Robinhood Stock Sale Soured By Investor Confusion, Valuation | Sidnaz Blog


Robinhood Markets Inc.’s


HOOD 3.45%

bid to revolutionize IPOs has created losses for investors instead, after one of the year’s most highly anticipated listings fell flat.

In a regulatory filing in early July, the trading platform’s co-founders said they would open their initial public offering to customers on equal terms with institutional investors. They said they recognized it may be the first IPO many would participate in, and pledged to “never sacrifice the safety of our customers’ money.”

It now appears Robinhood’s commitment to “democratizing” the IPO process played a role in the offering’s big initial stumble Thursday. An innovative auction system sowed some confusion among investors, many already suspicious of the valuation of a business that has drawn scrutiny from regulators and criticism from customers, people involved in the process said.

The stock, initially priced at $38, the bottom of the target range, sits below that. It is a disappointing result at a time when IPOs are booming and investor appetite for new issues is robust.

Robinhood proudly tore up the traditional IPO playbook. It insisted a large chunk of its stock—in the end up to 25%—go to its individual-investor customers compared with the normal retail allocation of well under 10%. It said employees could sell a portion of their stock right away instead of being locked up for six months. And when it came to determining the price of its IPO, Robinhood decided to use a hybrid-auction process, which attempts to assign shares to investors based on what they are willing to pay, regardless of who they are.

Robinhood co-founder Baiju Bhatt, in gray suit, and CEO and co-founder Vladimir Tenev in the Wall Street area of New York City on Thursday.

The hybrid auction has worked in other IPOs in the past year. In typical listings, underwriters give their investor clients updates throughout the roadshow—the seven- to 10-day period in which a company pitches its stock. These updates typically include guidance on how much demand bankers are seeing for the shares and the rough price they ultimately expect to set.

In this case the company and lead underwriters

Goldman Sachs Group Inc.

and

JPMorgan Chase

& Co. gave few such updates, people familiar with the matter said. When some large investors called the other underwriters on the deal, some of those bankers pleaded ignorance.

The opaqueness of the process sowed suspicion among some investors who assumed the deal was going poorly and adjusted their orders accordingly, investors and bankers said.

Many had already expressed concern about how much of Robinhood’s revenue comes from a controversial practice called payment-for-order-flow, which the Securities and Exchange Commission is reviewing, people who attended the roadshow said. Others questioned what they saw as the high valuation the eight-year-old company was seeking—in excess of $30 billion.

Another concern: whether Robinhood’s controversial decision earlier this year to stop users from buying meme stocks like

GameStop Corp.

would prompt some to eschew the offering.

Wednesday night, as bankers met with Robinhood Chief Executive

Vlad Tenev

to set the price, some investors said they were only told it would be within the $38 to $42 target range. This surprised many large institutions, who are used to more guidance heading into a pricing meeting.

A Robinhood IPO event in Times Square.

An unusually large percentage of shares were set to be allocated to hedge funds, which are more likely to “flip” IPO stock on the first day of trading, according to people close to the deal. To bring in more of the biggest institutional funds who are viewed as “buy-and-hold” investors, Robinhood chose $38 a share instead of the higher price some funds were willing to pay.

The company and Goldman felt comfortable that the lower price was conservative enough that the shares would rise on their first day of trading, especially given the buzz around Robinhood in the lead-up to the listing, according to people close to the deal.

Instead, the stock opened at $38 a share, unusual at a time when big initial pops for hot IPOs are more the norm. It rose higher briefly, touching $40 before dropping through the IPO price. It closed down 8.4% Thursday.

The shares fell further still Friday morning before regaining some ground in the early afternoon.

The brokerage app Robinhood has transformed retail trading. WSJ explains its rise amid a series of legal investigations and regulatory challenges. Photo illustration: Jacob Reynolds/WSJ

Robinhood’s Stock Market Debut

Write to Corrie Driebusch at [email protected]

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Robinhood IPO Is No Giveaway | Sidnaz Blog


Robinhood Markets likes to give away free shares to attract new customers. Its public offering to investors is a different matter.

