Unintended Consequences: When SAFE and Convertible Notes Go Awry

Andrew Krowne and I recently co-wrote an article in Tech Crunch, Why SAFE Notes Are Not Safe for Entrepreneurs. We’ve received numerous constructive comments, both privately and on social media, from attorneys, VCs, and CEOs who are well aware of the problem (including several who are experiencing it in real time). This is a fundamental issue that does, indeed, boil down to understanding the post-money valuation of a company. But it is also a topic that many find esoteric and difficult to grasp. To restate two core points of the article: While there are proper uses of notes (to bridge the company to achieve a major milestone, or driven by insiders’ willingness to extend runway), there also are troubling and frequent improper uses (to postpone pricing equity until valuation is higher or to ignore the implicit message associated with being unable to find a lead investor to price the Continue reading "Unintended Consequences: When SAFE and Convertible Notes Go Awry"

Why the Bond-Yield Curve Isn’t Likely Signaling Recession Ahead

Record-low yields on U.S. Treasurys have for decades signaled weakness in the U.S. economy and foreshadowed recession. Not this time. Some economists are pointing to the so-called yield curve—the difference between long-term and short-term rates—as a harbinger of a new slowdown. Yields on 30-year and 10-year Treasurys plumbed record depths earlier this month, setting fresh milestones in three-decade downward trends. Yields have since retreated a bit from their lows. But combined with weak business investment, falling corporate profits and slipping auto sales, the slump in bond yields has led some investment banks to put the risk of recession as high as 60%, accounting for past yield-curve compressions that were followed by recessions. [wsj-responsive-dynamic-inset id=2] But unlike in the past, the pressures likeliest to trigger an economic contraction this time lie outside the U.S. Turmoil and weakness overseas have drawn investors to the security of U.S. government bonds, driving their prices up and their yields down. “The low level Continue reading "Why the Bond-Yield Curve Isn’t Likely Signaling Recession Ahead"

The Tale of the Swiss Coco

The coco bond market has endured its Paradise Lost moment. The main index has fallen nearly 8 per cent this year after returning 7 per cent in 2015 – practically utopian, in the current rates environment. Some names – Deutsche, UniCredit, Banco Popular – have experienced the distress of trading below 75 cents on the euro. Let’s briefly set aside these qualms of heart-sick malady. Let’s turn instead to the mostly untold tale of a $2.5bn Credit Suisse 6.25 dollar-denominated AT1 bond. CS 6.25, as we’ll call it. Continue reading: The Tale of the Swiss Coco

Who Wins and Loses in the IMF Governance Overhaul, and What’s Next

China, Brazil and other developing nations will now have more power at the International Monetary Fund, largely at the expense of European nations.
MANDEL NGAN/AFP/GETTY IMAGES
More than five years after the deal was inked by global powers, the International Monetary Fund executive board this week officially approved the governance overhauls that give emerging markets more power at the emergency lender. The so-called quota reforms help restore some of the credibility the fund lost in the last decade as emerging markets grew in economic heft and injected critically needed cash into the fund, but gained little power at the IMF in return. “These reforms will ensure that the fund is able to better meet and represent the needs of its members in a rapidly changing global environment,” said IMF chief Christine Lagarde. IMF brass worried that countries such as China, India and Brazil were growing increasingly disenfranchised with the Washington-based
Continue reading "Who Wins and Loses in the IMF Governance Overhaul, and What’s Next"

Why Emerging Markets Are Melting Down, and Why It Matters, in 10 Charts

An Indian rickshaw driver pushes a heavy cart up an incline in New Delhi. World Bank economists say 2016 could be a hard slog for emerging-market countries.
MANPREET ROMANA/AFP/GETTY IMAGES
Emerging markets face one of their most challenging years since the financial crisis. Here’s why, and why it matters in 10 charts.

1. The Party’s Over

Economists, including at the International Monetary Fund and the World Bank, have had to slash their forecasts for emerging markets over the last several years.

2. The Pain Isn’t All the Same

Some countries have faced bigger downgrades than others, for example, Russia, Brazil and China.

