Financial_Times_Asia_-_April_6_2020

6 ★ FINANCIAL TIMES Monday 6 April 2020

PE G GY H O L L I N G E R —LO N D O N

Rolls-Roycewillthisweekabandontar-

gets on profits, cash and deliveries, and

suspend its dividend for the first time

since privatisation in 1987, as the

grounding of most of the world’s wide-

body aircraft takes its toll on the UK

aero-enginemaker.

The group, which is still in the throes of a

wide-ranging, multiyear restructuring,

is also aiming to announce new credit

facilities in excess of £1bn to bolster

liquidity that at the end of 2019 was

close to £7bn. An announcement could

come as early as today, according to two

people with knowledge of the situation.

Rolls-Royce, which builds engines for

widebody aircraft such as the Airbus

A350 and A330, and Boeing’s 787

Dreamliner, has been hit hard by global

measures to contain the spread of coro-

navirus. Border closures and national

lockdowns in several countries have led

air travel to be all but halted.

The company’s civil aerospace divi-

sion, which accounts for roughly half of

Rolls-Royce’s £15.4bn annual revenue,

makes its profit from the number of

hours its engines fly. But two-thirds of

the world’s widebody aircraft are now in

storage, according to Cirium, an avia-

tion consultancy.

In March, engine flying hours were 40

per cent down, according to one person

close to the subject. The drop is

expected to be steeper this month.

As a result, the group will ditch a

pledge, set in 2017 and restated only in

February, to generate £1bn in free cash

by the end of this year.

It had also promised 15 per cent

growth in core operating profit for this

year. The dividend payment of 11.7p per

share, frozen since 2016, will be

suspended.

Rolls-Royce’s move comes as Airbus

prepares to slash the rate of production

on twin and single-aisle aircraft, in the

expectation that demand will fall in the

medium term as cash-strapped airlines

struggle to recover from the crisis.

Rolls-Royce will give no new guidance

for this year until Airbus’s new rates for

widebody aircraft are clear, said another

person close to the subject. This could

come as early as this week. But job losses

are likely in the longer term if produc-

tion has to scale back significantly.

The widebody market had already

been slowing before the virus hit. Rolls-

Royce had cut expectations for deliver-

ies from 500 to 450 for this year.

Rolls-Royce

set to ditch

profit goal and

halt payout

P R I M R O S E R I O R DA N
A N D N I C O L L E L I U— H O N G KO N G

Retail investors in Hong Kong have
threatened legal action against HSBC
and will attempt to force the bank to
hold an extraordinary general meeting,
after it was pressed by UK regulators to
cancel its dividend due to the coronavi-
rus crisis.
The controversy surrounding the sus-
pension of HSBC’s annual payout for the
first time in nearly 75 years has again
highlighted the lender’s complicated sit-
uation in Hong Kong, where it derives
most of its profits before tax.
Individual HSBC shareholders in the
Asian financial hub — from wealthy

business people to low-income earners
— have banded together to try to reach
the threshold of 5 per cent of outstand-
ing shares required to secure an EGM.
“The decision [to withhold divi-
dends] is unreasonable, this is about
gathering Hong Kong people who have
held the shares for a long time and fight-
ing for our rights,” said office clerk Ray-
mond Tang, a member of a large Face-
book group dedicated to the cause.
A third of London-headquartered
HSBC’s shares are owned by retail inves-
tors in Hong Kong. Many rely on the
bank’s dividends for income.
The bank was one of five UK-based
lenders that last week bowed to pres-
sure from the UK’s Prudential Regula-
tion Authority to withhold its annual
dividend due to the coronavirus pan-
demic, which has badly damaged the

British economy. That has reignited the

debate over whether HSBC’s headquar-

ters should move to Asia, where it

makes most of its revenue.

The Hong Kong retail investor collec-

tive has also threatened to sue HSBC in

the city’s courts over the dividend issue.

The group has about 2,700 members on

Facebook but it is not clear how many

shares they control. They want the EGM

to discuss ways to insulate HSBC’s Hong

Kong business from UK regulators.

At least 200 of the retail shareholders

are being advised by Surich Asset Man-

agement, according Simon Yuen, the

Hong Kong-based investment group’s

founder. Surich itself does not own

shares in HSBC.

“Many of them use this as their retire-

ment plan. They rely on the dividend to

pay for their living expenses after their

retirement, so this will actually hurt

them a lot,” Matthew Chung , an

adviser at Surich, said of the suspension.

