It was not a red-letter week for Alex Chisholm. His swansong report at the Competition and Markets Authority into retail banking was greeted by raspberries all round. Still, never mind, he is shortly off to run the Department for Energy and Climate Change, and best of luck with that, with the magnificent money sink of the Hinkley Point nuclear power station to contemplate.

The day before urging us all to shop around for a bank, he popped up with an assessment of the decision by the CMA’s predecessor body, the Competition Commission, to force the break up of BAA. The assessment concludes that this was a fine decision, claiming that it was frightfully controversial at the time, because the owner of Heathrow, Gatwick and Stansted maintained that airports did not compete. How clever, then, of the CC to see through this, thanks to its “market investigation regime”.

This is first-class piffle. Five minutes’ analysis was enough to conclude that BAA was cynically privatised as a monopoly in order to maximise the proceeds. The argument that there was competition from Schiphol or Charles de Gaulle was risible, as many of us pointed out at the time. The takeover approach from Ferrovial finally concentrated bureaucrats’ minds to see the bleedin’ obvious, and they rushed to start a competition enquiry before a deal could be consummated. Persuading the bidders to pay up anyway was BAA chairman Marcus Agius’s finest hour.

Competition has clearly worked, and gains from the break-up will, in the bizarrely precise estimate in the latest assessment, be worth £870m by 2020. At Heathrow, staff now act as if they want to help passengers, rather than seeing them as obstacles to the smooth running of the airport.

Mr Chisholm is far too civil a servant to express a view on a new runway, except to say that we need one. He may be wrong about that, too. The Heathrow Hub proposal to extend an existing runway would reduce the early morning noise by having planes land further west, cost much less than Heathrow’s own plan, and allow the prime minister to keep his pledge not to build a third runway. Mr Chisholm has at least got one thing right: it is time to make the call.

 

A happy ending for POG the dog

They laughed at Peter Hambro last year when Petropavlovsk fell into the 99 per cent club, along with the inevitable cracks about going bust in a gold mine. The company nearly went under, thanks to a convertible bond his advisers had earlier urged him to launch “to make the balance sheet work harder”.

To keep the company going, he bet the family wealth on a rescue rights issue at 5p a share. You could have bought as many of the 3,102,922,510 new shares as you wanted at that price, but then a funny thing happened. The gold price recovered, the cash flow from POG’s low-cost, high grade mines in the Russian far east has melted the debt, the shares are now 8.5p, and the prospects look quite good.

Whether the shares are still cheap depends on your view of gold, but even if it slips, POG will see strong cash flow, boosted by the weak rouble. You may be sure that, whatever else the company plans, Mr Hambro will not be tempted into making the balance sheet work harder.

Flexible forecasting

Goldman Sachs has decided that oil is going up from today’s $50 a barrel or so. This is quite a change of view because “the oil market has gone from nearing storage saturation to being in deficit much earlier than we expected.” It is only a few months since its analysts concluded that the world’s tanks were so full of crude that the price might get down to $20. When oil was surging past $110 in 2011, Goldman’s top oilman feared a “super-spike” to take it towards $200. Elsewhere in the Goldman empire, its economists now recommend avoiding shares for the next year. To be fair, hardly anyone saw the collapse of the oil price coming, but can the squid really be so consistently wrong?

 

BHS and Thames Water do not appear to have much in common, but Martin Blaiklock, a scourge of utilities and their financing, can see some uncomfortable parallels. Studying their pension funds, or more accurately their deficits, he has found a growing hole in the accounts of Thames Water Utilities, the subsidiary that actually runs the water. The hole has been there for a decade, but it has grown from £38m in 2005 to £246m last year.

Unlike shopkeeping, water is not a labour-intensive business, and on his calculations, that sum is equivalent to £51,154 for each employee. [His comparable figures for BHS as a going concern are £111m and £10,900. The much-quoted £571m is the cost of paying an insurance company to assume the whole liability immediately].

