Featured Commercial Awareness Update - July 2019!

Discussion in 'Commercial Awareness Forum' started by Sairah, Jul 3, 2019.

  1. Sairah

    Sairah Valued Member

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    Hi everyone!

    Welcome to the first commercial news update for July.

    Happy reading!

    Commercial News Update: 3rd July 2019

    Topics covered this week are:

    1. The bid for British Steel and problems facing the Steel Industry (@bugsy malone)
    2. US-China Trade Truce at the G-20 Summit (@Jaysen)
    3. Rise in Gold Investment (@Sairah)

    1. The bid for British Steel and problems facing the Steel Industry (by: @bugsy malone)

    The Story:

    On Sunday evening the deadline for bids to purchase British Steel past. The company collapsed in May after its owner, Greybull Capital, failed to secure a government loan of £75 million. If a buyer is not found then the company will be wound up. Although, an official announcement of the bids is yet to be released, newspapers have mentioned companies such as Liberty Steel, India’s JSW and China’s HeSteel group are interested in purchasing the entire company. Whilst others are interested in purchasing parts of the company. For example, Network Rail have confirmed an offer for the rail section (as most of the steel used on UK railways is made by British Steel (97%) and they buy around 100,000 tons per year). Although, Network Rail said “our overwhelming preference is that a purchaser for the entire business is found”.

    Impact on Businesses and Law Firms:

    For the long term future of British Steel, bidders’ investment intentions and what the government is going to do in terms of helping that investment (e.g. business rates) will be important. As the steel sector is massively capital intensive, companies have to make a lot of investment year in year out. The UK steel industry faces much higher costs than other European competitors such as France and Germany whose electricity prices are 50% less than the UK. Also, there is massive global over capacity. For example, in 2018 China made 100 million tons more steel than they needed, in turn we have seen an increase in exports, which could flood the UK market in the future.

    Although, Brexit uncertainty has been spoken of as massive for the steel industry, this does not seem to be putting off foreign buyers as the products British Steel makes for rail and construction have seen growing demand.


    2. US-China Trade Truce at the G-20 Summit (by: @Jaysen)

    The Story:

    Last Friday and Saturday, world leaders met to discuss pressing global economic and financial issues at the annual G20 summit.

    The summit ended with the US postponing further tariffs on Chinese goods and lifting some restrictions on Huawei. In return, China agreed to buy more US agricultural products.

    Impact on Businesses and Law Firms:

    The markets are happy. Stock markets around the world rose sharply, with the S&P 500 closing at an all-time high. They had feared Donald Trump would keep to his word and impose tariffs on the $300bn in goods that aren’t already covered by existing US tariffs. With the ban lifted on Huawei, US tech stocks rallied; they can now get back to selling high-tech equipment to the company provided there’s no national security risk.

    The trade truce is a positive sign, at least in the short term. The US-trade war has caused global organisations, such as the IMF and the World Bank, to cut global growth forecasts. It has caused investors to move to safe haven assets and likely exacerbated China’s slowdown. China’s growth has made it a crucial player in the world stage, which is why a fall in demand from China impacts everything from European shoe giants to Australian mining companies.

    Is it worth it? Perhaps. You might argue it’s a necessary cost to tackle China’s lack of market access, discrimination against foreign companies and technology transfers. Alternatively, you might suspect Trump is trying to sabotage China’s attempts at competing on the global stage.

    What we do know is Trump’s re-election campaign is underway. In the first Democratic primary debate, four of the 10 candidates identified China as the biggest threat facing the US. If Trump secures a weak deal, it will be used against him. In other words, the market should be wary of celebrating too quickly.
     
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  2. Sairah

    Sairah Valued Member

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    3. Rise in Gold Investment (by: @Sairah)

    The Story:


    The price of gold has reached its highest in six years – climbing as high as $1,398.00 per ounce last Friday. Investors have turned to gold as a safe-haven asset (an asset which holds or increases its value during periods of market and economic uncertainty) amid increasing concerns about the health of the global economy. Recent developments such as the weaker US dollar and the fall of the ten-year US Treasury yield dropping below 2% for the first time since 2016 has contributed to the boost of gold prices. This is because, gold tends to rise in dollar terms when the US bond yields fall.

    Impact on Businesses and Law Firms:

    According to the World Gold Council, almost one fifth of central banks have signaled their intention to increase gold purchases over the next 12 months, as part of diversifying their reserve base. In May, China increased its gold purchases for the sixth-month running, taking its total reserves to 1,916 tonnes. Private banks and wealth managers have also started to shift a small percentage of their clients’ portfolios out of equities and into gold to protect investors from the uncertainties of the market. This is because, the price of gold offers a safety net to investors in times of crisis – as it moves in a opposite direction from other assets, such as stocks and bonds. It can also do well and serve as a hedge when inflation threatens.

    Following on from the G20 Summit, the US and China have agreed to restart trade talks, causing gold prices to decline as much as 2% on Monday. This has boosted investors’ confidence in opting for riskier assets such as stocks. But, the release of the US economic data report this week should help investors better assess how the US economy is performing. This includes whether the Federal Reserve will cut interest rates later this month. If the data shows signs of a weakening global economy – is it highly possible for gold to edge back up.

