Equity Analysis / Global

What the collapse of UAE-based Phoenix Commodities means for food prices

  • Commodity finance will be highly strained as Phoenix Commodities is the latest in a string of collapsing traders
  • Food prices may escalate further due to the dislocation and lack of finance
  • Investors should consider stock market proxies for a food price rally

Marc Rich, the infamous commodity trader, amassed a fortune despite facing extradition charges. He spent much of his life in exile in Switzerland. The US authorities charged him with racketeering and tax evasion. Rich started a commodity trader that now forms the basis of Glencore.

But even Marc Rich never faced a calamity as devastating as the crisis brought on by Covid-19. The streets are now littered with bust commodity traders. Last month, Hin Leong, a Singaporean marine fuel trader, declared bankruptcy with US$4bn of debts. This was followed by Zenrock, another trader in Singapore, that went into judicial management. On Friday, Phoenix Commodities Pvt Ltd, a UAE-based commodity trader, went bust with US$450m of trading losses.

Phoenix is a trader that was founded in 2000 by Gaurav Dhawan. It rose (like a phoenix) to amass US$3bn in revenue by 2019. The firm traded grain, coal, metals and other commodities. 

The intense volatility from Covid-19 affected the currency hedges. There were also reports of fraudulent use of invoices. Phoenix Commodities was using the same invoice to generate leverage from several financial institutions. 

The implications of these reversals are as follows:

(1) Commodity finance will be highly strained

Many banks are restricting trade finance, in the wake of the bankruptcies. This is also increasing the pressure on commodity traders. According to one account of the Phoenix collapse, it was the desperation to raise cash that led to alleged malpractice such as multiple pledges of cargoes. 

Banks are also watchful about the use of letters of indemnity instead of bills of lading for trade finance. Bills of lading carry the actual title. The misuse of letters of indemnity were allegedly at the heart of both Hin Leong and Zenrock's fraudulent activities. 

(2) Food prices may escalate due to the dislocation and lack of finance

The trade finance crunch could further tighten the food supply situation. The food market is facing export curbs and supply chain dislocation. 

Unlike oil prices, which have fallen 33% in 2020, Covid-19 has had the opposite impact on food prices. Other than pork, staples such as wheat and rice have rallied. Rice prices are now at their highest since April 2013. Thailand, the world’s second-largest rice exporter after India, is expecting higher prices as export bans sweep Asia. 

Thai exporters anticipate more sales, as their main competitors India and Vietnam battle domestic coronavirus outbreaks. India’s production has halted with the country on lockdown. Vietnam (the third-largest exporter) has imposed an export ban. Thailand quoted its benchmark 5% broken white rice at cUS$560-US$570 per tonne on a free-on-board (FOB) Bangkok basis last week, according to Reuters.

Meat prices in the US could rise. Tyson Foods, one of the principal meat producers, has closed several plants after Covid-19 spread among its workers.



Source: Bloomberg

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Equity Analysis / Global

The EM consumer stocks at risk of bankruptcy

  • The Altman Z-Score has a proven record of predicting bankruptcies
  • We apply it to a selection of EM/FM consumer stocks
Nirgunan Tiruchelvam @
Tellimer Research
16 June 2020

In the summer of 2015, I met Prof. Ed Altman at a lecture in New York. He devised the Altman Z-score in 1968 and first published his formula 50 years ago, after doggedly sifting through thousands of pages of annual reports to obtain the data for his analysis. The Altman Z-score became the gold standard for bankruptcy analysis.

The Altman Z-score is a formula for determining whether a company is headed for bankruptcy. It takes into account profitability, leverage, liquidity, solvency, and activity ratios. The Altman Z-score has predicted many high profile collapses including Enron, Worldcom and Hertz.

The formula is summarised below:

Source: Investopedia.com

Using the formula, a Z-Score of less than 1.81 indicates distress, while a score of more than 3.0 suggests a company is safe. Between 1.81 and 2.99 indicates caution.

Half our selection of EM consumer names is in the safe zone, but nearly a third warrant caution and a sixth are showing distress.

EM stocks in the danger zone

According to the Z-Score, a sixth of our selection of consumer stocks are in the danger zone. They include INTBREW NL, JKH SL, CPF TB, UNILEVER NL, JCNC SP and GUINNESS NL.

These companies have a common affliction. They have all incurred high leverage but have poor interest coverage ratios. Their cashflows from operations are weak, especially at a time when consumption is under strain.

The Nigerian players in the table above are branded food & beverage companies and part of multinational firms – INTBREW NL is owned by AB InBev, for example. Operating earnings have collapsed in the past few years, with sales suffering due to the depreciation of the Naira.

