Does your company make a “material contribution to economic activity in the UK”? If it does, and has issued some bonds, then the Bank of England has £10bn to spend buying them. This latest extension of quantitative easing, which got under way this week, promises to be as entertaining as it is futile, as the BoE sinks ever further into the monetary mire.
For a start, corporate bonds are comparatively rare beasts. A buyer of £10bn-worth, even spread over 18 months, would have to bid fairly briskly to get the paper, and the holders will see him coming. At the same time, £10bn is little more than a rounding error in the great QE game, which has seen the BoE buy in a third of Britain’s national debt.
Then there is the question of which corporate bonds to buy. Only investment-grade paper makes the list, including from such obvious material contributors as United Utilities and Rolls-Royce, but also Apple, the famous tax-avoiding behemoth and McDonald’s, whose biggest material contribution has been to the nation’s waistline.
Not on the list are the likes of EnQuest, whose efforts to squeeze the remaining oil from the North Sea surely make it a material contributor. Unfortunately, it is financially challenged, and its retail bonds have been a sore disappointment to us holders. They are currently half price, yielding over 10 per cent and promising to double our money in six years. Since it is only Enquest’s promise, the market reckons it’s a good deal less reliable than the BoE’s promise on those new plastic fivers.
The serious point here is that giving the material contributors the opportunity to borrow more at a fraction of a per cent less than before will make no difference to their plans. Rather, the malign impact on their pension fund deficits from still lower yields will raise the stress on their balance sheets and make them less inclined to invest. Thus does this adventure into corporate bonds expose the absurd lengths to which the proponents of QE are now driven.
The devil of a bid to unravel
A publicly quoted private equity group sounds like an oxymoron, which is why there are so few of them. Should HarbourVest succeed in buying SVG Capital, there will be one less, but it is a strange affair. Last month the $42bn US group bid 650p a share, just shy of the last published 666p net asset value, followed by an old-fashioned dawn raid. Sufficient other big SVG holders indicted acceptance to take the total in favour past 50 per cent.
Ah, not so fast, said SVG. Did we say 666p? We meant 735p, and you’re not the only one who likes them. Then Schroders, the second-largest shareholder, rejected the bid. Even if HarbourVest now wants to pay up, the Takeover Panel rules prohibit it without SVG’s agreement, because it called its first bid final.
Contested bids for investment companies are rare, because the target can threaten the nuclear option of liquidating the assets and paying net asset value to its shareholders. However, valuing unquoted shares is an inexact science. When those assets are themselves holdings in other investment vehicles, there’s another layer of guesswork (and fees).
SVG shares fell off a cliff in 2008, and despite a strong recovery, at 666p they are still cheaper than a decade ago. The company’s current financial commitments effectively rule out liquidation, and the share price will always lag behind the NAV. An agreed takeout at the number of the beast would be a happy ending, of sorts.
Mine’s a monopoly, thanks
The creation of the world’s largest maker of alcoholic fizzy drinks moved a stage closer this week, as SABMiller shareholders voted to be taken over by the even bigger Anheuser-Busch InBev. The precise overlap of the share registers (and that of Molson Coors, buyer of some chunky bits which must be sold) is hard to gauge, but is likely to be significant given the presence of monster funds like BlackRock and State Street. Since the deal self-evidently reduces competition, it is easy to see why the big shareholders were so keen. Do not expect any economies of scale to find themselves into your glass, though.