The offering bears some similarity to recent IPOs such as

Coinbase Global

and

Rocket Cos.,

which made their debut in the midst of crypto and mortgage booms, respectively. Investors had the challenge of trying to chart out a normalized earnings and revenue path. So far, neither of those prior examples have worked out for initial public investors.

Robinhood derives the vast majority of its revenue from trading by its customers, including in cryptocurrencies like Dogecoin. In this topsy-turvy market, it will be quite difficult to forecast what that activity level looks like a year from now. Plus, its primary trading revenue source is payment for order flow, one of the most hotly debated topics in finance and in Washington.

Amid that uncertainty, there is one measure that cuts through a lot of the noise: how much an investor would be paying at the IPO valuation per funded account. That is a way to benchmark Robinhood to established peers in the retail brokerage business.

At the proposed IPO price range set on Monday, a funded Robinhood customer account is worth about $1,500 to $1,600. Contrast that to a long-term average of about $2,000 for E*Trade over the past 15 years, before it was acquired for about $1,800 by Morgan Stanley, according to figures compiled by Christian Bolu of Autonomous Research. Charles Schwab, a much broader wealth- and asset-management business, has traded around $3,600 historically, and is closer to $4,000 today.

Vlad Tenev, co-founder and chief executive officer of Robinhood Markets. It will be Robinhood’s broad appeal that is most vital to justifying the IPO price.



Photo:

Daniel Acker/Bloomberg News

So that multiple isn’t by itself wild and suggests that, even if Robinhood has to alter its revenue model, it could still be a viable business just by virtue of the number of customers it has. But it also is giving Robinhood credit for a lot of growth it has yet to achieve. Consider that Robinhood’s typical funded account had about $4,500 worth of assets in custody at the end of the second quarter. The established retail brokers’ typical accounts are well into the six figures.

Yes, Robinhood’s accounts on average trade more. But overall, Robinhood still generates much less revenue out of its customers, in part because they are smaller. In the first quarter, average revenue per user was $137 at Robinhood. By contrast, TD Ameritrade and E*Trade were generating more than $500 around the time they were acquired, according to Autonomous. Charles Schwab was above $600 in the first quarter.

So the per-account price implies that Robinhood will either far better monetize its customers in the future, grow them at a much faster rate, or some combination thereof. Faster growth is much more likely, based on recent history: Schwab added 1.7 million net new brokerage accounts in the second quarter, while Robinhood added 4.5 million funded accounts on net. “Expanding the universe of investors has been, and we expect will continue to be, a significant driver of our market-leading growth,” Robinhood writes in the IPO prospectus.

Meanwhile, per-user revenue trends are already slowing. Preliminary second-quarter results given by Robinhood imply a drop-off in average revenue per user to under $120, with Robinhood noting that, while cryptocurrency and options trading are growing, equities trading activity in the second quarter was lower than it was a year ago.

The company can build on other revenue streams, which include margin loans to customers and cash management. But low pricing is a vital part of the company’s mission to expand its customer base. The company is still building out its securities lending platform, which could generate incremental revenue. In the face of slowing trading activity, though—and that includes crypto in the third quarter, according to the company—it is hard to bank on significant per-user revenue growth in the near future.

So it will be Robinhood’s broad appeal that is most vital to justifying the price. That makes the IPO itself a pivotal moment. Robinhood will be distributing potentially over 20 million shares to its own customers via its own platform. If the deal doesn’t perform well out of the gate for any reason, that could frustrate some of its most engaged customers.

Investors might have to wait for the dust to settle on this offering before thinking about nabbing any Robinhood stock for themselves.

