November 9, 2020

Weekly Newsletter EDHEC Student Finance Club

Sign up form EUROPE BRITAIN LAGGING IN BID TO REPLACE EU TRADE DEALS

SWITZERLAND HOLDING OUT AGAINST NEW Britain is on the verge of losing EU trade benefits with more than a LOCKDOWN dozen nations from January 1st. Britain have been trying to negotiate Switzerland is determined to avoid new deals and agreements that Brussels has with governments all lockdown deciding against following around the world. its neighbours. Having reported more Liz Truss, the international trade secretary, has concluded than 1,580 cases per 100,000 citizens replacement deals with many countries, but still have about 15 which is higher than the U.K, the countries they seek to rollover or replace deals. Liz hopes to finalize federal council at Bern has deals after promising negotiations with Canada and Singapore. introduced a raft of new measures instead. Source: FT Ueli Maurer, the swiss finance

minister warned that the new restrictions could be disastrous, and Switzerland cannot afford a second

lockdown. But the federal council hopes to ward off the second wave of coronavirus with the new measures.

Source: FT

Twitter and Google’s head of A.I back London based VC fund

Volkswagen goes Green!

Nathan Benaich, founder and general partner of boutique VC firm Air Street Capital has caught the eye of Twitter, Google execs and the billionaire founder of Clash of Clans maker Supercell. The 32-

year venture capitalist has raised a $17m fund which will be used to back around 25 start-ups in Europe and the U.S. that have AI at their The Government of Greece and the core. Volkswagen Group signed an agreement last week to co-plan and Benaich has dominated the worlds of venture capital and artificial establish an electric transport system intelligence for almost a decade. As the sole general partner, on an island in the Mediterranean. Benaich is the only full-time investor at Air Street Capital. He has got The project is slated to last for an support from the likes of Jeff Dean, Google’s head of AI, and initial period of six years on the island Supercell founder Ilkka Paananen, who have also invested in his of Astypalea and is based around the fund. – Source: FT and CNBC development of an electrified transport network with the goal of developing “a model island for climate-neutral mobility.”

Source: FT and CNBC

OCADO ACQUIRES TWO U.S. ROBOTICS START-UPS

Online supermarket Ocado, which also raised its full-year profit forecast, has acquired San Francisco based robotics firm Kindred Systems for $262m and Las Vegas firm Haddington Dynamics for $25m in cash and shares. Shares of Ocado were up over a as+ 9% on Monday after the announcement of acquisitions.

“In our mission to solve one of the world’s hardest challenges in robotics, the picking and packing of groceries, we’re acquiring two leading robotics companies,” Ocado mentioned in an announcement. Chief Executive of the organization Tim Steiner said the acquisitions will allow the company to “acce lerate delivery, innovate more and grow faster.” – Source: FT and CNBC

USA

JOE BIDEN WINS THE PRESIDENTIAL ELECTION “Prospect of divided pushed US break-even rates — Congress and questions a market proxy for inflation US EMPLOYERS surrounding economic expectations — to a one- ADD 638,000 stimulus have had big month low. effects on markets”. JOBS IN OCTOBER But there is a divided Joe Biden was elected the 46th Congress, which might shield AND president of the US, pledging to corporates from higher taxes UNEMPLOYMENT tackle the pandemic and restore and tighter regulation. the soul of America in a victory. Besides, there is room for RATE FALLS movement on the regulation of As election results rolled in, fin-techs after this election. For US employers added 638,000 jobs money managers dialed back example, there is a lot that in October, as the labor market wagers on a spending-fueled fintech cannot do, in both continued its slow rebound eight economic boost that would feed lending and payments, without months from the start of the through to inflation. Their being heavily regulated like a pandemic. shifting bets propelled a sharp deposit-taking bank. The latest figures from the US rally in Treasuries and Source: FT Bureau of Labor Statistics came in higher than economists’ forecast for a gain of 600,000 jobs. The unemployment rate dropped to 6.9%, compared with 7.9% a month earlier, and analysts’ average estimate of 7.7%. Unemployment peaked at 14.7% in April.

