|Bid||233.45 x 800|
|Ask||233.80 x 800|
|Day's Range||232.06 - 241.66|
|52 Week Range||167.78 - 287.25|
|Beta (5Y Monthly)||1.22|
|PE Ratio (TTM)||31.73|
|Earnings Date||Apr 21, 2020 - Apr 26, 2020|
|Forward Dividend & Yield||2.24 (0.92%)|
|Ex-Dividend Date||Feb 23, 2020|
|1y Target Est||272.10|
Moody’s Corporation (NYSE:MCO) posted an updated management presentation for investors on its website, http://ir.moodys.com, on Thursday, February 27, 2020. This presentation reflects certain information regarding the Company’s results for the three months and full year ended December 31, 2019 and its posting is provided pursuant to Regulation FD. Senior management may use this updated presentation during meetings with analysts and investors.
(Bloomberg Opinion) -- Utilities are more Tennessee Valley than Silicon Valley, but they’re having a distinctly tech-like moment. At more than 20 times forward earnings, they sport an average multiple on a par with tech stocks.Have the poles-and-wires guys somehow morphed into digital growth machines? Not so much. Utility earnings are expected to rise by just more than 4% in each of the next two years, well below what’s estimated for technology stocks (and the broader market). Same goes for trailing earnings growth.What the utilities do have going for them right now is the thing afflicting most everyone else: fear of a pandemic.Wednesday marked a watershed in the energy world, with utilities’ weighting in the S&P 500 rising above that of the energy (or oil and gas) sector for the first time ever. Leave aside things like energy transition and climate change, and this dichotomy explains a lot. Oil and gas is a cyclical, global business where China looms disproportionately large, and the oil price is a go-to macro trade. A pandemic scare originating in the center of global demand growth is about as bad as it gets for oil — and it’s also not great for a host of other sectors relying on global markets and supply chains, tech included.Utilities are the opposite of this. They are overwhelmingly domestic, with wires strung above and pipes laid below American streets. Demand for their products isn’t likely to be affected too much whether people are commuting or staying home. More importantly, demand doesn’t drive their near-term earnings anyway; regulators set an allowed return on investment. This is why energy stocks now yield almost 5% and utilities less than 3%. The majors are being penalized for spending money, while utilities are rewarded for doing just that.It isn’t the promise of high growth pushing utilities higher; it’s more the sense their earnings will be resilient to whatever is coming on the coronavirus front. For example, we are yet to see what happens when a major outbreak is confirmed within the U.S.Pandemic-flavored panic also offers a boost via the bond market. Here’s the utilities sector relative to the S&P 500 in terms of forward price/earnings multiples over the past decade:The premium has obviously kicked up this year, but it has been there since late 2018. That was when the market sold off heavily on concerns about excessive tightening by the Federal Reserve. Then 2019 saw the interplay of fears about a trade war and the Fed’s pivot, first toward holding off on further interest-rate hikes and then to outright easing. Like the coronavirus, this backdrop of turmoil centered on international business activity played to utilities’ strengths.The added twist is that utilities’ regulated earnings and high payouts have long led investors to treat them as bond proxies. Greg Gordon, an analyst at Evercore ISI, tracks the relationship between utility dividend yields and the yield on a Moody’s Corp. index of triple-B-rated corporate debt. As corporate bond yields feel the gravitational pull of a sinking 10-year Treasury yield — cut in half since the start of 2019 to today’s 1.34% — so utility yields have also reset lower and lower:This presents a conundrum. On one hand, utility valuations clearly look stretched. Their premium to the S&P 500 looks historically high, and they also trade significantly above another defensive sector, healthcare.And yet the spread between utility dividend yields and corporate bond yields has narrowed to less than 60 basis points, roughly half the average of the past decade. That leaves little room for utility yields to rise without breaching the long-established relationship with the bond index. The latter, meanwhile, is being held down by those record low Treasury yields; and what with pandemic fears and an oncoming election, it is hard to see right now what could shift those appreciably.One risk is that the fear that has crept into high-yield bonds seeps up into the higher-rated end of the market. That would loosen the grip of investment grade yields (hardly bargains themselves) on Treasuries, meaning wider spreads — and ultimately higher dividend yields and lower prices for utility stocks.It would be correct to say utilities are priced for something like perfection. In the current context, though, “perfection” means something pretty awful.To contact the author of this story: Liam Denning at email@example.comTo contact the editor responsible for this story: Mark Gongloff at firstname.lastname@example.orgThis column does not necessarily reflect the opinion of Bloomberg LP and its owners.Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
These high-debt companies could be next in the wave of credit downgrades, making them more vulnerable to losses Continue reading...
