Author: Ashton Wenborn

Indonesia lists first ever start-up IPO

Posted on by Ashton Wenborn

On October 5, an Indonesian e-commerce firm became the first start-up to file for a domestic IPO. Kioson Komersial Indonesia, which aims to build the largest retail network in the country, saw its shares rise in value by 50 percent after making its trading debut on the Indonesia Stock Exchange (IDX).

The highly anticipated IPO saw Kioson sell 150 million shares, 23.1 percent of the company’s total, raising a sum of $3.34m. The fact that the offering was 10 times oversubscribed could prompt other Indonesian tech firms to follow in the company’s footsteps.

“Kioson’s IPO is an important milestone for the Indonesian capital market because this is the first time retail investors can invest in a tech start-up,” said Kioson CEO Jasin Halim. “We thank all parties that have participated and helped Kioson during the IPO process. The success of this corporate action can set a precedent for other start-ups to consider IPOs as alternative fundraising.”

The fact that Kioson’s offering was 10 times oversubscribed could prompt other Indonesian tech firms to follow in the company’s footsteps

Kioson hopes to use most of the money raised by the IPO to acquire Narindo Solusi Komunikasi, an affiliated technology company. The acquisition should enable Kioson to break even by 2018, which will no doubt give the company’s new investors even greater cause for optimism in what is already South-East Asia’s largest economy.

Indonesia’s first start-up IPO has been long overdue, however, as the country’s business sector has been encouraging entrepreneurs to source alternative funding methods for some time now.

Last year, financial regulator OJK issued a new ruling that allowed start-ups to raise as much as $74.6m from IPOs. As a result, it is hoped that larger e-commerce firms like Tokopedia and Bukalapak could also find themselves listed on the IDX soon.

European Union tightens trade rules to guard against Chinese dumping

Posted on by Ashton Wenborn

EU President Jean-Claude Juncker asserted that “[Europeans] are not naïve free traders” upon announcing a landmark change in EU anti-dumping law. The law will position regulators to guard against cheap Chinese imports should the country be granted market economy status.

Newly introduced legislation will change the way the EU calculates dumping margins for cases where there are “significant market distortions, or a pervasive state’s influence on the economy”.

To determine whether market distortions are taking place, the EU will consider factors such as state policies and influence, the independence of the financial sector, the presence of state-owned enterprises, and any discrimination in favour of domestic companies.

Under previous rules, it would have become much more difficult for the EU to accuse Beijing of illegal trade practices if China were granted market economy status

The rule change preempts a ruling by the World Trade Organisation over whether China should be granted market economy status, as was initially promised when the country signed up to the organisation in 2001.

Under previous rules, it would have been much more difficult for the EU to accuse Beijing of illegal trade practices if China were granted market economy status.

Cecilia Malmström, EU Commissioner for Trade, said: “We believe that the changes [to the legislation] agreed today… strengthen EU’s trade defence instruments and will ensure that our European industry will be well equipped to deal with the unfair competition they face from dumped and subsidised imports now and in the future… With today’s successful outcome, the EU will have an anti-dumping methodology in place which will deal head-on with the market distortions which may exist in exporting economies.”

While the rules are technically country-neutral, and Juncker has underscored that the legislation does not aim to target any particular country, the move could act to add fuel to tensions with China.

A report by Xinhua, China’s official news agency, has argued that the new market distortion principle amounts to underhand trade protectionism.

 

Shell cancels sale of Thai gas subsidiaries

Posted on by Ashton Wenborn

On October 4, Royal Dutch Shell announced that it has cancelled the sale of its two subsidiaries in Thailand. Shell Integrated Gas Thailand (SIGT) and the Thai Energy Company (TEC) were due to be sold to the Kuwait Foreign Petroleum Exploration Company (KUFPEC) for $900m in the first quarter of this year.

The deal would have amounted to a sale of shares in the Bongkot gas field, located on an island in the Gulf of Thailand. Collectively, SIGT and TEC held 22.222 percent equity in the Bongkok field, with PTT Exploration and Production owning 44.445 percent and Total 33.333 percent.

Shell confirmed that the decision to cancel the sale was the result of an overly long negotiating process.

Shell confirmed that the company is satisfied with its current divestment programme, meaning that the motivation to sell shares in its Thai gas field was reduced

“Although Shell and the Thai Government have worked together closely and collaboratively on the matter, the different interpretations of the treatment of share sale transactions were not resolved within Shell and KUFPEC’s agreed timeframe,” a Shell spokeswoman told Reuters. “Therefore, both parties jointly decided to terminate the transaction.”