There’s another common thread. The owners, both based in tax havens, have eviscerated the companies’ balance sheets. The dividends paid to Philip Green’s wife are now well documented. Thames Water’s various owners have taken nearly £3bn in dividends since 2006/07. The debt on the balance sheet has risen from £1.6bn to £10bn in a decade, equivalent to seven times the barely-changed equity. A whole new utility is needed to pay for the proposed super-sewer under the River Thames.

Thames Water has the sort of opaque, debt intensive financial structure that private equity owners prefer, and which bankers love for the fees the debt issues generate. Like all but three of the 10 privatised water companies, Thames is out of the gaze of the public markets. It is constrained only by the regulator and the market’s willingness to buy its debt at rising risk. As a result, there is little meaningful outside scrutiny of the business.

Thames’ monopoly means its employees are unlikely to need the Pension Protection Fund, now reeling from the double whammy of the failure of both Tata Steel and BHS. Its chief executive says he is confident it can cope with both if needs be, but the collapses highlight the fundemental  instability of a system which obliges a dwindling number of solvent schemes to pay up to help those which fail.

The PPF was, obviously, not designed to allow owners to slough off their obligations. BHS may provide a test of the limits, while the Pensions Regulator, who is supposed to oversee the health of the industry, might usefully enquire how Thames intends to bridge its troubled pensions water.

To be franc, it must be Swiss

Like most of us, you may never have seen a “Bin Laden” E500 note. They are likely to be even rarer in future, now the European Central Bank is to stop issuing them. In a fine example of euro-fudge, they will remain legal tender, a great comfort to savers who like to keep the odd million euros in a briefcase under the bed.

The boys at Bond Vigilantes  asked  readers whether the notes would now command a rarity premium or a hot money discount. A discount, of course, since the notes imply money laundering or worse. They may be a useful store of value, but they fail miserably as a medium of exchange, even before the ECB stops the presses.

For a real store of value, the Swiss 1000 franc note is peerless. Over the years it has become progressively more valuable as other currencies crumbled. It is also splendidly cheap funding for the government, since the notes are effectively unsecured, zero coupon irredeemable bonds. No wonder the Swiss have no intention of scrapping them.

Doing good, but is he doing well?

Nigel Wilson is not like other insurance company bosses. He rails against excessive executive pay. Rather than hand-wringing over the lack of houses, he plans to get Legal & General building them. He was one of the first CEOs in the life insurance business to understand the importance of cash flow.

Now, encouraged by another Wilson, Rob, who is apparently Minister for Civil Society, he is to chair a committee to discover how to grow “mission-led businesses”, defined as “profit-driven businesses that make a powerful commitment to social impact.” Well, best of luck with that, Nigel. Just don’t forget the day job. L&G shares are close to their lowest for two years.

