Remember buybacks? That process of paying some shareholders to go away at the expense of those who remain. They were sold on the argument that they made the balance sheet more “efficient”, by replacing expensive equity with cheaper debt. But that was just PR spin: their real attraction was the fees paid to the banks and the magical impact on earnings per share, and hence the CEO’s bonus.
Now their real cost is only too painfully apparent. Shares in companies where there is the slightest doubt about the balance sheet have been put to the sword. Other companies are scrambling to draw down credit lines before the banks cancel them. Still others are warning that they may not be able to go on without state aid.
Owners of bars, cafes, clubs, theatres and shops can only hope they will get help before the money runs out, but the most pitiful begging bowls are those held out by the airline industry. Both airports and airlines are warning of disaster without government help, as business dries up, but the more interesting question is: disaster for whom?
Grounded planes are very bad news for the staff who will lose their jobs (although Izabella Kaminska points out that many of the 90,000 employed in the industry in the UK could be quickly retrained to work for the NHS), but there is no case for state aid to keep the companies going. The pain should fall first, on the shareholders, and when they are bust, the banks which lent the money.
The industry runs on high-octane debt, often with just a sliver of equity to skim the rewards during the boom times. The farcical “rescue” of Flybe rather demonstrated how little money the rescuers were prepared to risk. The owners of Heathrow have taken borrowing to such an extreme that they cannot afford to build another runway, even if they got permission to do so.
Tim Wu at the New York Times has a brutal analysis of American Airlines, one of the US flyers now pleading for help. Since emerging from bankruptcy in 2013, AA has generated $17.5bn of net revenue, paying out $15bn in buybacks, borrowing $30bn for the actual planes. Today, the business is worth $6.5bn. The mugs left holding the stock have paid the others handsomely to go away.
In the event of financial failure, the airports and planes will still be there, and there is never a shortage of risk capital for starting another airline. “Whatever it takes” is a fine slogan, but the money hose should not be turned onto this industry. They are already crying crocodile tears.
No, you can’t have your money back
Property is a British obsession. After this week, it may be rather less of one, as a string of property funds slammed the door, preventing withdrawals and trapping £15bn of assets, probably for many months.
These are so-called open-ended funds, offering the promise of instant withdrawal to any holder who wants it – until the gates are shut. So-called closed-ended funds have investors’ capital permanently, and wannabe sellers must find another investor to buy, just like any other share. So: an open-ended fund is one that can close on you without warning, while an closed-ended fund is always open, although you may not like the price you are offered.
The justification the industry supplies for closing is that it is impossible to value the assets in today’s febrile markets. This is true, up to a point, but in many cases it’s more that the fund managers can’t stomach the prices those markets offer them
To get some idea of how far out of whack the valuations are, look at Land Securities, the UK’s biggest closed-ended property company. In November it valued its portfolio at £13 a share, and the price touched £10 in January. It is £6 now.
The closed open-ended funds may think they have £15bn of assets between them, but the implication is that they may not be worth much more than half that in today’s markets. Like the rest of us, the managers cannot bear too much reality, so they closed the funds. No suggestion that they will waive their fees, though.
A good man gone
David Prosser, who died this week, was the man who saved Legal & General from the fate that has befallen Aviva. As CEO for 15 years until 2006, he witnessed the merger orgy which saw Commercial Union, General Accident and Norwich Union shoved together into a sprawling conglomerate whose problems persist today. L&G, smaller than any of them before they merged, resisted the urge, and is now worth more than Aviva (although both shares have plunged in the collapse).
In 1999 National Westminster Bank’s weak management fell for the line that “bancassurance”, combining banking, life assurance and fund management was the future, and bid for L&G on terms that Sir David was unable to resist. The move so shocked Peter Burt at the Bank of Scotland that he launched a reverse takeover bid for NatWest, on condition that the L&G bid was dropped. This in turn triggered a (successful) counterbid from Royal Bank of Scotland, thus allowing Fred Goodwin to launch his ill-fated attempt to conquer the world.
Neil Collins used to write the Inside London column for FT Weekend for many years, and before that was City Editor of the Daily Telegraph.
He writes a Friday blog at neilcollinsxxx.wordpress.com