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Dealmaking versus ‘The Walking Dead’

Corporate vultures aren’t the only ones hungry for the taste of flesh.

© Ingram Pinn/Financial Times

Since the coronavirus pandemic hit, public and private investors alike have poured trillions in rescue finance into the market, sustaining big businesses from collapse as earnings tumbled. 

Here are some useful numbers: 

  • Since the US Federal Reserve announced on March 23 plans to buy corporate bonds as a financial backstop in response to the coronavirus crisis American companies have issued a record $1.25tn of debt, according to data from Refinitiv.

  • Junk-rated companies have sold $220bn worth of bonds so far this year, according to Refinitiv, on track to be one of the best years for high-yield issuance since 2012.

  • Globally, corporations have raised $2tn so far this year in bonds alone, a $600bn increase on the same period of 2019, according to rating agency S&P.

  • In the US, S&P 500 non-financial companies were sitting on $1.35tn of cash and equivalents at the end of June.

  • In the UK, cash and equivalents have also ballooned 30 per cent to £205bn at the largest UK-listed non-financial companies on the FTSE 350 index.

But cash injections into defensively managed corporations have done little to truly revive the hordes of “zombie companies” that walk among us, void of life and waiting for their next bailout.

If anything, the zombies may be spreading. Full of high cash balances from eager junk bond investors and government loans, debt-ridden companies can trudge along comfortably for longer until they eventually default, Lex explains in its in-depth column.

Charts of aggregated data for S&P 500 and FTSE 350 companies showing how debt has soared

“By definition, business has become less competitive,” Luke Templeman, a Deutsche Bank analyst, told Lex.

How to ward off the undead? Some are turning to M&A as a means to cut costs and raise returns.

“It is not enough simply to be in a position to survive. You also have to be able to pursue opportunities for M&A,” said Jean-Francois Astier, head of global capital markets at Barclays

Private equity presents for many a potential way out. US buyout shops are sitting on nearly $806bn, according to data provider Preqin, wielding the power to extend high-interest loans or purchase minority stakes in debt-ridden companies. 

We told you about how KKR harnessed both of these techniques when it purchased a majority stake in JAB-backed cosmetics maker Coty and injected it with $750m in exchange for preference shares.

But the prospect of fresh debt could come at a cost for corporations yet to break the surface of the first coronavirus wave, let alone a potential second one.

In this survival of the fittest scenario, DD will be watching for more alliances forged between companies tackling their burgeoning debts.

Wall Street (virtually) heads to China for the party of the decade 

No matter where you list an IPO, big banks seem to always be the winner. 

© AFP/Getty Images

Wall Street’s top bankers may still be shuttered in their Hamptons homes, a layer of dust coating their corner offices and their passports moot, but the pandemic hasn’t halted the arrival of international paydays.

They stand to make a killing in a different kind of land out East than the far stretch of Long Island they’re hunkered down in. Cue the crates of champagne delivery.

Ant Group’s colossal dual offering in Hong Kong and Shanghai, expected to debut in October, is poised to shower US lenders Citigroup, JPMorgan and Morgan Stanley with at least $300m in fees.

The Chinese fintech company is angling for a valuation between $200bn and $300bn, insiders told the FT. On the high end, that’s nearly four times the valuation of Goldman Sachs.

Fees are likely to represent 1.5 per cent of the IPO’s size, meaning bankers will probably be blessed by the largest windfall in Asia’s top financial hub since the $408m earned from AIA Group’s 2010 $20.5bn Hong Kong listing.

Bar chart of Fees on primary listings ($m) showing Ant Group IPO fees could break Asia ex-Japan record

And despite boiling trade tensions between the US and China, America’s cornerstone financial institutions seem unbothered by the heat. 

Wall Streeters amassed over $410m in fees from Chinese listings in New York and Hong Kong in 2020 so far, up nearly a quarter from last year.

Morgan Stanley and Goldman Sachs led the pack in terms of fees raked in from Chinese IPOs this year, bringing in $151m and $74m, respectively.

