Small M&A advisory shops, once expected to be among the biggest beneficiaries of the financial crisis, are instead struggling to grow and are facing pressure to expand beyond their advisory businesses.
Analysts and investors had expected advisory firms such as Greenhill, Evercore Partners and Duff & Phelps to boost revenue by tapping talented bankers from large institutions, where writedowns on credit losses led to U.S. government cash injections and restrictions on pay.
But earnings at these so-called boutique firms have also been squeezed by the global recession and hiring has proved to be costly in spite of the downturn.
“If you’re doing M&A advisory in a period where there’s a lot of activity going on, then great,” said Roger Freeman, an analyst at Barclays Capital. “But when that ends you start scratching your head and thinking how are you going to make money — and if you’ve taken that extra step and gone public, now the pressure’s on you from shareholders.”
Year-to-date, U.S.-target M&A has slipped to $438.1 billion, compared with $725.9 billion over the same period a year earlier, according to Thomson Reuters data.
No matter what unique niche they occupy, advisory shops need to look beyond their core business to expand, Freeman said.
“You inevitably see it expand because you hit the limits of what you can do in that narrow scope and investors want to see revenue growth,” he said.
Like the larger banks, advisory companies’ stock has been volatile this year. While Evercore shares have leaped more than 80 percent since the start of the year to $22.51, Greenhill shares are up 5.5 percent at $73.82 and Duff & Phelps shares are down 4 percent at $18.28.
ACQUISITIONS
Many advisory shops had been relying on restructuring fees to offset the drop in acquisitions, but there is concern the slowly improving capital markets may curtail the restructuring business without providing an offsetting boost in takeovers.
That has some shops now looking for acquisitions of their own to capitalize on advantages they have over larger firms such as Goldman Sachs and Morgan Stanley, which became bank holding companies last year and are now subject to more onerous regulation.
Some, such as Gleacher Partners, an advisory firm run by banking veteran Eric Gleacher, have already joined forces with other businesses. Gleacher agreed in March to combine with Broadpoint Securities Group, a small independent investment bank, to form Broadpoint Gleacher. Broadpoint shares have soared more than 100 percent since the start of the year to $6.33.
Others, including Evercore, which has climbed to 10th place in the year-to-date league table for global mergers and acquisitions, are planning to build out investment management businesses.
“We’re going to … carefully look at high-quality opportunities to expand that business,” Ralph Schlosstein, the firm’s new chief executive, said on a call with analysts discussing second-quarter results.
Evercore, which acquired Bank of America Corp’s special fiduciary services division in April, had about $3 billion under management at the end of the second quarter, but it has been hurt by losses on private-equity investments.
More employers are planning to reverse pay cuts and other employee cutbacks, another sign that the employment picture is improving, according to a survey released Thursday.
The percentage of employers who will reverse pay cuts jumped to 44% in August from 30% just two months ago, consulting firm Watson Wyatt said.
About one-third of companies plan to unfreeze salaries within the next six months, up from 17%, according to the report that surveyed 175 large employers.
"Some employers are seeing the light at the end of tunnel and feeling optimistic," said Laura Sejen, a director at Watson Wyatt, in a statement..
Almost one-quarter of employers plan to reverse reductions to 401(k) match contributions in the next six months, up from just 5% in June online payday loan.
However, health care did not fare as well. The survey found 66% of companies that increased the percentage employees pay for health care premiums do not expect to reverse that decision.
And 40% are planning to increase the percentage employees pay for health care premiums. About the same number expect to increase the deductibles, co-pays or out-of-pocket maximums for 2010 health care plans.
On the surface, China presents a fiscal study in contrast with the United States, keeping a remarkably low ceiling on debt even as it spends its way out of the financial crisis.
But when Chinese leaders meet their U.S. counterparts this week, they should pause for reflection before venting any criticism, because hidden liabilities mean China’s books are uglier — potentially much uglier — than at first sight.
Thanks to successive years of fast economic growth and even faster government revenue growth, the official debt-to-GDP ratio was 17.7% at the end of last year, far lower than almost any other major economy.
The trouble is that excludes local government borrowing, the current surge in loans backstopped by Beijing and bad assets cleared from the banking system but still floating about.
