Financial_Times_Asia_-_April_6_2020

8 ★ FINANCIAL TIMES Monday 6 April 2020

CO M PA N I E S & M A R K E T S

F T R E P O RT E R S

Can oil ministers reach a deal on
supply curbs?

Oil ministers from Opec and countries
that were part of the Opec+ alliance that
collapsed last month are expected to
take part in an emergency meeting this
week to discuss cutting supply in
response to the coronavirus pandemic.
Ministers will participate in an online
conference after US president Donald
Trump said a deal was imminent
between Russia and Saudi Arabia that
could see up to 15m barrels a day taken
off the market, potentially supporting
prices after a big decline this year.
The move has prompted questions
about whether Saudi Arabia and Russia
can mend their differences and what
any potential deal might look like.
Saudi Arabia has been supportive of a
deal to cut supply as long as all global
producers do their part. In recent days,
it has also alluded to necessary partici-
pation from beyond the Opec+ group —
which would include the US.
The Opec+ alliance fell apart last
month after Russia was reluctant to
agree to a Saudi proposal for deeper and
prolonged cuts in the face of a drop in oil
consumption. In turn, the kingdom
launched a war for market share, cut-
ting prices and accelerating production
to a record of above 12m barrels per day.
It is unclear how far producers might
be prepared to cut, how the US might
participate and what Russia wants to see
before it agrees to any deal.
As lockdowns and travel bans prolif-
erate, traders have said oil demand
could fall by up to 30m barrels a day this
month — roughly one-third of the
world’s average daily consumption in
2019.Anjli Raval

How much further will the pound

fall?

Data due out on Thursday are expected
to show zero economic growth in the UK
in February — a fragile backdrop, before
the full effects of the coronavirus out-
break hit the country in March.
Already, the pound has been on a wild
ride. It dropped more than 13 per cent
from peak to trough last month, reach-
ing a low just above $1.14 before shoot-
ing back up to $1.23 by the start of April.
But the pound remains vulnerable to
flare-ups in dollar demand and the
impact of coronavirus on the economy.

Thursday’s data releases for February

include those relating to GDP and indus-

trial production.

Analysts said rising unemployment,

coupled with a poor performance by the

manufacturing sector in March, point

towards a deep recession.

Andrew Wishart, UK economist for

Capital Economics, forecast a 15 per

cent drop in GDP in the second quarter

compared with the first three months of

2020. He noted that would be a bigger
      fall in output than during the last finan-
      cial crisis, or the Great Depression.
      Derek Halpenny, an analyst at MUFG
      Bank, argued a slower death rate from
      the disease in the UK compared with
      Spain and Italy could lend some support
      to the pound.Eva Szalay

Will the coronavirus crisis pave the

way for eurobonds?

The coronavirus crisis has forced a long-

running debate back on to the agenda in

the eurozone: the issuance of debt

backed by all of the common currency’s

member states.

Last month, nine eurozone countries

called for so-called eurobonds (some-

times now rebranded as “coro-

nabonds”) as governments ramp up

borrowing to tackle the pandemic.

In a rerun of similar debates during

the eurozone debt crisis, a group of

northern European countries including

Germany and the Netherlands objected,

saying they would prefer struggling

nations to be given a credit line by the

European Stability Mechanism, the

region’s bailout fund. The topic is likely

to dominate discussion at tomorrow’s

meeting of finance ministers.

Debt mutualisation in the eurozone

would mean higher yields on Germany’s

debt, and the push for greater burden

sharing is one reason for recent pressure

on Bunds, according to HSBC head of

fixed income research Steven Major.

Most investors think jointly issued

bonds would trade somewhere close to

debt issued by the ESM, meaning higher

yields than Germany but far lower than

fiscally weaker countries such as Italy.

Whether or not the Dutch and Ger-

mans agree to eurobonds, Mr Major

argues the bond buying by the Euro-

pean Central Bank in effect already

amounts to increased sharing of debt

burdens across the currency bloc. The

ECB announced an extra €750bn of pur-

chases last month as part of a virus-

fighting package, halting a sell-off in

Italian bonds.

“The near doubling of the ECB’s bal-

ance sheet to over 50 per cent of GDP,

through the last decade, arguably says

debt mutualisation is taking place any-

way, albeit below the surface,” Mr Major

said. Over the long term, he added, this

trend was likely to mean further conver-

gence of German yields and those in the

rest of the eurozone.Tommy Stubbington

Market questions.Virus fallout

Crude supply curbs pose challenge for ministers

and sterling vulnerable to dollar flare-ups

Russia has been

reluctant to

agree to a Saudi

proposal for

deeper and

prolonged

production cuts

Maxim Shemetov/Reuters

P E T E R C A M P B E L L —LO N D O N

The car industry’s shutdown in Europe

and North America is forecast to cost

more than $100bn in lost revenues if

factories across both continents

remaincloseduntiltheendofApril.

Lost European sales will rise to 2.6m

cars, worth €66bn, while in North

America they will hit 2m cars, worth

about $52bn, if, as expected, the clo-

sures remain in force for the rest of this

month.