When the sale was initially announced, pressure had been mounting on Shell to reduce debt following the acquisition of multinational petrochemical firm BG Group in 2016.

However, Shell confirmed that the company is satisfied with its current divestment programme, meaning that the motivation to sell shares in its Thai gas field was reduced.

The British-Dutch organisation is aiming to make $30bn of divestments between 2016 and 2018, with $25bn already either in progress or complete.

Shell’s renewed commitment to its South-East Asia portfolio was confirmed after the company declared that SIGT would participate in the upcoming licensing round to expand the Bongkot concession.

The recent fall in oil prices  has perhaps led the firm to place greater emphasis on Thai subsidiaries, which continue to be a profitable part of its operations.

Bancomext: a trendsetter for Mexican banks

Posted on by Ashton Wenborn

This year marks two decades since Mexico transformed its pension system. In line with recommendations from the World Bank, the model was reformed from a pay-as-you-go, defined benefit system, whereby individuals were given lump sums at retirement to a fully funded, private and mandatory defined contribution scheme.

This change meant that both individuals and their employers could start making small and regular contributions, revolutionising retirement for the Mexican population while also creating a new and burgeoning market for the country.

Until this change was made, there were no institutional investors in Mexico, nor any asset managers. Two decades on, however, and the investment landscape in Mexico is incredibly different. Today, the country’s largest pension fund is Banco Nacional de Comercio Exterior – also known as Bancomext – a state-owned development bank with assets under management worth $35bn.

This year is a noteworthy one for the industry for another reason: Bancomext celebrates its 80th year of operations. During this time, Bancomext has led the way for Mexico’s pension market and pushed the economy into new international investments. Of its recent milestones, there is one that stands out in particular.

In a bid to strengthen its capital ratio and help improve the country’s trade prospects, on August 4 2016, Bancomext launched a historic issuance of subordinated capital notes. World Finance spoke with the CEO of Bancomext, Francisco González, about his company’s country-first bond issuance, and what this means for Mexico’s economy.

What was the motivation behind Bancomext’s recent decision to issue $700m of Tier 2 subordinated preferred capital notes?
Since 2012, Bancomext has experienced a strong and healthy growth in its loan portfolio. In order to preserve a healthy capital ratio, the management team at Bancomext decided to explore different plans of action to either reduce the loan portfolio through schemes such as securitisation structures, or to increase the capital ratio through the issuance of market and Basel III-compliant capital instruments.

Eventually, a decision was made to opt for the issuance of a Tier 2 capital instrument, which was denominated in US dollars. Hence, the issuance would not only strengthen the bank’s capital ratio, but also hedge it against movements in the peso/dollar exchange rate.

The bank’s capital was exclusively denominated in Mexican pesos, while the loan portfolio is primarily denominated in US dollars. Bancomext is proud to say that this deal won the World Finance Corporate Finance Award for Quasi-Sovereign Deal of the Year 2017.

How did the deal come about?
A contest was created among several potential banks based on their experience in arranging and selling these types of hybrid notes. The other two banks in the running were Credit Suisse and BBVA.

No Mexican development bank had ever issued a capital instrument before, therefore several meetings took place with Mexico’s banking authorities and the Ministry of Finance, before the structure and provisions of the subordinated notes were defined and ultimately authorised.

It took about six weeks to prepare the documentation, and then, on August 3 2016, five teams from Bancomext set off on a roadshow to New York, London, Boston, Los Angeles and Mexico City. The following day, Bancomext announced a $500m 10NC5 subordinated preferred capital notes offering (Tier 2). Given the high demand and excellent reception that it received, the deal was upsized to $700m.

What’s more, the price was tightened from the initial 337.5 basis points to 300 basis points over the five-year UST, for a final coupon of 3.80 percent and a yield of 4.032 percent.

Why did it prove to be such a big hit with investors?
In October 2015, the bank had issued a $1bn 10-year note, after being absent from the international markets for almost 11 years. This transaction put Bancomext’s name back in the minds of the most important institutional investors worldwide. It was because of this that the market was expecting a new issue from the bank.

Bancomext has led the way for Mexico’s pension market and pushed the economy into new international investments

Furthermore, the ambitious one-day roadshow at five of the world’s most important financial centres, which exposed our offering to key investors, proved to be a great marketing strategy. Investors were given so little time to decide that they rushed to place orders exceeding $3.7bn. This total came from just 230 investors. In other words, the transaction was oversubscribed by almost eight times the amount originally announced.