When all are thrown into the pot, analysts estimate that China’s debt may be closer to 60% of GDP, putting it in virtually the same league as the United States, which was at 70% at the end of 2008 before it launched its massive economic stimulus program.
To be sure, Washington is now set on a path of exploding debt that Beijing will largely avoid. The United States budgeted for a federal deficit of 12.9% of GDP this year, whereas China is aiming for just 2.9%.
But China’s finances are deteriorating more quickly than the government expected, fueling a rise in the stock of both explicit and disguised debt that will constrict its wriggle room.
"It is serious because, one, much of it is hidden and, two, local governments are currently doubling down on their bets," said Stephen Green, economist at Standard Chartered Bank in Shanghai. "As with all fiscal deficits, it limits space for further stimulus."
This is probably a moot point, for now. With China’s economy back on track and private-sector investment kicking in, few think Beijing will need to ramp up spending beyond its existing 4 trillion yuan ($585 billion), two-year stimulus plan. But the narrowing of options still discomfits Chinese leaders.
"Our fiscal work is very grim," Chinese Premier Wen Jiabao told officials last week.
Eroding finances
Government revenues declined 2.4% in the first half compared to a year earlier, well shy of the official goal of an 8% rise. Expenditures were ahead of target and set to surge in the second half on the back of infrastructure projects.
Tax intakes are, of course, closely tied to economic activity, so China’s upturn should deliver cash to government coffers. But improvement in June came mainly from land sales, a one-off revenue source that masks the difficult road ahead.
"Even when we are already factoring in relatively optimistic revenue growth due to the economic recovery, the deficit is quite sticky at around 5 % per year for the next three years," said Isaac Meng, economist at BNP Paribas in Beijing.
But the real worry is the thickening morass of indirect debt immediate payday loans online.
Officials at the Ministry of Finance estimated earlier this year that local government debt already topped 4 trillion yuan, or 16.5% of GDP, much more than previously assumed.
Above and beyond that are 400 billion yuan in bad loans in banks’ hands and at least 1 trillion yuan in non-performing debt hived off their books and assigned to asset management companies. The buck stops with Beijing on all of these.
The record surge in bank lending this year means that its sum of liabilities is about to swell in size.
Banks have showered money on infrastructure projects that are seen as having iron-clad government guarantees. Green said he "conservatively" estimates that Beijing’s bill for covering loans issued this year alone will be 1.75 trillion yuan, enough to push its 2009 deficit to 10% of GDP.
"Debt bomb"
Most troublesome of all is the potential for a "debt bomb", in the words of China’s Economic Observer newspaper, at lower levels of government as officials engage in financial engineering that is both opaque and highly leveraged.
Rules prevent Chinese banks from lending to governments the equity capital which they need to obtain further loans for investment. But local officials and banks are now exploiting a vast loophole thanks to intermediaries known as trust companies.
The process is simple enough. Trusts create specially designed "wealth products", which banks sell to their clients. Banks then give the funds to the trusts and they, in turn, funnel them to governments as equity capital.
Local authorities, in short, are piling debt on top of debt. The Chinese banking regulator has started to warn trusts and banks of the growing risks, state media recently reported.
It was not long ago that bad loans in China’s banking system seemed to pose a massive debt threat to the wider economy. The core solution over the past decade was sustained double-digit growth, vastly expanding the denominator in debt-to-GDP ratios and generating the taxes to pay down the numerator.
Beijing is already looking to raise taxes where it can — increasing the levy on cigarettes, for example — but a return to super-charged growth is again its principal debt reduction plan.
In the meantime, China needs to fund its rising deficit.
On that front, at least, the government can be supremely confident, even if it has to issue more than the planned 950 billion yuan in bonds this year and yet more to cover shortfalls in coming years.
"There is so much saving and so much liquidity, so there is definitely not a problem that China will not be able to finance its deficit," said Tao Wang, UBS economist in Beijing.
Oil fell toward $69 a barrel Wednesday after government data showed a build in U.S. gasoline inventories ahead of the Independence Day holiday, traditionally the peak of the summer driving season.
Gasoline stockpiles in the world’s top consumer rose by 2.3 million barrels last week, above analysts forecasts, data from the U.S. Energy Information Administration showed.
Distillate inventories, including diesel, increased by 2.9 million barrels, while crude stockpiles fell by 3.7 million barrels.