The brokerage app Robinhood has transformed retail trading. WSJ explains its rise amid a series of legal investigations and regulatory challenges as it looks forward to its IPO. Photo illustration: Jacob Reynolds/WSJ

Write to Telis Demos at [email protected]

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Paytm and Zomato IPOs Point to Coming Wave of Indian Tech | Sidnaz Blog


NEW DELHI—India is gearing up for tech IPOs, including two worth more than $1 billion, as startups look to tap a stock market that has proved resilient despite Covid-19.

The initial public offerings reflect the maturing of a generation of e-commerce and digital-economy companies, bankers say, many of which have grown rapidly during the pandemic as well-off city-dwellers turn to them when purchasing products from milk to medicines.

On July 16, the operator of the Paytm digital-finance app, One97 Communications Ltd., filed a prospectus for what would be India’s largest IPO in local-currency terms. The group offers services such as a mobile wallet, loans and stock-trading, and is backed by

Jack Ma’s

Chinese financial-technology giant Ant Group Co. One97 aims to issue new and existing shares worth a total of up to 166 billion rupees, the equivalent of $2.23 billion.

Other companies considering IPOs include digital-payments platform One MobiKwik Systems Ltd., which filed its prospectus earlier this month, and logistics and supply-chain-services provider Delhivery Pvt., according to a company spokeswoman. Online cosmetics seller Nykaa E-Retail Pvt., API Holdings Pvt., the parent company of online pharmacy PharmEasy, and PB Fintech Pvt., the parent of insurance aggregator Policybazaar.com, are also considering listings, according to people familiar with their plans.

“This is the first set of these companies coming to the public market” in India, said

Kaustubh Kulkarni,

the head of investment banking for India at the local unit of

JPMorgan Chase

& Co.

Demand for the shares is likely to be strong, given the companies’ brand recognition, said Mr. Kulkarni, who is also the bank’s co-head of investment banking for South and Southeast Asia. “Most of these companies are offering products, services or capabilities which millions, if not hundreds of millions, of customers are utilizing on a day-to-day basis,” he said.

Last week investors placed orders worth 38 times the shares being offered by Zomato Ltd., India’s answer to

DoorDash Inc.

The food-delivery group raised around 94 billion rupees, the equivalent of $1.26 billion, and its shares are due to start trading on July 27.

Some market-watchers say Indian tech has plenty of room to grow, as more consumption shifts online. Earlier-stage investors have poured about $16 billion into Indian startups this year, creating 16 new unicorns—young private companies valued at $1 billion or more—according to data firm Venture Intelligence.

India’s unicorn population will rise to 150 by 2025 from 60 now, predicted

Gaurav Singhal,

the head of India consumer technology at

Bank of America Corp.

’s investment-banking arm. Many will eventually look to float, he said, translating into a big increase in market capitalization.

“India will see $300 billion to $400 billion of market-cap creation in the internet ecosystem in the next five years,” said Mr. Singhal.

The deals already under way show how India’s financial sector has been swept up in an international boom, even as the country records more than 30,000 new Covid-19 cases a day, among the highest daily counts in the world.

Already this year, India has hosted a rush of IPOs—joining a global surge fueled in part by tech companies from elsewhere in Asia, such as China’s

Kuaishou Technology

and South Korea’s

Coupang Inc.

The operator of the Paytm digital-finance app filed a prospectus for what would be India’s largest IPO in local-currency terms.



Photo:

Dhiraj Singh/Bloomberg News

India’s 22 IPOs in the first six months of 2021 brought in $3.7 billion, a record half-year haul, according to Prime Database Group, a research firm in New Delhi. Shares in some recently listed companies are trading at twice their IPO price.

At the same time, Indian stock indexes have soared as investors bet on big listed companies. The S&P BSE Sensex has hit a series of record highs, most recently on July 15, and international investors have poured about $7.7 billion into Indian shares this year, official data shows.

Millions of individual Indian investors are trading stocks for the first time, again mirroring trends seen in the U.S. and some other markets.

Harpreet Singh,

a 23-year-old from the northern city of Pathankot, started dabbling in the market last year while waiting for the chance to study abroad.