    To navigate institutional investors from this uncertain situation, international law firms will need to step in, to provide advice with respect to issues such as investment into sovereign wealth funds to portfolio trading practices.
     
    #2 Sairah, Jul 3, 2019
    Last edited: Jul 3, 2019
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  3. Hida74

    Hida74 Standard Member

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    Thank you! Brilliant summary and so helpful!
     
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  4. JaneS

    JaneS Standard Member

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    Hello

    How can I get the email updates instead?

    Btw great read, very informative. Thanks Jaysen and team :D
     
  5. Sairah

    Sairah Valued Member

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    Thank you for the feedback - we are glad you like the articles! :)

    @Jaysen will be best placed to answer your question about how to subscribe.
     
  6. Jaysen

    Jaysen Legendary Member
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  7. Syafiqkay92

    Syafiqkay92 Star Member

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    Hi

    Thanks for writing the story about business news and current affairs.

    I just thought I add something to this piece.

    It seems to me that British Steel could be a target for private equity investment. I'm thinking distressed M&A. Greybull Capital, a private equity firm specialising in turnaround distressed companies, has attempted to improve the business but seems unable to do so. This means that British Steel might be an unattractive investment, even to private equity capital whose dry powder is increasing at an unprecedented level.

    Despite initial interest from several buyers, British Steel did not receive any bids and that makes me wonder why. In practical terms, private equity firm tends to look at their cash flow projection. There are more factors that negatively affect their cash flow than benefits. This include factors such as increasing cost of energy, UK's commitment towards becoming carbon neutral by 2050, competition with steel supply from China and increasing cost of credit as a result of increase central bank interest rate.

    One risk in particular is the decrease in steel prices affecting its revenue. This is due to Chinese companies over supplying the market with steel causing the price to fall. This could be an unintended impact of US-China trade war on the UK. As the tariff is affecting Chinese export of steel to the US, there is lower demand for their steel in the US, so they export that steel to the UK market instead.

    As British Steel is the UK's second largest steel maker, if it does collapse, it means that 4000 jobs are at risk. This could also affect 20,000 jobs in the supply chain. This could have a strong impact on UK economic growth which increases the risk to UK inbound investors, making them less likely to invest in the UK.

    This news shows how the bigger issues such as US-China trade war, Brexit uncertainty, and rising interest rate environment could affect a company. This means that companies need to review their financing arrangement and this would require the help of law firms to negotiate a more favourable financing, so that their operation is more resilient towards macroeconomic factors.

    I hope this makes sense and I am keen to hear if anyone has a different view about this that I can learn from.

    Best wishes,
    Syafiq.
     
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  8. Angel

    Angel Distinguished Member
    Commercial Writer

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    Hi everyone!

    Welcome to this week's commercial news update. Happy reading!

    Commercial News Update: 10th July 2019

    Topics covered this week are:

    1. Private Equity Funds Targeting Real Estate @Sara Moon
    2. Huawei’s 5G Network Concerns @Sairah
    3. Deutsche Bank’s radical restructuring @Jaysen
    4. Christine Lagarde's nomination as the next ECB president @Angel


    1. Private Equity Funds Targeting Real Estate @Sara Moon

    The Story

    The global property market seems to be going downhill. In the UK, investments in London offices, affected by the Brexit uncertainty, fell by 37% in the first half of 2019 compared to the previous year. The increasing trend to shop online coupled with the devaluation of the sterling increased retailer costs. This made it difficult for landlords to rent out their high street properties. The atmosphere in the US is similar. The Financial Times reported that every one in six retail stores on the famous shopping street Fifth Avenue is empty- with Topshop being the most recent retail brand to close all of its US stores.

    However, private equity industry is seeing opportunities in this seemingly slumping real estate market and has raised $8bn in the first quarter to invest in problematic retail estates. This is double the amount raised in the last two years aggregated. Private equity firms aim to gain juicy returns by investing in cheap properties through methods such as providing debt finance or interfering with the property management to increase the value of the property.

    Impact on Businesses and Law Firms

    Private equity funds raised are not yet being spent and firms are waiting for a property slump to realise in the near future. A recent report by LaSalle Investment Management stated that by 2021, “a cyclical inflection in many real estate markets is inevitable after a long run of global growth and real estate value appreciation”. Thus, private equity deals (‘PE deals’) are likely to be flooding the market in the coming years.

    PE deals are lucrative sources of revenue for law firms not least because they tend to focus on generating profit in the long-run (10 years on average). This means that law firms engaged in the deals work with the same PE firm for a long time. Lawyers involved in PE deals advise on the sale and acquisition of companies, the negotiation of the deal, and the drafting of documents. Banking lawyers also advise on financing the deal.