Noel Quinn, HSBC chief executive,

last week sent an apology to the bank’s

Hong Kong shareholders following the

cancellation of the dividend, saying it

did not take them for granted.

It is the second time in several months

that HSBC, which is so synonymous

with the city it is still known by many

locals as the Hong Kong bank, has

angered parts of the community.

Anti-government protesters in the

Chinese territory last year vandalised

HSBC’s branches and ATMs after it

closed an account used to raise funds for

demonstrators, citing money launder-

ing rules. Protesters accused the bank of

siding with Beijing.

HSBC said the bank “deeply regrets”

any harm caused by the suspension of

the dividend, reiterating the move was

at the request of UK regulators.

US lenders defend dividendspage 8

HSBC investors

threaten to sue

lender over

dividend cut

3 Fury from Hong Kong shareholders

3 UK regulators piled on the pressure

‘Many... use this as their

retirement plan. They rely

on the dividend to pay for

their living expenses’

Rana Foroohar‘The internet is almost the only thing that has kept the economy and society functioning’ yOPINION

CO L BY S M I T H— N E W YO R K

The Federal Reserve’s balance sheet

is expected to balloon to an unprece-

dented size this year after its dra-

matic interventions to protect capi-

tal markets and the world’s biggest

economyfromtheeffectsofthecoro-

navirusoutbreak.

As Covid-19 brought the global eco-

nomic engine to a screeching halt last

month and sent stocks into a bear

market, the US central bank

announced confidence-restoring

measures to relieve strain in the trad-

ing of US Treasuries, agency mort-

gage-backed securities and commer-

cial paper, as well as municipal and

corporate bonds.

Last week the Fed added yet

another new facility, which will allow

central banks and other international

monetary authorities to temporarily

swap their Treasuries for highly

prized dollars amid a global shortage.

Analysts at Bank of America say

these actions, taken together, could

result in the Fed’s balance sheet top-

ping $9tn by the end of the year, or

more than 40 per cent of US gross

domestic product. Its balance sheet

has already expanded by more than

$1tn since the coronavirus outbreak

began.

That could prove an underestimate.

Krishna Guha, vice-chairman at Ever-

core ISI, expects the balance sheet to

hit the $9tn milestone by mid-year.

Should the economic shutdown

become “prolonged”, and the Fed is

forced to scale up the size of its emer-

gency purchases, Mr Guha said he

could see the balance sheet soaring to

as much as $12tn by mid-year, and ris-

ing from there.

That is equivalent to about 60 per

cent of US national output — and

would push the Fed higher up the

table of central-bank intervention.

According to BofA, the assets on the

European Central Bank’s balance

sheet equate to around 40 per cent of

GDP. For the Bank of Japan, it already

tops 100 per cent.

An expansion of this magnitude is

not without its risks, warn analysts.

“When the balance sheet is this large,

it does make it difficult to unwind,”

said Gennadiy Goldberg, a rates strat-

egist at TD Securities. “Policymakers

will have to be more comfortable

holding more assets and never really

getting back to ‘normal’.”

Emergency purchasesFed relieves strain but

balance sheet likely to top $9tn by end of year

Sources: BofA Global Research; Bloomberg; BoE; ECB; BoJ; Federal Reserve Board; Statistical Oice of the European Communities;

Cabinet Oice of Japan; US Bureau of Economic Analysis; UK Oice for National Statistics

Federal Reserve’s balance sheet

could reach tn

tn

Projected

      





















      

US takes a cue from Japan

Central banks’ balance sheets as  of GDP

Bank of Japan

European Central Bank

Bank of England

Federal Reserve

Andrew Harrer/Bloomberg

M A R K D I ST E FA N O— LO N D O N

Even at the beginning of March, Udo

Mueller, the founder of one of Europe’s

biggest outdoor advertising groups, was

describing the market reaction to coro-

navirus as “hysteric”.

“In every average influenza wave in

Germany, 25,000 people are dying,” the

chief executive of Ströer told analysts.

“And now we have 140 people infected

in Germany from 80-something million

people. I don’t think that in two or three

months, anybody [will be] talking

about it any more.”

Just a few weeks on, the coronavirus

pandemic has dealt a devastating blow

to the so-called “out-of-home” sector, a

once resurgent industry dependent on

busy roads, packed urban centres and

transport hubs.

Mr Mueller has been made to back-

track, with the crisis forcing Cologne-

based Ströer to scrap its 2020 guidance

and tell investors it would consider revi-

sions to dividends. Other operators have

taken drastic action, cancelling payouts

and drawing on revolving credit lines.