What did the deal and its success mean for Bancomext?
The positive effect for our bank was twofold. We were able to increase our capital from 11.4 percent to 19 percent. Additionally, considering that 70 percent of our assets are in dollars, the injection of capital in dollars enabled the bank to offset any devaluation or movement from the exchange rate.

In addition, the offering provided a natural FX hedge for the bank’s capital ratio, which was exposed to movements in the peso/dollar exchange rate. As a result, the capital notes denominated in US dollars helped to minimise such exposure.

The success of the deal confirmed Bancomext’s reputation in international capital markets as a solid credit. It also demonstrated its ability to reinforce its presence within the international investor community.

Why do Bancomext subordinated capital notes have strong demonstration value to quasi-sovereigns around the world?
State-owned development banks usually depend on the resources provided by their federal governments. Such resources may not be sufficient for the bank’s growth. Also, they may not comply with its mission of providing finance for the country’s continued development.

Therefore, by accessing capital markets to raise capital-related funds, development banks can reduce their dependence on federal funding, while increasing their capacity for providing financing support to the population.

What did this deal mean for the market in Mexico and the wider economy?
As mentioned before, Bancomext’s transaction represents the first subordinated note issued by a Mexican development bank. In addition, it attained the lowest ever coupon for any subordinated capital instrument by a financial institution in Latin America.

There are other Mexican development banks owned by the federal government, with different market niches. As the precedent has now been set, those Mexican banks, along with others in Latin America, could replicate Bancomext’s Tier 2 benchmark notes in order to enhance their own capital ratios.

What long-term opportunities does the deal present, both to Bancomext and the Mexican market?
With its 10-year $1bn senior note due in 2025 and its 10NC5 $700m subordinated note due in 2026, both of which were oversubscribed at issuance, Bancomext has demonstrated how well received it is in international markets. Given this success, the bank plans to maintain its presence in these markets through additional issuances of debt instruments in the future.

The Mexican long-term debt capital market has now become an important liquid source of funding for banks and corporations in the country. In fact, there is a well-developed investor base for local subordinated notes. Although only commercial banks have issued peso-denominated subordinated notes in the local market, other state-owned development banks could replicate Bancomext’s Tier 2 structure to raise capital in pesos.

What key lessons did Bancomext learn during the process? What advice would Bancomext give to other issuers?
For the issuance of its Tier 2 capital notes, Bancomext received the support of the Mexican banking authorities, as well as that of the Mexican central bank. Undoubtedly, such support was crucial during the design phase of the notes’ financial structure.

It is therefore extremely advisable for any banking institution in Mexico seeking to issue similar securities to work very closely with the Mexican authorities. It is vital to obtain their sponsorship and assistance throughout the process to ensure the bank’s ultimate success in such endeavours.

What can markets expect to see from Bancomext in the coming year?
Bancomext is planning to keep its presence in the local and international debt capital markets. In fact, in addition to the traditional dollar markets, the bank is also now exploring the possibilities of entering other regional markets, such as the Taiwan Formosa market, the China Panda market, the Norwegian NOK market, and the Suisse CHF market.

AIG sheds ‘too big to fail’ label

Posted on by Ashton Wenborn

Federal Reserve Chair Janet Yellen has released a statement defending the recent decision to remove American International Group’s (AIG’s) ‘too big to fail’ label. The judgement, which will lessen the regulatory burden on the company, was the outcome of a tight vote from the US Financial Stability Oversight Council. With a two thirds majority necessary to remove the label, six members of the council voted in favour of the ruling, while three voted against it.

The move comes almost a decade after the company was rescued from the brink of collapse by a taxpayer bailout worth $185bn, and has come under fire from those who believe that the company is still large enough to cause widespread damage should it collapse.

The size, scale and concentration of AIG present a threat to financial stability in the US

Council member Melvin Watt – who voted against the ruling – argued that it was “premature and unwise”, while Richard Cordray, who leads the Consumer Financial Protection Bureau, said the size, scale and concentration of the company presents a threat to financial stability in the US.

In the face of criticism over the decision, Yellen argued that the financial system would be able to handle any fire sales that might result from the company’s collapse: “Since the financial crisis, AIG has largely sold off or wound down its capital markets businesses, and has become a smaller firm that poses less of a threat to financial stability. For example, it has reduced its assets by more than $500bn, wound down its Financial Products division, and sold off its mortgage insurance company.”

She also implied that part of the justification for the move was to create an incentive for other systemically important institutions to downsize. “The possibility of de-designation provides an incentive for designated firms to significantly reduce their systemic footprint,” she said.