The calculations have been made by

Ian Henry, who owns research group

AutoAnalysis and compiles vehicle out-

put forecasts for Britain’s motor indus-

try trade association, the SMMT.

Mr Henry said that each further week

that European sites were closed would

cost the industry an additional €8bn in

lost production value.

In North America, the figure would be

up to $7.5bn.

Every major European and North

American plant is closed after carmak-

ers shuttered sites last month because

they not only wanted to protect workers

but also because demand fell.

Mr Henry calculated expected output

for each auto plant this year, taking into

account new model launches and

demand levels, then subtracted the

number of days lost through closure.

The number of cars lost is then multi-

plied by the expected “factory gate

price”, which is the vehicle price without

dealer costs or taxes, for the final value

lost. “I can’t see any semblance of nor-

mality returning before May, at the very

earliest,” he told the Financial Times.

Many of the early estimates by car-

makers about expected reopenings in

late March or April have since been

scrapped, with several including Nissan,

Ford and General Motors now saying

sites are closed “indefinitely”.

Carmakers have placed hundreds of

thousands of workers on to government

wage schemes, and drawn tens of bil-

lions of dollars of debt to try to weather

the Covid-19 lockdown.

General Motors and Ford have both

drawn $16bn and $15.4bn respectively

from their credit lines, while Germany’s

Daimler on Thursday opened a fresh

€12bn credit line on top of its existing

€11bn facility.

Last week, Nissan placed all of the

6,000 production staff at its Sunderland

plant on a furlough scheme, where the

UK government pays 80 per cent of

their salaries.

The financial toll on the industry

remains unknown, though Volkswa-

gen’s chief executive Herbert Diess said

the German carmaker faced a bill of

€2bn a week in costs.

Car sales across western Europe fell

about two-thirds last month, according

to country-by-country data published

so far, while US car sales in March fell to

the lowest level in 10 years.

While car sales that are delayed may

come back once the lockdowns are lifted

by European and US authorities,

the state of the economy and employ-

ment levels are expected to taper

demand.

Automobiles

Carmakers

face revenue

hit of more

than $100bn

‘I can’t see any semblance

of normality returning

before May’

Ian Henry, AutoAnalysis owner

L AU R A N O O N A N— N E W YO R K

America’s biggest banks will defend
their plans to continue paying dividends
in submissions to regulators today, just
days after Europe’s regulators urged
lenders to abandon shareholder pay-
outs while they dealt with the coronavi-
rus pandemic.
US banks’ annual capital plans, due to
be submitted to the Federal Reserve
today, are expected to include proposals

to continue paying dividends, reinforc-

ing comments from prominent bank

chief executives in recent days, accord-

ing to people familiar with the situation.

The bankers, including Goldman

Sachs boss David Solomon, Morgan

Stanley boss James Gorman and Citi-

group chief Mike Corbat, argued they

had the means to continue paying divi-

dends and cutting them would be

“destabilising to investors”.

“We’re in a very different position

than what we see in Europe,” said Marty

Mosby, a veteran banks analyst at Vin-

ing Sparks.

“How we set it up [post-crisis capital

requirements] was to be able to not have

those dividends collapse [in a crisis].

That’s what creates a financial crisis:

when dividends start to be ratcheted

lower that shakes confidence.”

The top 20 US banks have more than

$200bn in excess capital and make

more than $50bn in profits before loan

losses every year, according to analysts

at Barclays, giving them ample room to

cover dividend payouts even if loan

losses across the group were as high as

the $175bn they recorded in 2009.

Mr Solomon told CNBC last week that

US banks were in a different position to

those in Europe.

“Here in the United States, it [the divi-

dend] is a much smaller part of capital

return. We have as an industry stopped

a large portion of the capital return

[and] it’s my expectation we’ll pay our

dividend return.”

Research from Autonomous shows

that about two-thirds of US banks’ pay-

outs are in the form of share buybacks,

which the biggest eight banks voluntar-

ily suspended until at least July. In

Europe, share buybacks account for

about 10 per cent of capital return, so

“in order for European banks to ‘pitch

in’ and reduce their payouts, it really has

to be the dividends that get cut”, Auton-

omous said.

Mr Gorman told CNBC that suspend-

ing dividends would be a “very poor

thing to do” since it would deprive inves-

tors of income and be “destabilising”.

In a separate interview, Mr Corbat

told CNBC that Citi’s dividend was

“sound and we intend to keep paying it”.

Jason Goldberg, analyst at Barclays,

said that whether the banks ultimately

make those payouts would depend on

the broader environment in June.

Banks

US lenders defend dividend payments

Wall Street chiefs say they

have the means to keep

rewarding shareholders

Goldman, Citigroup and

Morgan Stanley bosses say

cutting payouts would be

‘destabilising to investors’

FastFT

Our global team

gives you the

market-moving

news and views,

24 hours a day

ft.com/fastft

RYA N M C M O R R OW

Luckin Coffee yesterday apologised
and pledged to strengthen controls
after an internal investigation found
hundreds of millions of dollars of
alleged fake sales last year, wiping
about 75 per cent off the company’s
marketvalue.