U.S. crude traded down 58 cents to settle at $69.31 a barrel Wednesday, after earlier rising as high as $71.85.
"The fact that gasoline stocks are up 2.3 million barrels ahead of the Fourth of July weekend is huge," said Stephen Schork, editor of The Schork Report, adding, "Demand is low."
The economic crisis has battered fuel demand, sending crude off record highs over $147 a barrel hit last July. But optimism that a potential economic recovery could push demand higher has helped lift crude off lows below $33 a barrel touched in December.
Total U.S. product demand fell 5.8% over the four weeks to June 26 compared to year-ago levels, according to the EIA report fast payday loan no faxing.
The stockbuilds outweighed optimism in equities markets, with U.S. stocks rising on improving prospects for manufacturing around the world and suggestions the global economy was recovering.
Further pressure on crude came after a Reuters survey showed OPEC output rose in June, with members’ compliance with agreed cuts at 72% last month, a fall from 75% in May.
The producer group last year agreed to a series of output cuts aimed at taking 4.2 million barrels per day of crude off the market to help stem the slide in crude prices.
Kuwait’s oil minister said OPEC is unlikely to raise output when it meets again in September if markets remain oversupplied.
Output from OPEC member Nigeria has dropped over the past month due to an escalation of civil unrest in its oil-rich Niger Delta region. Tuesday, oil major Royal Dutch Shell (RDS.A) said attacks by Nigerian militants had cut its onshore output to around half of what it was producing earlier this year.
A committee of St. Louis aldermen will consider a plan today to help the city get more control over its thousands of privately owned vacant buildings.
The board’s Neighborhood Development subcommittee will hold a hearing on a bill to create a vacant building registry to charge owners of the buildings an annual fee and to make them provide local contact information to deal with problems at the property.
Some local real estate and development groups have criticized the bill, concerned about potentially having to pay fees for houses that take a long time to sell affordable health insurance with good benefits.
"It’s very frustrating to try and track down the owners of these buildings," said Alderman Kacie Starr Triplett. "We will now be able to hold people accountable."
The hearing starts at 1 p.m. in City Hall, Room 208.
(Tim Logan)
A spike in U.S. mortgage rates drove down total home loan applications last week as demand for refinancing shriveled to the lowest level since November, the Mortgage Bankers Association said on Wednesday.
Borrowing costs have soared as bond yields have risen, even as the Federal Reserve has sopped up hundreds of billions of dollars in bonds to keep rates low and stimulate the housing market.
The average 30-year fixed mortgage rate jumped 0.32 percentage point in the June 5 week to 5.57%. That was nearly a full point above the record low rate of 4.61% in March, the trade group said.
The vast majority of mortgage activity this year has been from homeowners cutting costs with new loans at rock-bottom rates.
The Mortgage Bankers Association’s seasonally adjusted index of total applications dropped 7.2% to a four-month low of 611.0 in the latest week.
The refinancing index slumped 11.8% to a nearly seven-month low of 2,605.7 last week, and refinancing accounted for about 59% of all applications, the lowest share since November. As recently as April, refinancings accounted for almost 80% of all home loan applications.
Purchasers have been slower to act in the current housing market, with some waiting in hopes that prices will fall further and others paralyzed by unemployment or wage cuts.
Demand for loans to buy homes was little changed last week, rising 1.1% to 270.7, having basically been stuck in neutral throughout the important spring sales season.
"I’m not optimistic for 2009 or 2010," Mark Goldman, real estate lecturer at San Diego State University and mortgage broker, said on Tuesday no teletreck payday advance.
The swift percentage point rise in mortgage rates cuts the purchasing power of a borrower by about 10%, he estimated.
"Employment is still bad, wages are still low, interest rates are up. That’s going to hurt the housing market," said Goldman.
The number of U.S. jobs cut in May was the lowest level since September, but the unemployment rate rose to 9.4%, the highest since July 1983.
First-time buyers taking advantage of new tax credits and investors snapping up foreclosed properties at distressed levels have in recent months buttressed the hardest-hit housing market since the Great Depression.
But borrowers will foreclose in record numbers at least for another year, several industry sources, including the Mortgage Bankers Association, predict. Those homes will add to the already large supply of unsold properties and will keep pressuring prices.