Relying on advice from videos on YouTube and Telegram, Mr. Singh said, he has lost money at times—but still finds trading stocks more appealing than getting a job in his hometown, where he said private-sector work pays barely 10,000 rupees a month, equivalent to about $134.

“If you have knowledge of stocks,” he said, “then in three to four months you can earn hundreds of thousands of rupees, sitting at home.”

Write to Shefali Anand at [email protected]

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UBS Profit Jumps on Wealth Management Boom | Sidnaz Blog


A pedestrian passes a UBS branch in Zurich earlier this month.



Photo:

Stefan Wermuth/Bloomberg News

UBS Group AG


UBS -2.22%

posted better-than-expected second-quarter earnings from strong client activity in the world’s buoyant markets.

On Tuesday, Switzerland’s biggest bank said net profit jumped to $2 billion from $1.23 billion a year earlier, outpacing analyst expectations of $1.34 billion. It said wealth clients traded more, pushing transaction revenues 16% higher from a year earlier, and added that recurring fees were 30% higher on their existing trades and products.

At UBS’s investment bank, deal advice for mergers and acquisitions and other corporate transactions pushed global banking revenue 68% higher, helping to offset a 14% decline in market-trading income.

UBS said markets revenue would have been flat but it took an additional $87 million hit the quarter from the late March default by family office Archegos Capital Management. UBS was one of about a half-dozen banks that lent to Archegos to take large, concentrated positions in stocks. The Swiss bank said in April that it had lost $861 million when exiting the trades, most of it booked in the first quarter.

UBS helps the world’s rich manage their wealth and competes with Wall Street banks in investment banking.

On Tuesday, Chief Executive

Ralph Hamers

said wealth clients are investing more with the bank in private markets and in separately managed accounts, adding that they are also freeing up liquidity as a buffer against unforeseen events by refinancing assets and borrowing from the bank.

He said momentum is on UBS’s side and that its strategic choices are paying off. The bank refocused around wealth management a decade ago and pared back its investment bank. It has been less in the limelight than its smaller domestic rival,

Credit Suisse

Group AG, which lost more than $5 billion from the Archegos affair this year.

Write to Margot Patrick at [email protected]

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Nvidia Stock’s Surge Makes Chip Maker 10th-Biggest U.S. Listed | Sidnaz Blog


Nvidia chips’ parallel-computing capabilities make them better than rivals’ for artificial-intelligence performance and mining cryptocurrencies.



Photo:

nvidia corp/Reuters

The post-pandemic boom in the semiconductor business has powered

Nvidia Corp.


NVDA -4.25%

into the top 10 U.S. public companies, joining the likes of Apple Inc. and JPMorgan Chase & Co.

Shares of the Santa Clara, Calif., firm have risen nearly 80% over the past year, giving it a market value of around $453 billion. That is more than rivals

Intel Corp.

and

Broadcom Inc.

combined.

Nvidia makes processors that power gaming and cryptocurrency mining. Chip shares have risen in part thanks to a pandemic-induced global shortage of semiconductors that has driven up the prices of everything from laptops to automobiles.

One reason for Nvidia’s outperformance, analysts say, is that its chips’ parallel-computing capabilities make them better than rivals’ for artificial-intelligence performance and mining cryptocurrencies. Nvidia’s graphics processors are used for mining ethereum and the cryptocurrency’s value has soared this year, even after a recent correction.

That surge has exacerbated the shortage of gaming chips. Nvidia plans to sell cards aimed at the crypto market and has employed technical adjustments to make gaming processors less useful to miners. Analysts also expect Nvidia to get a boost from tech and autonomous-vehicle companies using its chips to navigate traffic or track online behavior.

SHARE YOUR THOUGHTS

How do you think Nvidia will perform in the next year? Join the conversation below.

