Lend me 100 and I pay you back 99.6.
The Japanese Central Bank started it and the
European Central Bank took it to a different level. Japan’s government has been paid USD 464
million to borrow money since yields turned negative in October 2014. The European Central Bank (“ECB”) went full
throttle with negative interest rates and lowered its overnight deposit from
-0.3% to -0.4%. It is like taxing people
with money in bank account. Mario
Draghi, European Central Bank President said it out loud that interest rates
would stay very low for at least another year.
Mario is doing everything it could to stop Euro zone economy goes into
deflation. ECB extended its monthly
asset purchase to EUR 80 billion a month and will add investment grade
euro-denominated bonds issued by non-bank corporations. This means ECB is practically lending money
to non-bank corporations directly.
German mortgage bank Berlin Hyp AG made history by selling a EUR 500m
3-year bond at a yield of -0.162% last week.
There is now over EUR 6 trillion of debt in the world that yields
negative which is 29% of the Bloomberg Global Developed Sovereign Bond
Index. Central Banks in Switzerland,
Sweden, Japan, Denmark and ECB are all in the Negative Interest Rate Policy (“NIRP”)
Club. What this could mean is that US interest
rate and UK interest rate could eventually get to negative as well. Normal citizens are getting used to getting close
to zero for their deposit in GBP. In the
corporate world, its means blue chips companies would enjoy cheap borrowing and
they are encouraged to leverage and expand through acquisition.
Marriott and China’s Anbang Insurance Group have
made Starwood Hotels and Resorts Worldwide Inc shareholders very happy. Marriott is keen to acquire Starwood that
owns the Sheraton and Westin hotel brands to create the world’s largest hotel
chain in the world. Marriott offered USD
12.2 billion or USD 72.08 per share in November last year. Anbang put USD 13.16 billion cash on the
table in March (equivalent to USD 78 per share). Marriot increased its offer to USD 13.6
billion with a stock and cash offer on 21 March, 2016. Anbang may not get the hotels but they have
surely flexed their muscle. Last October,
Anbang bought Waldorf Astoria New York for USD 1.95 billion, the largest-ever
US real estate purchase by a Chinese buyer.
Anbang is Beijing based, started in 2004, and has 30,000 staff and more
than EUR 100 billion in assets. Anbang
has less than 5% market share in the domestic insurance market in China.
Cheap borrowing could also lead a company to the
cliff. Valeant Pharmaceuticals was once
a real gem in the fund managers’ eyes. Valeant
made use of cheap funding available. Buy
up companies and increase the price of drugs.
Their big wins included eye-care company Bausch & Lomb and gastrointestinal
medicines maker Salix Pharmaceuticals.
Valeant also tried to buy Botox maker Allergan but that did not go
through. Buy low sell high, rule number
1 in trading. Unfortunately, politics
are not exactly science and politicians questioned Valeant aggressiveness in
raising two heart drugs prices. The
stock dropped 88% in the last 6 months as of 21 March, 2016. The company is trying to pivot its strategy
through getting a new CEO. Billionaire
investor Bill Ackman’s Pershing Square Capital Management lost USD 764 million
in its investment in Valeant. The board
of Valeant invited Mr Ackman to join the board, a very expensive board seat.
The new mega trend is cheapest funding ever is
available to corporates. The old trick
is to leverage and buy low sell high.
Borrowing rate at zero means infinite rate of return in theory. If one company pays nothing to borrow money (or
even gets paid to borrow money), any profit this company could make from the
loan means huge return. Too good to be true? It happened before and probably still happens
in some countries where if you know the right person in the government, you get
cheap land, cheap construction loan and guarantee buyers and tenants. Government toll road projects and green
energy projects are classic example. The
negative interest rate could make this business model even more lucrative. This is exactly the purpose of ECB to
encourage corporations to invest and grow.
ECB and central banks in the NIRP Club believe this can fight against
deflation and increase GDP. Before that
happens, investors should expect to see more mergers and acquisitions in the
stock market and stock prices could reach higher level. There will be winners becoming losers like
Valeant. Very few people have betted on
Leicester City winning the league at the beginning of the season. Quite a few would guess Arsenal getting into
top 4. Some investors would find the
Starwood and Valeant. Some may prefer to
take FTSE or DAX index funds to catch the general trend.