3. Bad Assumptions

Old estimates assumed growth rates based on much stronger commodity prices. And economists assumed much higher productivity. But oil, metals and other commodity prices have plummeted. Crude oil prices have lost roughly 65% of their value over the last 18 months:  

4. Slackers

And governments didn’t
Continue reading "Why Emerging Markets Are Melting Down, and Why It Matters, in 10 Charts"

IMF Chief Economist’s 2016 Warning: Watch Out for China and Emerging-Market Volatility

An investor reacts at a stock exchange hall Monday in China. Chinese shares slumped on the first trading day of 2016, forcing authorities to halt all mainland trading.
CHINAFOTOPRESS
China’s slowdown and rising volatility in emerging markets are two of the top global economic risks International Monetary Fund chief economist Maury Obstfeld is watching out for in 2016. Global stocks took a hit on the first trading day of the new year following a rout in Chinese markets, fueled by another bout of disappointing data in the world’s second-largest economy. Growth challenges in China and other emerging markets are expected to force the IMF to downgrade its global economic forecast for the year when the fund posts its latest outlook in January. Global growth will be “disappointing and uneven,” IMF Managing Director Christine Lagarde said late last week.  Beijing is facing critical decisions in the coming months on how Continue reading "IMF Chief Economist’s 2016 Warning: Watch Out for China and Emerging-Market Volatility"

WSJ Survey: Yuan No Challenge to Dollar Amid China’s Tiptoe Toward Freer Markets

The National People’s Congress, China’s Communist Party-controlled legislature, gathers at the Great Hall of the People in Beijing this year. “Until China fully transforms its nation into an open democracy with an economy much more transparent, subject to market forces…there is no chance the renminbi will overtake the U.S. dollar,” said Economic Outlook Group’s Bernard Baumohl. 
WANG ZHAO/AFP/GETTY IMAGES
China’s yuan is highly unlikely to challenge the dollar’s hegemony as the world’s most used reserve currency in the next 50 years despite winning International Monetary Fund backing, according to economists surveyed by The Wall Street Journal. The IMF last week added the yuan to its elite basket of reserve currencies, acknowledging the growing heft of the world’s No. 2 economy and encouraging Beijing to move ahead with promised liberalization. But economists surveyed by the Journal expressed deep uncertainty about the country’s political and economic fate. Beijing’s ponderous move toward freer markets
Continue reading "WSJ Survey: Yuan No Challenge to Dollar Amid China’s Tiptoe Toward Freer Markets"

Cheap Oil May Force Exporters to Sell Assets, Fueling Market Volatility

Fahad al-Mubarak, governor of the Saudi Arabian Monetary Agency, may face pressure to use the country’s rainy-day funds to cover gaps in the country’s budget.
YASSER AL-ZAYYAT/AFP/GETTY IMAGES
Add one more thing likely to fuel market paroxysms in the months and years ahead: Oil exporters liquidating their rainy-day funds to buffer their economies against anemic crude prices. The International Monetary Fund estimates oil exporters holding $4.2 trillion in global equities, bonds and currencies maybe forced to shed nearly $1 trillion of their assets over the next five years to fill emptying government coffers. Given weak global growth, gains in energy efficiency and a massive gap between the available supply of oil and demand, economists are predicting a long period of soft oil prices. Although some of those oil-fund sales will likely be offset by oil-importing countries buying assets, those mass liquidations could foment turbulence in markets across the globe.
Continue reading "Cheap Oil May Force Exporters to Sell Assets, Fueling Market Volatility"

Highly Indebted and Slow Growing Equals Hot IPO, but for How Much Longer?

Associated Press
What IPO investment is up 68% on average since 2013? It’s not technology companies, which are up on average 14%. And it’s not IPOs broadly, which are up 28%, according to Dealogic. Surprise! It’s highly indebted, slow-growing companies that are legacies of private-equity buyouts. The 41 private-equity-owned companies that have gone public since the beginning of 2013, raised more than $300 million, and had debts that represented more than three times their cash earnings are up on average 68% since their debuts, according to a figures compiled using FactSet. Top performers include NXP Semiconductors NV, up 526%; Norwegian Cruise Line Holdings Inc., up 216%; and Dunkin Brands Group Inc., up 153%. That’s a big reason why during a slow period for IPOs bankers and private-equity firms continue to bring more of these deals to market, including First Data Corp.’s $3 billion offering and Continue reading "Highly Indebted and Slow Growing Equals Hot IPO, but for How Much Longer?"

