German Chancellor Merkel rules out informal talks with Brexit talks

With the debate on “Brexit” heating up, German Chancellor Angela Merkel commented that there would not be any informal negotiations with the United Kingdom before any formal declaration of intention to leave the European Union.

Merkel stated that she was willing to accommodate more time for the U.K. if the nation needed more time to file the Article 50 needed to trigger a member state’s EU exit.

Source: Bloomberg

Goldman sees post-Brexit UK recession; cuts EU, U.S. growth views

According to Goldman Sachs’ economists Jan Hatzius and Sven Jari Stehn, the British economy would enter into a mild recession by early 2017 based on the outcome of last week’s decision to exit the European Union.

The ‘Brexit’ referendum, announced on 23 June 2016, would cut the country’s GDP by a total of 2.75% in the next 18 months.

Separately, according to Goldman Sachs, Eurozone’s GDP would average 1.25% vs. 1.5% before the Brexit vote, over the next two years.

For the U.S. economy, the bank expects GDP growth in the second half of 2016 to come in at 2% vs. previous forecast of 2.25%.

Goldman attributed the changes in GDP forecasts primarily to principle risks arising out the Brexit vote:

  • Terms of trade would most likely deteriorate as companies would scale back their investments due to the uncertainty created by the outcome
  • Financial conditions would tighten due to exchange rate fluctuations and weakness in risk assets like stocks and junk bonds

Source: Reuters

Saudi Arabia appoints banks for its first dollar-bond sale

According to sources, the Government of Saudi Arabia appointed JPMorgan Chase & Co., HSBC Holdings Plc and Citigroup Inc. to arrange its first international bond sale of atleast $10bn.

The banks would act as the global coordinators on the issue and additional banks would be added later as joint lead arrangers and book-runners on the deal.

Previously in April 2016, the kingdom had issued a $10bn loan, its first in 15 years from a group of U.S., European, Japanese and Chinese banks.

Source: Bloomberg

India’s civil aviation policy replaces 5/20 condition with 0/20 rule

India’s Cabinet of Ministers gave its approval for partial abolition of the 5/20 rule, which will enable new carriers like Vistara and Air Asia to start international operations sooner.

The new Civil Aviation Policy released by the ministry on 15 June 2016 decided to overturn a requirement that mandated airlines to have five years of domestic operations to be eligible to fly overseas.
However, an airline would have to allocate 20 aircrafts or 20% of its total fleet, whichever is higher, to domestic operations in India if they wished to fly overseas. This effectively means a carrier must have a minimum of 20 aircrafts in its domestic fleet.

Abu Dhabi’s IPIC to pursue 1MDB arbitration in London court

Abu Dhabi sovereign-wealth fund International Petroleum Investment Co. (IPIC) plans on pursuing arbitration in a London court for about $6.5bn it says it was owed as a result of a dispute with Malaysian state investment fund 1Malaysia Development Bhd. (1MDB).

The arbitration was a fallout of an earlier dispute that erupted in April 2016 when 1MDB reneged on key provisions of a $1bn loan agreement with IPIC, wherein IPIC was responsible for interest payments on some of its debt.

Later, IPIC said that it would only make those payments as an official guarantor on two 1MDB bonds and that it intended to pursue repayment from Malaysia’s Ministry of Finance.

A key point that could impact the arbitration is the exact status of a British Virgin Island based company called Aabar Investments PJS Ltd., which received more than $3.5bn in transfers from 1MDB over several years. These transactions were made as part of agreements struck between 1MDB and Aabar.

IPIC, however, says it did not receive any funds from 1MDB and has said that Aabar, which has a similar name to an IPIC investment company in Abu Dhabi called Aabar Investments PJS, wasn’t part of its corporate structure.

According to sources, 1MDB has argued in private negotiations between the companies that IPIC did indeed own the Aabar company in the British Virgin Islands.

Further, during its business interactions with IPIC in the past, 1MDB was provided with a certificate of incumbency showing the Aabar company in the British Virgin Islands was owned by Aabar Investments PJS.

The certificate, dated 13 April 2012, also listed Khadem Al Qubaisi, former managing director of IPIC, and Mohamed Badawy Al Husseiny, former CEO of Aabar, as directors of the British Virgin Islands-based Aabar.

That the company might have been owned by Aabar is a legal distinction and important for the dispute. But investigators in two countries believe it was created to siphon funds from 1MDB for other purposes.

Source: WSJ


Virgin Australia’s restructuring plan to raise fresh equity and downsize its fleet and workforce

Virgin Australia is seeking an equity infusion of $852m and looking to cut its fleet and jobs as part of a major corporate restructuring program.

The capital raising has so far been supported by key shareholders Singapore Airlines, Air New Zealand and Chinese companies HNA Innovation and the Nashan Group, although 24% shareholder Etihad Airways has yet to commit any additional capital.

The group will also cut its smaller fleet of ATR turboprop aircrafts and decommission all of its E190 aircraft from its fleet over the next three years in an attempt to assist the group in simplifying its business and increasing its productivity.

Virgin also announced it would undertake a new efficiency drive aimed at cutting up to $250m in discretionary expenses, as well as flagging impairment charges of between $150 to $200m through to 2019.

Virgin Australia’s chief executive John Borghetti said there was no target for job losses in the restructure, as the focus was a realignment of existing jobs.

The $852m capital raising will be a fully underwritten on a 1 for 1 non-renounceable pro-rata offer. The raising along with an earlier $159m placement to HNA will pump up Virgin’s balance sheet with $1.01bn of fresh equity.