Home prices on a national level have tumbled more than 32% from the peak three years ago, according to Standard & Poor’s/Case-Shiller indexes.
"Prices continue to erode on a national level, and with the rest of the economy not doing well either and the jobless rate constantly increasing, we don’t see a recovery in housing on a national level coming soon," Kevin Marshall, president of Clear Capital, based in Truckee, Calif., said this week.
"That doesn’t mean there aren’t values to be had out there," he added.
Reliv International Inc. reported Wednesday lower fourth-quarter earnings reflecting investment losses for which the Chesterfield-based maker of nutritional supplements does not expect to receive an income tax benefit.
Net income was $250,000, or 2 cents per share, for the fourth quarter ended Dec payday loans online. 31, down from $697,000, or four cents a share, a year ago. Sales were $22.1 million compared to $24.6 million.
Shares in Ireland’s three main banks soared on Monday after the government agreed to inject 5.5 billion euros ($7.7 billion) into the trio, taking one under its control, in a move that should boost lending to firms and homeowners.
Anglo Irish Bank () shares rose nearly 17 percent on the plan, which will give the government 75 percent control of the lender and eased fears it could collapse.
Bank of Ireland () shares rallied by over a third and Allied Irish Banks () jumped by more than a fifth. They will get a capital boost in return for giving the state 25 percent of voting rights on major issues.
“While the market will want to see some significant equity issuance in the New Year, this is a good start,” said analyst Scott Rankin of Davy Research in a note.
“On top of the 5.5 billion euros, the government says that it ‘has a substantial pool of additional capital available to underwrite and otherwise support the issuance of core tier 1 capital’. This should help put a floor under the banks and get us into the New Year.”
The government announced late on Sunday it would make an initial investment of 1.5 billion euros in Anglo Irish Bank, giving it control and a fixed annual dividend of 10 percent. Dublin said it would make further capital available if required.
The government will also invest 2 billion euros each in market leaders Bank of Ireland and Allied Irish through preference shares.
Investors have been waiting for months for a bailout plan to match schemes in other countries and pressure intensified last week after Anglo Irish revealed its chairman had kept shareholders in the dark about 87 million euros worth of loans he had received from the lender.
“The government’s commitment to make further capital available ensures that the bank will continue to be a sound and viable institution,” Anglo Irish Chairman Donal O’Connor said in a statement health insurance. Bank of Ireland said the injection would strengthen its capital base and give it the flexibility to raise more cash, and was positive for it and the Irish bank sector.
“It brings certainty at a time of great volatility and aids our ability to continue to support our customers and provide a meaningful return to our stockholders in the medium term,” Brian Goggin, BoI chief executive, said on a conference call.
Goggin said the raising of an extra 1 billion euros could come from issuance of new shares and/or preference shares, but only if it can be done on acceptable terms for existing investors.
The plan will lift BoI’s core tier 1 capital ratio to 8 percent from 6.3 percent at the end of September, in line with European peers after recent cashcalls. The ratio would rise to near 9 percent if it raised the extra 1 billion euros, it said.
Allied Irish Banks (AIB) also said it was aiming to raise an additional 1 billion euros from shareholders.
“We do feel this has a good chance of stabilizing the banks — whilst the quantum is smaller than we had hoped for, the implicit guarantee that the Irish government will do what it takes should help the banks in the near term,” said Alex Potter, analyst at Collins Stewart.
By 1009 GMT Anglo Irish Bank’s () shares were up 16.4 percent in London at 31 euro cents. Bank of Ireland () was up 36 percent at 90 cents and AIB () was up 20.5 percent at 1.99 euros.
The global digital camera market may contract next year, the president of industry leader Canon Inc (7751.T: Quote, Profile, Research, Stock Buzz) warned, as sluggish economic conditions dampen consumer demand.
Tsuneji Uchida also told Reuters that Canon was aiming to cut $1 billion in costs with a new computer system to be completed by 2010 and that he was in no rush to join an acquisition spree by other cash-rich Japanese firms.
The economic slowdown has started to hit sales of digital single-lens reflex (SLR) cameras — high-end models that use interchangeable lenses — but overall Canon’s camera sales are solid ahead of the year-end shopping season, Uchida said.
The outlook, however, has become increasingly murky and the $40 billion digital camera market may shrink next year in unit terms, Uchida said, a development that would heighten the risk that Canon’s earnings downturn stretches into 2009.
