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TMCNet:  Nils Pratley on Saturday Cash-rich investors make for happy days in leverage land

[February 08, 2013]

Nils Pratley on Saturday Cash-rich investors make for happy days in leverage land

(Guardian (UK) Via Acquire Media NewsEdge) =Are you a billionaire or a private equity baron seeking finance for a big leveraged buyout Your luck is in. There's a global shortage of junk bonds, apparently, and would-be investors are awash with cash looking for a home. They are weary of chasing down yields on existing corporate debt, and they want ambitious chief executives and private equity firms to do new deals. The debt ammunition, reflecting four years of ultra-loose monetary policy from central banks, is promised at prices that look terrific by historical yardsticks. Terrific for the borrower, that is.

John Malone, the so-called "king of cable" from the US, is not the type to ignore such an invitation. His Liberty Global group this week agreed a debt-funded $23bn (pounds 14.5bn) purchase of our own Virgin Media at more than twice the UK firm's market value a year ago. In the US, Michael Dell launched a $24.4bn bid for his old PC maker, Dell, with the help of a consortium of private equity firms plus Microsoft. Next in line may be EE, which despite its silly name is the UK's largest mobile phone operator. Two groups of private equity outfits are said to be eyeing EE for a pounds 10bn bid.

=Happy days, then, in the land of leverage. But how's life for small UK companies looking for loans for expansion Not so wonderful, according to the business secretary, Vince Cable. Here is his sober assessment this week: "The cost of borrowing for smaller companies is flat or even increasing. There has been a remorseless decline in net lending to SMEs [small and medium-sized enterprises], by pounds 7.8bn over the last 18 months with no sign of a turning point." Is this what central banks' cheap money and quantitative easing was meant to create A world where the leveraged buy-out brigade can party like it's 2006 while others are locked out If you're an optimist, you might say the locks will soon be removed. According to this theory, the swagger in top-end finance will spread confidence, stir economies and ensure oil reaches the stickier parts of the banking system.

Well, maybe. An alternative view is that cart and horse are mis-arranged. Or, to use the metaphor of Bob Janjuah, Nomura's famously bearish strategist, central banks are engaged in a hopeless attempt to turn water into wine by persisting "with the idea that some form of debt-fuelled asset price elevation will lead to real wealth creation, which in turn will fix all our ills".

Real wealth, Janjuah thinks, can only be created by "innovation and hard work in the private sector, with policymakers, the financial sector and financial markets there to aid and encourage/incentivise". He fears central banks' synthetic concoction will intoxicate briefly but prove poisonous. He predicts a "final parabolic spike up" for stock markets before a loss of faith in the money miracle.

He's right to worry. At a push, one might argue that the Dell buyout is a brave attempt to create real wealth by reinventing the firm beyond the harsh glare of the stock market. But a leveraged buyout mini-boom in the midst of economic stagnation and while SME funding is still a struggle That does not feel like the right kind of progress.

="We've heard a lot of good intentions. What we want is some concrete evidence," said Andrew Tyrie, the chairman of the banking standards commission, at the end of a three-hour session this week with Barclays' chief executive, Antony Jenkins, and the bank's chairman, Sir David Walker.

Tyrie was right. It was nice to hear that Jenkins has appointed 1,000 "values leaders" to preach a gospel of doing the right thing. But we need concrete. Jenkins's moment arrives on Tuesday with his first strategy day for investors. The heart of the event will be cuts in the investment banking side. Then he has to decide if Barclays wants to be in business banking in Spain, Italy and parts of Asia.

Those announcements will obsess the City. The outside world, though, wants to know what an ethical bank looks like. Here are a few points that Jenkins must answer to be taken seriously: * Which activities will Barclays close down out of principle It's not illegal to help clients save tax, but is the bank in that game now Members of Tyrie's committee have complained that the structured capital markets (SCM) unit was engaged in "industrial scale tax avoidance". Barclays disputes the description. But has SCM been disbanded * How has he responded to his first ethical test, the revelation that a senior executive at Barclays Wealth America shredded the single copy of a commissioned report that alleged the unit had a culture that was "actively hostile to compliance" The executive resigned last month, but how has Jenkins reacted to the report's contents * What is a fair division of the spoils between shareholders and employees Former chairman Marcus Agius enraged investors last year with his pledge to "rebalance" after handing out bonuses of pounds 2.1bn and dividends of only pounds 700m. It's time to give the phrase some meaning.

=Six years after the US authorities decided they'd had enough of online poker companies flouting their gambling laws and launched a clampdown, the end of prohibition is slowly happening. New Jersey is the latest state to say it will consider the licensing of online casinos and poker. Shares in digital, the oddly named European online leader, rose 16% yesterday.

It was always likely that online licensing would come eventually. Lest we forget, though, recall the madness of allowing Partygaming, one half of pre-merger Bwin, to list on the London Stock Exchange in 2005 and, indeed, briefly enter the FTSE 100 index.

The prospectus breezily confessed to the hostility of the US justice department and admitted that Partygaming's business relied on "the apparent unwillingness or inability of regulators generally to bring actions against businesses with no physical presence in the country". Never had a "risk factor" in a float prospectus been so neon-lit. Naturally, the managers of our pension funds, with only a few honourable exceptions, piled in.

(c) 2013 Guardian Newspapers Limited.

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