The consumer sector represents about a fifth of the operating earnings of the Sri Lankan conglomerate John Keells Holdings (JKH SL), which also appears in the distressed zone. The US$ net debt that it accumulated is for its US$850m Waterfront project, a luxury mixed-use integrated resort. Though the debt had been drawn down on, it only appeared in the financial statements in the latest quarter. This is because the accounting treatment recognises the debt only when the asset that it finances yields revenue.

The accounting recognition of the Waterfront debt takes place at a time of intense cash flow contraction due to Covid-19 and other pressures. Metrics such as EBIT/Assets, retained earnings/Total Assets and Total Assets/Total Sales are considerably weaker than in previous quarters.

The two ASEAN players in the danger zone – CPF TB and JCNC SP – are blue-chip names in Thailand and Singapore. CPF TB is a consumer company with heavy elements of a consumer processor. Only a third of its domestic Thai business is in the branded consumer sector. The remainder is animal feed and meat processing.

These businesses have low ROA and high working capital requirements, which is reflected in their poor metrics. CPF TB has taken on US$10.3bn of net debt to fund its expansion in Vietnam and China. Its associate investment CPALL TB has net debt of US$5bn as well. The Covid-19 contraction in Thai consumer spending comes at a bad time for it, as it coincides with its high debts.

Covid-19 has magnified the leverage issues of these companies, lessening their ability to service debt and worsening the working capital position. The situation is not beyond redemption, as the companies in the danger zone can liquidate assets to bolster their balance sheets. But in the current circumstances, Professor Altman's metric indicates that investors should be cautious of these Emerging and Frontier consumer companies with low Z-Scores.

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Flash Report / Germany

Wirecard bankruptcy could be a Lehman moment for e-commerce

  • Though the immediate financial exposure is limited, the fraud has reputational liability for EM e-commerce
  • Investors will increase their focus on the cash generation in EM e-commerce and the sanctity of the cash balances
  • We are still bullish on EM e-commerce such as JMIA US, MELI US and SEA US
Nirgunan Tiruchelvam @
Tellimer Research
25 June 2020

Wirecard, the German-listed payments giant, declared insolvency today. The collapse comes close on the heels of the disclosure that US$2.1bn was missing from its balance sheet. The company had drawn on almost all of its credit lines in the last few days and the previous CEO, Markus Braun, has been arrested. Further arrests of Wirecard personnel seem imminent.

This is the first ever bankruptcy of a member of the elite DAX Index of blue-chip German companies. It also has immense implications for EM e-commerce. Wirecard is one of the principal lubricants of e-commerce, particularly in emerging markets.

What is the risk for e-commerce players?

Wirecard's customers include the principal e-commerce players. Its business model is heavily exposed to the e-commerce space in emerging Asia, with its customers including Grab, Tencent and Alibaba.

Unlike the Lehman bankruptcy in 2008, Wirecard does not carry principal exposure. Wirecard connects merchants with credit card companies, collecting a commission for assuring merchants of payment. 

For example, the EUR3.8bn that Wirecard claimed to have on its balance sheet in 3Q19 was accrued from retained earnings that were driven from these commissions. The actual payments are guaranteed by the credit card payment systems run by giants such as Visa and Mastercard.

Therefore, the risk for EM e-commerce players is more reputational than an immediate financial risk. Many EM e-commerce companies have already distanced themselves from Wirecard. Yesterday, Grab Holdings Inc., the leading ride-hailing firm in ASEAN, announced that it would be reviewing its relationship with Wirecard.

What it means for EM e-commerce valuations

EM e-commerce companies are burning a lot of cash. Revenue growth has come at the expense of the cash flow statement, but Wirecard's insolvency will raise the scrutiny of these companies' cash balances. EM e-commerce companies use credit card companies to collect payments, and payment providers, such as Wirecard, collect the cash from the credit card companies. Third parties that hold cash in trust are often used for this purpose. The fraud takes us to the heart of the EM e-commerce model, and now investors are much more inclined to check that heart is fit and healthy.

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Flash Report / Global

How to profit from the rubber bounce

  • Rubber glove demand has risen sharply with Covid-19
  • Rubber has been in a long slump but could bounce back as supply is tightening
  • Proxies for the rubber rally include Thailand's Halcyon Agri and Singapore's Sri Trang
Nirgunan Tiruchelvam @
Tellimer Research
24 June 2020

Covid-19 has led to a huge boom in demand for rubber gloves. Rubber companies (producers and processors) are making hay while the sun shines by rushing to the market.

Thailand's Sri Trang Gloves, one of the largest rubber glove producers, has just announced plans to raise US$484m. Halcyon Agri (HACL SP – controlled by a Chinese state-owned enterprise), the world's largest rubber processor, is looking to raise S$175m in a rights rise. The rights are priced at a 36% discount to the last transacted price on 19 June. Halcyon Agri is.

Meanwhile, the world's largest rubber glove producer Top Glove, listed in Malaysia, has risen 251% this year. It expects to generate 35% of its revenue growth on the back of the Covid-19 surge.

