and transit systems.

Exhibit 2 highlights the performance of five leading infrastructure-management companies active in a single EU country. Despite the common working environment, the operations and economics of each company’s toll collections, motorway patrols, and routine maintenance work are quite different. In fact, all of these companies showed room for improvement in one or more aspects of the business—no single contractor was best across the board.

Our work with road operators provides many examples of operational improvements and feasible savings. Some techniques are sophisticated, such as restructuring procurement systems to bring in smaller raw-material companies and thus make suppliers more competitive. Others are strikingly simple: for instance, designing the shape of embankments to minimize construction time or drafting winter maintenance contracts in order to reduce unnecessary salting and sanding. In projects that involve existing roads, experience suggests, a proactive investor could cut its costs by 9 to 16 percent in present-value terms by raising the operations of European or North American highways from average to best in class. That would certainly allow a bidder to be a touch more aggressive—say, by offering 22 rather than 20 times EBITDA²—and also preserve acceptable rates of return. While a change of this magnitude isn’t transformative, it has the potential to make the difference between winning and losing a bid or to help an investor recognize that it’s time to walk away.

The importance of operational improvements grows as infrastructure projects become more complex. Macquarie and Ferrovial’s coinvestment in the UK’s Bristol International Airport, for example, involved upgrading signage systems; renewing check-in, baggage reclaim, and catering facilities; rerouting foot traffic; and installing all-weather landing equipment. The investors also rejuvenated the airport’s retail offering, strengthened the management and sales teams, and even tweaked the system for booking parking spaces. In the four years after the acquisition, the number of passengers using the airport doubled—as did its EBITDA. More recently, the management of the airport had to address operational concerns over its runways to ensure the project’s continued success. Ferrovial’s subsequent acquisition of the British airports operator BAA has involved complex decisions about airport logistics, security, management restructuring, regulatory strategy, and investment priorities. It would be unthinkable for an investor with no expertise in the transport sector to make these decisions.

Even the apparently straightforward business of rail maintenance offers room for greater efficiency. Work with a range of OECD rail operators suggests, for instance, that implementing best-practice procedures in maintenance scheduling, repairs, purchasing, and overhead management can cut annual upkeep costs by 15 to 30 percent. Routine maintenance is usually just the start of the challenge, however. Complex decisions about signaling systems, integration with other networks, and negotiations with rail operators all offer further scope for operationally savvy investors to distinguish themselves from less sophisticated ones.

Again, these realities should come as no surprise to anyone who has followed the development of the private-equity industry. A McKinsey analysis of 60 completed private-equity deals showed that over 60 percent of the value they created arose from improving the performance of companies (that is, raising revenues and margins or redirecting corporate strategy) rather than financial engineering, arbitrage, market timing, or sector appreciation.³

Mastering investment risk

Operational understanding and operational capabilities are essential for assessing and managing risk. The ability to deal with risk is in turn a prerequisite for investing in projects—in particular, greenfield projects, deals in emerging markets, and complex schemes—that might scare other bidders. It is also required to know which deals to avoid.

When investors deal with a familiar type of brownfield infrastructure project in a well-understood geography, assessing and managing risk is relatively straightforward. They can typically assess the levels of demand risk, maintenance cost risk, and political risk, if any; factor the financial impact of unexpected events into a bid; and track such problems over a project’s life.

The number and magnitude of the risks increase if a project involves building a new asset, operating in a complex or untested regulatory environment, or bidding for an asset that has complex interdependencies with other projects. McKinsey’s work with leading developers in the oil, gas, and energy sectors, where complex billion-dollar-plus projects in unfamiliar locations are a fact of life, highlights practices that infrastructure experts can use to advantage.

In the preproject phase, for example, successful developers tailor their project-development and risk-management processes specifically to the venture in hand rather than rely on standard processes. They assess various types of risk in a structured way, avoiding unwarranted focus on a single category, such as technical delivery or regulatory compliance. To do all this, and to reduce the dangers of faulty intuition or any bias toward optimism, they quantify and prioritize risks wherever possible and regularly revisit their estimates.

Once a project is under way, good governance is the key to managing risk. Leading developers ensure single-point accountability wherever possible, giving project teams direct control over the resources needed to complete the work and avoiding matrix or functional structures. To prevent silos from developing as projects unfold, a centralized integration function should regularly and rigorously review them to ensure that they are on track or, if they aren’t, that corrective measures are taken swiftly. Finally, successful developers implement appropriate financial incentives to make sure that the owners of risk manage and optimize it.

Investors incapable of assessing risk accurately may come to grief. Consider the early difficulties in building the Channel Tunnel between France and Britain. The initial winners of the contract, in 1986, did little work on detailed design and produced cost estimates that one recent study described as “more or less rough guesswork.”⁴ A subsequent change of ownership at Eurotunnel led to the appointment of a new management team, a more detailed assessment of risk, and tighter contracting terms. In the end, the massive project was completed close to deadline, though at a cost substantially above initial estimates (see sidebar, “Effective infrastructure investment: The public-sector perspective”).

