Financial Times Europe - 13.11.2019

Wednesday13 November 2019 ★ FINANCIAL TIMES 13

O RT E N C A A L I A J A N D J O E R E N N I S O N
NEW YORK
M I L E S K R U P PA— SAN FRANCISCO

WhenPacific Gas & Electric iled forf
bankruptcy protection in January, a
once prominent Wall Street hedge fund
wasfeelingthepain.
BlueMountain Capital, founded in
2003 by two former Harvard Law
Schoolstudentsduringthehalcyondays
of the hedge fund industry, reckoned
themarketwastoogloomyontheutility
that supplied 16m Californians with gas
andelectricity.
After first buying PG&E shares in
August 2018, BlueMountain increased
its bet last November even as California
was again ravaged by the deadly wild-
fires for which the utility would eventu-
allyshouldertheblame.
“I still remember the head of dis-
tressed [investments] saying they
[PG&E] are not going to file for bank-
ruptcy,” said a former BlueMountain
portfolio manager. “Six days later, there
itwas.”
Ninemonthson,andthefirmhasshut
its flagship Multi-Strategy $2.5bn Credit
Alternativesfundafterithaemorrhaged
half its assets in three years. In October,
it completed the sale of the rest of the
business toAssured Guaranty, the bond
insurer,for$160m.
Itwasahumblingmomentforahedge
fund that shot to fame in 2012 after
making substantial profits from the so-
called London whale trading debacle at
JPMorgan Chase. BlueMountain’s trad-
erswentontoassisttheUSbankinliqui-

dating the calamitous credit derivative
positions about whichJamie Dimon,
chief executive, was hauled before Con-
gresstoexplain.
Months later, and riding high on its
new-found cachet, BlueMountain
poachedJes Staley, now chief executive
ofBarclays, the UK bank, from a top job
at JPMorgan Chase. Investors followed,
pouringmoneyintoBlueMountain.
But according to six former employ-
ees as well as investors, the London
whale triumph also marked the begin-
ning of troubles thatculminated in a
series of botched bets, including stakes
inoiltankers.
The money managed by the group
ballooned to $18bn in 2013 from $12bn
the year before, prompting the fund to
stray from the corporate bond and
derivative trades that were the bread
and butter ofAndrew Feldsteinand
Stephen Siderow, the co-founders, and
hadbuiltitsreputationbeforethefinan-
cial crisis. Its assets would eventually
peakat$23bnin2016.

“Boatloads of capital have over-

whelmed a lot of opportunities that

hedge funds used to have,” Chris Wal-

voord, global head of hedge fund

research at Aon, said of the dangers

fundsfacefromrapidexpansion.

Between 2012 and 2018, BlueMoun-

tain launched five new strategies,

including a systematic equity fund and

private capital one. The firm started

allocating a portion of the flagship fund

toso-calledpodtraders,wherecapitalis

allocated to employees to run their own

strategies, according to people familiar

withthefirm.

Nathaniel Dalton, chief executive of

Affiliated Managers Group, the asset

manager that bought a stake in Blue-

Mountainin2007,lamentedinMaythat

the fund had moved from its core

strengths in credit and volatility trading

asAMGdiscloseda$415mwritedownin

thevalueofitsstake.

“There was a lack of direction,” said

one former portfolio manager who

worked after the London whale trades.

“The firm became very large and they

were trying to chase whatever the hot

hedgefundthingwas.”

MrFeldstein’sbackgroundwasrooted

infixedincome,havingcuthisteethasa

credit trader at JPMorgan Chase in the

late 1990s. Former colleagues say he

preferred to keep a low profile while Mr

Siderow,aformerMcKinseyconsultant,

was recognised as the face of the busi-

ness and was more of a point of contact

forinvestors.

MrFeldsteinandMrSiderowdeclined

tocomment.

Even as the variety of investment

strategies at BlueMountain grew, the

fund kept a foothold in credit with a

push into collateralised loan obliga-

tions,securitiesbackedbypoolsofbusi-

ness loans often tied to private equity

buyouts. They comprised about 60 per

centofthegroup’sassetsundermanage-

ment this year, according to a presenta-

tionfromAssuredGuaranty.