Exxon loses top spot in energy rankings to Russian Gazprom

Posted on by Ashton Wenborn

For the first time in 12 years, ExxonMobil is no longer the world’s top energy firm according to a list published on October 2. The 2017 S&P Global Platts Top 250 Global Energy Company Rankings confirmed that Russian business Gazprom is the new number one, knocking Exxon down to ninth place.

The changing of the guard is partly the result of volatile oil prices, which have hit producers like Exxon particularly hard. In contrast, utility firms have been able to record relatively stable profits, as have pipeline companies, which generally rely on more long-term revenue streams.

“The bigger story this year is not who is at number one, however,” explained Harry Weber, a senior natural gas writer at S&P Global Platts. “Germany’s E.ON shooting up 112 places to number two from number 114 for the last year is something that reveals the broader trend for utilities making further inroads due to stable cash flows and strong returns on invested capital.”

Utility firms have been able to record relatively stable profits, as have pipeline companies which generally rely on more long term revenue streams

As highlighted by the new rankings, the rise of E.ON makes for a particularly interesting reading, with the company spinning off its fossil fuel assets last year. As a result, E.ON’s revenue plummeted but its return on invested capital increased by 35 percent, resulting in a stronger ranking overall.

The list, which takes into account return on investment, asset worth, revenue and profit, also revealed a number of other worldwide trends. The natural gas sector in the US is performing strongly, for example, with the production of new gas-fired plants and increased pipeline capacity ensuring that current demand is being met.

When it comes to the new industry leader, the rise of Gazprom, which placed third last year, indicates that the state-controlled firm has been able to weather Russia’s recent economic troubles.

The company’s enhanced showing will raise further questions about whether sanctions, like those recently imposed by the US, are an effective way of applying pressure on the Kremlin.

Colorado leads the way for advanced industries in US

Posted on by Ashton Wenborn

Not only are advanced industries (AIs) key drivers of the US economy, they are also the prime economic drivers for the state of Colorado. Comprising engineering and R&D-intensive companies, they deliver products and services in a wide range of markets, from aerospace to medical devices.

To ensure the progression of this vital aspect of Colorado’s economy, the AI Accelerator Programme was created in 2013. This initiative promotes growth and sustainability in these industries by driving innovation, commercialisation and public-private partnerships, while also increasing access to early-stage capital and creating a strong infrastructure that enhances the state’s capacity to be globally competitive.

Colorado’s AIs include aerospace, advanced manufacturing, bioscience, electronics, energy and natural resources (including cleantech), infrastructure engineering, and technology and information. Together, they account for nearly 30 percent of the state’s total wage earnings, around 30 percent of total sales revenue, and almost 35 percent of the state’s total exports.

Tech to market
As part of a statewide strategy to support these critical industries in their various phases of growth, four types of grants and two global business programmes have been made available. The four targeted grant types are proof of concept, early-stage capital and retention, infrastructure funding, and AI exports. A network of consultants and an export training programme are also available as part of the AI global business programme, to support these industries as they strive to reach worldwide markets.

“Colorado continues to set the standard for innovative programmes, which in turn accelerate key and growing industries in our economy,” said Stephanie Copeland, Executive Director of the Colorado Office of Economic Development and International Trade. “It’s exciting to see this programme working to bring pioneering ideas, from concept to development, to the global marketplace.”

Since the programme’s inception in 2013, approximately $49m has been granted from the AI fund. To date, the programme has created more than 490 new jobs, while also ensuring that some 590 jobs were retained. Additionally, the programme’s funds have helped companies acquire over $200m in grants and investments in order to further commercialise their advanced technologies.

“Colorado is a leader in innovation and business start-ups,” said Copeland. “The AI Accelerator Programme is a key initiative in encouraging such activity within the state, and we’re thrilled to fund so many innovative organisations.”

The programme helps to promote Colorado’s innovative business ecosystem, while also ensuring that the state’s innovators can compete in the global economy. Colorado’s technology industry is a sizeable and diverse economic sector; it has an inspirational and productive base that underpins the industry’s growth in a sustainable manner, much like the relationship between the state’s rocky granite peaks and fertile plains.

Talent pool
Colorado has the third-highest concentration of tech workers in the US, with nine percent of the state’s private sector workforce employed in technology firms, according to CompTIA’s Cyberstates 2016 report. IT software was the region’s fastest-growing cluster in 2016, having grown by 9.4 percent as a result of landmark company expansions and venture capital activity. A strong entrepreneurial spirit fuels this industry, which employs 54,580 workers at 5,180 companies throughout the nine-county region.

