ECONOMY

Breaking down the crisis at Evergrande

One scoop to start: SoftBank has followed Saudi Arabia’s Public Investment Fund and Abu Dhabi’s Mubadala in backing a new $2.5bn private equity fund set up by former US Treasury secretary Steven Mnuchin just eight months after he left office. Full story here.

In late October 2018, Steven Mnuchin met Saudi Arabia’s Crown Prince Mohammed bin Salman, despite international outrage over the murder of the journalist Jamal Khashoggi. The country’s sovereign wealth fund is also backing his new private equity vehicle © AFP via Getty Images

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Can China control the Evergrande explosion?

The liquidity crisis at the Chinese real estate giant Evergrande is deepening by the day.

With two interest payments on its bonds due on Thursday, the sprawling property empire is teetering on the edge and many think it could default.

All eyes now turn to Shenzhen. Investors anxiously await whether the property group will pay up, a pivotal test as to whether it can make good on its near-Rmb2tn ($310bn) in liabilities, even as it falls behind on payments to its creditors, suppliers and other offshore investors.

While Evergrande’s chair, Hui Ka Yan, has sought to reassure staff the company will “walk out of its darkest moment”, many find it difficult to see how. 

The company’s troubles have prompted a global market sell-off and Evergrande shares are down to their weakest level since May 2010. The consensus appears to be that Evergrande is going to have a hard time finding the cash to pay.

Evergrande’s chair Hui Ka Yan
Evergrande’s chair Hui Ka Yan pictured in 2017 © AFP via Getty Images

S&P Global Ratings said in a report earlier this week that it expected a default on Thursday, which would hit a crop of major financial institutions who own its bonds such as BlackRock, UBS and HSBC.

The question now appears to be as to how far Evergrande’s money troubles would have to stretch for Beijing to step in. 

As the FT’s global China editor James Kynge points out, the Communist party, which owns the majority of the country’s commercial banking sector, is almost certainly capable of digging Evergrande out of a hole. 

But many analysts think Beijing is intent on making an example out of Evergrande as it enforces a sweeping crackdown on borrowing from real estate developers to mitigate the risk of asset bubbles after initially slashing rates in response to the pandemic.

Line chart of Cents on the US dollar showing Evergrande bond prices tumble

Once an emblem of the leverage that fuelled China’s urbanisation, Evergrande has now become the main target of Beijing’s efforts to rein in debt and bring prices under control.

But it isn’t just large financial institutions that are affected by the Evergrande crisis. Thousands of Chinese retail investors are owed money by the company alongside banks, suppliers and foreign investors, and fear they will not be repaid if the property group collapses.

The Financial Times revealed on Tuesday that the company had been using cash from retail investors to plug funding gaps. Billions of dollars have been raised by selling wealth management products that one Evergrande executive suggested were too high risk for ordinary investors and shouldn’t have been offered to them.

An electronic screen displays the Hang Seng Index in the Central district of Hong Kong
© Bloomberg

As the FT’s Robert Armstrong writes, what happens next will have huge implications for China’s property sector, but is unlikely to significantly affect the global financial system. A “Lehman Brothers moment” it isn’t, according to Barclays

Evergrande’s troubles don’t exactly come as a surprise, but investors have tolerated the risks in exchange for high returns from the Chinese property sector amid ultra-low interest rates in the west. 

There likely was a belief that China wouldn’t let the world’s largest property developer to just collapse. The FT Lex column’s take is to view it as a controlled explosion

Place your bets: DraftKings vs MGM

DraftKings knows a thing or two about placing a well-timed bet.

The platform hopped on Wall Street’s Spac gravy train at the perfect moment, going public in a highly lucrative three-way blank-cheque deal as America’s legalisation of sports betting and the pandemic spurred a gold rush in the world of online gambling.

The Spac frenzy has since cooled off, but the company is hoping for another win with its £18.4bn bid (including debt) for its UK rival Entain. 

This is the second offer placed by DraftKings. Its first attempt, a cash-and-stock offer at £25 a share, was rejected. It then followed up with an offer of £28 a share, £6.30 of which would be in cash.

DraftKings is one of the most successful companies to list on the public markets through a special purpose acquisition company
DraftKings is one of the most successful companies to list on the public markets through a special purpose acquisition company and is widely regarded as the catalyst for the boom in Spacs © AP

Entain brings with it a sizeable loot, including legacy UK brands such as Ladbrokes and Coral Gaming. But its pièce de résistance, a 50/50 American joint venture with US casino giant MGM Resorts, could throw a spanner in the works.

The UK gambling group rejected an £8bn takeover bid from MGM in January though they remain exclusive partners on US online sports betting, placing DraftKings head-to-head with Entain’s existing partner.

MGM could always place more chips on the table, but its $20bn market capitalisation doesn’t give it much to work with, as Lex points out.