Source: FT

BERKSHIRE HATHAWAY REPORTS A PROFIT OF $30BN POTENTIAL PRIVATE EQUITY BIDDERS FOR REEBOK

Private equity firms have been eying US sports Berkshire Hathaway, the conglomerate that owns outfitter Reebok, as the brand’s corporate parent insurers including Geico, fast-food chain Dairy Queen, Adidas looks to untether itself from the long- and railroad giant BNSF reported a profit of $30bn for term, awkward relationship with the subsidiary. the quarter, an increase by +82% from a year ago, or Reebok was acquired in 2006 for €3.1bn and $18,994 for each of the company’s class A shares. recorded just €1.7bn in revenues last year. A potential sale of the brand would mark the end of Berkshire’s investment portfolio, which includes big one of the most costly and ill-suited pairings in the stakes in Apple, American Express and Bank of America, history of the sports gear industry. swelled by $25bn for the period as the US stock market continued to rally. Private equity firms Permira and Triton have considered a move for Reebok. London-based The increase in profits for its railroads, utilities and Permira has a record of buying footwear and energy businesses helped to offset a net loss for its apparel brands. It owns Dr Martens, maker of insurance business that dragged operating earnings classic punk-style boots, and has also recently down by a third, to $5.5bn. Berkshire had reported a acquired trendy footwear brand Golden Goose. $218m loss from insurance underwriting for the However, a potential investment in Reebok would quarter, down from a $440m profit a year ago. be a change for Triton, which invests primarily in Source: FT and CNBC European companies and mostly has portfolio companies in manufacturing, healthcare and business services.

Source: FT and CNBC

ASIA MALAYSIA’S CHINA HALTS $37BN ANT PETRONAS TO GROUP IPO, CITING ‘MAJOR PAY SABAH STATE $303M IN SALES ISSUES’ TAX Chinese regulator has lucrative lending and credit Malaysian state-owned energy suspended the $37bn listing of business. giant Petronas is expected to pay Ant Group, which had been set the resource-rich state of Sabah to become the world’s largest That online aspect of the firm's 1.25bn ringgit (US$303m) in sales IPO, one day after regulators business accounts for nearly 40% tax next year. Sabah Deputy Chief had grilled Jack Ma, founder of of its revenue, per regulators Minister Jeffrey Kitingan said the company. filing, and allows millions of country’s Prime Minister Chinese residents to easily Muhyiddin Yassinhad agreed for The Chinese fintech company access loans via credit platforms. the state to collect the 5% tax from Ant Group was ready to shatter Ant may be forced to spin in out Petronas next year. records with a $37bn IPO on due to the regulations, as the November 5th, with a reported information reported. Sabah and neighboring Sarawak estimated valuation close to state in Borneo island hold much of $300bn. The billionaire, Jack Official said there were "major the nation’s oil and gas reserves, Ma, publicly criticized China's issues" with Ant's listing under and have long asked for more financial regulatory system at a the new rules, and the Shanghai payments from Petronas, the sole Shanghai conference on exchange suspended Ant's IPO manager of the country’s energy October 24, declaring the rules on November 3rd. The company reserves. Petronas is a significant to be ill-suited for fostering willingly pulled its listing from source of revenue for the federal healthy innovation. He also Hong Kong stock exchange on government and a hit to its finances slammed the regulators that the same day. could also affect the annual enforce a set of international Experts informed that it would dividend it pays to the government, banking rules as "an old man's take another six months before its sole shareholder. The company club." A week later, regulators Ant resumes its IPO, if it even is set to pay 34bn ringgits in immediately introduced new does, and the firm has its work dividends this year to help the regulations on online lending, cut out: it will need to review the government fight the Covid-19 which directly impacted Ant's nation's new lending rules and pandemic, and 18-billion-ringgit reapply to qualify for its dual next year. listing. Source: FT and Business Insiders Source: FT and Business Insiders

