Financial Times 09Apr2020

Thursday9 April 2020 ★ FINANCIAL TIMES 9

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

L AU R E N C E F L E TC H E R

Covalis Capital, the London-based
investment firm, plans to raise $500m
for a new portfolio to take advantage
of sharp stock market moves, the
latest fund to spot opportunities in the
coronavirus-driven turmoil.

The equity-focused company, which
manages about $1.5bn in assets, believes
large-scale selling by investors cutting
exposures in recent weeks, as well as the
impact of lockdowns on companies’
earnings, is throwing up trades for
managers who can act quickly.
“We see a lot of dislocations right
now,” said Zach Mecelis, the founder,
whose company specialises in utilities,
commodities and infrastructure stocks.
“We’re our most excited on a five-year
view,” added the former trader at GLG
Partners, the hedge fund.
The fundraising follows simi-
lar moves y a number of larger manag-b
ers that have been closed to new inves-
tors for long periods.
DE Shaw s raising $2bn for its firsti
fundraising in its flagship fund in seven
years and Baupost has been approach-
ing investors while Christopher Hohn’s

TCI has been looking at further fund-

raising after being approached by inves-

tors.

Covalis’s two hedge funds have been

shut to new money for years. However,

it has occasionally done co-investments

in which a client invests alongside a

hedge fund in a specific trade.

But such arrangements can take time

to put together. And because of the

sharp daily swings in stocks over recent

weeks, some disparities in share prices

have opened for only a matter of days.

For the new vehicle, investors will

reserve a portion of the $500m capacity

and, if an investment that Covalis spots

meets their criteria, then it can put the

money into the market rapidly.

Mr Mecelis said he had noted steep

falls in some stocks hit by investors

slashing risk, even though other stocks

in the same industry and with similar

characteristics were less affected.

He also pointed to sectors such as

airports and toll roads where the global

impact of the lockdown is hurting com-

panies’ earnings. Big changes in profits,

which have been lacking in recent years,

can create opportunities for traders to

bet on one stock against another.

“We’ve lived in a world where

dispersion is very low, which is depress-

ing,” he said, referring to the spread of

profits of individual companies. “We

now see enormous dispersion and vola-

tility of earnings.”

Covalis’s main fund has made an aver-

age annual return of about 14 per cent,

including double-digit gains in 2015,

2016 and 2017.

Pecora Capital, a US-based hedge

fund, has raised $30m for a new

Recovery Opportunity fund to exploit

short-term price falls in assets.

Equities

Covalis targets $500m fund to exploit

opportunities in lockdown ‘dislocations’

K A D H I M S H U B B E R— WA S H I N GTO N

P H I L I P STA F F O R D— LO N D O N

US regulators have expressed

relief that the plumbing underpinning

capital markets withstood the whipsaw

volatility in prices produced by the

coronavirus pandemic in the past

month.

In interviews with the Financial Times,

officials at the two federal agencies in

charge of maintaining orderly markets

said they had seen minimal problems

even as equities and futures were

buffeted in record trading.

“The story thus far has been a very

good story, a story of resilience,” said

Heath Tarbert, chairman of the

Commodity Futures Trading Commis-

sion, which has oversight of the US

derivatives markets.

“That wouldn’t have been necessarily

what we would have expected in 2013 or

2015,” said Brett Redfearn, director of

trading and markets at the Securities

and Exchange Commission, the equity

markets regulator.

“Only five or six years ago, we saw a lot

more system glitches,” he said, referenc-

ing past trading outages at major equity

exchanges. Investors’ fears over a global

economic slowdown lead to record

demands for funds to backstop futures

deals, according to figures shared with

the FT, as well as repeated trading halts,

putting the nation’s exchanges and

clearing houses under their most sus-

tained pressure since 2008.

The result has been a dramatic stress

test for the post-2008 crisis market

infrastructure reforms that US

regulators have spent the past decade

implementing.

Former regulators, too, have joined in

praise of the system’s performance to

date, though cautioning there could still

be months of trouble on Wall Street if

pain in the broader economy shakes up

the markets and drives down asset

values.

“People ought to draw some comfort

with how well the system has held up,”

said James Burns, a partner at Willkie

Farr who was deputy director of the

SEC’s trading and markets division from

2012 to 2014. “However, as [baseball

legend] Yogi Berra said, it ain’t over till

it’s over.”