“The company is the biggest and best supplier of parallel computing,” said

Ambrish Srivastava,

analyst at BMO Capital Markets. “It’s hard to compete against that.”

While Nvidia has a leg up in the data-center industry, competitors are catching up, analysts said. The recent slide in crypto also could spur miners to dump their chips on the secondary market, as happened when a previous ethereum skid hit revenue in 2018.

A global chip shortage is affecting how quickly we can drive a car off the lot or buy a new laptop. WSJ visits a fabrication plant in Singapore to see the complex process of chip making and how one manufacturer is trying to overcome the shortage. Photo: Edwin Cheng for The Wall Street Journal

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Crypto ‘Yield Farmers’ Chase High Returns, but Risk Losing It All | Sidnaz Blog


One of the hottest trends in cryptocurrencies is a financial activity that dates back to biblical times: lending money to earn interest.

Instead of just waiting for their

bitcoin,

ether or other digital coins to rise in value, cryptocurrency investors are now actively chasing returns by lending out their crypto holdings or pursuing other strategies to earn yield. Such “yield farming” can earn double-digit interest rates, far higher than the rates one can get with dollars.

It is a high-stakes endeavor. Investors run the risk of having their digital wealth stolen by scammers or erased by sudden bouts of volatility. The space is also largely unregulated. Yield farmers aren’t protected by the Federal Deposit Insurance Corp., which compensates depositors when banks fail.

Yet the promise of outsize returns in a low-yield environment has helped attract mainstream attention. In the past year, professional and amateur investors alike poured tens of billions of dollars into yield farming, according to industry analysts and data providers.

“Yield farming is not much different than buying high-dividend paying stocks or high-yield unsecured debt or bonds,”

Mark Cuban,

the billionaire owner of the Dallas Mavericks and an active crypto yield farmer, told The Wall Street Journal. “There is a reason they have to pay more than other companies. They are at greater risk.”

Even pros can get hurt. In June, Mr. Cuban lost money when Titan, a digital currency in which he was earning yield, crashed to zero.

Mark Cuban, owner of the NBA’s Dallas Mavericks, is an active crypto yield farmer.



Photo:

Richard Shotwell/Invision/Associated Press

Instead of putting their money in a bank, yield farmers typically hand their cryptocurrencies to computer programs. Some of these programs lend coins to borrowers and collect interest for the yield farmers.

For example, if an investor wanted to earn interest on tether, a so-called stablecoin that seeks to maintain the same value as the U.S. dollar, she could link her digital wallet to Aave, a crypto-lending platform.

Aave would lend out the investor’s tether funds and pay the interest directly into her digital wallet. As of late Friday, Aave was offering an annualized yield of around 2.9% on tether. Such yields can fluctuate minute to minute based on lending and borrowing activity.

Aave is among the bigger players in decentralized finance, or DeFi, the fast-growing segment of the crypto market in which yield farmers generally look for returns. DeFi projects try to replicate traditional financial activities, such as lending and borrowing, using cryptocurrencies.

Some upstart DeFi projects tout annualized returns of 30% to 50% or more. The catch is that returns are often denominated in tokens that depositors receive as rewards for using their platforms. If the tokens lose value, that erodes the value of the returns.

SHARE YOUR THOUGHTS

Do you think cryptocurrency is a passing trend, or is it here to stay? Join the conversation below.

Yield farmers can also lose money to fraud. DeFi projects are frequently run by anonymous teams that sometimes abscond with investors’ funds in scams known as rug pulls. From January to April, DeFi frauds cost investors $83.4 million, according to CipherTrace, an analytics firm.

“It’s the virtual equivalent of handing your money to a stranger and expecting them to give you your money back,” said

Ryan Watkins,

a senior research analyst at the crypto-data firm Messari.

Marcio Chiaradia,

a digital-marketing professional in Irvine, Calif., began yield farming in December. He lost a few hundred dollars on a rug pull called MoltenSwap that was offering a yield of more than 1,000%, he recalled. But Mr. Chiaradia said his record has been mostly positive.

