Revolvers at dawn: Inside the corporate dash for cash

0

FT premium subscribers can click here to receive Due Diligence every day by email.

One scoop to start: Masayoshi Son explored an audacious leveraged buyout of SoftBank over the weekend with investors including Elliott Management and Mubadala before opting for asset sales to fund a huge share buyback and debt reduction plan. More here

Now to today’s lead topic . . .

Banks offer certain perks to win over big clients. One of those is something called a credit line, which under normal circumstances is a “nice to have”. 

Few banks anticipate that the clients they serve will need to use the credit lines in full. Up until a few weeks ago, if companies needed more money, they could tap the $10tn US corporate bond market where cash is cheap rather than tug on the safety net of a revolver which tends to be used in emergencies. 

But over the past three weeks, more than 130 companies in Europe and the Americas have drawn at least $124.1bn from their lenders, according to analysis by FT reporters. The figure is probably even higher because some companies just don’t have to report it.

The uncertainty injected into the market by the coronavirus — particularly as to how long a global lockdown will last — has pushed many companies to draw on their credit facilities, some of them in full. 

Anheuser-Busch InBev, the world’s largest brewer by volume, is among them. It pulled its entire $9bn loan facility last week to secure some flexibility in the weeks ahead. Kraft Heinz, Hilton Worldwide and Delta Air Lines also secured funding in the same way. The pain is more acute for companies in hospitality and aviation, but almost every industry is feeling it. 

Column chart of Weekly capital raisings by type ($bn) showing Critical sources of funding for multinationals freeze up

On the day that the final car facilities across Europe halted, General Motors also drew $16bn from its credit facility, hot on the heels of Ford

Bankers at JPMorgan Chase have been kept busy, providing more dollars in credit line extensions so far this year than any other bank. This shouldn’t come as a surprise to them. JPM went into the year with more than $367bn — about 13 per cent of its $2.7tn balance sheet. 

Bank of America, Citigroup and Wells Fargo together provided another $1.2tn of lines, while Morgan Stanley and Goldman Sachs had a combined $260bn, regulatory filings show. 

For many people in the banking industry, this is all relatively new. But for those that have lived through other events — like the 2008 financial crisis and 9/11 — they think the worst is yet to come. Even in the aftermath of the last crisis, tapping a credit line remained taboo.

‘Quant Quake’ shakes the holy trinity

On Tuesday DD told you about “Arbageddon”, today we bring you “Quant Quake”. We’re not panicking, honestly. 

For anyone out there that feels like they’re having a hard time adjusting to the brave new coronavirus world, perhaps you can take some comfort in the fact that even computers are malfunctioning. 

Quantitative hedge funds, which rely on high-powered computers, vast data sets and algorithms to turn a profit, have over the past decade been a rare bright spot in the hedge fund industry. But the turmoil inflicted by Covid-19 has unsettled even the gold standard of quant funds. 

DE Shaw, Two Sigma, and Renaissance — the holy trinity of quantitative investing — have all seen some of their biggest funds hurt this month, DD’s Ortenca Aliaj and our colleague Robin Wigglesworth report. One large hedge fund investor called his book of quants a “disaster”. 

Quants rachet back bets as markets turn chaotic

The pain is more profound because everyone seems to have expected the strategy to perform well, as was the case in 2018 when two volatility leaps inflicted huge losses on the hedge fund industry but quants stood tall. 

It’s almost unheard of to see Renaissance’s flagship Institutional Equities Fund take losses even in the single digits, let alone the 18 per cent drop it suffered in the first three weeks of March. Similarly, DE Shaw’s pricey “statistical arbitrage” hedge fund Valence, which at 3-and-30 charges almost treble the industry average, lost more than 9 per cent this month. 

Steve Cohen’s quant unit at Point72 Asset Management has also been hit, Bloomberg reported, and is down more than 20 per cent. 

The glitch in the quant system is perhaps another reminder that markets aren’t functioning as expected. Investors will have to see how the “Quant Quake” shakes out.

Facebook dials into Mukesh Ambani’s Jio

India, the world’s second most populous country, is headed into lockdown as it tries to stop the spread of the coronavirus. 

So depending on how you see things, Facebook’s plan to buy a multibillion-dollar stake in Reliance Jio, the mobile internet service company, has come at an opportune time.

© FT montage; Getty Images

As 1.3bn Indians are locked inside their homes in the coming three weeks, internet and mobile services will be of vital importance to receive information, work from home and stay in touch with friends and family. 

If they can get the deal through the door, that is. The investment has been stalled by the coronavirus travel ban.

The deal, first reported by the FT’s Anjli Raval, Tim Bradshaw and Benjamin Parkin, will give Facebook a 10 per cent share in Jio, whose cut-price service has attracted 370m Indians in just three years. The social media network stands to get a key foothold in the Indian market where its WhatsApp chat service already has 400m users and is about to launch a payments service. 

Launched four years ago by Indian billionaire Mukesh Ambani, below, Jio is valued at more than $60bn, but its rapid expansion has lumbered Reliance with a heavy debt load.

A deal with Mark Zuckerberg would help the company meet its target to cut net debt to zero in a year. And it’s not a bad time for a heavily capitalised company like Facebook to expand, says the FT’s Lex. Get smart on Ambani with this profile here.

Job moves

Smart reads

DIY workouts FT journalists from London to Rome stepped away from their desks to deliver their best tips on staying fit at home. You don’t need a lot of space or any gym equipment, just the will to carry on. After all, we need those endorphins more than ever. (FT)

Getting liquidity into markets As part of the FT’s Coronavirus: the economic cure series, Sheila Bair, a former chair of the US Federal Deposit Insurance Corporation, says banks should suspend discretionary bonuses, dividends, and share buybacks to help free up trillions of dollars of additional lending capacity. (FT)

Repurposed ethanol Pernod Ricard is best known for its Jameson whisky and Absolute Vodka brands. Now, one of the world’s biggest distilleries is rushing to make a potentially life-saving product: hand sanitiser. (Market Watch)

News round-up

DE Shaw quant fund takes hit from markets gone haywire (FT)

Daniel Loeb’s Third Point faces worst start to a year (FT)

Goldman Sachs spends $1.9bn to shore up two money market funds (FT)

Dealmakers getting creative after virus upends M&A market (BBG)

Mortgage investment funds become ‘epicentre’ of crisis (FT)

NMC Health discovers further $1.2bn of undisclosed debt (FT)

Chevron announces spending cuts and halts buyback programme (FT)

Grocers launch big hiring sprees as coronavirus spurs demand (FT)

Dollar surge stirs talk of multilateral move to weaken it (FT)

Santander chairman Ana Botín to donate half of pay to virus fund (FT)

We’re offering a free 30-day trial to Coronavirus Business Update, our level-headed briefing on how the epidemic is affecting the markets, global business, workplaces and daily lives. It also includes access to FT.com. Please spread the word by forwarding this newsletter to friends and colleagues who you think would find it valuable. They can sign up here.

Due Diligence is written by Arash Massoudi, Kaye Wiggins and Robert Smith in London, Javier Espinoza in Brussels, James Fontanella-Khan, Ortenca Aliaj, Sujeet Indap, Eric Platt and Mark Vandevelde in New York, Miles Kruppa in San Francisco and Don Weinland in Beijing. Please send feedback to due[email protected]

Source

Comments
Loading...