But it was the mis-step on PG&E that

investors and former BlueMountain

employees characterise as the straw

that broke the camel’s back for the flag-

ship Credit Alternatives fund that was

alreadystrugglingtogeneratereturns.

In a letter sent to investors last

December, and seen by the Financial

Times, PG&E was described as a “high

conviction investment” and the likeli-

hood of a near-term bankruptcy put at

lessthan10percent.

Three former senior BlueMountain

employees said the intense pressure on

portfolio managers to deploy capital as

quickly as possible contributed to the

decision to make a bet on PG&E. “It was

symptomatic of having to take big shots

to make things work, as opposed to run-

ning on the merits of an idea,” said one

ofthreeportfoliomanagers.

A spokesperson for BlueMountain

denied this was the case, and said that

the value of the PG&E investment never

exceeded 3.5 per cent of the flagship

fund’s net asset value. BlueMountain

also had exposure to PG&E in other

funds,thespokespersonadded.

As it outlined its conviction to inves-

tors last December, BlueMountain said

the shares could be worth $60 because

the market was overestimating the util-

ity’s wildfire liabilities. BlueMountain’s

opening $200m bet on PG&E had been

at an average share price of close to $46.

Last November, it added another 3.7m

shares at an average price of about $24,

regulatoryfilingsshow.

Late last month PG&E sharesfell to a

record low of below $4 after the com-

panycutoffpowertoalmost3mCalifor-

nians in an attempt to avoid the risk of

more wildfires. Analysts at Citigroup

havewarnedthatthestockmaybecome

worthless.

The fate of PG&E’s investors is now in

the hands of the courts, where share-

holders and bondholders have pitched

competingplansforarestructuring.

Assured Guaranty, which plans to

inject $500m from its investment port-

folios in BlueMountain’s strategies, is

shiftingthefocusbacktoitsrootsincor-

poratebondsandcreditderivatives.

Mr Siderow will leave the firm at the

end of the year, while Mr Feldstein is

staying on. Meanwhile, investors from

pensionfundstosovereignwealthfunds

seeking juicier returns will be hoping to

find the hedge fund industry’s next hot

property.

“They built a monster that was so

complicated they couldn’t manage it

any more,” said a former analyst at the

firm.

BlueMountain laid low by botched bets

Hedge fund that

made its mark

during London

whale debacle

tempted fate with

California utility

BlueMountain’s bad bets on PG&E

Share price ()













Nov Jan Apr Jul Oct

Initial m bet on PG&E was at an

average share price of close to 

Adds another m shares at an

average share price of about 

Source: Refinitiv

 

P E G GY H O L L I N G E R , A N D N I KO U A S G A R I

A N D DAV I D K E O H A N E

French authorities are considering

seeking assurances fromChina con-

glomerateJingye hat it will guaranteet

supplytoafactoryinnorth-eastFrance

as a condition for its approval of the

group’stakeoverofBritishSteel.

The authorities have indicated to the

Chinese group that they will require at

least two sources of supply from British

Steel for the steel used to make special-

ised high-speed rails for France’s TGV

network.

The condition,one of a number the

French are discussing, reflects concerns

over the stability of British Steel,

which has had three owners in a decade,

and about Jingye’s ability to guarantee

supply.

The deal to rescue Britain’s second

largest steelmaker, which could save

up to 4,000 jobs, was announced on

Monday.

However, it requires approval from

the French as well as UK, Dutch and EU

authorities. Under the terms of the deal,

Jingye would also acquire British Steel

France.

People close to Jingye said the assur-

ances over the French site would be the

subject of talks in the coming weeks.

OnesuggestedthataslongastheFrench

had confidence in supply from

Scunthorpe,theyshouldbesatisfied.

One of the UK’s last two remaining

blast furnace works, the Scunthorpe

plant in Lincolnshire is British Steel’s

mainmanufacturingplant.

Jingye has argued that its plans to

invest £1.2bn over a decade would

transform British Steel into an efficient

andenvironmentallyfriendlyproducer.

However, some in the industry were

puzzled by the Chinese company’s deci-

sion to buy British Steel and questioned

whether it would be able to turn round

the group given high energy prices and

businessrates.