The financial sector is comprised of companies that offer services broadly aimed at providing loans, insurance, and money management services for individuals and firms. Well-known companies in the sector include Citigroup Inc. (C), Bank of America Corp. (BAC), and Morgan Stanley (MS). Below, we'll examine the top three stocks in the financial sector for best value, fastest earnings growth, and most momentum.
(Bloomberg Opinion) -- The house of HNA Group Co. may be no more, bringing an end to the dramatic rise and fall of one of the biggest buyers of global assets in recent years. It was about time.The Chinese government is planning to take over the airline-to-insurance-to-property conglomerate that splashed out over $40 billion in recent years to buy assets including stakes in Hilton Worldwide Holdings Inc. and Deutsche Bank AG and airplane lessor Avolon Holdings Ltd., Bloomberg News reported citing people familiar with the plans. A government seizure would mark the final step in an unwinding of the closely held and debt-encumbered behemoth that began more than two years ago. In theory, Beijing was already running the show behind the scenes. In early 2018, as Anbang Insurance Group Co. (another binge-buyer that scooped up assets like New York’s Waldorf Astoria Hotel) was being taken over by the Chinese government, HNA was extended over $3 billion of credit lines by large state-owned lenders to keep going. Since then, on Beijing’s directive, it has sold off assets and attempted to retreat to its core airline-related business. Despite state support, HNA has still been late to make payments on bonds and unable to effectively run the sprawling businesses it bought.An official takeover would mean ownership changes at its foreign affiliates and subsidiaries. Would Ingram Micro Inc., the Irvine, California-based electronics distributor HNA bought in 2016, effectively become a Chinese state-owned enterprise? And if it did, would the company then have to go back to the Committee on Foreign Investments in the U.S. for approval?Under its existing agreement with CFIUS, Ingram Micro is required to operate as a standalone company, and is subject to annual audits of its compliance with certain operating and security agreements, according to Moody’s Investors Service. The company’s board composition is governed by an agreement with CFIUS and the U.S. Defense Department. Another subsidiary, Swissport Group Sarl, a ground handler, serves over 300 airports and millions of metric tons of cargo through over 100 warehouses globally. HNA representatives comprise a majority of the board. If the government officially takes control of HNA, those relationships will get more complicated. Just this week, the U.S. State Department designated five Chinese state-owned media outlets as foreign missions, increasing their reporting requirements around property and personnel. Waltzing onto foreign boards or owning overseas real estate isn’t as easy for Chinese entities as it once was.It also makes sense that Beijing would act now, in the teeth of the coronavirus epidemic.There’s no doubt that with the outbreak all but halting the real economy, hard-up borrowers are coming to the fore. Analysts had long seen HNA’s indebtedness as a significant risk to the financial system. To fund the borrowing spree that fueled its risk, the company spun a complex web of debt between subsidiaries and affiliates, using its units as collateral at times to take on yet more debt.Now, Beijing is opening the spigots and relaxing bad loan limits to encourage banks to lend more freely and keep the economy ticking over. In this emergency environment, the ongoing risk of a collapse in HNA’s enormous net debt pile — worth $69 billion at the end of June, bigger than the borrowings of PetroChina Co. or Walmart Inc. — isn’t helping. You’re less likely to extend credit to a struggling business if you think your existing loan book might turn bad.It’s never easy to undo the excess of an M&A binge, and HNA’s large and labyrinthine balance sheet has meant even its wave of selloffs has barely moved the needle. While total assets have fallen by about $46.53 billion, to $142.8 billion, since their peak at the end of 2017, net debt is actually marginally up, making it increasingly difficult for HNA to service its borrowings. Affiliates and subsidiaries like Ingram Micro and Swissport have already distanced themselves, placing clauses in debt agreements that protect their cash flows. Throughout HNA's history, operating income has only occasionally run ahead of interest payments.To the extent that management has been able to keep these