“It feels like the beginning of the internet, with these weird and crazy things that are not going to be around in the long run,” said Mr. Chiaradia, who is 39 years old and has committed several thousand dollars of assets to yield farming. “But I feel like there are some DeFi sites that are going to stick around.”

It is hard to measure the exact amount of yield-farming activity, but a rough proxy is the total assets deposited as collateral with DeFi projects. That metric—called total value locked—has swelled to $74 billion from less than $2 billion a year ago, according to the data provider DeBank.

Nonfungible tokens, or NFTs, have exploded onto the digital-art scene. Proponents say they are a way to make digital assets scarce and therefore more valuable. WSJ explains how they work and why some question whether they are built to last. Photo illustration: Jacob Reynolds/WSJ

Some popular yield-farming strategies don’t have direct analogs to traditional finance. In “liquidity mining,” investors put digital coins in pools of assets run by decentralized crypto exchanges such as Uniswap and collect a slice of the exchanges’ trading fees.

In a related strategy known as “staking,” investors lock up their coins to support the integrity of a currency’s underlying computer network. In return, they are paid in new coins, earning interest.

There is a huge gap between dollar interest rates and the yields available in cryptocurrencies—even in stablecoins purportedly tied to the U.S. dollar. The national average interest rate for savings accounts is 0.06%, according to Bankrate.com. Meanwhile, crypto platforms offer depositors annualized returns of 1% to 10% or more on dollar-pegged stablecoins.

Such discrepancies have arisen because of the huge demand for borrowing digital currencies, said

Marco Di Maggio,

a Harvard Business School professor who has studied crypto lending.

The demand comes mostly from trading firms that can reap profits from various strategies, Mr. Di Maggio says. One strategy, for instance, involves exploiting the difference between the price of bitcoin and futures contracts linked to the price of bitcoin in months to come. But it takes significant amounts of capital to make such strategies work. Since the crypto firms often can’t borrow from banks, they turn to crypto-lending platforms, where they are willing to pay high rates.

Crypto interest rates will fall as the market matures, Mr. Di Maggio predicts. Moreover, a crypto price crash would cool the current frenzy for digital-currency loans. “It’s sustainable as long as there is a bull market and demand for leverage,” he said.

Meanwhile, companies such as the exchange operator

Coinbase Global Inc.

hope to benefit from lofty cryptocurrency interest rates. Last month Coinbase announced a program in which customers can earn 4% annual yield on stablecoin USD Coin. And the yield is low by crypto standards. BlockFi, a crypto-lending startup, offers depositors a 7.5% annual yield on the same coin.

“It’s getting more accessible to people who aren’t crypto-native,” said

Peter Johnson,

a partner at Jump Capital, a venture-capital firm that has backed BlockFi and a number of DeFi projects.

“If you just want to earn 4% on your dollars, there are now ways to do that without having to know a lot about crypto,” he said.

Bitcoin, Dogecoin, Ether: Cryptocurrency Markets

Write to Alexander Osipovich at [email protected]

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JPMorgan Profit More Than Doubles, but Revenue Falls | Sidnaz Blog


JPMorgan Chase opened the quarterly bank earnings season.



Photo:

Amir Hamja for The Wall Street Journal

JPMorgan Chase


JPM 1.43%

& Co. on Tuesday said second-quarter profit soared compared with a year ago, when the bank was stockpiling funds to prepare for a painful recession.

The nation’s biggest bank posted a profit of $11.95 billion, or $3.78 per share, compared with $4.69 billion or $1.38 per share a year ago. That beat the expectations of analysts, who had predicted $3.20 per share.

Yet revenue fell 8% to $30.48 billion from $33.08 billion a year ago, the result of depressed lending margins and lower trading revenue. Analysts had expected $29.97 billion in revenue, according to FactSet.