Alex Griffiths,steel analyst at Wood

Mackenzie, said Jingye was taking a

gamble investing in the UK at this point

inthesteelcycle.

“Our view is that European demand

will be depressed for a while so it is a big

risk,”hesaid.“Maybetheyareconfident

they can turn the company round. But it

is a different operating environment in

China so things will be different for

themintheEU.”

Tomas Gutierrez, Asia editor at steel

media organisation Kallanish Commod-

ities, said: “Jingye is... very domesti-

cally focused, and its export markets

aren’t European, they’re south-east

Asian. To go to such a distance in a new

market, it’s unclear how much of a

broaderstrategythereis.”

Over the past 20 years British Steel

has been merged or sold three times,

andcollapsed in May when Brexit

uncertainty led to a slump in customer

orders and a cash crisis over carbon

creditobligations.

People close to the sale rocess saidp

they expected Jingye to apply for gov-

ernment money towards making the

plants more environmentally friendly

andforthetrainingofstaff.

Industrials

Paris wants

assurances on

Jingye’s British

Steel takeover

COMPANIES

‘The firm became very

large and they were trying

to chase whatever the

hot hedge fund thing was’

Q I A N E R L I U A N D S U E- L I N WO N G

Huawei ill pay out Rmb2bn ($286m)w
in bonuses and double almost all
employees’ monthly salaries for Octo-
ber as a reward for helping the world’s
largest telecoms equipment maker
counter US sanctions imposed by the
Trumpadministration.

In May, the US barred the Chinese com-
pany from buying crucial semiconduc-
tors from suppliers includingQual-
comm nd banned it from usinga
Google’sAndroidoperatingsysteminits
smartphones, citing worries the group
posesanationalsecurityrisk.
Washington views Huawei as a poten-
tial spy on behalf of the Chinese govern-
ment, an allegation the company
denies.
Huawei, which employs about
190,000 people, will disburse Rmb2bn
to employees working in the team
focused on minimising the impact of US
sanctions through research and devel-
opment as well as finding new supply
chains, according to four Huawei
employees.
It is not unusual for Huawei to reward
its employees with cash incentives.
However, “this 2bn [renminbi] bonus is
enormous, especially considering it’s
only being allocated to one team”, said

one of the employees who works for the

company’sconsumerbusiness.

That team has been at the forefront of

efforts to redirect reliance on overseas

component suppliers towards domestic

ones including Huawei’s own HiSilicon

semiconductor company and its propri-

etaryHarmonyOS peratingsystem.o

“At most 20,000 people will share the

Rmb2bnbonus,”saidtheemployeewho

viewed an internal document outlining

theaward.

In addition, Huawei will pay most

employees, excluding any who have

received poor performance reviews, an

additional bonus of one month’s salary

this Friday, according to an internal

emailseenbytheFinancialTimes.

Huawei confirmed the authenticity of

thetwodocuments.

Ren Zhengfei, founder and chief exec-

utive officer, last week estimated that

Huaweiwasontracktosell240m-250m

smartphones in 2019, up from 206m

in 2018.

Telecoms

Huawei gives $286m reward

to team fighting US sanctions

H A R RY D E M P S E Y— LONDON

G I D E O N LO N G— QUITO

The rollout ofwind power projectsis

under threat from a shortage of balsa

woodusedinturbinebladecores.

Better known for its use in model air-

craft, table-tennis bats and surfboards,

balsa is a key component of many wind

turbine blade cores because it is both

strongandlightweight.

Priceshavealmostdoubledinthepast

12 months and supplierswarn that the

balsa shortage threatens a bottleneck in

newwindfarmdevelopmentsnextyear.

“Balsa has one of the biggest short-

ages”amongmaterialsusedinwindtur-

bines, saidTobias Hahn, chief executive

ofDiab Group, one of three leading

materialsuppliersforturbineblades.

The wood is grown almost exclusively

in Ecuador, Indonesia and Papua New

Guinea. Producers in the Latin Ameri-

can country have benefited from the

shortage,sayingpricesarelikelytokeep

risingnextyear.

