UK economy at risk of ‘hard landing’, warns bond giant Pimco – business live | Business

MPs then try to get a straight answer as to how much debt is on Asda’s books.

CFO Michael Gleeson explains that Bellis Acquisition (part of Bellis Finco, the parent company owned by the Issa brothers and private equity firm TDR) owes £3.7bn.

There is another £500m on the books of Bellis Finco (another peg in the ownership structure).

Liam Byrne MP digs deeper into the structure – how about Bellis Topco, how much debt is there?

Gleeson explains that Bellis Topco has £200m equity, and shareholder loan of £580m.

Q: So, is that total debts of £.4.7bn?

No, £4.2bn, Gleeson insists – he doesn’t count the shareholder loan to Topco.

Q: What impact will higher interest rates have?

Gleeson says that most of the £3.7bn loan is at a fixed date until February 2026. However, a £700m chunk of it will float at the end of February 2024.

The £500m on Bellis Finco’s books is also fixed, and matures in February 2027.

Q: What impact will higher interest have on that £700m loan?

The interest payments will “certainly increase” when it floats, Gleeson confirms.

He estimates that interest payments will rise by around £30m, if the rate increased by four to five percentage points.

Asda’s co-owner, Mohsin Issa, is now before MPs.

Business and trade committee chair Liam Byrne tells Issa that he has concerns, having read the transcript of Issa’s previous appearance at the committee.

Byrne reminds Issa that Asda employs 140,000 people in the UK, and was bought by TDR Capital and billionaire Blackburn-based brothers Mohsin and Zuber Issa in 2021 in one of the biggest leverage buyouts in recent years.

Your debts are very large, and very unclear – somewhere between £4bn and 7.5bn, Byrne says, with debt servicing costs set to rise sharply as interest rates stay higher for longer.

Ian Lavery MP then points out that the acquisition of Asda brought a debt of over £4bn onto its books. Since then, borrowing conditions have deteriorated – leading to two credit rating downgrades.

Q: Has it been a really difficult time since the acquisition?

Mohsin Issa defends his running of Asda, saying that the company has “chosen to invest in customers”, including spending £140m on price cuts to help with the cost of living crisis, at the expense of profits.

He says Asda staff have received two pay rises – 8%, and 10%, costing £264.8m, plus £60m into pay for logistics workers.

He insists:

We chose to invest, and that’s why we were downgraded.

Credit rating agencies were also concerned by Asda’s lack of convenience stores, Issa adds, which is is addressing through acquiring grocery retail sites from Co-op.

However… when Fitch downgraded Asda from “stable” to “negative” in September 2022 it pointed to the extra £200m of debt that Asda will use to help finance the Co-op deal.

Over in Parliament, MPs on the Business and Trade committee are probing the role of private equity in the UK retail sector.

Eli Talmor, professor at London Business School, has told MPs that private equity has grown from the fringe to centre stage in last two decades.

That growth, is due to the cheap financing that had been available to private equity (before interest rates climbed), points out George Lagarias, Chief Economist at Mazars Wealth Management;

Lagarias adds that “lower valuations and innovation” has made retail attractive to private equity firms.

Q: So have private equity firms been naive by making deals in an era of low interest rates?

John Plender, FT columnist, denies they were naive – instead, they were “cashing in on a wonderful windfall”.

Plender says:

Cashing in in a very big way because private equity is a wonderful reward system.

Their fees are phenomenal, both direct and indirect. They have reaped a very big harvest.

The going is tougher not, though, so they will reap a smaller harvest in future, Plender adds.

Q: Will we see more business failures, now interest rates are high?

Plender says we “certainly” will see more business failures, pointing out there have been many business failures in private equity going back over decades.

Plender adds:

What you will see is much poorer performance figures coming out of the industry.

I think the going will be tougher for the institutional investors who back them as well as for the fund managers.

Switzerland’s financial watchdog is also calling for more powers to help it oversee the banking sector, following the collapse this year of Credit Suisse.

In its report into the demise of Credit Suisse (see last post), Finma explains that its current powers were insufficient to save the bank.