Lu Zhengyao, the company’s chairman,
said on social media he was “ashamed”
and “accepted all questions and criti-
cisms”, while promising to do his best to
recover the losses. Mr Lu backed the
start-up in 2017 as it aimed to take on
Starbucks in China and remains one of
its largest shareholders.
“I personally blame myself. Regard-
less of the final findings of the independ-
ent committee, I will bear the responsi-
bility that I ought to,” Mr Lu said in a
post widely reprinted by local Chinese
media yesterday.
Mr Lu is also the chairman of Hong
Kong-listed China Auto Rental, whose
share price plunged as much as 70 per
cent on Friday as investors cut their
exposure to the entrepreneur’s busi-

nesses. “We’ve let down and hurt too

many people,” Mr Lu said. Several

employees, including Luckin’s chief

operating officer, have been suspended

and are under investigation and Luckin

said it reserved the right to take legal

action against them.

The group warned last week that its

previous financial statements could no

longer be relied on.

Law firms in the US have already

begun recruiting investors with losses to

join class-action suits against the loss-

making company, which had more than

4,000 outlets by the end of 2019.

China’s securities regulator con-

demned the alleged fraud on Friday and

said it would look into the case.

“The company will also deeply reflect

and repent, and strengthen our internal

controls,” Luckin said in a statement.

The internal investigation, overseen by

a special committee of the board, is in its

early stages and Luckin said its conclu-

sions would be made public.

“We will take all necessary remedial

measures and we will not skirt any prob-

lems brought on by this matter,” the

company said, noting it would continue

to serve its customers and operate nor-

mally in the meantime.

The company revealed last week that

the early stages of the investigation indi-

cated that the “aggregate sales amount

associated with the fabricated transac-

tions from the second quarter of 2019 to

the fourth quarter of 2019 amount

to around Rmb2.2bn ($310m)”.

The intense local media coverage of

the alleged fraud has spurred a rush of

customers to Luckin’s takeaway coffee

shops. Some are apparently worried

they might not be able to cash in their

discounted coffee coupons that the

chain is known for. “If we wait any

longer, we won’t have the opportunity to

drink anything,” said one user on

Weibo, China’s version of Twitter.

Food & beverage

Luckin Coffee sorry for alleged fraud

A N J L I R AVA L A N D R O B E RT S M I T H

LO N D O N

The biggest oil companies have raised

debt worth more than $32bn in recent

weekstobuildupwarcheststomanage

the financial fallout of the coronavirus

outbreakwhilepreservingshareholder

payouts.

Companies that have tapped the bond

market since mid-March include Exx-

onMobil of the US, Royal Dutch Shell,

the UK’s BP, Norway’s Equinor and

France’s Total, raising debt in euros and

dollars. Oil and gas companies are pull-

ing on every financial lever possible

before having to cut their dividends.

They are curbing capital spending by

billions of dollars, suspending share

buyback programmes, reducing costs

and delaying the approval of projects.

Global oil demand has collapsed amid

widespread lockdowns and travel bans.

The drop in consumption has coincided

with a Saudi Arabia-led price war that

could see millions of barrels a day extra

unleashed on to the oil market. The

drop in Brent crude — the international

oil benchmark fell last week to the low-

est level since 2002 — has caused tur-

moil for energy companies whose share

prices have also taken a hit.

Brendon Moran, a senior energy

banker at Société Générale, said: “The

playbook is the same as previous crises:

those that can get out into the bond mar-

ket are doing it. It secures liquidity but it

also demonstrates that they have access

to funding.” Shell this week raised €3bn

and $3.75bn, while BP tapped the mar-

ket for €3.25bn and $3.25bn. Total and

Equinor raised debt of €3bn and $5bn

respectively. This followed a move by

Exxon to raise $8.5bn a few weeks ago.

For some groups, such as Shell and BP,

the bond issuance comes on top of

securing multibillion-dollar credit facil-

ities. While some smaller and independ-

ent companies have already cut their

dividend as they come under financial

pressure, major energy groups are treat-

ing this as a last resort. Many are aware

that the payouts are one of the few rea-

sons some investors hold the shares, as

pressure builds on investors to move

away from carbon-intensive industries.

Before the coronavirus outbreak,

energy groups were already facing chal-

lenges. They had promised to keep

shareholder distributions intact despite

the macroeconomic uncertainty, main-

tain revenues from fossil fuel businesses

and invest in lower carbon energy. Ana-

lysts have said that while existing pay-

outs from energy majors were generally

safe for now, the return of scrip divi-

dends could happen, referring to the

option for investors to receive addi-

tional shares instead of cash payments.

Energy

Oil majors tap bond market for $32bn

‘I personally blame myself.

Regardless of the final

findings’

Lu Zhengyao, Luckin chairman

ExxonMobil is one of the groups

raising debt to preserve dividends

APRIL 6 2020 Section:Companies Time: 5/4/2020 - 18: 30 User: andrea.crisp Page Name: CONEWS3, Part,Page,Edition: USA, 8, 1