The volatile market moves in March

created record demands for margin at

clearing houses run by CME Group,

Intercontinental Exchange and the UK’s

LCH, regulators’ figures show.

Forcing traders to set aside large

amounts of cash, known as margin, as

insurance on their trades was a key area

of post-2008 crisis reformdesigned to

reduce risk in derivatives markets that

caused havoc to the financial system.

As Saudi Arabia’s decision to provoke

anoil price war ent crude and stocks

prices tumbling on March 8, clearing

houses in the US and Europe collected

an extra $55bn of variation margin from

banks, Mr Tarbert told the FT. That far

exceeded the $31.5bn collected in the

tumultuous trading after Brexit.

The following week, as markets

reacted to the US Federal Reserve cut-

ting interest rates, one bank had to

stump up an additional $9.6bn of

margin within an hour, Mr Tarbert said.

Cross asset

US regulators express relief at lack

of glitches despite jump in volatility

‘People ought to

draw some comfort

with how well the

system has held up’

The lockdown is hurting company

earnings in sectors such as airports

B RYC E E L D E R

Investors are getting set for a flood of
emergency share sales as companies try
to secure funds to tide them through the
effects of the coronavirus pandemic.
The first wave of issuers has included
vulnerable companies such as cruise
line operator Carnival, which included
e quity as a slice of its $6.25bn
rescue financing ast week, and UKl
retailers WHSmith and SSP, which have
many outlets at airports and train
stations.
Companies such as Auto Trader, the
classified ads publisher, have also raised
funds in part to take advantage
of “opportunities” that the outbreak
may create.
European retailers and leisure busi-
nesses are seen by analysts to have the
most urgent need for funds. Pressure
has also been building on industries
already undergoing long-term struc-
tural changes, such as the car sector.
With a funding window now open,
however, the most distressed compa-
nies are not expected to be the first in
the queue.
“Stumping up new equity at a time of
pressure on fund performance and
redemptions is a difficult ask for
investors,” said Mark Irvine-Fortescue,
an analyst at Stifel who covers the travel
and leisure sector.
Investors would “more readily” sup-
port companies that had solid balance
sheets before the pandemic hit but are
now seeking to protect their cash flows
during a trading halt, he added.
“It helps when the investment case is
still intact and there is a path back to

some sort of trading normality,” said

Mr Irvine-Fortescue. “It also helps

where stakeholders are seen to be

sharing the pain collectively... [Fall]

short on any of these points and compa-

nies could struggle.”

Bankers are optimistic that investor

demand will match supply, especially if

new issues are offered at a discount to

the current share price.

Big investors including long-only

funds have about 5-10 per cent of their

assets in cash, said Fabian de Smet,

global head of equity syndicate at

Berenberg, and are ready to support

companies they are already invested in

or to use discounted placings as an entry

point.

“The market is wide open,” said Mr de

Smet. “And everything has a price.”

Authorities around the world, includ-

ing in China, Germany and Australia,

have responded to the crisis by easing

restrictions such as how much compa-

nies can raise without seeking share-

holder approval.

In the UK, the Pre-Emption Group, a

branch of the Financial Reporting Coun-

cil advising on best practices, has said it

supports equity issues of up to 20 per

cent of issued share capital on a case-by-

case basis. Previously, it capped cash

calls for general corporate purposes at

just 5 per cent.

A Berenberg client survey showed

broad support for such concessions,

although opinion was split between

long-only investors who feared dilution

of their holdings and hedge funds that

prized the extra flexibility.

While existing shareholders already

have an incentive to support a company,

new investors have bargaining power to

influence terms.

Volatility heightens the pressure. The

vast majority of cash calls over the past

two decades have been priced when the

Vix, Wall Street’s volatility index, was

below its long-term average of 20,

according to Berenberg.

With the Vix last month hitting a

record high bove 80, new investorsa

have been demanding ever deeper dis-

counts to match their risks.

One compromise is to offer what

bankers call soft pre-emption rights,

where current investors are offered first

refusal. “We have a duty to protect

existing shareholders,” said Mr de Smet

of Berenberg. “When doing allocations,

we will always favour the top 10 or top

20 investors.”

Equity markets are not the only

option for fresh funding. State guaran-

tees have backstopped banks’ credit

lines and kept the bond markets open

for companies with high credit ratings.