Finma sayd it needs new instruments such as a Senior Managers Regime (which makes senior bankers more accountable, as in the UK), the power to impose fines, and more stringent rules regarding corporate governance.

Thomas Hirschi, head of the crisis unit and FINMA’s Banks division, says:

“FINMA used the full range of tools available to it, and identified the risk of possible destabilisation at Credit Suisse at an early stage. Although its actions had an effect, they were unable to overcome the causes of the loss of confidence, such as shortcomings in strategy implementation and in risk management.

Marlene Amstad, Chair of FINMA’s Board of Directors, emphasises this point too, saying:

“We are committed to ensuring that supervisors hold even better cards. The specific case of Credit Suisse illustrates both the possibilities and the limits of supervision.

Switzerland’s financial regulator is shining a spotlight on the litany of failures that led to the collapse of Credit Suisse this spring.

Finma’s report on the Credit Suisse crisis, published this morning, shows that the bank failed due to shortcomings in its strategy and management, leading to its rescue by UBS.

Finma points to the scandals that gripped Credit Suisse, its failure to rein in bankers’ pay, and its struggle to implement turnaround strategies.

The regulator points out that the disappearance of one of Switzerland’s two large global banks was “a traumatic event for the Swiss financial services sector”.

Finma also reveals that it asked Credit Suisse to take various measures to prepare for an emergency since the summer of 2022, many months before the bank’s collapse.

Its report says:

• The definition, implementation and monitoring of the strategy are the responsibility of the bank’s Board of Directors. The Board made numerous strategic changes with the aim of downsizing the investment bank, reducing the volatility of its earnings, and focusing the business model more on asset management. These strategic changes were not implemented consistently. Earnings remained volatile both in the investment bank and in asset management.

• Recurrent scandals undermined the bank’s reputation, weighed on its results and resulted in clients, investors and the market losing faith in it.

• Credit Suisse’s problems manifested themselves in a range of business areas and due to various risk types. In almost all of these problems, serious deficiencies in risk management played a role. FINMA’s measures targeted these deficiencies and tightened up checks and controls. FINMA also repeatedly criticised the bank’s risk culture and went to the limits of its legal powers with its measures. Despite the – sometimes extensive – adjustments, over the years the bank’s governing bodies were unable to find long-term overall solutions to the shortcomings in the bank’s organisation identified by FINMA.

• Even in years where the bank reported large losses, the variable remuneration remained high. Credit Suisse’s main shareholders made little use of the possibilities available to them to influence remuneration.

• Reorganisations, high costs, fines and losses also eroded its capital base. As a result, Credit Suisse was repeatedly forced to raise capital on the market.

• Credit Suisse satisfied the regulatory capital requirements. However, these were not enough to prevent the huge crisis of confidence. The parent company, CS AG, had the weakest capital adequacy within the Group, which made it the weakest link in the chain.

• Credit Suisse also complied with the regulatory requirements for liquidity, and held comfortable liquidity buffers in summer 2022. However, the loss of confidence in the bank led to rapid, extensive liquidity outflows that were further exacerbated by the digital communication channels (digital bank run) and ultimately brought the bank to the brink of insolvency.

The woes of Hipgnosis Songs Fund, which owns the streaming rights to artists ranging from Beyoncé to Neil Young, have deepened, as it delayed the publication of its half-year results at the last minute.

Hipgnosis said it was postponing its results because the company valuation by its independent valuer was “materially higher” than the valuation implied by proposed and recent transactions in the sector, in particular its recent sale of a chunk of song rights at a steep discount.

The fund sold 20,000 “non-core” songs for $23.1m (£18.4m), at a 14% discount to their previous valuation, last week.

More here.

Google has agreed to pay $700m and to allow for greater competition in its Play app store, according to the terms of an antitrust settlement with US states and consumers disclosed in a San Francisco federal court.

Google was accused of overcharging consumers through unlawful restrictions on the distribution of apps on Android devices and unnecessary fees for in-app transactions. It did not admit wrongdoing.