Of Colorado’s adult population, more than 39 percent has completed a bachelor’s or higher level degree, making Colorado the second-most highly educated state in the US, behind Massachusetts. Interestingly, IT services and software publishing were among Colorado’s top five leading tech industry sectors by employment in 2015, while the state’s average hi-tech wage ($106,350) was double that of the average private sector wage, according to the US Census Bureau.

5.54m

Population

39%

Proportion of degree-education adults

$63,909

Average salary

$106,350

Average hi-tech salary

Colorado also ranked third in the nation for small business innovation research grants per worker. According to the US Bureau of Labour Statistics, in 2016 the state received more than 200 grants, totalling nearly $82.1m, or $32.90 in grants per worker compared with the US average of $11.80.
What’s more, Colorado’s simplified corporate income tax structure is based on single-factor apportionment, which allows companies to pay taxes based solely on their sales in the state. Along with few regulatory burdens, Colorado’s corporate income tax rate of 4.63 percent is one of the lowest and most competitive tax structures in the nation.

Forget the next Silicon Valley – all tech eyes are turned to Colorado. From start-ups to major tech giants, nearly 11,000 technology companies are now located in Colorado, including global corporations AT&T, DISH Network and IBM.

And it’s not just major companies either: with a digital technology company launched every 72 hours in the state and the innate desire to collaborate, it’s easy to see why Colorado has become a centre of innovation and entrepreneurial activity.

With more than 146,000 jobs each year in the technology and information industry, Colorado tech workers make more money – 98 percent more, in fact – than the average private sector worker. These factors, alongside Colorado’s vibrant urban cores and affordable cost of living, see tech-minded entrepreneurs continuing to flock to Colorado.

This is prompted further by support from groups like the Colorado Technology Association, which promote the industry through collaborative programmes, events and initiatives. With four of the top 10 cities for tech start-ups located in Colorado, more and more individuals and companies are seeking to become part of the next tech revolution to sweep the nation.

Security hub
As the threat of cyberattacks continues to rise, Colorado’s cybersecurity industry is growing to meet the challenge. With the creation of the National Cybersecurity Centre (NCC) and several Colorado-based companies, the state’s cybersecurity sector is second only to those of Maryland and Virginia. Some 21 companies in the Rocky Mountains region are among the top 50 cybersecurity companies in the US, with 12 in Colorado. This includes the number one firm – root9B, a cybersecurity consulting and operational support company with headquarters in Colorado Springs and regional offices across the country.

“Cybersecurity is an essential element of our strong technology and information industry, which is providing well-paid jobs for Coloradans,” Copeland explained. “Colorado’s success in this booming industry is due, in part, to the vision of Colorado Governor John Hickenlooper, who led the creation of the NCC in Colorado Springs in 2016.”

The NCC’s training programmes are designed to educate different types of people and organisations – from students and entrepreneurs, to small businesses and large corporations, as well as politicians at local and state level – on how to protect themselves from an ever-expanding list of cyber threats. Moreover, the NCC is reaching out to cities and counties around Colorado, offering to provide officials and staff with the most effective tools to protect their information systems.

Cyber personnel
Today, there are approximately 85,000 people in Colorado working in the cybersecurity industry, and nearly 100 cyber-focused businesses operating in Colorado Springs and Denver alone. According to Burning Glass, a company that analyses the job market, Colorado is among the country’s leading states for cybersecurity jobs on a per capita basis, alongside Washington DC, Virginia and Maryland.

AIs account for nearly 30 percent of the state’s total wage earnings, around 30 percent of total sales revenue, and almost 35 percent of the state’s total exports.

Among these businesses, a few stand out in particular. Webroot, for example, is continuing to invest in the state’s rapidly growing cyber ecosystem. It currently employs 284 skilled individuals, and will be adding another 443 highly skilled positions with an average annual salary of $110,000 over the next eight years.

Colorado’s popularity as a cyber hub is rooted in its highly educated workforce and the market’s well-paid jobs. Entry-level workers with a relevant college degree, for example, can earn annual salaries between $55,000 and $65,000, while workers with five to 10 years of experience in the industry can earn between $80,000 and $100,000 a year. Add a security clearance to that level of education and experience, and salaries in the industry can easily approach $200,000.

Unsurprisingly, Colorado is in the process of further enhancing and supporting the workforce for this growing industry. As such, several Colorado institutions are now offering cybersecurity certificates and degree programmes. The University of Colorado, for example, offers a bachelor’s degree in cybersecurity engineering and graduate-level cybersecurity certificates in behavioural sciences. What’s more, four local institutions are National Security Agency certified Centres of Academic Excellence for Information Assurance – the University of Colorado at Colorado Springs, the Air Force Academy, Regis University and Colorado Technical University.

