Week in Brief: BUSINESS & THE CITY
SOVEREIGN DEFAULT: The Greek government may have bought some time to sort its finances out, but the Commonwealth of Puerto Rico, whose troubled finances were discussed here a few weeks ago, has failed to do so, and has gone into default. A US$58m loan repayment was due at the beginning of the week, but the island could only find $628,000. Not enough: the quasi state is now in default on the $72bn of debt it owes. This is uncharted territory – Puerto Rico is neither a State of the USA (so probably no help from that direction), nor is it a sovereign nation, so it cannot call in the International Monetary Fund to assist. Even more alarming, most of the debt has been sold by the original lenders to a group of hedge funds, who have been making some very unfriendly noises and seem determined to get considerable influence over Puerto Rico’s finances. A spokesman for them said that Puerto Rico simply needs to cut spending, especially on social security and education. The government does not think things are so simple; at the moment both sides are heading for court, the hedge funds to get some sort of distraining order in place; the government to stop them. Next – privatisation of the country?
SCOTTISH BANKS: Banks and politics really don’t mix. George Osborne sold 636 million Royal Bank of Scotland shares on Monday in a private placement, at 330p per share, raising £2.1bn. Technically, that crystallises a large loss as the “purchase” price – the government’s in-cost when it rescued the bank in 2008 – was 502p per share. But Mr. Osborne needs to raise some money to help with meeting his spending and taxing targets; who knows when the share price will recover – it looks pretty fair value at the moment and RBS would like the government off its back so it can get back to being a proper unfettered private bank again. However, the Labour Party, currently riven by its leadership contest, found something to agree on for once – various candidates and spokesmen condemned Mr. Osborne’ sale as political, premature, and taking a loss unnecessarily.
DIRECT PROFITS: If bankers continue to cause difficulties, things are different in the insurance business. Direct Line, the major on-line selling insurer behind many consumer policies – and ironically, spun off by Royal Bank of Scotland in 2012 as part of its recovery programme, continued to perform well in what is traditionally a very competitive market. Annual profits to June were up £100m, to £315m, on a flat turnover (premium income mostly) of £1.55bn. That is partly driven by continued attention to costs, but some was luck – no bad weather or disasters in its areas of cover meant pay-outs were kept down and some modest release of reserves could be made. The price war in motor insurance seems to be over, but that in home insurance continues, so trading is still demanding.
WAR IN DRUGS: More news of corporate warfare in the pharmaceuticals business, which is seeing a period of intensive takeover and merger activity at the corporate level, as we outlined here last week. This time it is Shire, based in Dublin. Following the repulse of its softly softly approach to Baxalta, a medium sized USA based manufacturer that makes rare disease drugs (also Shire’s speciality), it came back with a formal hostile US$30bn offer, mailing it direct to shareholders. The deal would give Shire over 60% control of the new group, and would also protect it against AbbVie which had a go at taking over Shire last year and is rumoured to be thinking of a further approach. Baxalta was recently demerged from Baxter Group, a conglomerate, and the offer price shows getting on for a 40% premium to the recent share price. The board may be resisting, but at that premium the shareholders will be taking the offer seriously.
TROUBLE ON THE TUBE: A regular headline at the moment but London Underground, which operates London’s underground railway system, is troubled on several fronts. Its proposals to run all-night services on a selected and modest number of lines, to service London’s increasingly 24 hour life style, are very unpopular with its drivers (translation: they want more pay). Later today and tomorrow the network is facing another round of strike action to try to drive the management into making a higher pay offer for the new shifts. It is however rumoured that the management side may decide the game is not worth the late night candle and put the idea on hold for a while.
But a bigger management headache is the need for a new signalling system on key parts of the network, the Circle, District, and Metropolitan lines which service large parts of central London. The existing system is approaching the end of its life and cannot cope with the large expansion in the frequency of trains which London Mayor Boris Johnson wants to achieve – indeed must achieve – if the ever increasing numbers of Londoners are to be moved about. What is making this especially sensitive is that it is the second run at the project – the first, by Canadian rail group Bombardier which was projected to cost £354m, had to be abandoned in 2013 as too complex and underpriced, with over £80m spent. Now a new contract has been awarded to specialist engineer Thales at a cost of £760m for a seven year programme of works. It should, when installed, double train capacity on the lines, which in part parallel the new Crossrail system, opening in 2017.
OIL SKID: The market has been expecting some modest upward pressure on oil prices with further movement up next year. What it got this week was a 10% slide, down to below $50 a barrel. As they say, if you knew why the markets moved you would have retired from them long ago, but this move is perplexing the market, theories ranging from a Chinese bear raid to a Saudi need to buy off Isis threats. But it may be more prosaic than that – we are getting more efficient all the time in how we use oil (demand down), and at the same time the big producers continue to need cash flow (supply up), for security (Iraq), security (Venezuela), security (Saudi Arabia) – well, you get the picture. It’s not that easy to adjust spending plans quickly and the easy way for low cost producers is to pump more out of the ground. And it has the long-term benefit, perhaps, of wiping out some of your high cost competition.
KEY MARKET INDICES: (at 04 August 2015; comments refer to change on week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 mth 0.56% (steady); 5 year 1.52% (falling).
Europe€: 1 mth –0.6% (steady); 3 mth -0.2% (steady); 5 year 0.28% (falling)
US$: 1 mth 0.21% (steady); 3 mth 0.38% (steady); 5 year 1.63% (falling)
Currency Exchanges:
£/Euro: 1.42, £ steady
£/$: 1.55, £ steady
Euro/$: 1.1, € steady
Gold, oz: $1091, fall continues
Oil, Brent Crude barrel: $49.52, 10% fall on the week.
Wheat, tonne: £120.15, steady
London Stock Exchange: FTSE 100: 6,687. FTSE 350: 3,710
Briefly: Currency and interest rate markets remain relatively steady, though with longer interest rates falling slightly. Gold after a recovery last week is trending down, (as are other metals). The UK stock markets also continue to drift down – reacting to a continuation of mildly disappointing data on job creation and economic growth. The big shock is the abrupt drop in the oil price which we mention above.