Covid-19 drives demand for gloves

With rubber gloves being used by medical practitioners to prevent the spread of disease and by the general public as PPE (personal protective equipment), Covid-19 has seen orders swell.

Rubber glove demand is expected to rise by nearly 17% yoy to 330bn pieces in 2020, according to Margma, an industry observer. Top Glove has reported a four-fold increase in orders. The lead time for orders has risen from 30 days to almost 300 days.

Rubber prices could surge

The world tends to focus on industrial commodities such as oil and iron ore, disregarding rubber, but the latter is vital for car tyres – c70% of the world's natural rubber is used for tyres, with the remainder is used for rubber gloves, condoms and other applications.

Rubber has collapsed more sharply than oil in the recent commodity rout and is now at a 15-year low, more than 60% below its 2010 peak, mostly due to fear that travel would grind to a halt with Covid-19.

However, there are distinct signs that a rubber bounce is imminent. Demand for cars in China is robust and could rebound quickly, not least given that only c50% of Chinese families have a car. If car penetration doubles in China in the next decade, rubber supply will have to rise 50% to meet demand.

Rubber supply, though, emerges at a slow pace. It takes seven years to harvest rubber and another three to reach peak production.

Moreover, many rubber plantations are struggling, with Thailand, Malaysia and Indonesia (the main producers of the 13.9mn tonne rubber market, over 80% of which is produced in Southeast Asia) all having imposed moratoriums on rubber planting this year. Supply could contract, and 2020 could see demand exceed supply for the first time in three years.

Look out for stock market proxies

Therefore, investors would be well-served to focus on the proxies for a potential rubber price rise.

Halcyon Agri, which is listed in Singapore, with operations in Ivory Coast, Cameroon, Indonesia and China, is raising funding for an expansion and debt repayment at a turning point for rubber prices. As a processor with a tight grip on rubber supply, it could be viewed as the ideal proxy for a rubber rally.

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Flash Report / India

Digital food delivery is an early casualty of India-China tensions

  • Indian food delivery players face funding constraints at precisely the wrong moment
  • The growth drivers in India such as higher smartphone penetration are present in other large emerging markets
  • The cash-rich Western and Chinese players may turn their attention to other emerging markets
Nirgunan Tiruchelvam @
Tellimer Research
6 July 2020

The fallout of the deadly clashes between India and China in the Himalayas has had repercussions for the Indian food delivery business. The Indian food delivery start-up Zomato (valued at US$3 billion) has been prevented from drawing down from its US150mn of fresh funding from Ant Financial. Ant Financial is a US$150bn Chinese digital payments company and an affiliate of Alibaba. Ant Financial has invested US$560mn for a 25% stake in Zomato.

Many Indian tech startups have raised funding from Chinese giants such as Tencent and Alibaba, but in April India announced that it would block "opportunistic takeovers" by neighbouring countries.

Zomato's main competitor Swiggy is also backed by Chinese investors. Swiggy's include Tencent and Meituan-Dianping. Meituan-Dianping is the world's largest digital food delivery company with 25mn meals delivered per day.

The implications of this development are as follows:

(1) Indian food delivery players will face funding constraints at precisely the wrong moment. Business has suffered due to the Covid-19 pandemic, with both Zomato and Meituan-Dianping laying off workers.

(2) The growth drivers of digital food delivery in India – such as higher smartphone penetration – are also apparent in other large emerging markets such as Nigeria, Indonesia, Kenya, Vietnam and Pakistan. They could attract more attention from the hungry market leaders such as UberEats and Meituan-Dianping. For instance, Nigeria's food delivery business has tripled in the last three years to US$465mn.

(3) Across Developed and Emerging Markets, massive cash burn is common in the industry. However, the market leaders in the West and China have the cash for acquisitions in the fledgling markets. We think investors would be better served to pursue food delivery in other emerging markets such as Nigeria, Indonesia, Kenya, Vietnam and Pakistan, as opposed to India.

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Macro Analysis / Global

Supporting FX markets during turbulent times

Refinitiv Perspectives
8 June 2020

COVID-19 has caused great disruption, not just to FX markets, but also to those who work within that environment and the way that they operate. How has Refinitiv, a market-leading provider of foreign exchange trading solutions, helped sustain the FX markets?

  1. COVID-19 has seen the normal working practices of the FX markets heavily disrupted, with many people conducting business from their homes. Refinitiv has ensured a successful transition to this virtual office environment (VOE) to support its clients and the wider FX trading infrastructure.
  2. Crucial to the success of this transition has been how Refinitiv has enabled its clients to have continued access to the trading platforms providing the liquidity needed across currency pairs and geographical regions.
  3. To further support the business continuity of its network of clients, Refinitiv has provided access to the trends, market insights and tools that will support compliance and best practice, and ensure the FX market ecosystem continues to operate smoothly despite the disruption.

