11 May 2017
Week In Brief: BUSINESS AND THE CITY
CAN’T GIVE IT AWAY: It’s not easy owning a bank nowadays – but it is even more difficult getting rid of one. Readers will remember RBS’s struggles to get rid of its Williams and Glynn’s arm, Barclays has struggled to sell some of its peripheral operations, and the Coop Group has been trying to sell its bank – the Cooperative Bank – for several years. It looked as though a deal was done earlier this year, with rumours that Virgin Money was the buyer, the latest suitor in a little list, which included Clydesdale Group, and JC Flowers – no relation to Paul Flowers, the bank’s former chairman whose extraordinary lifestyle brought the bank’s problems to the public attention in the first place. The difficulty continues to be two fold – firstly the complex ownership structure which reflects the original rescue plan by the Coop Group which brought in a group of hedge funds to recapitalise the bank, Coop itself being too light on capital to do that by itself; and secondly the troubled nature of the bank’s loan book. Apparently, although nine years have passed since the banking crash, the bank has only made slow progress in sorting out its portfolio of bad or non-performing loans. The bank has a concentration of business in the North West, with much credit extended to small business owners and particularly the smaller end of the property industry, including development finance. These have proven difficult to work through, and the North West has been slow to recover from the recession. The bank is no minnow; it has nearly 1.5 million customers, many private individuals with great loyalty to the other parts of the Coop Group – now principally its retail food business and a very strong funeral business. Shutting the banking operation down is not thought to be an option although the shareholders have considered splitting it into two to get the non-performing loans into a “bad bank” where they can be dealt with, and leaving the retail bank as a clean and private customer focussed business. It is understood though that the banking regulators are not keen on this because of the weak capital base of the bank, and its very complex pension plan, which covers the whole Coop Group and is in deficit. If the bank cannot be sold, then further capital will have to be introduced – which is a problem for the Coop because neither it nor the regulator want to let that shareholding go below 20%. The current talk is that £750m will have to be injected soon, the Coop part funded, at least in part, by forcing bondholders to convert their holdings to equity. But the hedge fund shareholders cannot agree whether that is the way forward or how much can be injected. Which may yet mean that a buyer just has to be found…
FEELING SICK? The problems of the NHS are well publicised but not so often commented on is the rapid growth in the private healthcare sector in the UK. The public, if they can afford it or are insured – as many office workers are under employer-provided healthcare insurance – increasingly take health issues to private hospitals or care centres, to such an extent that the business in the UK is said to be worth over £6bn and growing fast. In fact it has grown so fast that it is said that there is over capacity in the private sector, with specialist machinery and operating facilities standing out of use. The sector does contract with the NHS to do some work, but pricing is of course an issue there. One of the biggest private healthcare treatment businesses in the UK is currently up for sale – Aspen Healthcare which owns six private hospitals and two cancer treatment centres. The price is said to be around £150m, and the vendor is Tenet Healthcare from Texas which is under some pressure financially because of a large fine imposed following a bribery scandal in its US business. Tenet only bought the business in 2015, from a private equity group, for £144m. Revenues are thought to be running at around £120m and have shown only modest growth over the last two years. Even so the price seems modest and reflects both the demand and revenue issues in the UK private sector, and Tenet’s need to raise cash.
FLYING LOW: Ryanair was once said to be the world’s least favourite airline, but it remained the one every budget conscious traveller flew, with super low fares and reliable schedules, and a fleet of modern jets. If it flew to some pretty obscure places (Frankfurt-Hahn, anyone?) it opened up new destinations and brought prosperity to some modest towns across Europe. In recent years the airline has sought to improve customer loyalty by being generally nicer and cutting out some of its more controversial charging supplements. But if it is improving passenger opinions, it will now have to work on doing the same with investors. Seven pension funds have just announced that they are selling their holdings in the airline, because they are concerned about labour relations at Ryanair, which is involved in a series of disputes in continental Europe about locally employed labour. Ryanair argues that its staff are subject to Irish employment law – staff say that if they work exclusively in one jurisdiction they should be subject to the relevant law in that jurisdiction (when it is more beneficial to them, unsurprisingly). The pension fund investors say that this is not acceptable and think Ryanair should do the right thing by its people. They also worry about the long term effect on the business model if staff become too restive. Michael O’Leary, CEO and a major shareholder in Ryanair, is famous for his plain-speaking. He commented that he does not care if the pension funds don’t want to invest in his business, calling them “idiots”. The Ryanair share price has risen 10% so far this year.
IRON ORE: We have added iron ore to our commodities list. Iron ore is a still a key component in many manufactured goods and its price movements are an insight into industrial production, especially in the eastern growth economies. Last August the price was $60 a tonne, from which point it climbed as output from mines was cut and investors expected Chinese industrial production to recover fast.
Recently there have been further dramatic movements in price, back now to $60 from over $90 in late February this year, which reflects that industrial output in the Far East is modestly improving – but mine output, responding to that peak, has enormously increased – and there are suspicions that some users have big stockpiles which they bought as the price rose so fast. That means somebody is sitting on some ever growing losses. As there is not much speculative trading in iron ore – not easy stuff to handle if you have to take delivery – the main traders are mines and manufacturers. So it is almost certainly steel manufacturers that are sitting on the losses.
KEY MARKET INDICES: (as at 9th May 2017; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.32% (steady); 5 year 0.77% (rising).
Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.13% (rising)
US$: 1 mth 0.99% (steady); 3 mth 1.18% (rising); 5 year 1.98% (rising)
Currency Exchanges:
£/Euro: 1.19, £ rising
£/$: 1.29, £ rising
Euro/$: 1.09, € steady
Commodities:
Gold, oz: $1,225, falling
Aluminium, tonne: $1,878, falling
Copper, tonne: $5,465, falling
Iron Ore, tonne: $60.72, falling
Oil, Brent Crude barrel: $49.43 falling
Wheat, tonne: £149 slight fall
London Stock Exchange: FTSE 100: 7,343 (rise). FTSE Allshare: 4,031 (rise)
Briefly:
Last week was pretty quiet; this week certainly wasn’t. Commodities all fell; gold a bit, oil and iron ore a lot – oil dipping below that key $50 a barrel price to, as we write, $49.43 (it was lower at opening). But the LSE likes this – prices rose, with the All-share again breaking through the 4,000 mark. Long term interest rates continue to edge up and the pound strengthened a little.
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