Friday26 July 2019 ★ FINANCIAL TIMES 19Some suppliers have alsogrown nerv-
ous about Brexit andstarted to demand
payment from UK companies upfront
since the start of this year, pilingmore
pressure on profits. Danny Michelson,
owner of London-based cheese shop La
Fromagerie, has experienced that diffi-
culty when importing goods from
Europe. “We are always behind the
curve when the pound is falling, because
the effect is immediate, whereas alter-
ing our prices to counteract that can
only be done gradually,” he said.
Buying financial productsto protect
against exchange rate swings is not an
option for many cash-strapped small
companies, leaving them to choose
between investing in the hope of growth
or trying to snap up extra foreign cur-
rencies when the pound pokes higher.
But timing is tricky; few importers
would have been able take advantage of
better exchange rates as recentralliesin
the pound had been shortlived, said Will
Hassan, head of European corporate
foreign exchange at Barclays.
Some companies are looking to reor-
ganise their supply chains andmake
investments in other countries to diver-
sify their Brexit risks.Mr Manco’s olive
oil business has already moved its main
processing plant from the UK to Italy.Over the first six months of the year, a
quarter of UK companies absorbed cost
increases rather than passing them on
tocustomers, according to a Western
Union poll ofmore than 1,000 busi-
nesses released last week. But for some,
with margins under sustained pressure,
that situation is set to change.
Patrick Dudley-Williams, founder of
tie and clothing companyReef Knots,
said that, after three years of cutting
expenses to combat the impact of a
weak pound, “it’s no longer sustainable
to absorb cost increases”.
Reef Knots, which has an outlet in
London’s Leadenhall Market, imports
all its products from Italy and Portugal
but 95 per cent of its sales are in the UK.quently $1.25 against the dollar has
erased profit margins for some import-
ers from the US. The pound has also
dropped from more than €1.17 against
the euro in May to about €1.12.
Confidence levels among small busi-
nesses was in negative territory for an
unprecedented fourth straight quarter
between March and June this year,
according to the Federation of Small
Businesses, a body representing around
165,000 companies across the UK.
The FSB said “real damage” was being
done. Even exporters, which on paper
would benefit from a weaker pound,
were feeling the pain, the FSB said, not-
ing that international sales growth had
hit “rock bottom”.EVA SZALAY— LONDONThe unpredictability thatBrexithas
brought to the pound is starting to bite
for many small businesses in the UK,
forcing them to consider raising prices
or relocating key facilities.Sterling hasweakened 6 per cent since
the start of May against both the euro
and US dollar,dropping below the levels
that some companies had used to plan
for this year.
That has squeezed the margins of
companiessuch asThe Olive Oil Co,a
specialist retailer based in Borough
Market in London.
“The whole Brexit thing sucks,
including the currencysituation,” said
chief executiveDanilo Manco, who
imports oil from the Puglia region of
Italy and sells it on to shoppers as well as
restaurants in the UK.
Mr Manco’s experience is typical of
any business owner whose import costs
rise as the pound falls. As currency mar-
kets shifted to the view that Boris John-
son would becomeprime minister, ster-
ling weakened, suggestingconcerns
over his willingness to embrace a no-
deal Brexit if he cannotreach a deal with
the EU before the October 31 deadline.
The slump below $1.30 and subse-equator principles as a brand become
irrelevant.”
Investors view theEPs as a risk-miti-
gation tool, Mr Bonham said. The stand-
ards give assurances that banks’ deals
“won’t blow up in their face and then
become an issue for us as investors”, he
added.
Pressure groups such as the Sierra
Club have applauded theEPs and
attacked banks when they participate in
deals that appear to deviate from the
standards.
But theEPs drew criticismduring a
fight to stop Energy Transfer’s Dakota
Access Pipeline in the US in 2017.
More than a dozen banks that
adhered to theprinciples proceeded to
finance the deal despite concerns that
the pipeline could poison the water sup-
ply for nearby native tribes.
Amid the public uproar over thepipe-
line,ING, a Dutch bank, sold a $120m
loan for the project and divested from
$220m of shares in Energy Transfer.