MGM’s chief executive Bill Hornbuckle
MGM’s chief executive Bill Hornbuckle told an investor conference in Las Vegas last week: “We critique ourselves giving up 50 per cent of [BetMGM] . . . And so yes, we would like more of it”

The Las Vegas stalwart hasn’t indicated that it will give up easily, stating that “any transaction whereby Entain or its affiliates would own a competing business in the US would require MGM’s consent”. 

DD can’t help but be reminded of the tussle surrounding William Hill: a takeover attempt of the UK bookmaker by Apollo Global Management led its US joint venture partner Caesars to threaten to pull out if another group bought the business.

Caesars ended up getting its way in the end, but the same can’t be said for MGM. A tie-up with Entain means DraftKings would dictate about 40 per cent of the US online betting market, surpassing frontrunner Flutter, which controls DraftKings’ direct competitor FanDuel

And to think DraftKings and FanDuel were set to merge just four years ago before regulators stepped in

It goes to show that what happens in Vegas isn’t likely to stay there much longer as online betting takes over the industry in spades.

A star-studded boardroom brawl unravels at Twitter

As Silicon Valley brawls go, it’s hard to think of a juicier group of combatants than Jack Dorsey, Jesse Cohn, Egon Durban and Gregg Lemkau. Just how it is the foursome made peace is now the subject of its own battle.

Just before the outset of the pandemic in March last year, Twitter announced it had settled with Elliott Management, the fearsome hedge fund that had been threatening a proxy contest. 

The compromise included Elliott’s Cohn joining the board of the social media platform. Also being named a director at the time: Durban, the Silver Lake heavy-hitter whose firm was buying a $1bn convertible bond issued by Twitter. The deal had been arranged by Lemkau, then the star banker at Goldman Sachs whom the Twitter board was leaning on for advice.

Line chart of $/share showing Twitter shares have rallied since the start of 2020

The convertible bond seemed curious as Twitter was profitable and had billions of dollars in cash. One Twitter shareholder, a Florida pension fund, was bothered enough, however, to sue the board earlier this year. 

The allegation was sensational: after looking at board materials prepared by Goldman and the communications consultant Joele Frank, the pension fund said the board was so frightened by Elliott’s record that it quickly — and improperly — caved to Cohn’s demands in order to save their jobs and personal reputations. The pension fund was particularly upset over the convertible bond, which it argues is a straight giveaway.

As DD’s Sujeet Indap wrote earlier this week, a Delaware judge, for now, finds the pension fund’s narrative plausible enough to let the case move towards a trial.

Gregg Lemkau, chief executive of MSD Partners
Gregg Lemkau, chief executive of MSD Partners and former co-head of investment banking for Goldman Sachs © Bloomberg

Lemkau himself is in the crosshairs given his ties to Silver Lake. The shareholder lawsuit cites an FT article that mentions that Lemkau’s vacation home in Hawaii is near Durban’s and that of Michael Dell. Lemkau now works for Dell’s private equity firm, MSD Partners, and Silver Lake is a top shareholder in the Dell technology empire. 

A Delaware judge will now be left to untangle quite the web.

Job moves

  • Squire Patton Boggs has named Michele Connell as the next US global managing partner. She succeeds Fred Nance, who will remain in the firm’s executive leadership group as head of its new diversity, equity and inclusion office.

  • Herbert Smith Freehills has hired Jan Eltzschig and Heike Schmitz as corporate partners based in the firm’s Düsseldorf office. They join from DLA Piper in Cologne, where they were a partner and a counsel in the firm’s corporate group, respectively.

  • Warburg Pincus has appointed SAP executive Brian Duffy as a senior adviser in its technology group. 

  • Simpson Thacher has opened a new office in Brussels, following the hire of Antonio Bavasso, who joined the firm from Allen & Overy in February.

  • Allen & Overy has hired Dario de Martino as an M&A partner in New York. He joins from Morrison & Foerster.

Smart reads

Climbing the ladder An infamous presentation describing junior bankers’ gruelling hours at Goldman Sachs spurred industry wide salary bumps and debate. One of its authors is the son of a TPG financier familiar with the high demands placed on the industry’s lower ranks. (Bloomberg)

Switching hands A new guard of private investment firms including Apollo and KKR are buying up businesses from traditional insurers. Some policyholders and annuity owners aren’t aware of who controls their plans until the deal is already done. (Wall Street Journal)

Sound the alarm Wall Street has been in an ebullient mood as of late. But risks are brewing elsewhere, as credit rating agencies issue stark warnings on the junk bond and leveraged loan market. (FT)

News round-up

Zoom’s $14.7bn deal for Five9 receives US scrutiny over foreign ties (FT)

MUFG to sell US retail business to US Bancorp in $8bn deal (FT)

Universal Music shares sing on debut delivering $140m payday to CEO (FT)

Toshiba heads for showdown with restive investors (FT)

Streaming service DAZN in advanced talks to buy BT Sport (FT)

SoftBank buys into $4bn NFT fantasy football start-up (FT)

Walgreens makes $970m investment in speciality pharmacy company Shields Health 

Mirakl raises $550m to expand online marketplaces (FT)

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