Although the COVID-19 pandemic has dominated the news agenda in recent months, there have been other events that have affected the geopolitical landscape.

The simmering trade tensions between the major global economies, the Australian bushfires, and the crisis in the oil market have all added to market jitters across the world.

Volatile FX markets

For FX markets, the uncertainty has led to volatility that has not been seen since the vote on Brexit.

However this time round, volatility was not limited to market movements across G10 and Emerging Markets countries. Volatility also extended to the physical act of work — where we work from, and how we work — as many in the trading community found themselves working outside of their usual office environments.

Not within living memory have continuity planning measures been put in place on this scale across the FX trading buy-side and sell-side.

Supporting FX markets

At Refinitiv, we have ensured that we continue to support the market appropriately, no matter what the circumstances are. Across the world, our colleagues have been able to resolve client challenges within hours of them arising. And have done so while sitting on sofas, kitchen chairs, or deckchairs in their homes.

Access to liquidity

So far this year, the average daily volume across Refinitiv’s FX trading platform is around US$460bn, which is among the highest volumes facilitated by a single FX trading service worldwide.

FXall is the complete end-to-end solution for your FX trades

Considering the disruptive circumstances in which these volumes are being reached – and how our clients were able to find continued access to liquidity across the currency pairs and geographical regions needed — is testament to how effectively our partners were able to transition to virtual work environments.

Refinitiv’s network of clients, including almost every single major institutional FX trading firm (across the buy-side and sell-side), is connected to more than 2,300 institutional clients and nearly 200 liquidity providers through Refinitiv FXall.

FXall’s advanced workflow solutions and execution tools have been critical in helping the buy-side safely cope with much larger volumes from their remote or virtual work environments. FXall clients rely daily on a broad range of features, including:

  • Pre-trade order netting (including cross-currency netting and netting of same pair exposures that have different dealt currencies) to submit orders to the market for the most cost-effective execution possible.
  • Batch trading workflow and rules-based auto-execution, in order to automate all or portions of clients’ trading activity and increase operational efficiency.
  • Execution algorithms and other advanced order types that help users access liquidity in smarter ways, minimizing market impact as well as information leakage.
  • Sophisticated business intelligence to assess trading performance, identify improvement opportunities and enhance provider selection.
  • Regulatory reporting, audit trails and transaction history for robust risk management and compliance.

Similarly, via Refinitiv FX Matching, we are well established across more than 900 client sites and over 5,000 manual Refinitiv FX Trading users, making us the single largest ecosystem for FX transaction venues across the markets.

Business continuity support

Very early on during the disruption, we reached out to over 500 of our leading clients across the buy-side and sell-side. We wanted to understand how they are adapting to their virtual environments and the areas in which they might need help and support.

The insights gave us a fair representation of why the electronic trading venues that we provide are the essential cogs in keeping the FX global ecosystem up and running.

This was a test of our support, infrastructure and continuity services as well. For example, Refinitiv as a whole processed 176 billion updates on one day, when markets reached peak volatility in March. That is not just breaking a previous record, it’s obliterating it. The operational resilience and the way in which the entire industry is coping with this fast and sudden change is quite remarkable.

Market insights and compliance

With Refinitiv FXall Trade Performance Analytics, we have enhanced how buy-side clients can monitor market spreads, and build greater insights to help focus on transaction cost analysis (TCA) — an essential consideration during this disruption.

Access to liquidity and counterparties for our clients was an important consideration, but a further critical element of our strategy was to provide quick and easy access to the trends, market insights, and tools they required to ensure regulatory compliance.

The launch of Refinitiv Compliance Archive in partnership with Global Relay has helped ensure that we can provide archiving and compliance support for all ‘virtual engagements’ our clients undertake.

What lies ahead for FX trading?

Our vision and strategy for FX trading in 2023 is the cornerstone of gauging the progress made towards transforming the FX trading eco-system.

There are many releases on the horizon.

The introduction of APIs for Forwards Trading in Refinitiv FX Matching is based on the Spot Matching API that is already used by many FX participants. This new Forwards Matching API from Refinitiv will further support trading efficiencies and reductions to total cost of ownership (TCO) for Refinitiv clients.

In addition, with FXall Large Order Splitting, buy-side traders will soon be able to break up large orders into smaller child orders that can be executed using different execution methods, providing them with greater flexibility and control over their execution, while helping them minimize market impact and information leakage.

Meanwhile, by introducing liquidity aggregation via our Refinitiv FX Trading platform, and a faster binary feed for our Refinitiv FX Matching clients, we are ensuring that we will continue to be a market leader for many years to come.

FXall is the complete end-to-end solution for your FX trades

The post Supporting FX markets during turbulent times appeared first on Refinitiv Perspectives.

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