The divergence between profit and revenue is largely due to the extraordinary conditions of the second quarter of 2020, when the coronavirus pandemic appeared poised to decimate the economy. Then, JPMorgan set aside $10.47 billion to prepare for a wave of loan defaults. This quarter, the bank continued to free up pandemic loan-loss reserves, releasing another $3 billion and boosting its bottom line.

The second quarter will likely prove to be an in-between period for big banks like JPMorgan. Businesses that boomed throughout the pandemic, especially trading and investment banking, are slowing down from record paces. Corporate clients that last year nervously rushed to raise money are now flush with cash. Last year’s market chaos, which can be ideal for trading, has quieted now that the U.S. has gotten the pandemic under control.

Revenue fell 19% in JPMorgan’s corporate and investment bank and was up 3% in its consumer bank.

Loan balances grew 3% but with interest rates still near zero, the bank’s lending profits fell again.

Write to David Benoit at [email protected]

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Credit Suisse’s SPAC Bonanza Dries Up | Sidnaz Blog


Now the market for SPACs—or special-purpose acquisition companies—has come off the boil, and new underwriting fees are threatening to dry up. Credit Suisse’s SPAC deals are being closely watched by investors and analysts, because revenue from them came to represent a large chunk of overall investment-banking revenue last year. That raised concerns that the fees and deal volume might not be sustainable.

Credit Suisse went from making an estimated $466 million in gross SPAC underwriting fees in the first quarter, to $16.1 million between April 1 and June 15, according to data provider Refinitiv.

Across banks, SPAC underwriting fees fell to $541 million in the second quarter to June 15, from a record $4.85 billion in the first quarter, according to Refinitiv data. Other banks, including

Citigroup Inc.

and

Goldman Sachs Group Inc.,

also saw sharp dives in their SPAC initial public offering fees in the second quarter, according to Refinitiv data.

SPACs are shell companies that raise money to target a private company and take it public. They became a popular cash cow for big-name investors and celebrities in soaring stock markets, but demand cooled in the second quarter as shares of some companies that merged with SPACs tumbled and the Securities and Exchange Commission toughened its stance on the format.

The drop-off in activity doesn’t mean banks will stop reporting strong SPAC revenue. Refinitiv calculates full IPO underwriting fees upfront, while in practice, banks receive around 2% of money raised when the SPAC goes public and another 3.5% or so if and when the SPAC buys or merges with another company. Mergers continued in the second quarter, producing those deferred underwriting fees, and frequently additional fees too for deal advice or raising more cash.

Nearly 300 SPACs have said they intend to raise money, meaning new blank-check IPOs and underwriting could pick up again.

The SPAC business is emblematic of the bank’s post-Archegos dilemma: It wants to ratchet down risk and focus on managing the wealth of the global rich—but investment banking brought in 40% of revenue last year. Credit Suisse Chairman

António Horta-Osório,

who started May 1, said there could be strategic changes and that tough decisions lie ahead.

Credit Suisse’s share price has been among the worst performers of global banks this year, down 14%. Over the same period, an index of European banking stocks is up by more than one quarter.

Credit Suisse’s new chairman, António Horta-Osório, has said tough decisions lie ahead for the bank.



Photo:

Simon Dawson/Bloomberg News

The SPAC fee surge last year helped Credit Suisse offset $1.3 billion in unexpected charges from a legal case, and revaluing a hedge-fund stake. The revenue took on more importance when Archegos Capital, the family office of hedge-fund manager

Bill Hwang,

couldn’t meet margin calls at several banks in March, causing more than $10 billion in losses at lenders exiting the Archegos positions.

Credit Suisse said it was able to largely contain losses from Archegos because of the strong quarter it had elsewhere in the investment bank, including in underwriting SPACs and other IPOs. It reported a $275 million first-quarter net loss and tapped shareholders for $2 billion capital in April.

SHARE YOUR THOUGHTS

Can the SPAC market make a comeback? Why or why not? Join the conversation below.