BNP Paribas, a French bank, andDNB,a
Norwegian bank, alsosevered tiesto the
pipeline project in 2017. Thecontro-
versy dealt banks a reputational blow,
prompting a call for a review ofEPs.PATRICK TEMPLE-WEST— NEW YORKA joint effort by banksacross 37 coun-
tries to avoid social and environmental
risks associated with their project
finance exposures is breaking apart.Lenders will gather in Torontoearly
next week for a final meetingon
“equator principles” —standards that
financial firms haveshared for 15 years
toavoid lending to projects that might
impedeindigenous people’s rights.
But the banks are quarrelling over the
revisions, with some European lenders
clamouring for theEPs to be strength-
ened following the controversial Dakota
Accesspipeline dealin the US.
A failure to agree ona new set of prin-
ciples raises the prospectthatthe exist-
ing principles will become worthless in
the eyes of investors just as banks are
increasingly facing political pressures
concerning their lending practices.
“They [the banks] are clearly not on
the same page and the worst-case out-
come is that you get no revision,” said
Jamie Bonham, manager of corporate
engagement at NEI Investments, a
Toronto-based asset manager oversee-
ing C$7.8bn. “The fear is that theMARKETS & INVESTING
Currencies
Sterling’s Brexit drop hits small businesses
Fixed income
Banks test faith of investors
as show of public spirit falters
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ft.com/fastftJOE RENNISON— NEW YORKLonger term debt and lower borrowing
costs. That was the promise made to
shareholders by Brazilian meat proces-
sorJBSon its first-quarter earnings call a
few months ago.
This week, finance chiefGuilherme
Perboyre Cavalcantiwas true to his
word. The US arm of the company sold
$1.25bn of high-yield bonds on Tuesday,
repayable in 2030, to refinance existing
debt due in 2023 and 2024.
It joins a number of companies —
many of them withlow scoresfrom
credit rating agencies — that have issued
longer dated debt as borrowing costs
have tumbled.
The trend is consistent with one that
took hold after the financial crisis, when
companies gorged on ultra-low interest
rates and strong demand from investors
to load up on cheap money.
The latest move downwards in global
bond yields — fanned by expectations of
the first cut in interest rates from the US
Federal Reserve for more than a decade
— is raising concerns among some inves-
tors who fear thatmonetary policy eas-
ingwill encourage companies to take on
more debt thanthey can handle.“It’s a recipe for disaster in the longer
term,” said John McClain, a portfolio
manager at Diamond Hill Capital Man-
agement in Columbus, Ohio. “As an
investor, it means you are lending to
fairly risky companies at fairly low rates
at the end of the cycle. It might not be
three months from now or six months
from now but, at some point, these
bonds are going to be pretty chal-
lenged.”
JBS had originally planned to sell $1bn
of debt but expanded the deal in
response to investor demand, fixing a
coupon, or regular interest payment, of
5.5 per cent, according to people famil-
iar with the deal.
That rate marks a full percentage
point decline since April when the com-
pany sold debt of a similar maturity.
Over that period, 10-year US govern-
ment bond yields, which anchor the
overall rate paid by corporate borrow-
ers, have fallen from about 2.6 per cent
to just over 2 per cent.
The consensus among investors is
overwhelming: almost everyone
expects the Fed to cut rates next week.
According to Bank of America Merrill
Lynch’s latest survey of credit investors,
concerns over the effects of rising rates
have almost vanished with investors
firmly focused on trade wars and geopo-
litical risks as the potential disrupters to
the market.
“This is the opposite of where things
stood last summer and early fall,” notedthe bank’s analysts. JBS acknowledged
that this was a key support to its
finances. “The search for yield from
investors during a falling interest rate
environment creates a tremendous
opportunity to refinance debt with very
good terms,” it said in a statement.
Butthe long maturity of the new
bonds — 10.5 years — is feeding concerns
in some quarters.
Investors rarely lend for long periods
in the high-yield bond market, on the
understanding that it is foolhardy to
assume that a risky company will still be
around to pay coupons a decade or so
down the track. It also comes after a
period where the average maturity of
high-yield bonds had been falling.
“When the market getsreallyfrothy,
you will see companies sell 12-year
bonds,” said Ken Monaghan, co-director
of high yield at Amundi Pioneer in
Raleigh, North Carolina.
For now, fund managers are loading
up anyway. During the second quarter
of this year, companies issued $15.5bn of
US high-yield bonds with a maturity of
10 years or more, amounting to 17 per
cent of all issuance — the highest per-
centage since the fourth quarter of 2017.
