Tuesday 6 November 2007

Rationing Sovereign Funds: News From the Souk

The collapse of the Qatari play for J Sainsbury is obviously a complex affair, people rushing for the exits briefing against everyone else. But as far as one can tell the credit crunch had a major part in this. Even a sovereign fund would plan to leverage the deal, in a way that seems not possible at present. And if you can’t borrow against Sainsbury’s, what can you leverage?

That’s the important take-way. A failed bid for a supermarket chain doesn’t matter much in the overall scheme of things: but that’s not the only type of investment at stake. Passing swiftly to my own field: much of the next wave of finance for the new energy infrastructure that is required – for the LNG that will reduce our dependency on Russian gas, and for the new power plants we need quite urgently – was expected to come from sovereign petro-funds such as the Qatari’s.

Now if an established retailer (tremendous cash-flow + asset-base) doesn’t support the required proportion of debt, how much less do unbuilt energy assets ? We saw the complete collapse of the project finance sector, and with it new power-plant building, in the wake of the Enron fiasco and downtick in UK power prices – and the amounts involved there were small by comparison.

A good many easy assumptions are going to take a battering in the coming months and years. Meanwhile, Ruth Kelly pins her hopes on biofuels, and if we don't freeze we shall starve



James Higham said...

The oil dollar is mighty over our way.

Nick Drew said...

I rather think Alex Salmond thinks the same, King James

perhaps he has his eye on Sainsbury's

Anonymous said...

Alex Salmond has his eye on the EU gravy train.

Every other consideration can bugger-off

CityUnslicker said...

Quite right ND. It seems the Boots deal is a long way off too.

yet First Data in the US did go through recently.

I think there is an issue here with the fully funded pension requirement bulking up the price a bit.

Still, we need the money back in teh West and not sitting gathering dust in the desert serving no purpose. So I hope things turn soon; but the hope is a little one.

Whispering Walls said...

We'll have to pin our hopes on JPs McManus and Magnier

Nick Drew said...

WW - yes there's still a lot of cash around, isn't there ? But the really big equity players, like the Middle-Eastern sovereigns, have been encouraged (by their London / NY advisers) to plan on leveraging up their deals considerably, and this has coloured their expectations of what they'll get for their buck.

It may take some time for these expectations to adjust, with a lot less being spent for a while, on both counts.

I guess McManus & Magnier favour stocks offering plenty of liquidity ...


Wolfie said...

Clearly the age of easy leverage is over, and its probably a good thing as it allowed unbalanced asset flows. Like many things at this juncture its people's expectations (which have been unrealistic for some time) which need to change, the economies are not quite as flaccid as some postulate.

The real danger here, as you quite rightly identify, is the risk to civil projects as this government has got far too used to an easy ride. Now is their Winter of Discontent.

Nick Drew said...

Wolfie - there is reason to believe the DTI (or BERR or whatever) can see this all too clearly, but ministers don't wish to hear it.

Parallels with banking: we learn today that last year, the Treasury / BoE / FSA had 'wargamed' a run on a bank, concluded they didn't have the means to prevent it, and ... set up a working party

so that's all right

Anonymous said...

Nick, this is a worrying development. I saw something else that backed up your story and is worrying me even more.

I work in telecoms and our forecast orders for equipment just dropped off a cliff this month. The last time I saw that was back in early 2001. Now back then a lot of people said that the telecoms crisis was caused by the "dot.com" crash. Well it wasn't. It was caused personally by Gordon Brown and Tony Blair. You see, they had this wizard wheeze to pay off £35bn in national debt by using 3G mobile phone licences. It worked really well. So well, in fact, that it caught on and the rest of socialist Europe tried the same trick. £100bn of debt was paid off using the European telecoms industry. But it didn't stop there - another £150bn was required to roll-out the 3G equipment, and this was required in the terms of the licence agreement. In all the industry rolled-up a staggering $250bn in debt facilities. At this point the financiers said "oh, sorry, we are a bit over-extended in the telecoms sector so we can't give the telecoms industry any more cash". Bang went the broadband over cable industry, the alternative service providers and the ADSL business within weeks. The whole equipment industry suffered. Ericsson and Nortel made two thirds of their workforce redundant. It was a majoy disaster.

So are we seeing the same thing repeated again? The figures are alarmingly similar. But with oil at close to $100 a barrel telecoms should be flavour of the moment, not a financial pariah. What worries me is we are looking at a credit crunch of epic proportions hitting the entire global economy. If that is true then NEXT quarters earnings reports will tell the true story. Earnings reports of today are only telling us what was happening before the credit crunch really took hold. If companies start losing money, they need finance to keep them running until they are back on their feet. Who is going to finance a loss maker in this environment? Reducing bank interest rates will not help if the confidence to lend has evaporated.

Imagine if the 66% job reductions that took place at Ericsson in 2001 were repeated across the entire global economy....

...on second thoughts DON'T!

Nick Drew said...

Anon @ 10:52 - very interesting, I wasn't aware of that episode in detail. Seems to me we need to be taking the possibility seriously, at very least. (I am amazed at how government breezes along in 'business-as-usual' mode, but then again I suppose it's their job to whistle in the dark.)

It's also striking how slowly the dominos sometimes fall even when all the elements of a collapse are visibly in place - in the case I mentioned (collapse of the 'merchant energy' sector 2001-02) it took a full 12 months between the first casualty (Enron itself) and the last (TXU).

I guess there are huge vested interests trying to paper over the cracks while they bail out.

Check out Sackerson's blog for a running commentary on the build-up to doomsday !

Anonymous said...

"I guess there are huge vested interests trying to paper over the cracks while they bail out."

Or simply disbelief. One of our management team is running around saying the forecasts MUST be wrong, so now he is pushing the marketing teams to come back with "proper" forecasts. Which could mean they come back with a "forecast" designed to keep management happy of course, no longer bearing any relation to reality. Which would mean that not only will we be in the shit, but it will be some time before we know just how deep.....

Nick Drew said...

As you've probably gathered, Anon, the 2001-02 energy market was personal for me. I was involved in a co whose internal response was not dissimilar to what you are describing

I have to say, I quietly sold up and left ... truth to tell, it was quite helpful (to me, having made that decision) that so many were in systematic denial, or disbelief, or whatever

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