According to estimates from Exane

BNP Paribas, policy responses across

Europe should allow the banking sys-

tem to underwrite the existing €1.5tn of

non-financial corporate bond-market

debt, of which around €170bn matures

this year.

But some companies have already

beenstripped f their investment gradeo

ratings while lower rated bonds are

beyond the scope of central bank pur-

chasing programmes.

As to whether equity issues make a

good bet for investors, the evidence is

mixed. Research from Macquarie

suggests that building a war chest tends

to be appreciated by shareholders in the

short term — but may be a bad idea over

the longer term.

In the 2008 financial crisis, for exam-

ple, the vast majority of fundraisings in

Australia were to repay debt or to pro-

vide working capital, according to Mac-

quarie.

Companies raising money for oppor-

tunistic acquisitions, meanwhile, saw

their shares surge nearly 40 per cent on

average in the month following the issue

compared with gains of 15-20 per cent

for companies seeking to boost liquidity.

Yet the latter group held on to their

gains over the following 12 months

while returns for those that tapped the

market for acquisition funds turned

negative.

Today, early movers such as Auto

Trader and Hays, the recruiter, have

seen their share prices soften since.

“This is a tough market and the

recommendation to go early with equity

raises is not looking so smart so far,” said

one senior European banker.

Additional reporting by Arash Massoudi

Stock investors set tofavour

groups that entered the crisis

with strong balance sheets

Stumping

up new

equity at

a time of

pressure is

a difficult

ask for

investors

UK retailer

WHSmith is

among the first

wave of issuers

in the equity

market during

the pandemic

crisis period

Charlie Bibby

Equities. mergency issuanceE

Companies rush for funding

to ride out downturn

E VA SZ A L AY

Companies are scraping together what

funds they can as their revenues

collapse under the weight of corona-

virus, including by cashing in currency

hedges.

Before the virus hit, many companies

had taken out protection against big

swings in exchange rates by entering

into contracts with banks.

For UK exporters, that meant shield-

ing themselves against losses from

a rally in sterling; for importers, the

opposite.

But now that revenues for some

companies have come to a sudden stop,

they are unwinding those hedging

agreements like cash-strapped shop-

pers hunting for coins down the back of

the sofa.

“There was a general desire to build

up liquidity on the balance sheet as

much as possible, so many chose to

terminate or restructure their FX

hedging portfolios, taking out as much

cash as possible,” said Amol Dhargalkar,

managing director at financial consul-

tancy Chatham Financial.

One company that has taken this step

is JN Wine, which supplies 2,000 restau-

rants and hotels in the UK and Ireland.

“The bars and hotels are all closed. We

are selling wine online — we won’t get

new stock in until we have more cer-

tainty,” said James Nicholson, the com-

pany’s founder, from his base inNorth-

ern Ireland. Mr Nicholson has put on

hold about 10 shipments of wine from

the US, Australia and New Zealand.

That prompted him to terminate all

his hedging contracts in recent weeks.

Settling contracts early incurs a fee but

it is cheaper than following through on

agreements to buy foreign currency that

Mr Nicholson will no longer need.

Hedging contracts are agreed pri-

vately so no data is available on how

many companies are taking steps like

these. But contracts have been liqui-

dated in what one banker described as

a “bit of a fire sale,” while few companies

want to enter into new hedges until they

have more certainty.

Luca Annesanti, head of Emea FX

corporate solutions at Nomura, said

companies are typically most active in

the first few months of the year, hedging

a large proportion of their currency

needs for the foreseeable future. “This

isn't happening right now,” he said.

Historic swings in the pound’s

exchange rate have turned many UK

companies into big winners or losers

from their currency hedges.

The sharp drop in sterling last month

— when it tradedbelow 1.15 against the$

dollar for the first time since the 1980s —

proved to be an additional burden for

UK exporters, who were facing not only

cancelled orders but hefty losses on

contracts designed to protect future

revenues in foreign currencies.

Currencies

Hedging

contracts

terminated in

drive for cash

‘There was a general

desire to build up liquidity

on the balance sheet

as much as possible’

Coronavirus sparks stock falls and fundraisings

Share prices rebased







Apr  Apr

Carnival

Auto Trader

Source: Refinitiv

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APRIL 9 2020 Section:Markets Time: 4/20208/ - 17:59 User: stephen.smith Page Name:MARKETS1, Part,Page,Edition:EUR , 9, 1