Olympus Bets On Asian Healthcare

A maintenance worker rides a scooter past banners reading “Development” and “Prosperity” in English and Chinese on a street in central Beijing.  Growing wealth means the world’s second largest economy is experiencing a boom in demand for healthcare. (AP Photo/Mark Schiefelbein, File)
Associated Press
Healthcare is fast becoming one of the hottest targets for private equity firms in Asia. On Thursday, Olympus Capital Asia said it had invested $40 million in private Chinese hospital manager Tendcare Medical Group. Olympus, which has a stake in Indian hospital management firm Aster DM Healthcare, said it is investing in Tendcare, also known as Tian Jian Hua Xia Medical Group Holdings Pte. Ltd.,  to help the Chinese firm expand. Founded in 2009, Tendcare currently operates five hospitals totaling over 2,400 beds, four pharmacies, two medical equipment companies and 17 clinics across five cities in China, and is in the process of completing the acquisition Continue reading "Olympus Bets On Asian Healthcare"

Who Wins and Who Loses When Interest Rates Rise

Getty Images
The big shakeout is coming. Whenever the Federal Reserve ultimately decides to raise interest rates–whether it’s Thursday, or in December, or even later–there will be repercussions for both stocks and bonds, on Main Street and Wall Street, and for economies in all corners of the world. For some, the impact could be felt right away, and for others, the shakeout may be felt more acutely over time, especially if the Fed follows the first rate hike with sustained tightening. Here’s a roundup from Journal staffers about who wins and who loses when rates rise. Banks. Banks have been yearning for the Federal Reserve to start raising rates for years to stem the decline in their net interest margin, an important measure of banks’ profitability. The interest rates banks charge on many loans are directly tied to the Fed’s target rate, meaning they immediately earn more interest on those items, while
Continue reading "Who Wins and Who Loses When Interest Rates Rise"

Shale’s dirty little capital market secret

Many shale producers outspend cash flow and thus depend on capital market injections to fund ongoing activity.

That’s from Citi’s Richard Morse and Edward Morse (related?), plus team, on the way capital markets rather than cartels are driving commodity prices these days. The note is titled: “From Cartel to Capital Markets: Investors Join OPEC Shaping Oil Market Dynamics.” This of course relates to our point on Monday that even the big commodity traders have been forced to turn to market-based funding in lieu of a dearth of bank finance in the sector. Continue reading: Shale’s dirty little capital market secret

The Past, Present and Future of Economics, According to Olivier Blanchard

Olivier Blanchard, who is soon to leave his post as the IMF’s chief economist.
ERIC PIERMONT/AFP/GETTY IMAGES
Olivier Blanchard began his tenure as the International Monetary Fund’s chief economist at the start of the 2008 global economic crisis and is leaving his post amid world-wide market turmoil. But one would be hard-pressed to say that it’s not a changed world. In the latest issue of the IMF’s research magazine, Mr. Blanchard gives a high-altitude survey of the recent past, present and future of the global economy and the science of economics (or alchemy, depending on your view). Here are a few highlights: The recent past: “The financial crisis raises a potentially existential crisis for macroeconomics. Practical macro is based on the assumption that there are fairly stable aggregate relations, so we do not need to keep track of each individual, firm, or financial institution–that we do not need to Continue reading "The Past, Present and Future of Economics, According to Olivier Blanchard"

Demand Troubles Risk Cementing a Decade of Anemic Global Growth

Major economies such as Germany need to boost domestic demand to limit further distortions in the global economy, the IMF says.
(ADAM BERRY/GETTY IMAGES)
Failure of the world’s largest economies to fix their underlying demand problems—despite record central-bank injections—is setting the stage for weak global growth for years to come. That is a key message in the International Monetary Fund’s latest report detailing distortions in the global economy caused by too much saving in some countries and not enough demand in others. In particular, if countries such as Germany and China don’t act to boost domestic demand, the IMF is worried they could cement a decade of anemic global growth. “There’s been little progress lately in reducing imbalances,” said the IMF’s No. 2 official, deputy managing director David Lipton. “They are still too large.” Inaction by governments in the world’s most important economies “is the enemy of
Continue reading "Demand Troubles Risk Cementing a Decade of Anemic Global Growth"

Chinese Economics, Not Stocks, the Focus for Analysts

Patrick T. Fallon/Bloomberg
Violent swings in Chinese stock are rattling global markets Monday, but in the longer run, and at least in Europe, some strategists and investors are more focused on the underlying economic recovery of the country – and prospects for that don’t look too bleak. China stocks suffered their sharpest daily percentage decline since 2007 on Monday. But Citigroup economists write in a note, that they are still of the view that the country’s growth prospects are stabilizing and that the recent bout of stock market volatility will have relatively little impact on the economy. They do remain cautious, saying that policymakers’ aversion to volatility across many assets “could propagate moral hazard, delay price adjustment, lead to prolonged resource misallocation and a build-up of future risks” but at the same time, they also say that “China’s data suggest growth stabilization.” Laith Khalaf, senior analyst at Hargreaves Continue reading "Chinese Economics, Not Stocks, the Focus for Analysts"