plates spinning at all, it's likely to have depended heavily in recent months on the way that HNA's investments in logistics, air transport, catering and retail have given it a presence throughout the sinews of China's economy, and the world’s. The coronavirus represents a critical blow to that proposition. China's aviation market has shrunk from the world's third-biggest to 25th place because of the infection. Hotels and shopping malls are empty. Cash is barely flowing.Two years on, Beijing is still trying to shed the assets of Anbang, now renamed Dajia Insurance. Officially unwinding the House of HNA will prove a much hairier task. But China may have no other options left.To contact the authors of this story: Anjani Trivedi at email@example.comDavid Fickling at firstname.lastname@example.orgTo contact the editor responsible for this story: Rachel Rosenthal at email@example.comThis column does not necessarily reflect the opinion of Bloomberg LP and its owners.Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal. David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
US Collateralized Loan Obligations (CLOs) are increasingly seeking flexibility to provide rescue financing to distressed companies after other lenders have been able to swoop in and offer lifelines to borrowers and often obtain a senior claim on assets in the process. CLO managers can be prohibited from participating in restructuring or workout scenarios due to constraints in their deal documents, so when sales and marketing firm Acosta reworked its debt late last year, their funds were essentially forced to sit on the sideline. The result could impact returns to CLO investors, especially in the next downturn when recovery rates are already predicted to be more than 20 percent lower than the historical average.
Moody’s Analytics announced that more than 250 institutions globally selected its Creditlens™ credit lifecycle management solution.
Moody’s Corporation (NYSE: MCO) announced today that Stephen Tulenko, President of Moody’s Analytics, will speak at the Raymond James Institutional Investors Conference on Wednesday, March 4, 2020 in Orlando, Florida. Mr. Tulenko’s presentation will begin at approximately 7:30 a.m. Eastern Time and will be webcast live. The webcast can be accessed at Moody’s Investor Relations website, ir.moodys.com.
(Bloomberg Opinion) -- In the asset-management industry, reputation is everything. A mutual-fund manager might have a fantastic strategy, but without a steady stream of cash flowing in to set up the position, returns may come in weaker than expected. That, in turn, could lead some investors to lose confidence that the concept was ever great in the first place.That, in a nutshell, is what happened to Franklin Resources Inc. over the last several years. The company has been stuck near $700 billion in assets under management for the past 18 months, down from a peak of $921 billion in mid-2014, while its competitors have grown steadily. Moody’s Investors Service downgraded Franklin’s credit rating in mid-2018 and last year “expressed concern that Franklin's reputation for global/international strategies and solid relative investment performance has been undermined.” That’s not quite a death knell, but it’s close. Faced with that grim reality, Franklin made the obvious move: It got bigger in a hurry. On Tuesday, it announced an agreement to acquire asset manager Legg Mason Inc. for almost $4.5 billion. The deal would create a $1.5 trillion behemoth whose size trails only BlackRock Inc., Vanguard Group Inc., Fidelity Investments, Capital Group Cos. and Amundi Asset Management among “independent asset managers,” according to Willis Towers Watson data cited by Franklin. It would leap ahead of Invesco Ltd and T. Rowe Price Group Inc. in this arms race. (The ranking format conspicuously excludes investing giants tied to Wall Street banks like Goldman Sachs Group Inc. and JPMorgan Chase & Co., or those affiliated with insurers, like Allianz Group and Prudential Financial.)At first glance, the takeaway is that the entire asset-management industry is consolidating because of the rise in passive, low-cost index funds, and Franklin’s move is just the latest example. While that’s true, the combination of these two firms in particular suggests that in the current investing landscape, fund companies can either choose to be the biggest, or they can elect to remain small, nimble and specialized, but falling somewhere in the middle is purgatory. Neither firm is accustomed to being viewed as a second- or third-tier money manager. After all, Franklin, which leans into its affiliation