    2. Huawei’s 5G Network Concerns (@Sairah)

    The Story

    Last Saturday, it was revealed that four of UK’s major telecom operators – EE, O2, Three and Vodafone are using Huawei to build their 5G networks, despite the recent US sanctions that threatened Huawei’s global supply chain. The decision to use Huawei equipment in the “non-core” elements of their networks (e.g. antennas allowing wireless communication) is a concern for the operators. Although Theresa May approved Huawei’s bid to build 5G networks in April, the UK government has yet to confirm whether Huawei will be permitted to build the wireless infrastructure. It is estimated a partial to full restriction on Huawei could result in an 18-month to 24-month delay to the widespread availability of 5G in the UK. This would deter the UK from becoming a ‘world leader in 5G’ (a key-government target), costing the economy between £4.5 to £6.8 billion.

    Impact on Businesses and Law Firms:

    The involvement of Huawei in the UK’s 5G network industry has threatened relations between the UK and the US. In May, the Trump administration placed pressure on other countries to follow suit and prevent businesses from using Huawei equipment. In the UK, Trump has threatened to restrict intelligence-sharing between allies unless the government clamps down on the company[JS1] . However, Huawei has expressed preparations to take additional steps to provide the UK and other countries with assurances that the company is not involved in ‘spying claims for the Chinese government’. This will be done by signing “no-spy, no-backdoor” agreements. On Monday, China’s ambassador, Liu Xiaoming, also issued a guarantee that the UK will suffer economically if it refuses to allow Huawei to build the 5G mobile network. It could also impact trade and investment with other Chinese companies.

    This issue is critically important for businesses such as BT Group and Vodafone, some of Huawei’s biggest clients. Vodafone has already switched on its 5G network in six of the seven cities in the UK. It will not be easy for companies that are already using Huawei equipment to switch to another equipment provider as Huawei’s equipment already forms the infrastructure for 4G networks of many major wireless carriers in Europe and other countries. Without Huawei, there would be a ‘huge’ gap in the market, one which Huawei’s competitors such as Nokia or Ericsson would not be able fulfil quickly.
     
    #8 Angel, Jul 10, 2019 at 11:34 AM
    Last edited: Jul 11, 2019 at 2:25 PM
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  9. Angel

    Angel Distinguished Member
    Commercial Writer

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    3. Deutsche Bank’s radical restructuring @Jaysen

    The Story

    Last Sunday, Deutsche Bank announced a radical turnaround plan that would see it cut 18,000 jobs by 2022, exit its global equities business and move billions of toxic assets to a separate unit -- a so-called ‘bad bank’.

    Impact on Businesses and Law Firms

    Is it too little too late? The German lender failed to clean up its balance sheet properly after the financial crisis. It has since been plagued by regulatory investigations, fines and stiff competition. It’s no wonder that its recent attempt to merge with rival lender Commerzbank failed.

    It’s not only Deutsche Bank either. Other European banks failed to aggressively reform after the crash. They’ve also suffered from negative interest rates, slow growth and fragmentation within the Eurozone, which have stifled their profitability. While these banks have stumbled, US rivals like Goldman Sachs and Morgan Stanley have increased their market share in Europe.

    Deutsche Bank will now go back to its roots, focusing on European companies and retail-banking customers. The plan is to reduce costs while leaving enough money to fund the restructuring, so it doesn’t have to raise more capital. Its ‘bad bank’ will take in the assets the bank no longer wants, which can then be sold or wound down.

    Lawyers play an important role in the restructuring process. Take the job cuts, for example. Lawyers must advise Deutsche Bank on making staff redundancies across multiple jurisdictions. And this can be delicate; how will they be consulted? Will they be offered financial compensation? How can they avoid potential claims for unfair dismissal?

    Germany will also be an interesting case study. The country has strict employment laws that are supported by powerful unions. Yet in Frankfurt, legislation was recently introduced to make it easier to fire high-earning bank officials as Germany sought to benefit from the fallout of Brexit. Deutsche Bank could be the first major test case.

    4. Christine Largarde's nomination as the next ECB president @Angel

    The Story

    Last Tuesday, Christine Lagarde was nominated to be the new European Central Bank (“ECB”) president. The ECB in the Eurozone is analogous to the role of the Federal Reserve in the US. It sets monetary policy and supervises the banking and financial activities for the 19 countries that adopt the common European currency (Euro) – aka, the Eurozone. Therefore, it plays a crucial role in maintaining the stability of prices and inflation within the Eurozone.

    Impact on Businesses and Law Firms

    Financial markets across Europe rallied upon news of her nomination. The response from business leaders and central banks on Lagarde’s ECB nomination have been positive. Investors take the view that Lagarde will retain current ECB President Mario Draghi’s policies that support economic growth. Put simply, this is achieved by adopting expansionary monetary policy - the process in which a central authority (in the case, the ECB) influences the economy of its province (the Eurozone) by controlling the money supply or the interest rates in the zone (in this case, to keep interest rates low to stimulate the economy).

    Commercial lawyers, especially those who specialise in capital markets, will need to stay up-to-date with the nomination. The role of capital market lawyers includes helping clients raise funds in the financial markets. In doing so, they work closely with bankers to advise on the legal and regulatory aspect of a transaction. In the likely event that Lagarde is appointed as the new ECB president, capital markets lawyers would need to be prepared for changes in policies, a shift in investors’ confidence (for better or for worse), and alterations to regulations that must be complied with.
     
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