That number was close to 56 per cent
of issuance for the investment grade
bond market with its higher quality
companies, the best level since the
fourth quarter of 2012 when the
Fed’s target interest rate was anchored
near zero.“There is no question that, with lower
rates, it is an opportune time to lock in
[cheap financing],” said Andrew Cata-
lan, head of long duration at Insight
Investment. “From the point of view of
an issuer, they are going to want to take
advantage of whatever terms the mar-
ket affords them.”
Some investors have argued
that companies pushing out the matu-
rity of their bonds is no bad thing.
It could help alleviate pain through an
economic downturn, they said, reduc-
ing the likelihood of an issuer defaulting
on its debt as it might not need to refi-
nance during the worst of the turmoil.
“We are positioned to handle cycle
downturns or challenging situations
with enough time to improve liquidity if
needed,” said JBS in its statement.
Analysts also noted that the total vol-
ume of long-dated debt includes compa-
nies that are refinancing existing bor-
rowings — as is the case with JBS —
rather than piling on more.
“We are not yet seeing the excesses we
saw back in 2007,” said Matt Fey, direc-
tor of corporate bond research at Frank-
lin Templeton.
Still, others worry that the high prices
being paid by investors to own the
debt makes it susceptible tosharp
declinesshouldeconomic conditions
weaken.
“When you look at where we are in the
cycle and where valuations are, it makes
us more cautious,” said Mr Catalan.Brazil meat processor is
latest example of trend
for extending maturities
‘When the
marketgets really
frothy, youwill see
companiessell 12-year
bonds’Meatpacker
JBS has taken
advantage of
lower borrowing
costs—Eraldo Peres/APFixed income.Riskier deals
Junk bond issuers seize
chance to stretch out debt
High-yield bond issuance
By maturity ( of total issuance)Source: Dealogic -
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Investment grade bond
issuance
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- RICHARD HENDERSON— NEW YORKA UK start-up is aiming to lure more
companies to public markets by cutting
the cost of listing their shares.
SquareBook, a technology platform
that aims to link listing companies
directly with potential investors, will
sidestep the investment banks that
dominate the process.
The company received approval to
operate from the Financial Conduct
Authority, the UK securities regulator,
last month and is in talks with several
companies considering a listing.
The number of listed companies in
Europe and the US hashalved in the past
two decadesas fewer IPOs and a boom
in private capital have weakened the
role of public markets as a vital means to
raise money.
SquareBook aims to cut the cost
involved in listing a business by up to 50
per cent by automating the tasks invest-
ment banks perform, such as building
interest and allocating shares among
potential investors.
Lower listing costs would reverse the
“atrophy” occurring in the stock mar-
ket, saidRichard Balarkas, co-founder
of SquareBook and the former chief
executive of Instinet Europe, the broker.
“We want to take the lid off the proc-
ess, to make it transparent and to putthe issuer in control of listing their
shares,”he said.
Mr Balarkas said SquareBook would
provide a clearer picture of the costs
involved in a listing, which were often
opaque. It would also aim to reduce the
“pop” a new stock typically experiences,
which is celebrated by investors but sig-
nals the underwriting banks did not
properly value the company, resulting
in less capital being raised for the issuer.
Companies are showing a willingness
to experiment with the listings process
to save money.
In June,Slack, the messaging app,
completed a direct listing, where its
shares shift on to the stock exchange but
no capital is raised — a cheaper option
that requires a shorter roster of invest-
ment banks.
The combination of fewer IPOs and a
tightening of the fees banks typically
make from listings has hurt investment
banking revenues. UBSannounced this
weekin its quarterly earnings that reve-
nues for the investment banking division
were 23 per cent lower than a year prior.
Mr Balarkas said SquareBook would
not necessarily compete with banks but
could work together to lower the cost of
a listing for a shared client.
The use of technology would give the
issuing company greater control over
the types of investors that hold its
shares,he said.For instance, a fund
manager with a long-term focus might
receive a preferential price for a large
allocation of shares — which is allowed
under FCA rules.Equities
Tech platform
SquareBook
aims to cut
cost of listing
‘We want to make the
process transparent and
to put the issuer in controlof listing their shares’
UK business confidence languishes in negative territory
-
Source: Federation of Small BusinessesSmall business confidence index (Q )
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