Bar chart of Bank fees from China offshore IPO, follow-on and convertible deals (US$m) showing Wall Street banks rake in fees from China equities offerings

Even in the midst of a once-in-a-century crisis, Wall Street’s reach knows no borders.

US-China tensions: follow the money

China’s relations with the US have deteriorated badly this year, culminating in punitive measures from the Trump administration that have largely been directed at the tech sector.

But in the world of finance, it’s a very different story — the two countries are starting to edge closer together.

This week it emerged that JPMorgan is set to pay a hefty premium of over 50 per cent to buy out its Chinese partner, with which it owns Shanghai International Fund Management.

JPMorgan already owns a slim majority, but the remaining 49 per cent stake will cost it Rmb7bn ($1bn) — a figure which our colleague Peter Smith noted as early as April.

That deal, if it goes through, will make the household US name the first foreign company to fully own a mutual fund business in the mainland.

This milestone is possible because of the easing in April this year of Chinese rules that required foreign companies to partner with mainland counterparts. That in turn is one part of an ongoing liberalisation of the country’s closely controlled financial services industry.

More of the world’s biggest players in finance — many of them also American — are making moves. Last weekend, it emerged that BlackRock, Singapore’s Temasek, and China Construction Bank had received approval from Chinese authorities to establish an asset management business in the country.

A spokesperson for BlackRock said the partnership was “consistent with the US-China efforts to open the Chinese market to US financial services firms”.

The appeal is clear: China, the world’s most populous country, has by extension a vast population of savers. Deloitte expects its retail financial wealth to reach $30tn by 2023, of which it estimates $3.4tn will sit in Chinese funds.

On Thursday, another big American investment group, Vanguard, said it was closing its Hong Kong office. Where will its regional head Scott Conking eventually be based instead? Shanghai.

Job moves

  • Former Bank of England governor Mark Carney is joining Brookfield to launch an impact investment fund. Get the full story.

  • Former Trump adviser and Goldman Sachs president Gary Cohn joined forces with former KKR dealmaker Clifton Robbins to raise $600m through a blank cheque company. More here.

  • Neil Gerrard will retire as co-head of US law firm Dechert’s white collar crime practice after a decade on the job. He is known for leading the fraud investigation against Kazakh mining company ENRC. Go deeper.

  • Teneo, the advisory group to chief executives, is acquiring financial restructuring company Goldin Associates. As a result, the entire Goldin team will join Teneo’s capital advisory segment.

  • Law firm K&L Gates hired Patrick Richards as a partner in its IP procurement and portfolio management practice. He joins from Richards Patent Law, the IP practice he founded in 2009.

Smart reads

Well, that escalated quickly Microsoft and TikTok never wanted to be a Hollywood item. Before Donald Trump took the deal into his own hands, the software company hoped a minority stake in TikTok would propel its cloud computing unit. (NYT)

The social distance network The co-founder of Facebook abandoned his old college roommate Mark Zuckerberg to launch his work collaboration app Asana. As companies scramble to work efficiently from home, the software is picking up speed. (Forbes)

Loan sharks More than $1bn in federal aid intended to keep small businesses afloat may have fallen into the wrong hands. (Bloomberg Businessweek)

News round-up

Palantir takes aim at Silicon Valley in IPO filing (FT + Lex)

Retail and tech group The Hut to reveal £4.5bn float plan (FT)

Italy clears KKR purchase of stake in Telecom Italia network: La Repubblica (Reuters)

Mike Pompeo renews attack on HSBC as bank walks line between US and China (FT)

McDonald’s probes whether ex-chief executive covered for others (FT)

UN-backed climate fund faces wave of abuse allegations from staff (FT)

Buyout groups team up in €13bn battle for Italy’s Serie A (FT)

Jack Ma-backed biotech firm Brii considers Hong Kong IPO (FT)

Vanguard uproots staff from Hong Kong to focus on Shanghai (FT)

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, Mark Vandevelde and Francesca Friday in New York and Miles Kruppa in San Francisco. Please send feedback to due.diligence@ft.com

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