PHILIPPINE AUTHORITIES THAI REGULATOR APPROVES BHP SET TO MAKE ITS FIRST INVESTIGATE TRANSACTIONS $10.6BN TESCO TAKEOVER INVESTMENT FROM $400M FOR LINKS TO WIRECARD CLIMATE INVESTMENT FUND THROUGH A LANDMARK DEAL WITH CHINA’S BIGGEST STEELMAKER

Thai competition authorities have approved one of Asia’s Philippine regulators in June biggest merger and acquisition launched an investigation into deals of the year - allowing a go Wirecard’s local partner ahead to the $10.6bn takeover businesses. It includes of Tesco’s south-east Asian The Anglo-Australian miner - BHP Centurion Online Payment operations. The purchase by Group and China Baowu Group, International, PayEasy local family conglomerate China’s biggest steelmaker, have Solutions and ConePay Charoen Pokphand was signed a memorandum of International that appeared — approved on Friday, subject to a understanding focused on on paper at least — to do few conditions including on decarbonizing steelmaking, an substantial business with relations with suppliers. Tesco industry that is responsible for up to Wirecard. has nearly 2,000 supermarkets in 10%t of global greenhouse gas Thailand and 74 in Malaysia. Wirecard declared insolvency emissions. As announced on Friday, in June after reporting that CP already operates 7-Eleven under the five-year partnership BHP €1.9bn was missing from its convenience store chain and the will invest $35m in low-carbon accounts. The company’s Asian Siam Makro cash and carry steelmaking technologies and share headquarter is in Singapore, brand. Fears over potential technical knowledge with Baowu, but Philippines was a principal market dominance after the one of its biggest customers. location for its partner merger triggered the BHP has pledged to develop businesses. The missing money competition review. CP won the technologies to make steel was purportedly held in escrow deal in March, beating rival manufacturing 30% less carbon- accounts by two banks in the companies - TCC Group and intensive under new climate goals Philippines: BDO Unibank and Central Group. set out in September. This Bank of the Philippine Islands. agreement might also include a Benjamin Diokno, governor of Source: FT and CNBC potential carbon capture and the Philippines central bank, storage project at one of Baowu’s has said the money never production sites in China and the entered the country while the utilization of low carbon fuel lenders themselves have sources such as hydrogen. claimed ‘the money held on account’ with them was Source: FT and CNBC fraudulent.

Source: FT and CNBC

FINANCIAL TERM OF THE WEEK MORTGAGE-BACKED SECURITIES All of us have, at least once, heard or read about how subprime Mortgage-Backed Securities (MBS) brought the biggest financial institutions of the U.S. on their knees during The Great Recession. Today, let’s try and understand how hybrid securities, such as MBS are created.

THE TRADITIONAL BANKING PROCESS Let’s assume Alex wants to buy a house and would like to finance it using a loan. He would go to the local bank and present his financial documents to get the loan. The bank will approve the loan after analyzing Alex’s financials and creditworthiness. Here, the risk of default is borne by the bank.

Alex provides his financial documents

Bank determines creditworthiness and issues loan

THE MODERN-DAY BANKING PROCESS In today’s scenario, most of the banks sell these loans to big investment banks in exchange for money. The investment banks then pool a number of these loans into Mortgage-Backed Securities and sell it to investors in exchange for money. This process is called Securitization. In the end, it is the investors who bear the default risk and enjoy the returns if borrowers like Alex keep paying their loans.

Alex goes to the bank

Bank sells the loan for cash

Bank approves the loan ALEX BANK INVESTMENT BANK

The investment bank then pools a number of these loans to create securities which are sold to investors.

THE CRISIS As the banks had no exposure to risk, they approved loans to borrowers with very low creditworthiness (also referred to as Subprime borrowers). These loans were then securitized as MBS and issued to investors. As the economic activity started reducing, Subprime borrowers found it hard to pay their installments, leading to a free fall in the housing markets. This caused investors to lose a lot of money on their products and the resulting lost of trust in the banking system caused The Great Recession.

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