The company will pay $630m into a settlement fund for consumers and $70m into a fund that will be used by states, according to the settlement, which still requires a judge’s final approval.

The settlement said eligible consumers will receive at least $2 and may get additional payments based on their spending on Google Play between 16 August 2016 and 30 September 2023.

More here.

UK retailer Superdry has added to the gloom, by warning that its autumn sales were weaker than expected.

Superdry blamed the “challenging consumer retail market” and the “abnormally mild” weather, as it reported a 13.1% fall in retail sales, year-on-year, in the first half of its financial year.

This “challenging trading environment” will hit Superdry’s profitability this financial year (although the current soggy weather might help sales!).

Julian Dunkerton, founder and CEO of Superdry, says:

“The unseasonal weather through the early autumn led to a delayed uptake of our Autumn/Winter range and this impacted sales in the first half of the year.

Whilst we have seen modest signs of improvement through the recent spell of colder weather, current trading has remained challenging, and this is reflected in the weaker than expected business performance.

The operational progress we have made in the first half has been more encouraging with the IP sale for the South Asian region and strong progress on our cost efficiency programme.”

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

The ghost of a future recession is haunting the UK this morning, with less than a fortnight until the new year.

One of the world’s biggest active bond fund managers has dampened the festive mood, warning that the UK is at high risk of a serious economic downturn in 2024.

Daniel Ivascyn, chief investment officer at Pimco, is predicting the UK will suffer greater economic strain than the US economy next year, when both countries will be holding general elections.

Ivascyn told the Financial Times that higher interest rates are having more of an impact on British consumers than their American counterparts.

“In the case of the UK — a smaller, open economy, with a consumer that’s feeling the brunt of central bank policy far more than their US counterparts — you just have a higher probability of more significant economic deterioration.

“We do think there’s potentially more hard landing risks.”

Ivascyn also warns that Europe’s economy could also struggle in 2024, adding that both the UK and Europe risk “a more significant deterioration” than the US, whose economy had held up well in 2023. More here.

Both the US and UK central banks have left interest rates on hold in recent months – at 5.25% in the UK, and a 5.25-5.5% target range in the US.

Optimism has been growing in recent weeks that the US will pull off a tricky ‘soft landing’ – bringing down inflation without triggering a recession [corrected, thank you kind reader].

That would allow the Federal Reserve to ease policy in 2024, with the markets pricing in as many as six quarter-point cuts to US interest rates next year.

But the Bank of England continues to push back against market expectations that it might cut interest rates by over one percentage point next year.

Last week, accountancy and business advisory firm BDO reported that UK business confidence has fallen three months running, driven by gloom in the services sector. BDO’s optimism index fell to its weakest point since April, with rising wages forcing firms to cut back on hiring.

Worryingly, the UK economy shrank by 0.3% in October, suggesting it weakened towards the end of 2023.

On Friday, updated GDP data will show how the UK economy performed in July-September. It will probably confirm that GDP stagnated, but there is chatter that the data could be downgraded to show the economy shrinking in Q3.

Looking more widely, analysts at Oxford Economics predict that global GDP growth will slow to just 2.1% next year – a weak outcome even by post-global financial crisis standards.

They add:

However, it would still amount to a soft economic landing after the aggressive monetary policy tightening over the past couple of years.

Also coming up today

New eurozone inflation data is expected to confirm that consumer prices rose more slowly in November, to a 28-month low. The initial estimate was that the eurozone CPI rose by 2.4% over the last year, as inflation cooled.

In the UK parliament, the Business and Trade Committee is holding an evidence session examining the use of private equity in the retail sector. Asda co-owner Mohsin Issa will be among the witnesses.

The agenda

• 10am GMT: Eurozone inflation report for November (final estimate)

• 10am GMT: Business and Trade Committee session on use of private equity in retail sector

• 11am GMT: CBI Industrial Trends survey of UK manufacturing

• 1pm GMT: Bank of England deputy governor Sarah Breeden: Speech at the IIF talking policy series