This level of support is expanding constantly. In 2016, Catalyst Campus, a private technology campus, announced plans to build a cyber lab that will help technology SMEs. Then there’s SecureSet, the nation’s first cybersecurity accelerator and academy, which gives people a direct path to a career in cybersecurity in around 20 weeks. SecureSet also serves as a way for start-up companies in the cybersecurity space to get funded, get noticed and improve their value.

Given such initiatives, the industry is now doing better than ever, with several of Colorado’s cybersecurity firms having received venture capital funding in the last year. For example, ProtectWise raised $25m in January, Red Canary raised $6.1m in August 2016 and now plans to double its staff to 30 in the next year, and CyberGRX received $20m in Q2 2017 to accelerate the adoption of its CyberGRX Exchange, the world’s first global third-party cyber risk management exchange.

Indeed, through its constant commitment to AI industries, the state of Colorado has become a hub for hi-tech industry and cybersecurity – one that is set to continue expanding, with no end in sight.

Catalan independence vote impacts Spanish markets

Posted on by Ashton Wenborn

Following a disputed referendum that took place on October 1, Carles Puigdemont, First Minister of the regional Catalan Government, announced that the region will declare independence from Spain in the coming days.

The region of Catalonia has long been the industrial powerhouse of Spain, making up 20 percent of the country’s economy and 16 percent of its population.

According to regional authorities, Catalans voted overwhelmingly to become independent from Spain, with two million casting votes in favour of independence. The ‘yes’ vote made up 90 percent of the total votes cast, while just nine percent voted against independence.

The referendum was characterised as illegal by the Spanish Government, and violent clashes have been reported as police attempted to prevent people from taking part in the vote. Despite violence, turnout in the referendum reached 42.3 percent.

On October 2 – the morning following the referendum – both the Spanish stock market and the euro dipped as markets responded to the result. In early trading, the euro dropped by 0.06 percent against the dollar while the IBEX 35 was down 0.75 percent. Spain’s price of borrowing also jumped as yields on the country’s benchmark 10-year debt rose from 1.608 to 1.682.

On the morning following the referendum, both the Spanish stock market and the euro dipped as markets responded to the result

Despite the overwhelming referendum result and Puigdemont’s claim that the region will declare independence, many market analysts do not expect the bid for independence to be successful.

Indeed, according to the Financial Times, regional bonds have started to recover, signalling confidence from markets.

Ratings agency S&P has also issued a press release expressing doubt over the prospect of an independent Catalonia.

On the evening of September 29 – the day before the referendum took place – the agency confirmed Spain’s credit rating, stating: “Despite the rising internal political risk, macroeconomic developments do not appear to have been affected by the conflict so far. At the same time, we anticipate that Catalonia will remain part of Spain. Therefore, we believe that the current situation does not affect our positive outlook on the long-term rating.”

Monarch becomes Europe’s third airline to fail in five months

Posted on by Ashton Wenborn

British low-cost carrier Monarch Airlines filed for insolvency on October 2, marking the biggest ever collapse in the UK’s aviation industry. The airline’s bankruptcy makes it the third European operator to fail in the last five months.

Monarch’s bankruptcy caused 300,000 flight cancellations and left around 110,000 customers stranded. The situation is now being managed by the UK Government.

Moreover, the cease of trading, which was forced by severe losses, has also affected around 2,100 staff members, whose employment status is now uncertain.

Monarch’s insolvency is the latest casualty in the fight to conquer European skies, and follows both Air Berlin and Alitalia’s collapse into administration.

Irish carrier Ryanair has also faced difficulties this autumn, with confusion over pilots’ holidays causing more than 2,000 flight cancellations and resulting in high costs for the company.

Monarch’s cease of trading, which was forced by severe losses, has also affected around 2,100 staff members, whose employment status is now uncertain

Now, with Monarch’s collapse, the price war in the short-haul European market claims a new victim.

Speaking to the BBC, British Transport Minister Chris Grayling said the airline’s workers could be resettled across the industry. He stated the he had “already spoken to other airlines who think they are a first-rate team of people working for Monarch and are looking to try and hire some of them”.

Monarch, the UK’s fifth-largest airline, had been a highly profitable business when the Swiss-Italian Mantegazza family owned it, the Financial Times reported. The family sold the airline to Greybull Capital in 2014 for £75m ($100m), but in recent years, as the sector has moved away from charter flying towards budget airlines, competition has increased dramatically – particularly in flights to Spain, which was Monarch’s core market.