The bank said losses could also be material from the collapse of another client, financial firm Greensill Capital, with which Credit Suisse ran $10 billion in investment funds.

Credit Suisse doesn’t break out SPAC revenue in published earnings. However, its chief financial officer,

David Mathers,

told analysts in April that around $300 million of $1.5 billion capital markets and advisory fees in the first quarter came from SPACs. Revenue across Credit Suisse was around $8.4 billion.

Credit Suisse was the biggest underwriter of SPACs last year, benefiting from relationships with serial SPAC founders such as venture capitalist Chamath Palihapitiya and deal maker and Vegas Golden Knights owner

Bill Foley.

The Swiss bank invested in the sector in the years before SPACs went mainstream, hiring veteran SPAC banker Niron Stabinsky in 2015.

WSJ explains why some critics say investing in SPACs isn’t worth the risk. (Originally published Sep. 29, 2020)

Write to Margot Patrick at [email protected]

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Whatever Their CEOs Say, Banks Are Wary About the Office | Sidnaz Blog


Some bank chiefs, like JPMorgan’s

Jamie Dimon,

talk as if the office will soon look more or less as it did before. Their real estate lending teams seem less sure.

Banks on both sides of the Atlantic are becoming more selective about which offices they will lend against. Pockets of the market have been resilient during the pandemic: The rate banks charge for mortgages on the best central London offices was 1.65% in the first quarter of 2021, more or less where it was before the crisis, data from real-estate company CBRE shows. But U.K. lending margins for older, less central offices are close to historic highs, based on the Cass Business School’s commercial real estate lending report.

In the U.S., the value of new office loans issued by banks in the first quarter of this year was just 35% of levels in the same period of 2019, according to Trepp data—a sharper pullback than for unloved retail assets such as malls. The spread between office mortgage rates and 10-year Treasurys also has widened from precrisis levels.

The value of new office loans issued by banks in the first quarter was just 35% of levels in the same period of 2019.



Photo:

Amir Hamja/Bloomberg News

The rise in debt costs is notable because default rates on existing office loans are currently below 1%. Corporate tenants locked into leases are continuing to pay the rent, so landlords have met their mortgage payments. But that could change once existing contracts roll off and white-collar employees spend more time at home. Companies ranging from tech giant

Facebook

to global bank

HSBC

plan to let some staff work remotely on a permanent basis.

Oversupply is already an issue in San Francisco, leading to big falls in rent and high vacancy rates. Lenders are also watching New York closely. In the mid-Atlantic region, which includes the troubled Manhattan market, almost one-third of banks’ outstanding office loans now fall into the riskier “criticized” category, up from 6% before the pandemic, survey data gathered by Trepp shows.

The pandemic also has accelerated the pre-Covid trend toward more energy-efficient offices with strong communal areas, good ventilation and natural light. Expensive improvements are needed both to entice workers back and to meet growing expectations for businesses to disclose and reduce their carbon footprints. Unfortunately for landlords, green credentials seem set to become a requirement to let rather than the basis for charging tenants a premium.

All of these factors make it tough to predict where office valuations are headed and therefore to underwrite loans. In central London, the best offices are still changing hands at high valuations that give rental yields of just 4%, buoyed by rock-bottom interest rates and strong demand from overseas buyers. Shareholders are more bearish. The discount to book value at which U.K. and U.S. office real-estate investment trusts now trade imply 15% and 10% falls in the value of the properties they own, respectively, according to real-estate research firm Green Street.

For now, mortgage writers too are erring on the side of caution. Seen through the lens of their lending activity, banks’ efforts to big up the office to staff appear halfhearted.

Plexiglass dividers and floor decals might not be permanent, but the pandemic will bring lasting change to offices. Experts from the architecture and real-estate industries share how they are getting back to work and what offices will look like in the future. Photo: Cesare Salerno for The Wall Street Journal

Write to Carol Ryan at [email protected] and Rochelle Toplensky at [email protected]

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8



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