with one of America’s iconic founding fathers, started in 1947, while Legg Mason’s precursor firm dates back to the 19th century. And yet, both Legg Mason and Franklin have fallen way behind the top firms, and Franklin in particular was at risk of slipping even further away from the next group of asset managers.Franklin’s website declares it’s “a global leader in asset management with more than seven decades of experience.” At what ranking does being a “global leader” no longer hold up? The company clearly wasn’t interested in finding out.With the purchase, Franklin will strike an almost perfect balance between institutional and retail investors, which may help mitigate volatility in fund flows. Notably, it expects to maintain a nearly identical geographic focus, which is important given that some of its flagship offerings are worldwide in scope. For example, the $26.3 billion Templeton Global Bond Fund holds a large position in Brazil’s bonds, and both Franklin and Legg Mason have a presence in Sao Paulo. Even as active managers grow, they need to retain their identity.The acquisition also braces for an uncertain future. Legg Mason recently made headlines for announcing plans to take a majority stake in Precidian, known for its ActiveShares exchange-traded funds. If successful, the products could upend the mutual-fund industry because they would trade daily and yet require reporting only once a quarter. Analysts have suggested some $7.2 trillion in mutual-fund strategies could work in this format. Franklin took too long to get on the ETF bandwagon years ago and appears eager not to make a similar misjudgment.Now, one big move probably won’t be enough to bring Franklin back to its glory days. But by combining with Legg Mason, it at least has more than a puncher’s chance to reclaim its place as a leader in active management. Traders certainly seem optimistic: Franklin’s shares rose as much as 13.3% on Tuesday to $27.60, the biggest intraday jump since November 2016.The onus is now on Franklin’s fund managers to live up to their reputations. If there were any malaise in the air over in San Mateo, Calfornia, about the company’s future, management has alleviated it for now. Franklin is back in the game.(Corrects the size of the combined entity in the third paragraph. )To contact the author of this story: Brian Chappatta at firstname.lastname@example.orgTo contact the editor responsible for this story: Daniel Niemi at email@example.comThis column does not necessarily reflect the opinion of Bloomberg LP and its owners.Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) -- If every leveraged-loan and high-yield bond deal is “cov-lite,” then none is.This line of reasoning, loosely inspired by “The Incredibles,” might be how investors have to start thinking about the riskiest corners of the debt market. “Cov-lite,” a catch-all term for weak or nonexistent creditor protections known as covenants, has long been a popular buzzword among those concerned about excessive corporate leverage and how the leveraged-loan market has roughly doubled in size to $1.2 trillion just since 2012.For money managers, the proliferation of cov-lite deals is an easy target — who could dispute that fewer safeguards is an overall negative development for investors? Indeed, I wrote a column last month that highlighted some of the phrases used recently to describe risky debt, ranging from “dangerous and aggressive” to “abuse of documentation.” Seemingly day after day, news articles question whether the leveraged-loan market is overheated, using the growing share of cov-lite issues as proof. By now, though, it should be clear that the proverbial genie is out of the bottle with regards to looser bond and loan covenants. As long as those keeping score of investor safeguards don’t move the goalposts, a vast majority of deals seem certain to earn the cov-lite moniker.Moody’s Investors Service released a fresh batch of “covenant quality indicator” reports that back this up. In high-yield bonds, the rating company’s CQI remains pinned near its worst level ever. The gauge rates certain investor protections on a scale of 1 to 5, with 5 representing the most flagrant disregard of covenants. Overall, the junk-bond market scored a 4.48 in January. In leveraged loans, the overall CQI was 4.02 in the third quarter of 2019, the weakest since the all-time worst score of 4.16 a year earlier.If there were ever a time for loan covenant quality to improve, it should have been the third quarter. U.S. leveraged-loan funds experienced 43 consecutive weeks of outflows between November 2018 and mid-September 2019, according