Blair Nimmo, the KMPG partner of Monarch’s administration, said the sector’s overcapacity has caused the company to make losses. In 2016, Monarch reported a £291m ($387m) loss, according to the BBC.

In addition to a fierce competition, Monarch has seen its costs increase, partially due to the fall in the pound after last year’s Brexit vote.

Chancellor of the Exchequer Philip Hammond told BBC Radio that the UK Government was aware of Monarch’s risk, since it had opted for an unprofitable business model.

“The industry will restructure, that capacity will be absorbed and the competitive market will continue to operate,” he said.

Global Logistics Properties makes $2.8bn entry into European market

Posted on by Ashton Wenborn

Asia’s largest logistics firm will make its first foray into European markets, it announced on October 2nd. Global Logistics Properties (GLP) will acquire Gazeley, the owner of a range of logistic facilities in Europe, for approximately $2.8bn. The existing management team, as well as the Gazeley brand, are both expected to be retained.

In total, GLP will acquire 32 million square feet of property currently owned by Gazeley, with 57 percent of the portfolio based in the UK, 25 percent in Germany, 14 percent in France and four percent in the Netherlands. Perhaps the biggest coup for GLP is the fact that 85 percent of Gazeley’s development pipeline is situated in the UK, where property building can face restrictive legislation.

“We have been looking to expand to Europe and this portfolio presents an attractive entry point given the quality and location of the assets,” Ming Mei, co-founder and CEO of GLP, said. “This transaction adds a premier operational and development platform for us in Europe and is part of our long-term strategy to expand our fund management business.”

The mounting investment imbalance between China and Europe, the world’s two largest markets, has become a matter of growing concern, but shows little sign of abating

The Singapore-based GLP is currently being acquired by a Chinese private equity group, which includes Hillhouse Capital and the Hopu Investment Management Company. Although GLP’s entry into Europe is believed to have the support of its proposed buyers, the move will only heighten concerns about Chinese investment in the continent.

The mounting investment imbalance between China and Europe, the world’s two largest markets, has become a matter of growing concern, but shows little sign of abating. Back in June, it was announced that Blackstone had committed to selling its European logistics branch, Logicor, to the China Investment Corporation for a fee of $14.4bn.

South Korea follows China in ICO ban

Posted on by Ashton Wenborn

The South Korean Financial Services Commission (FSC) has announced a ban on all forms of initial coin offerings (ICO), joining a wave of regulatory pressure against the increasingly popular method of fundraising.

The new mechanism enables start-ups to raise money by issuing ‘tokens’ that can appreciate in value and later be used to buy the issuer’s products. They have been known to generate millions in capital in a matter of minutes, but have prompted concerns from regulatory authorities, which have cautioned over their speculative nature and lack of regulatory oversight.

Among others, authorities in both the UK and US have issued warnings against the new fundraising technology. The UK’s Financial Conduct Authority described virtual tokens as “very high” risk, while the US Securities and Exchange Commission cautioned that they could amount to ‘pump and dump’ schemes.

They have been known to generate millions in capital in a matter of minutes, but have prompted concern from regulatory authorities

Earlier this month, China became the first country to ban the token sales. Their enthusiasts paint them as a method of funding innovative projects that might struggle to do so through traditional means.

Following a meeting with the Finance Ministry and the Bank of Korea, the Financial Services Authority released a statement, according to Reuters: “Raising funds through ICOs seem to be on the rise globally, and our assessment is that ICOs are increasing in South Korea as well.”

The commission further stated that the ban would cover “all forms of initial coin offerings regardless of using a certain technology or a certain name”.

According to local news agency Yonhap, the Vice Chairman of the FSC, Kim Yong-beom, said: “There is a situation where money has been flooded into an unproductive and speculative direction.” The commission vowed that rule-breakers would face “stern penalties”.

Trump slashes corporation tax in reform plan

Posted on by Ashton Wenborn

US President Donald Trump looks set to fulfil one of his longest-held campaign pledges after publishing a tax reform plan on September 27. The nine-page Republican framework is short on details, but it is still being viewed as a major step in the administration’s attempts to overhaul the US economy.

Among a host of changes to individual and business tax rates, the headline figure is a reduction in corporation tax from 35 percent to 20 percent. The average corporation tax rate currently stands at 22.5 percent in the industrialised world, and so the move would make US businesses more competitive internationally.

“The Trump Administration, the House Committee on Ways and Means, and the Senate Committee on Finance have developed a unified framework to achieve pro-American, fiscally responsible tax reform,” the document reads. “This framework will deliver a 21st-century tax code that is built for growth, supports middle-class families, defends our workers, protects our jobs, and puts America first.”

