Outbound M&A activity from China plummeted last year, according to Fitch, with the total value of deals experiencing a 30.1% year-on-year slump to $68.6bn: a five-year low. Domestic corporates’ acquisitions in the US and Europe – China’s top-two outbound M&A locations of the previous year – dropped to their lowest levels since 2014 and 2012 respectively, with Asia overtaking Europe as the most favoured venue amid the ongoing rollout of the Belt and Road project.
In its analysis, Fitch noted that some Chinese corporates with large, debt-funded acquisitions have faced high liquidity risks or struggled to repay debt maturing in 2019 against a backdrop of slowing economic growth, plus a credit environment that has been steadily tightening since H2 2017. Examples include textiles firm Shandong Ruyi Technology Group narrowly avoiding default on $345m of bonds that were due in December, and Tianqi Lithium Corporation’s heightened refinancing risk stemming from sizeable loans for its 2018 $4.1bn purchase of a 24% stake in Chilean lithium miner Sociedad Quimica y Minera de Chile SA.
Looking ahead, Fitch pointed out that the risk of a re-escalation in US-China trade tensions – together with a further slowdown of China’s economy as a result of the global COVID-19 crisis – will weigh on Chinese corporates’ outbound M&A activities for the remainder of this year. The agency said: “We expect debt repayment pressure to rise for highly indebted Chinese acquirers in 2020 as slowing economic growth is likely to weaken their cash-flow generation – and hence their debt-serving ability.”
Ratings agency Moody’s has downgraded its outlook for KFC and Pizza Hut owner Yum Brands from stable to negative, following the ‘junk-rated’ company’s move to trigger a bond issue at the tail end of March. According to an analysis at the Financial Times, the issue enabled the firm to swell its size by $100m to $600m, boosting its cash position in the face of pressure from the COVID-19 crisis that has already led to the closure of 7,000 Yum Brands outlets worldwide – including 1,000 US Pizza Hut branches and 900 UK KFCs.
However, it was the very nature of that pressure that elicited Moody’s stern rebuke, with the agency’s senior credit officer Bill Fahy saying: “The negative outlook reflects the risk that there may be a sustained weakening in Yum’s credit metrics, as they are increasing debt levels at a time when the company is facing significant uncertainty surrounding the potential length and severity of restaurant closures and the ultimate impact that these closures will have on Yum's revenues, earnings and liquidity.”
The FT noted that Yum Brands was the first high-yield bond issuer to come to market in the US since 4 March. Citing coronavirus-related social-distancing measures in a number of territories, the firm has warned industry observers to expect a like-for-like sales drop for Q1 in a mid-to-high single-digit percentage range, with a larger drop to follow in Q2.
A patchwork approach to sustainable finance on a global scale is slowing the development of green funding instruments, a recent paper from the Institute of International Finance (IIF) has found. Published in early March, the paper argues that the policy landscape around sustainable finance is complicated by the lack of a global framework. “Moreover,” it points out, “some key jurisdictions that will be essential to achieving aligned frameworks have been largely absent from the still-emerging global policy and standard-setting discussions.”
The paper hails efforts undertaken by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS): an organisation in which national banks and regulators are sharing best practices to pave the way for a more sustainable global economy.
However, it stresses, “activity is taking place in various pockets across the traditional international standard-setting organisations – including the Financial Stability Board, the Basel Committee on Banking Supervision, the International Organization of Securities Commissions, the International Association of Insurance Supervisors and the International Organisation of Pension Supervisors – as well as in institutions comprising the [global] financial architecture (for example, the International Monetary Fund).”
It notes: “All this is taking place alongside the work of new groupings outside the normal international economic policymaking apparatus (such as the NGFS and the International Standards Organization). In addition, many countries and regions across the world are developing jurisdiction-specific rules in relation to various aspects of sustainable finance.”
With those issues in mind, the paper adds: “The IIF urges the G20 to consider an enhanced sustainability agenda that brings together, in a careful and considered manner, key policy discussions across finance ministries, central banks, financial sector regulators/supervisors, and multilateral institutions. Ultimately, sustainable finance is only one part of a broader set of coordinated policies that will be required across the economy.”
Standard-setting body the International Organization of Securities Commissions (IOSCO) has established a special working group to track innovative behaviour around stablecoins: novel crypto-assets with global reach that are underpinned by either fiat currencies or other, real-world assets such as securities, commodities or real estate. As announced in a new report, IOSCO has set up the new Stablecoin Working Group within its existing Fintech Network, in order to “consider and evaluate” global stablecoin proposals from the perspectives of securities-market regulators.
In the report itself, IOSCO uses a hypothetical case study to conjecture and envisage a variety of scenarios in which a stablecoin may fall within the scope of globally recognised securities protocols, and/or IOSCO’s own Principles for Financial Market Infrastructure. The report notes: “Any stablecoin proposal should be viewed holistically, considering its substance over its form, and considering the economic realities of the proposal.”
It adds: “Should any stablecoin pricing – or the value of any assets that is intended to be linked to the stablecoin – be used in the future to price, or be the basis for the price, of certain financial instruments, including those traded on a regulated venue (such as a fund or derivatives), there is the possibility the stablecoin or the value of the linked assets could become a benchmark. In turn, depending on the jurisdiction, the administrator of the benchmark might need to be authorised or could be carrying out regulated activity.”
The UK government has enlisted the City of London Corporation as secretariat to a sweeping new review of the nation’s fintech sector. Announced in the Commons on 11 March during chancellor Rishi Sunak’s debut Budget, the review will be led by Ron Kalifa, chairman of payments firm Network International, and a non-executive director at the Bank of England and Transport for London.
City of London Corporation policy chair Catherine McGuinness said: “The strategic review of the UK fintech sector is a very positive step, and as secretariat we look forward to working with Ron Kalifa to ensure the sector continues to drive forward innovation in financial services and enhance its role as a key growth engine for the UK economy.”
Charlotte Crosswell – head of fintech industry association Innovate Finance – welcomed the chancellor’s announcement. “We are at a crucial moment in fintech’s development,” she said. “UK companies are now entering a phase of maturity that requires action to ensure that entrepreneurs can not only establish and scale their businesses in their home market, but also export their products and services internationally. By better understanding the needs, requirements and key focus areas for the sector, we will put ourselves in a strong position to boost the fintech industry, and in turn support the economy as a whole.”