CLO Veteran Returns to Market

James Zenni, one of the pioneers of the collateralized loan obligation market is back with his first deal in ten years — and the differences are telling. Mr. Zenni issued the first $1 billion CLO in 2005 when he was President of Black Diamond Capital Management and the securitization market was in its heyday, he says. Now the CEO of Z-Capital Partners LLC, he is closing this week a $401 million deal that is compliant with new European and U.S. risk-retention guidelines. “2005 – that ‘s when dinosaurs roamed the earth,” Mr. Zenni says. “We’re in a very different environment today where size has a tendency to dilute opportunities. I think smaller is better.” CLO managers buy leveraged loans with lots of money borrowed in the bond market and relatively small equity investments. They are one of the only types of debt securitizations that performed well through the Continue reading "CLO Veteran Returns to Market"

Yellen: Fed to Release New Emergency Lending Rules This Fall

Federal Reserve Chairwoman Janet Yellen said Wednesday the Fed plans to release a revised rule this fall that will limit its emergency lending authority. The 2010 Dodd-Frank law required the Fed to write a rule restrained the Fed’s ability to bailout individual financial institutions in a crisis—as it did in the case of the insurance company, American International Group, in 2008. The Fed issued a proposed rule in late 2013. But lawmakers from both parties, including Sen. Elizabeth Warren (D., Mass.), have complained the proposal didn’t comply with congressional intent. Several lawmakers are now pushing legislation to put more detailed constraints on those powers since the Fed failed to address their concerns. Asked Wednesday during her congressional testimony about when the Fed will release its final rule, Ms. Yellen said, “We’re working hard to come out with a revision and I expect that it will certainly be Continue reading "Yellen: Fed to Release New Emergency Lending Rules This Fall"

Bank of England Dove Says Raise Interest Rates Soon

Bank of England
Zuma Press
The Bank of England should begin raising interest rates in the U.K. soon to keep future increases in borrowing costs smooth and steady, one of the nine officials on the central bank’s rate-setting panel said on Tuesday. Monetary Policy Committee member David Miles said in a speech in London that waiting too long to start raising rates would be “a bad mistake.” “The time to start normalization is soon. That is not something to shrink from,” Mr. Miles said in a speech to the Resolution Foundation, a nonpartisan think-tank focused on living standards. Mr. Miles’ comments are significant as he is usually regarded as among the most dovish of the MPC officials, suggesting others on the panel may also favor raising interest rates sooner than expected. Investors predict central-bank officials won’t begin increasing rates until mid-2016. Yet Mr. Miles is unlikely to Continue reading "Bank of England Dove Says Raise Interest Rates Soon"

Bank of England Dove Says Raise Interest Rates Soon

Bank of England
Zuma Press
The Bank of England should begin raising interest rates in the U.K. soon to keep future increases in borrowing costs smooth and steady, one of the nine officials on the central bank’s rate-setting panel said on Tuesday. Monetary Policy Committee member David Miles said in a speech in London that waiting too long to start raising rates would be “a bad mistake.” “The time to start normalization is soon. That is not something to shrink from,” Mr. Miles said in a speech to the Resolution Foundation, a nonpartisan think-tank focused on living standards. Mr. Miles’ comments are significant as he is usually regarded as among the most dovish of the MPC officials, suggesting others on the panel may also favor raising interest rates sooner than expected. Investors predict central-bank officials won’t begin increasing rates until mid-2016. Yet Mr. Miles is unlikely to Continue reading "Bank of England Dove Says Raise Interest Rates Soon"

Bank of England Dove Says Raise Interest Rates Soon

Bank of England
Zuma Press
The Bank of England should begin raising interest rates in the U.K. soon to keep future increases in borrowing costs smooth and steady, one of the nine officials on the central bank’s rate-setting panel said on Tuesday. Monetary Policy Committee member David Miles said in a speech in London that waiting too long to start raising rates would be “a bad mistake.” “The time to start normalization is soon. That is not something to shrink from,” Mr. Miles said in a speech to the Resolution Foundation, a nonpartisan think-tank focused on living standards. Mr. Miles’ comments are significant as he is usually regarded as among the most dovish of the MPC officials, suggesting others on the panel may also favor raising interest rates sooner than expected. Investors predict central-bank officials won’t begin increasing rates until mid-2016. Yet Mr. Miles is unlikely to Continue reading "Bank of England Dove Says Raise Interest Rates Soon"