The energy industry provides more recent examples of the importance of assessing and managing risk. Increasingly, developers such as Marubeni undertake lump-sum turnkey projects to build power plants (Middle Eastern ones, in Marubeni’s case), taking ownership of construction risk and creating the incentives and processes needed to manage it. A leading oil company assesses a major investment’s probability of success by developing scenarios and stochastic models and then uses its findings as a yardstick for measuring the effectiveness of plans to mitigate any risks. Such lessons are just as useful for investors in infrastructure, as well as the funds that finance it, because this kind of project integration and control is something they are well positioned to provide.

Likewise, successful private-equity funds have been defined in part by their exceptional ability to assess and manage the risks in their portfolios of companies. In the 1990s, Nomura’s Principal Finance, a leading buyout firm of the time, purchased state-owned Angel Trains, one of the UK’s three lessors of passenger rolling stock. It then proceeded to demonstrate how much such firms could achieve. Nomura conducted a detailed due diligence and financial analysis to demonstrate that Angel’s future cash flow was more secure than other bidders realized and that they had exaggerated the safety risks. These efforts allowed Nomura to bid competitively in what was then an untested asset class. Refusing to accept the incumbent management’s claims, Nomura itself also assessed the possibility of raising Angel’s operating efficiencies. After winning the auction, Nomura quickly set new objectives for Angel, reorganized its management to achieve them, and kept a close eye on the operational risks already identified. The lesson—that good risk management not only reduces the potential downside but also creates an additional upside—holds true for today’s infrastructure investors as well.

Next steps for funds

Infrastructure investors and the funds they subscribe to must take important steps—one strategic, the other organizational—that will make them better able to improve both the operations they oversee and the way they deal with risk. First, they should focus on a manageable range of sectors where they can apply real insights that will help them source transactions, pay appropriate prices, and extract maximum value. Second, they should create a team of in-house experts to assess and manage the risks. Much as large buyout funds have moved on from the “three bankers and a Rolodex” model, so too infrastructure investors will probably need to start hiring people with experience beyond investment banking or commercial financing. They should consider former asset operators, risk managers from financial institutions, and former officials of government infrastructure departments.

The benefits of focus

Many of today’s new infrastructure funds were set up with a broad remit that helps them attract new capital quickly—their offering memoranda give them enough flexibility to target a wide range of infrastructure types in a wide range of countries. This kind of freedom has to be managed carefully; bidding reactively for projects in many disparate sectors probably won’t create value if a fund lacks the relevant expertise. Successful infrastructure players, such as Macquarie, direct their investments to high-potential areas in which they have the knowledge and capabilities to create a sustainable advantage.

One critical step for a new fund is to consider what distinctive skills, experience, and networks it can use to create value. A larger institution, such as a bank, that sets up a fund may have expertise in a particular region, industrial sector, or deal structure. Some of Macquarie’s early funds, for example, had a tightly defined focus on highways, airports, or South Korea.

Focused strategies can be particularly effective for smaller players. In the late 1990s and early 2000s, for instance, investors with experience in the UK debt and project finance markets began building equity positions in infrastructure undertakings launched under the UK government’s Private Finance Initiative (PFI). These projects were too small for larger generalized investors—and for many of today’s new funds. But smaller, more specialized ones, such as the Secondary Market Infrastructure Fund (acquired last year by Land Securities Trillium), have successfully built up portfolios of positions in UK infrastructure projects.

Developing in-house expertise

In the short term, investors can outsource some operational and risk-management functions to advisers, just as private-equity firms do and as infrastructure investors themselves do for demand forecasting and for legal and taxation due diligence. They can also rely on coinvestors or subcontractors to provide advice.

Relying on coinvestors with industry experience, such as construction or facilities-management firms, is often a successful approach. Some of these relationships, notably the fruitful partnerships between Macquarie and Ferrovial, have endured across a number of deals. But funds should think twice before depending exclusively on industrial coinvestors for operational insights and advice. As the European road-management analysis mentioned earlier shows, no operating company can claim to be a market leader in every aspect of operations. Since similarly uneven patterns can be found in other areas of infrastructure, funds risk losing value by locking themselves into a single partner.

Moreover, investors relying solely on the operational expertise of construction and maintenance firms may expose themselves to conflicts of interest: these businesses often perform a dual role as shareholders in infrastructure projects (and thus receive dividends) and as operators performing specific tasks (and receive fees, like any other contractor). Rumors circulate that in early infrastructure deals, financial investors lost out to subcontractors they had relied on for operational guidance. At the very least, a fund must know a business well enough to hold the managers of the investment project and the contractors accountable no less for operational than for financial targets and to form an independent view of the operational improvements achievable.

Leading private-equity firms, such as Texas Pacific (TPG) and Kohlberg Kravis Roberts, have increasingly developed the expertise to carry out much of the core due diligence and operational governance themselves, so they can execute complex and operationally demanding transactions with confidence. Infrastructure players like Macquarie and Henderson’s Laing subsidiary have adopted the same approach; both can rely on significant teams of operational experts to undertake due diligence for deals and to support the management of projects.