to Refinitiv Lipper. The S&P/LSTA Leveraged Loan Price Index fell in the three-month period as fears of a recession escalated, which in theory would have given investors an opportunity to extract more favorable terms. In May, at the Milken Institute Global Conference in Beverly Hills, big investors declared they were coming up with ways to fight back against weakening covenants. What happened? It certainly wasn’t a change in fund flows.The market moves didn’t go unnoticed by Moody’s. “The weakening protection is all the more striking because it continued even as volumes declined and spreads widened from Q2 to Q3,” analysts Derek Gluckman, Enam Hoque, Evan Friedman and Christina Padgett wrote. “Normally, covenant protections would improve in such market conditions. But the findings suggest that risks are increasing and that while investors are voicing caution, they are not effectively pushing back on permissive covenant terms.”This suggests that investors, who seek the strongest possible protections, have lost the battle with companies, private-equity firms and their lawyers, who aim to cram in as many favorable terms as possible. Covenant Review, an independent research firm that analyzes debt documents for investors, is among those who have valiantly pushed back against the trend toward looser safeguards. But even it acknowledged in its 2019 year-in-review that documents have become so loaded up with offensive covenants that few deals are ever fully scaled back to what they looked like several years ago.All this is to say, it’s too simplistic for investors to say they’re staying away from cov-lite deals. If anything, clinging to the few deals that still have strong covenants might somewhat counter-intuitively increase the risk of losing money.Among the loans listed by Moody’s in its report, only two managed to avoid receiving the worst-possible score of “5” in at least one of the seven categories assessed by the credit rater. Those were MoneyGram International Inc. and Monitronics International Inc. MoneyGram took more than a month to finalize its deal after price talk, paying an extra 50 basis points over the London Interbank Offered Rate compared with where it was set to price initially. The financing also included a second-lien secured term facility that will pay 13% a year, according to Moody’s. Monitronics emerged from Chapter 11 bankruptcy on Aug. 30. As part of that process, $823 million of its term loans were converted into a new facility.Those don’t sound much like thriving companies, even if the head of Monitronics contended it “emerged as a stronger, more focused organization.” Certainly, risk comes with the territory of investing in junk bonds and leveraged loans. But these are some of the worst-rated securities, and the strongest covenants only go so far when an issuer is in deep distress. By contrast, a better-situated company may have the weakest safeguards but never actually put them to the test.This is the trade-off that investors have to get used to. Sure, they would be smart to raise a fuss if a borrower tries to sneak unprecedented favorable terms into a deal. But for better or worse, these markets have shown that once one a company sails through the market with weakened covenants, many others will attempt to do the same — and probably succeed.If and when the credit cycle turns, the aggressive push toward weakening protections virtually ensures that recovery rates will be worse than in 2008, as Moody’s has predicted. But there’s no going back now: The risky debt markets are full of cov-lite deals. Investors either have to acclimate to that reality or get out of high-yield and leveraged loans.To contact the author of this story: Brian Chappatta at firstname.lastname@example.orgTo contact the editor responsible for this story: Daniel Niemi at email@example.comThis column does not necessarily reflect the opinion of Bloomberg LP and its owners.Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
Moody's Investors Service, a leading provider of credit ratings and research, is pleased to announce that it has won four of The Asset Triple A Rating Agency of the Year Awards for 2019. "In particular, we have been awarded both Green Rating Agency of the Year and Financial Institution Rating Agency of the Year for the third consecutive year now, highlighting the consistent rigor and relevance of our ratings, research and our overall thought leadership," adds Cheong. Moody's has won "Financial Institution Rating Agency of the Year", "Corporate Rating Agency of the Year", "High Yield Rating Agency of the Year" and "Green Rating Agency of the Year".