“We hope we will see the same level of demand next year as this year,” Uchida said in an interview conducted on Friday and embargoed from publication until Tuesday. “Whether or not that will become reality is up to economic conditions.”
Global digital camera demand grew 24 percent to 130.7 million units in 2007, according to research firm IDC, and Canon and its top rivals, which include Sony Corp (6758.T: Quote, Profile, Research, Stock Buzz) and Nikon Corp (7731.T: Quote, Profile, Research, Stock Buzz), are still forecasting sales growth this year.
Canon last month cut its 2008 compact digital camera sales forecast by 6 percent to 23.5 million units, though that would still mark a year-on-year jump of 10 percent businesscards. It stood by its estimate for SLR sales to rise 38 percent to 4.4 million units.
Demand for SLR cameras has grown strongly over the past few years, spurred on by a drop in prices that has expanded the customer base beyond professional and advanced amateurs.
That has meant big profits for Canon and Nikon, which dominate the high-margin segment of the market.
Uchida said SLR demand was starting to show signs of “stagnation” but that it was not enough to knock its overall camera sales forecasts off track.
“According to our internal data, recent sales appear to have been fairly good … no worse than we had thought,” he said. “In fact, we saw our products gain some market share last week.”
HOLDING ON TO CASH
Canon was founded 71 years ago with the goal of overtaking Leica and other German camera makers to become the global leader.
Uchida joined the company in 1965 and has played a key role in Canon attaining and keeping the industry’s top spot, first as an engineer developing cameras and then as head of the camera division before he became president in 2006.
It diversified during the 1960s into copiers and other office equipment, creating a new growth driver that now accounts for about two-thirds of its revenues. Its rivals in the copier market include Ricoh Co (7752.T: Quote, Profile, Research, Stock Buzz) and Xerox Corp (XRX.N: Quote, Profile, Research, Stock Buzz).
Macau has no plans to help Las Vegas Sands Corp (LVS). with financing after the struggling casino operator announced it was suspending multibillion-dollar projects in the Chinese gambling city amid a cash crunch, the territory’s leader said Tuesday.
In his annual policy address, Macau Chief Executive Edmund Ho said that the government was aware of Sands’ funding difficulties. "Because of its over-leveraged borrowing in the U.S. and around the world, it’s normal and expected that it has to suspend some of its projects," he said.
Asked whether he had any comment on reports that a Chinese bank would extend a significant loan to Sands, Ho responded that the government was not in a position to intervene. "Until now, the Macau government has no concrete measures to help it solve its financing difficulties immediately," he said.
On Monday, Sands said it was suspending several projects, in Macau and elsewhere, and had agreements to raise $2.14 billion in new capital. The announcement, amid worse-than-expected results for the third quarter, came after Sands said Thursday it was in danger of breaching lending conditions Dec. 31 and defaulting on $5.2 billion in credit facilities secured by its Las Vegas operations.
The company said it would temporarily shut down sites five and six along Macau’s Cotai Strip, including a Shangri-La/Traders hotel tower, a Sheraton hotel tower and three casinos. The Macau sites cost $1.16 billion so far, and represent a part of the company’s $13 billion master plan to develop Cotai short term cash loan.
The company said other projects, however, were still on track, including the $2.7 billion Marina Bay Sands to open in Singapore at the end of 2009.
Sands has controlled almost a quarter of of the gambling market in the southern Chinese gambling enclave, with its popular Venetian Macao Hotel Resort taking in $2.18 billion in revenues during its first 12 months.
Sands’ successful Macau properties have given the company a needed boost in the last year, accounting for almost 70% of revenues.
A Sands representative did not immediately respond to a request for comment Tuesday evening. On Tuesday, Ho said the suspension of Sands projects could cost some workers their jobs and revealed government officials had started discussions with the company to "make appropriate arrangements."
Ho also said he expected monthly gambling revenue to drop to about 7 billion patacas ($876 million) next year from about 8 billion patacas ($1 billion) a month this year. "We expect there certainly will be some downward pressure on the entire gaming industry next year," he said. "Although there’s pressure, we believe there’re still business. On one hand, we have to be cautious, but on the other, we shouldn’t be too pessimistic."
Powered by WordPress -- XHTML 1.0