Opportunities to invest in global transport and other types of infrastructure—to build and operate new projects and manage old ones—are set to increase in the next few years, but so will competition for deals. A fund can position itself to stay ahead of the competition and improve its chances of securing healthy returns if it deepens its knowledge of operations, improves its ability to assess the risks of individual deals and to manage them, and develops the in-house skills to institutionalize these capabilities.

Effective infrastructure investment: The public-sector perspective

More intense bidding for infrastructure projects generally increases the amounts paid to governments for the right to run existing assets and reduces the cost of constructing new ones. Yet overexuberant bidding can clash with the public’s best interests and undermine the provision of services. Governments should entrust such projects to smart investors who understand their operating realities and risks. Although public-private partnerships give governments strong protection if the private sector fails to deliver, failure is rarely painless for any of the parties involved. The UK’s National Physical Laboratory is a case in point. Built under the UK government’s Private Finance Initiative (PFI), the project went substantially over budget, creating serious financial difficulties for one of the investors. The public sector didn’t foot the bill for these problems, but the facility was delivered late as a result of its complex financial restructuring.

Source: https://www.mckinseyquarterly.com/Financial_Services/Investment_Management/How_investors_can_get_more_out_of_infrastructure_2105

Cogs of China’s credit machine grind more slowly

Shoreline Capital, a Guangzhou-based investment firm which invests in distressed assets and provides debt capital in China, looked at over 700 opportunities to put money to work in China in recent months. Shoreline ended up providing capital to exactly four companies, despite the fact that the counterparties on all of the deals were willing to pay returns of at least 25 per cent and offered full collateral backing.

“So many people promise that they will pay us 25 to 40 per cent per annum and think they can use the funds to make many times their money,” says Ben Fanger, co-founder of Shoreline. “But many of these are overly speculative or even just get rich quick schemes with no actual value being created. To use borrowed money on such inflated promises to pay such returns can be, as the Chinese saying goes, trying to ‘snatch a white wolf with empty hands’.”

Beijing’s recent tight money policy has given rise to ever more money games, speculation and corruption, though the effects are only now beginning to become evident. Such money games have become a big threat to China’s prosperity and to its social harmony. These games are symptomatic of a society where everyone is on the take, looking for short-cuts.

In the autumn, the great Chinese credit machine began to slow dramatically. Total financing in China (which includes loans, fundraising in the capital markets and activity in the shadow banks) fell 30 per cent year over year in the third quarter. In September, bank loans grew at their slowest pace since October 2008. Growth in M2, the most widely used measure of money supply, is now well below the year end target of 16 per cent.

Beijing’s tight money policy has been effective in taming inflation (now 5.5 per cent) and the rise in asset prices. It has also slowed the number of property transactions and the rise in property prices, squeezing developers lacking deep pockets. At the same time, though, the difficulty in obtaining money through the official channels has given rise to a system in which state-owned enterprises that are supposed to make real things are increasingly turning themselves into financiers, borrowing at the official rate themselves and then turning around and putting the money to work in the grey market. Firms ranging from cellphone operators to shipbuilders have formed finance companies to engage in such activities.

The reversal from the loose money policy of 2009 and 2010 giving rise to an explosion of such games has been sharp. Between 2005 and 2010, bank credit had expanded at a compound annualised rate of 21.2 per cent. Since December 2008, the banks have put $4,100bn of new credit on to their balance sheets (and perhaps another 30 per cent off their balance sheets), and bank credit went from being 100 per cent of gross domestic product to about 130 per cent.

Now there is evidence that the Chinese may relax the current tight money policy at least incrementally. This week, Citic Securities issued a report entitled “Turn on the printing press!!!” Some banks are receiving increases in their loan quotas and analysts expect regulators to cut the reserve ratio requirements soon.

Still, such money games, speculation and corruption are unlikely to disappear – even when monetary policy eases – as long as the Chinese government continues to rely on the banks to allocate credit; controls interest rates, leaving savings depositors to receive a negative 2.5 per cent; and gives its people few other alternatives in which to invest.

If an entrepreneur wants to obtain funds in China, the choices are few and unattractive. Small and medium-sized enterprises are supposed to be the target of the selective easing that is now on the cards but banks don’t trust entrepreneurs because so many of them are more serious about taking money than using it. It isn‘t only the collateral that often turns out to be fake, even the proposed factories can be fake.

Many local governments have established science and technology funds to help struggling entrepreneurs in their districts. But the going rate for such funds now involves a kickback of about 30 per cent of the handout for the officials doling out the funds.

Legitimate businesses are struggling as informal demands for pay-outs multiply. One New York-based company which employs factories in China to make ornaments that it sells to the big box retailers such as Target or Walmart reports that the inspectors will only give their approval to factory conditions and product quality after generous payments.

The move from the hard work of manufacturing and value added to putting up luxury flats and playing money games is not confined to China alone. But the speed of the shift is a growing concern. In the past, there was corruption but things happened. Now, one entrepreneur in Shanghai laments, all the projects are like the reflection of the moon on the water – just an illusion.

Source: http://www.ft.com/intl/cms/s/0/6f851e30-0b8d-11e1-9861-00144feabdc0.html#axzz1do4A9hvt