(Bloomberg) -- Sign up to our Next Africa newsletter and follow Bloomberg Africa on TwitterThe rand strengthened the most among emerging-market currencies on Friday as investors assessed President Cyril Ramaphosa’s pledges to overhaul South Africa’s electricity industry and curb government spending.While offering little that is new on the planned restructuring of Eskom Holdings SOC Ltd., Ramaphosa announced sweeping measures Thursday to address power shortages and reduce dependence on the debt-stricken utility. He warned that the nation’s debt trajectory is unsustainable and said Finance Minister Tito Mboweni will announce spending cuts in the budget on Feb. 26, with the government and labor unions in talks to reduce the state wage bill.The rand climbed 0.7% to 14.8511 per dollar by 1:40 p.m. in Johannesburg, heading for its best weekly performance this year. The MSCI EM Currency Index fell less than 0.1%.Yields on government 10-year rand bonds dropped five basis points to 8.85%, while the cost of insuring South Africa’s debt using credit-default swaps fell three basis points to 169, the lowest in a month on a closing basis.“The speech touched on a broad range of domestic concerns, ranging from electricity supply, state-owned enterprises, youth unemployment, climate change and access to education,” said Siobhan Redford, a Johannesburg-based analyst at FirstRand Bank Ltd. “It is fair to say the president hit all the right notes in his annual song to the people of the South Africa, but many will want to see action before buying into the promises.”Ramaphosa is running out of time to convince Moody’s Investors Service to hold the country’s credit rating at investment level. The company is reviewing the assessment in March, shortly after Mboweni’s budget speech. Fitch Ratings, which already has South Africa at junk level, said Friday Ramaphosa’s address highlighted the government’s credit challenges.Investors will now focus on the budget presentation for reassurance that the the government has a credible plan to turn the economy around, said Piotr Matys, a London-based senior emerging-market strategist at Rabobank.“President Ramaphosa said exactly what investors would like to hear, and this, perhaps, is the issue – we have heard all that before and yet the economy is barely growing,” Matys said in a note to clients. “To avoid a downgrade to junk – and substantial capital outflows that would follow – the pace of economic reforms must accelerate markedly.”(Updates prices; adds analyst’s comment in final two paragraphs)To contact the reporter on this story: Robert Brand in Cape Town at firstname.lastname@example.orgTo contact the editors responsible for this story: Alex Nicholson at email@example.com, Paul Richardson, Hilton ShoneFor more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
The Louisville-based specialty hospital and rehabilitation company has a new credit opinion out from Moody's Investors Service.
Moody's (MCO) delivered earnings and revenue surprises of 4.17% and 1.75%, respectively, for the quarter ended December 2019. Do the numbers hold clues to what lies ahead for the stock?