The new shares will be offered to existing shareholders at $0.21 per share, a 28% discount to its previous day’s closing price of $0.26 a share.

The money raised would be utilized towards repaying a $425m unsecured loan made by its airline shareholders Air New Zealand, Etihad Airways, Singapore Airways and the Virgin Group. The balance of the raising will be used to pay down the existing $3bn debt on Virgin’s books.

The cost-cutting and efficiency drive aims to boost free cash flow by $300 million dollar a year by 2019.


RBI’s new debt restructuring scheme may not be a game changer

According to analysts and bankers surveyed, India’s Reserve Bank of India’s (RBI) new measure to tackle the pile of mounting bad loans in the banking system was not expected to be a game changer.

New norms pertaining to the Scheme for Sustainable Structuring of Stressed Assets do address some of the issues faced in earlier strategic debt restructuring (SDR) programs, where banks were unable to sell off the assets after taking management control of a company and converting its debt into equity.

The new scheme raised doubts on the practice of banks giving a new loan to repay an old one, also known as evergreening of loans.

According to credit rating agency  ICRA, the move might help the reduce the reported level of gross non-performing loans by 30-100 basis points from the current 7.7% as on 31 March 2016, after a lag of one year (following satisfactory performance of the sustainable debt portion).

The process would commence with loans worth INR 750,000-800,000m ($11 – 12bn) would be taken up for restructuring under the new norms.

The challenge pointed out by bankers is that this scheme is only for projects that are operational. So, several projects in the power and the infrastructure space would not qualify.

Under the new scheme, banks will have to divide the existing debt of a company into ‘sustainable’ (the share which can be serviced by the company even if cash flow remains the same as now) and ‘unsustainable’. An independent oversight agency will ascertain the economic viability of a project and the resolution plan.

The resolution plan needs to ensure that the unsustainable portion of the debt should be converted into equity/redeemable cumulative optionally convertible preference shares. The scheme also limits lenders from granting any fresh moratorium on interest or principal repayment or reduction of interest rate for servicing of the sustainable debt portion.

Analysts believe that this distinction between sustainable and unsustainable debt might also lead to problems and could cause limitations as it depended on the ability of banks to segregate stressed loans and the willingness of banks to absorb haircuts on the unsustainable portion.

Unlike the earlier norms, under new rules, the promoters are allowed to have management control. This, analysts believe, would create a moral hazard as equity writeoff always precedes debt.

However, bankers do expect a smoother resolution with this as compared to the earlier SDR norms. However, its impact will have to be tested over period of time to see how effective this tool had been in tackling bad loans problems being faced by the banking industry.

Source: Business Standard

Volkswagen plans on merging its components business and mulls asset sale

According to sources, German carmaker Volkswagen AG plans to combine the components business of its brands and divest certain assets as part of its strategy to navigate itself out of the emissions crisis.

The company’s senior management outlined its plans to the board, and may disclose it to investors by Thursday.

According to sources, the company plans to merge the components units of each brand into one new entity that would include about 70,000 employees at more than two dozen locations worldwide, allowing it to save costs and boost efficiency from a single management.

Currently, there were no plans outlined by VW to spin off or sell the new VW components unit.

VW is also likely to announce plans for a portfolio review, which could lead to the sale of non-core assets. While no decisions have been made on which assets are part of the sale, ones that could end on that list include motorcycle brand Ducati, the MAN Diesel & Turbo business and propulsion specialist MAN Renk.

An initial public offering of the trucking business could also be considered in future.

Source: Bloomberg

Government considers merging Hanjin Shipping and Hyundai Merchant Marine

The government of South Korea stated that they would consider merging ailing Hyundai Merchant Marine (HMM) and Hanjin Shipping, should they successfully normalize their operations. Currently, the two debt-riddled shippers are undergoing restructuring programs.

Depending on the outcome of the program, state-run Korea Development Bank (KDB) would emerge as the controlling stakeholder of the firms, whilst the government would then lead the merger of the pair in the future.

Restructuring update:

According to sources, Hanjin Shipping continued to struggle to obtain a cut in charter rates during negotiations with the owners of its chartered fleet. The charter rate cut was one of the key conditions set by its creditors for the company to avert court receivership.

According to sources, Hanjin Shipping, has been in talks with about 22 owners of chartered ships since April 2016, but reported little progress during negotiations.

Hanjin’s struggle for a charter rate cut was in stark contrast to its smaller local rival, Hyundai Merchant Marine, which has reached an agreement with its ship owners to cut charter rates by 21%.

Source: KoreaTimes



India’s RBI eases guidelines for asset restructuring

India’s Reserve Bank of India (RBI) relaxed guidelines for lenders restructuring large stressed loans, a move that could allow banks to more effectively manage bad loans.

As per RBI’s statement on Monday, lenders would be allowed to differentiate between stressed loan accounts into the following two categories.

  • The sustainable debt portion that banks, or a lending syndicate, deem repayable and that the borrower would continue repaying on existing terms.
  • The second is the remainder that a borrower is deemed unable to repay, which can now be converted into equity or convertible debt, giving lenders a chance to eventually recover funds if and when the borrower is able to turn around its business.

However, it should be noted that the above categories would only apply on loans of over INR 5bn ($74m) from a single bank or a syndicate, and only if a borrower’s project is already in commercial operation.

The move comes amid RBI’s deadline of March 2017 to banks to clear up their balance sheets of non-performing loans, which has swelled to about $120bn.

Source: Reuters