The defensive measures are likely to

be the start of a wrenching period with a

significant portion of the world’s popu-

lation largely confined to their homes.

Advertisers are pulling back on the

$40bn they were predicted to spend on

ads across big cities and transport sys-

tems in 2020. Douglas McCabe at End-

ers Analysis said widespread quarantine

measures had effectively “put a pause

button [on the] entire outdoor advertis-

ing sector”.

Known as the oldest form of market-

ing, outdoor advertising was seen as a

steady-but-dull business with roots in

ancient times. But groups such as Ströer,

JCDecaux and Clear Channel Outdoor

are now on the front line of the indus-

try’s battle to weather an unprece-

dented shock to the global economy.

While the precise impact is impossi-

ble to predict, overall ad spending fell by

about 11 per cent globally during the last

“advertising recession” of 2019, accord-

ing to figures by GroupM, the media

buying agency.

Analysts at Macquarie Research note

that about a fifth of global expenditure

is generated by sectors, such as leisure

and travel, that have been devastated by

coronavirus. If those clients halve

planned spending while others shave 10

per cent from campaign budgets, the

overall hit would be about 18 per cent,

they estimate.

Outdoor-focused companies will bear

the brunt and are already scrambling to

manage costs and shore up their balance

sheets.

Clear Channel, whose share price has

tumbled 75 per cent in a month, said last

week that it was tapping $150m from its

revolving credit facility.

JCDecaux, the world’s biggest out-of-

home advertising group, last month

unveiled sweeping measures that

included cancelling the payment of divi-

dends, cutting discretionary spending

and reducing employee hours. The

French group also withdrew guidance

issued at the beginning of March, pre-

dicting a 10 per cent hit to revenues.

“We are now facing a global recession

which is likely to be worse than the

downturn during the 2008 financial cri-

sis with the advertising market being hit

badly,” said Jean-François Decaux,

co-chief executive.

The family-owned group is also look-

ing to renegotiate rental deals with air-

ports, port authorities and train stations

where it runs more than 1m advertising

panels. Speaking in early March, Mr

Decaux said the rent on many airport

contracts represented more than 70 per

cent of revenues.

Digital technology has been the big

growth driver for the industry in recent

years, with expensive investments in

high-tech billboards allowing eye-

catching adverts to be sold and rotated

much faster than physical posters.

But relatively new entrants are now

exposed, especially in the UK, the

world’s most digitised outdoor advertis-

ing market.

In 2018 media group Global bought a

portfolio of outdoor advertising compa-

nies to secure almost a third of the UK

market, including the London Under-

ground contract.

Global declined to comment on

whether the company would try to rene-

gotiate its rental agreements in the wake

of train station closures and reduced

traffic. Transport for London said: “We

will in due course work with our adver-

tising agents to assess the impact of

these measures.”

For those groups that do survive,

there is also a bigger question on the

horizon: will ad spending flow back to

out-of-home sites if public behaviour is

permanently altered by the crisis?

Brian Wieser, global president of busi-

ness intelligence at GroupM, said there

was a need to “look beyond the period

directly in front of us”. If there were

“waves of people working from home”

in future, that would lessen the relative

appeal of the outdoor advertising.

The pandemic may be a prompt for

consolidation. “We will see some mar-

ket contraction that will create, obvi-

ously, some opportunities,” Mr Decaux

told investors in March. “It is clear that

our balance sheet is there to help us to

take advantage of opportunities when

they may come.”

Last week Clear Channel announced

the sale of its stake in Chinese subsidiary

Clear Media for $253m to a consortium

including JCDecaux, a sign that the

French group was trying to expand

despite the crisis.

An executive at one prominent out-

door advertising group insisted “it

wasn’t all doom and gloom”, pointing

out that Americans were still driving

past billboards on highways and in

supermarket car parks. But he added:

“This is the biggest single shock to the

business world that most of us have seen

in our lifetimes.”

Additional reporting by Leila Abboud

Media.Quarantine

Lockdowns ‘press pause’ for outdoor advertisers

Businesses take defensive

measures as clients pull back

on planned ad spending

Billboards over a near-deserted

Piccadilly Circus, London

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APRIL 6 2020 Section:Companies Time: 5/4/2020 - 18:45 User: andrea.crisp Page Name: CONEWS1, Part,Page,Edition: USA, 6, 1