(Bloomberg Opinion) -- Chinese billionaire Li Shufu is bringing his cash cow in-house. Let’s hope he doesn't milk it dry.Volvo Car AB and Hong Kong-listed Geely Automobile Holdings Ltd. have said in a statement that they’re considering merging their businesses in a combined entity that would tap capital markets through Hong Kong and Stockholm. The parent company that they share, Zhejiang Geely Holding Group Co., is run by the ambitious Mr. Li, who seems to be taking a big first step toward consolidating his sprawling holdings. Other moves, such as a spinoff, had already been signaled. In a bond prospectus dated November, Geely Automobile said that Volvo and the parent intended to merge operations into a standalone business to develop “next generation combustion engines and hybrid powertrains.” Volvo Car said this would clear the way for it to focus on developing all-electric premium vehicles.Li has spent billions buying or building stakes in the likes of Mercedes Benz-maker Daimler AG, Volvo AB and Lotus Cars Ltd. through to flying-car maker Terrafugia Inc. He was recently reported to be in the running to make an investment in Aston Martin Lagonda Global Holdings Plc. Until now, he’s kept them separate but under his holding company.Bringing the Swedish and Chinese car companies under the same umbrella makes sense at first glance. Volvo Car’s stable profits ($5.5 billion in 2019) could offset the tough terrain that Geely faces in China’s shrinking car market. The two already collaborate through a joint venture on the Lynk & Co. brand. Since the parent bought Volvo in 2010, Geely’s cars have received an upgrade after it set up the joint China-Euro Vehicle Technology AB research and development center. There’s also a case for cost sharing. Volvo is focused on the higher- and greener-end of the car spectrum. Geely hasn’t quite gotten there. That will help as China pushes forward with its electric car ambitions.The pair said in their statement that the merger would “accelerate financial and technological synergies” and create a strong global group. So, let’s talk about the finances. To build up his empire, Li has piled on leverage at the Zhejiang Geely holding company level. Net debt stood at $8.1 billion at the end of September, more than double from a year prior. It needs to service that debt while feeding and funding its ambitions. S&P Global Ratings expects the company’s leverage to increase this year as volumes and margins contract.Volvo has been a cash source for its parent. In 2019, Volvo paid out dividends of 2.9 billion kronor ($306 million), with 2.8 billion kronor of that to its parent. That was higher than the first dividends paid out in 2016. Volvo injected 1.15 billion kronor into another jointly-owned Geely brand, Polestar Group, last year. Related-party transactions with the Geely sphere of companies totaled 4.1 billion kronor in 2019. Geely has held up relative to its auto-making peers, but earnings have been shrinking as sales in the world’s largest car market deteriorate. Its ability to spend and stay ahead of the technology curve are also constrained. It shelled out $423 million on capital expenditures in the 12 months to June last year, compared to Volvo’s $1.25 billion in 2019. It’s clear who will be driving once they come together.The parent company will keep its firm grip. Through connected transactions, it holds the licenses that Geely uses to manufacture the cars in China. Because of this structure, Geely can make and sell cars there while holding 99% stakes in operating subsidiaries, despite its offshore incorporation, according to Moody’s Investors Service Inc. Li needs this merger to work. With the coronavirus potentially wreaking operational havoc, the parent company has to be in financial order. A blockbuster valuation will help fund his future ambitions in a tougher global auto industry and pay down the debt he’s built up. What better way than to create an improved asset in the new entity, give it a boost with your crown jewel, Volvo, and monetize it. A more valuable asset makes for better collateral. Li will look to maximize the efficiency of his capital.Geely, with an enterprise value of around $16 billion, trades at 7.2 times earnings before interest, tax, depreciation and amortization. It’s sitting on cash of around $2 billion and very little debt. Volvo generated $3.2 billion of Ebitda in 2019. Assuming a multiple of 2.5 times earnings, around that of other European carmakers, would value the Swedish company at around $8 billion. The valuation of the combined entity will be higher. Even two years ago, Volvo was looking for a valuation of double that on the lower end to as much as $30 billion when talk of going public alone surfaced. Wherever the valuation comes out and whatever shareholders are willing to digest, let’s hope there are indeed synergies and Geely isn’t drawing too much out of Volvo Cars. That may defeat the purpose of Li’s entire exercise.To contact the author of this story: Anjani Trivedi at firstname.lastname@example.orgTo contact the editor responsible for this story: Patrick McDowell at email@example.comThis column does not necessarily reflect the opinion of Bloomberg LP and its owners.Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal. For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
Potential conflicts in the credit-ratings industry are again on the agenda of a key meeting as bipartisan support to reform the prevailing issuer-paid model gains traction.