This is a modified version of my Saturday FT column

Just when you might have detected signs of a truce in the supermarket price wars, with Sainsburys struggling to keep our spirits up, along comes Morgan Stanley to warn of escalating future hostilities. The bank’s analysts put even more effort into tracking prices than the average housewife and they reckon that Asda is currently 4.5 per cent cheaper than Tesco, the widest gap since last September.
This new round of price-cutting follows the latest Kantar survey showing that April was Asda’s worst month ever for loss of market share. The new price gap may reflect the first stirrings from the Walmart monster wanting to protect its British offspring, or as Morgan Stanley put it: “We continue to see Asda as the industry’s main wild card this year: in a bear case scenario where Asda decides to reset its margin, it could lead to a halving of the industry’s profit pool.”
The brokers have said this before, but it is clear that the threat is still there. It helps explain why Sainsbury is rushing into the catalogue selling business with Argos and why Tesco shares are almost back to their level of the darkest days of 2014. They are still not obviously cheap. The Germans, in the shape of Aldi and Lidl, continue to rampage through the British supermarket industry, and none of the big four grocers has yet found a way of halting their advance. Good news for customers, but a concerted Asda counter-attack would spell more carnage for shareholders.
Sharing the pain
It is unlikely that BHP and Vale will have to find another $44bn between them to draw a line under the Samarco dam collapse. However, they can expect to pay a few billions more on top of the settlement with the Brazilian government. There are clear parallels here with BP’s Macondo well explosion, beyond the prospect of making an army of lawyers rich.
In both cases, the companies had the chance to signal that they really did share the pain of the loss in the most direct way possible, by immediately suspending payments to shareholders. None of them did so. In the case of BP it eventually became clear that the likely size of the liability made the dividend unsustainable, but by then any political gain from cutting it had evaporated.
For Vale, the potential liability is life-threatening, since it equals the company’s current market value. BHP, meanwhile, appears to have learnt nothing from BP’s experience. It carried on with the fiction of its “progressive” dividend policy as if nothing much had happened, until the falling value of commodities, including the iron ore mined at Samarco, eventually made the payout unsustainable.
Just as at BP, this blinkered response has cost the company dear in damage to its reputation. Suspending the payout promptly would have helped limit that damage. Furthermore, in cold-hearted accounting terms suspension costs nothing, since the cash stays within the company. Look and learn.
Doing well by doing good
Andrew Cook did not set out to become an expert on pensions. He would much rather have spent more time with his steam locomotive, or even in making difficult (and thus expensive) steel castings. This week the chairman of William Cook explained why he had needed to mug up on retirement benefits.
It took five years and £5m, but in the end his actions saved the family company from bankruptcy from its (then) £28m pension deficit. The advice from the experts “was only waffle”. The real work lay in gradually unpicking the problem, and today William Cook Holdings’ pension liabilities are either insured or in defined contribution schemes.
There is a lesson here for Philip Green, were he to buy back BHS. The company’s headline pension deficit is £571m, but with care and professional management at the shops, the deficit could melt away. Sir Philip may prefer the quick deal to exercising patience, but patience saved Mr Cook’s business. Keeping BHS trading would propel Sir Philip from zero to hero, helping Top Shop, Dorothy Perkins,Miss Selfridge and the rest of his Arcadia empire avoid the threat of an expensive boycott. He might even make yet more money.
This is my FT column from Saturday

 

Philip Green doesn’t do empathy. Green’s retail is red in tooth and claw. Now his pugilistic, foul-mouthed response to criticism has returned to bite him where it hurts. Make him pay the pensioners! Strip him of his knighthood! Hang him from the yardarm of his yacht!

Well, perhaps that is going a bit too far, especially since his spanking new gin palace lacks a yardarm, and were he to be reduced to the ranks, it would mark another step towards making all knighthoods contingent on future good behaviour, rather than a reward for past services.

The pensioners are a different matter. Sir Philip could, if he asks his wife nicely, cover the deficit, which has now ballooned to a headline figure of £571m, but the shortfall says at least as much about the crisis in the pensions industry as it does about his unloading British Home Stores for £1 to a bunch of retail naifs.

This week the UK government borrowed £4.75bn for 49 years. The issue went swimmingly, at a 2.35 per cent yield and a premium which guarantees holders a capital loss in 2065. The buyers, the likes of the BHS pension fund, subscribed not because they could see an unmissable bargain, but because their actuaries have told them that shares are much too dangerous. Rather, they must match their future liabilities with bonds. As the yields on bonds fall, the present value of those liabilities rises, requiring more bond purchases to match them.

This is the process which his taken the headline BHS pension fund deficit to £571m. The cost of past promises is so much greater than anyone envisaged that paying them would guarantee the failure of a fading retail giant like BHS, however competently it was run. This is little compensation to the BHS employees who will see those promises devalued, although it does show why only the doziest companies are still persevering with defined benefit schemes. One of the many curiosities of this affair is why Sir Philip failed to close the scheme when he bought the business 16 years ago, rather than letting the liabilities continue to accumulate.

The trustees of the BHS pension scheme will also have to answer for acquiescing to the £1 sale last year, but theirs is a thankless, often unpaid, task, and eviscerating them publicly would only cause mass resignations and a crisis in the pensions industry. Sir Philip, meanwhile, needs to avert the threat of a boycott his highly profitable Top Shop empire, so easing the pensioners’ pain is not entirely philanthropic. Perhaps he should simply pay £1 and buy BHS back, liabilities and all, and run it down professionally.