The average corporation tax rate currently stands at 22.5 percent in the industrialised world, and so the move would make US businesses more competitive internationally

The full report details a host of other tax reforms, including a new three-tier personal tax system and a one-time repatriation tax for all overseas assets owned by US companies. Difficult questions remain unanswered, however, primarily with regard to how the cuts will be financed.

Concerns also remain about the likelihood that the new framework will be passed. The president has already suffered a number of high-profile legislative setbacks during his time in office, with his failed attempts to repeal the Affordable Care Act, better known as Obamacare, proving particularly noteworthy.

There has been talk, however, that the Trump administration could use special budget rules to pass the new tax framework via a simple Congress majority, thereby avoiding another embarrassing defeat. For a presidency that has been short on political support, successful tax reform would provide a much-needed boost as Trump moves towards his second year in office.

 

Macron lays out hopes for a closer EU

Posted on by Ashton Wenborn

On September 26, French President Emmanuel Macron described his vision for sweeping reforms of the EU, in a speech that laid bare the extent of his ambition for the bloc. Packed full of far-reaching policy recommendations, the speech lasted almost two hours and pushed for the EU to work more closely on defence and immigration, as well as reiterating his call for deeper fiscal integration.

Outlining his proposal for far-reaching fiscal reforms, Macron said a joint European budget would be necessary to “finance joint investments and assure stability when confronted by economic shocks”. His proposed European budget would be funded by corporation tax receipts and supervised by the newly created role of Finance Minister: “A budget can only go hand in hand with strong political leadership led by a common minister and a strong parliamentary supervision at the European level.”

On the subject of taxes, he called for the establishment of a common corporate tax band as well as a reinvigoration of the debate surrounding a financial transaction tax. Further to this, he criticised the “inefficiency” of carbon prices, arguing that a carbon tax would be “indispensable”.

Addressing immigration, he pushed for a “European asylum office” that would act to accelerate and harmonise immigration procedures: “It is only with Europe that we can efficiently protect our borders and welcome those who need protection in a dignified manner, and at the same time send back those who are not eligible for asylum.”

Macron’s proposed European budget would be funded by corporation tax receipts and supervised by the newly created role of Finance Minister

On defence, he set out his vision for a joint civil protection force. “At the beginning of the next decade, Europe must have a joint intervention force, a common defence budget and a joint doctrine for action,” he said.

Other significant proposals included the creation of an “agency for creative disruption” and an overhaul of the common agricultural policy.

Macron’s speech came shortly after European Commission President Jean-Claude Juncker’s state of the union address, in which he said that he felt that the coming 12-18 months would provide a “window of opportunity” to push through reforms in Europe.

Italy’s EU Affairs Minister, Sandro Gozi, expressed optimism that the speech would inspire action on the part of European lawmakers. “An excellent speech by Emmanuel Macron on reviving the European Union. Let’s work on this together, starting tomorrow at the Lyon Summit,” he said, as quoted in Reuters.

However, the result of the German election two days ago has once again stoked fears over a surge in right-wing support. It has also pushed Angela Merkel into a new coalition that may limit her room for manoeuvre on Europe.

Siemens Alstom merger creates European giant

Posted on by Ashton Wenborn

On September 26, German industrial firm Siemens and French rail company Alstom announced plans to merge operations. The bringing together of the two competitors will create a new entity with a combined revenue of €15.3bn ($18bn) and will generate annual cost savings of €470m ($552m) in the four years after closing.

The merger also recognises the threat posed by Chinese competition, particularly the state-owned organisation CRRC. The newly combined company, which will be called Siemens Alstom, will be able to better target growth markets around the world, where the two firms already have a significant presence.

“We put the European idea to work and, together with our friends at Alstom, we are creating a new European champion in the rail industry for the long term,” explained Joe Kaeser, President and CEO of Siemens. “This will give our customers around the world a more innovative and more competitive portfolio.”

The newly combined company, which will be called Siemens Alstom, will be able to better target growth markets around the world, where the two firms already have a significant presence

Although the two companies are carrying out a merger of equals, Franco-German competition has not been completely quelled. Already there are anxieties that the formation of the new company could result in job cuts or the loss of French control of its iconic TGV brand, which relies heavily on Alstom technology.

Despite lingering concerns, the merger is viewed as a substantial coup for French President Emmanuel Macron, who has championed further EU integration as a way of remaining competitive in an increasingly global economy.

The merger also marks a sea change for the French Government, which has invested vast sums in its railway network in the past. Macron’s approval of asset sales that would once have been deemed strategic will help him make a clean break with the past, but will also open himself up to further criticism.