Wind turbine manufacturers are rac-

ing to prepare for a bumper year in

2020, when a surge in newly installed

wind capacity is expected in the world’s

twobiggesteconomies.

Next year “is going to be big for wind

power in the US and China”, said Shashi

Barla, a wind energy analyst at Wood

Mackenzie. The consultancy predicts 75

gigawatts of wind power capacity will be

addedgloballynextyear,upfrom67GW

in 2019, and expects a demand spike in

China head of the lapsing of subsidiesa

in2021.

The plastic material PET has increas-

ingly been used as a substitute for balsa

in turbine blades, accounting for about

30 per cent of the market. But a boom in

demand on the back of the balsa prob-

lems has also created a shortage of PET.

PVCisanotheralternative.

A long and heavy wet season inEcua-

dor t his year has not helped, hampering

both the harvesting of the wood and its

transportation to Ecuador’s main port

of Guayaquil for export. And produc-

tion is set to take another hit soon when

therainyseasonbeginsagain.

“It’sdifficulttoseeasolutionanytime

in the next two years,” said Ricardo

Ortíz, the owner ofLumber Industries,

anEcuadoreanbalsaproducer.

The potential lack of supplies of the

wood,whichtakesfouryearsfromplan-

tation to harvest, comes as the US and

Chinaplantorollout14.5GWand29GW

of wind power capacity next year

respectively, compared with roughly

8GWand21GWin2018.

Additional reporting by Leslie Hook

Energy

Balsa wood shortage poses

risk to wind power projects

P E T E R W E L L S— NEW YORK

The biggest milk processor in the US,

Dean Foods, filed for bankruptcyyes-

terday, succumbing to nearly $1bn in

debt,changing consumer tastes nda

tough competition in the latest sign of

pressureintheagriculturaleconomy.

The company, which produces Tuscan

and TruMoo milk as well as Lando

Lakes butter and Organic Valley milk

under licence, said it was in talks tosell

mostofthebusinesstoafarmers’co-op-

erative.

“Despite our best efforts to make our

business more agile and cost-efficient,

we continue to be impacted by a chal-

lenging operating environment marked

by continuing declines in consumer

milk consumption,”Eric Beringause,

the newchiefexecutive,said.

The Dallas-based group, which traces

its roots from 1925 when founder Sam-

uel Dean purchased an evaporated milk

processing plant in Illinois, said it was in

advanced discussions to sell substan-

tially all its assets to Dairy Farmers of

America, a national milk marketing co-

operative that counts more than 14,

dairyfarmersasmembers.

Any deal ould be subject to regula-w

toryapprovalandcouldstillbetrumped

by the receipt of a better offer during

bankruptcy. The company said it had

receivedacommitmentofabout$850m

in financing from existing lenders that

willhelpitcontinueoperatingasnormal

as it goes through Chapter 11 bank-

ruptcyproceedings.

The decision to reorganise comes at a

tough time for the US dairy industry.

Milk production has risen about 12 per

cent over the past five years, helped by

higher yields from cows and subsidies

thathavekeptsomefarmersproducing,

but prices have fallen by about one-

quarteroverthesameperiod.

Moves by large retailers including

Walmart to open their own dairy plants

have also heaped pressure on dairies

andfamily-ownedfarms.

Theagricultural industry is also suf-

fering. The number of farms inbank-

ruptcy protection, where family-owned

businesses can restructure their debts,

is up 24 per cent this year, according to

the American Farm Bureau Federation,

tothehighestlevelsince2011.

Food & beverage

Dean Foods seeks bankruptcy

protection as fewer drink milk

Pacific Gas & Electric workers and

firefighters clean up after a gas main

fire in San Francisco in February.

BlueMountain raised its stake in the

utility as wildfires ravaged the state

a year ago— David Paul Morris/Bloomberg

‘Boatloads of capital have

overwhelmed a lot

of opportunities that

hedge funds used to have’

In addition, the Chinese

company will pay most

employees an additional

one month’s salary

‘We continue to be

impacted by... continuing

declines in consumer

milk consumption’

NOVEMBER 13 2019 Section:Companies Time: 11/201912/ - 18:49 User: jon.wright Page Name:CONEWS2, Part,Page,Edition:USA , 13, 1