Don’t bank on good behaviour

Those nice chaps from Bank of America Merrill Lynch have kindly agreed to underwrite an emergency £500m rights issue for Cobham, the aerospace and defence specialist. The money will prevent Cobham being swamped by debt taken on two years ago to finance an ill-judged takeover in America. The joint lead adviser on that deal was BoA.

Bizarrely, Cobham still intends to pay out an unchanged £126m in dividends, presumably after taking advice from BoA, although this did not prevent the existing shares cratering. We do not yet know the terms or fees of the fundraising, but with Cobham now valued at just £1.9bn, BofA has a fine opportunity to demonstrate that it takes some blame for its client’s plight. It should abandon the scandalous practice of risk-free underwriting at a deep discount, and back an issue close to today’s depressed 164p. Do not hold your breath.

Financial toxic waste

It could be worse. You could be a shareholder in EDF, alongside the French government with 85 per cent. To round off a nightmare year which saw the shares more than halve, EDF wants E4bn from its owners to shore up its radioactive balance sheet, where debts total E37bn. The good news: dividends will continue to be paid. The bad news: they will be paid in shares, not cash. The worse news: the directors still think they can build a working nuclear power station at Hinkley Point in Somerset for £18bn. Well, some of them do.

This is my FT column from Saturday (with apologies for delay)

Perhaps it was the sight of Peabody Energy collapsing into bankruptcy, or perhaps someone had told the Rockefeller family of the terrible fate of the Nuffield Foundation, but there is something particularly poignant at their decision to sell their last shares in Exxon Mobil, the business that their forebear built.

Nearly all Nuffield’s eggs were in the basket marked British Leyland, and when it became a basket case, they broke. There are plenty of others who would like to see Exxon go the same way as BL, and who point to Peabody as a terrible harbinger. Lucky, then, that the Rockefeller family trustees can claim a convenient conflation of financial sense and ethical behaviour: “There is no sane rationale for companies to continue to explore for new sources of hydrocarbons.”

The experts at Bond Vigilantes tend to agree. A cheerful post entitled “The end is nigh” warns about the credit ratings of the three-quarters of the world’s non-financial high yield debt that is issued by energy companies. The Vigilantes fear that some of the assets backing these bonds will be “stranded” between rising restrictions and falling hydrocarbon prices, to the point where it will never be worth exploiting them.

Well, so far, so fashionable. Big oil cannot expect to be loved, but forecasts of the end of the oil age have been as wrong as they have been frequent. It is barely two years since Goldman Sachs was forecasting $200 oil, and it is only a decade since the price was last under $40. The big companies have learned to survive under feast and famine. BP has survived much worse, with the Macondo disaster demonstrating that there is a deal of ruin in an oil company. Oil powers the world economy, and will continue to do so for decades to come, whatever the green dreamers believe.

The assault on the oil companies has parallels with that on those other pariahs, the tobacco companies. They have grown used to ever-increasing regulation and tax rises, yet in the last decade, tobacco shares have more than doubled (the FTSE100 is almost unchanged). Unlike their customers, rumours of their demise are much exaggerated. Rather like the oil companies, in fact.

Maths lessons at the Treasury

Mervyn King, in his post-Governorship ruminations, made much of the idea of “radical uncertainty”, a somewhat more sophisticated version of “forecasting is difficult, especially for the future”. Experience at the Bank of England had taught him, often rather brutally, that stuff happens. Surprises in economics are seldom pleasant.

We should be grateful that nobody at the Treasury seems to have grasped this. Had they done so, we would not have had the entertainment of the Equation of the Week, the arithmetic gobbledegook behind George Osborne’s assertion of economic misery in 2030 if we leave the European Union. Produced by a Treasury which has proved so poor at forecasting that we need four Budgets a year, and brilliantly deconstructed by Chris Giles,  the equation asserts that you trade more with countries that are nearer, with bigger populations and who speak the same language. Of course. Has anyone been to Japan?

Pity the (relatively) poor chairman

The season for revolting shareholders is in full swing. After Bob Dudley came Mark Cutifani. Next month it’s Mark Wilson. They are CEOs of BP, Anglo American and Aviva respectively. It is understandable that any investor unlucky enough to hold all three of these duds wants to vote down egregious pay packets, and to blame the remuneration committee for awarding them in the first place.

The unfortunates who populate these committees must struggle each year to find justifications for the pay awards regardless of performance, which is why the dozen or so pages of the annual report contain explanations of metrics with all the clarity of, say, your mobile phone tariff. However, the buck should really stop with the chairmen, all done for a (relative) pittance. Lest they feel they are not getting the recognition they deserve in this debate, here are Sir John Parker at Anglo (£724,000) Sir Adrian Montague at Aviva  (£481,000 for part of 2015) and that Macavity of the oil industry, BP’s Carl-Henric Svanberg (£823,000).

This is my FT column from Saturday

 

 

Nick Macpherson has discovered that owning bank shares can damage your wealth. The former Treasury permanent secretary admits that the loss on the state’s £19bn holding of Royal Bank of Scotland is rather more permanent than his own position. One day, a chancellor will have to admit it.

The days of banking on a sliver of permanent capital, leveraged with debt, producing fat returns for shareholders and even fatter ones for bank executives, are over. Today’s regulators demand ever more capital. The banks are resisting, arguing that reduced leverage cuts the amount they can lend, restricting good things like economic growth and animal spirits.

Except it may not be true. A wide-ranging study for the Bank for International Settlements concludes that banks with more equity have lower borrowing costs and faster loan growth. This is grist to the mill of bank regulators everywhere, as they argue that there is still not enough permanent capital in the banking system to prevent the next crisis. As the study’s authors conclude: “Greater retention of net income…would almost pay for itself through lower cost of debt.”

In other words, stop paying dividends. In the five years to 2014, New City Agenda calculates that the top five UK banks paid £31.5bn to their shareholders. They also paid £32.6bn in bonuses and £32.9bn in misconduct costs, so attacking the egregious bonus culture and behaving better would be an even quicker route to stustainability. It is unlikely that the bank executives will want to take it.

However, the state does have leverage that other long-suffering RBS shareholders lack, in the form of voting control. It could insist on linking bonuses to dividends and good behaviour, rather than to some incomprehensible formula dreamed up by remuneration consultants.

Even at this price, selling the RBS holding might be prudent, if we discover that we can manage without banks altogether. Stephen Lewis argues in The Death of Banking that “The provision of credit will gravitate towards new, technology-based institutions.” All this, and negative interest rates threatening to destroy the very reason for being a bank, and you can see why Sir Nick reckons that the loss is permanent.

Managing to get away with it

Fund management is the City’s dirty little secret. The rewards from managing – in some case that is hardly le mot juste – other people’s money are out of all proportion to the effort. Consider: after private equity firm Permira bought Bestinvest in 2014, it made £39m in revenue from £5bn of assets. After its latest takeover, Towry, it expects to make £200m from £20bn of assets.

So much for passing the economies of scale on to the customers. It may be that Permira’s fund managers are so good that they earn their fees, but consistent outperformance is almost impossible, while many hardly even bother. The Financial Conduct Authority examined 19 fund management companies with 23 funds and £50bn between them. Five of the funds were, effectively, closet trackers of their benchmark indices, while “one used jargon that a retail investor might not have understood.” What, only one?

There is some pressure on fees following the Retail Distribution Review, which has forced more transparency on the industry, but the 3 1/2 pages of funds listed daily in the FT, compared to half a page of UK share prices, rather gives the game away. The profitability in this industry is out of all proportion to the value added. RDR looks like only the first step on a long road.

Ingredients for a bear market

*Rising annual tax on homes held corporately

*Higher stamp duty on more expensive homes

*IHT to apply to non-doms’ property

*CGT on property sales by foreigners

*3 per cent extra stamp duty on Buy To Let and second homes

*Restricted interest offset on BTL

*Bank of England curbs on BTL mortgages

(not to mention Brexit)

This is my FT column from Saturday

 

 

 

 

 

 

 

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