Australia’s dollar fell to the lowest in more than two years versus the greenback after home-loan approvals grew at the slowest pace in three months, boosting the case for further cuts to borrowing costs.
The Aussie slid against all but one of its 16 most-traded peers amid speculation the U.S. central bank will reduce stimulus this year, narrowing Australia’s interest-rate advantage. Standard & Poor’s lifted the U.S. credit outlook to stable from negative, supporting the view that the Federal Reserve could taper asset purchases under its program of quantitative easing. New Zealand’s kiwi dollar fell.
“Housing is the one area most likely to make up for the mining investment downturn, and it’s disappointed,” said Joseph Capurso, a Sydney-based foreign-exchange strategist at Commonwealth Bank of Australia.
A new April record has been set for Australian companies becoming insolvent. Some 941 firms were put under administration, marking the highest tally for that month since records were first made public in 1999.
Some 941 firms were put under administration, according to an FTI Consulting analysis of Australian Securities and Investments Commission records.
Almost 3450 companies have gone into administration so far this year, compared with 3524 during the same period in 2012.
But the number is higher than the opening four months of 2008 to 2011, which included the global financial crisis.
Competition is feral at the institutional end of the banking industry, where quantitative easing is creating a flood of cheap money, and in the big banks a recent development has everyone talking: covenant-light lending appears to be making a comeback.
Covenant-light loans were a phenomenon of the boom that ushered in the global financial crisis. Bankers who say covenant-light lending is on the rise again say loans that are being proposed now are not as radical as the ones created ahead of the crisis, but say they are watching closely.
Covenants are designed to protect lenders from corporate implosions. They impose financial limits on the borrower, maximum gearing levels, for example, and if they are breached, the lenders can take steps to protect their position.
Bankers say now that US banks and investment banks are leading the revival of covenant-light lending. They are surprised it has returned so quickly, but acknowledge that quantitative easing has created enormous pressure.
Their best guess is that covenant-light lending is back to where it was around the middle of 2006, before the final, frenetic stage of the boom. It is lighter-covenant rather than covenant-free lending, and it is only being offered to top-rated corporations where survival and debt servicing capacity is not in question.
The local bankers wonder, nevertheless, whether the return of covenant-light lending is a sign of QE seeding another unsustainable debt boom, but they still need to work out how to respond: if the trend continues and they don't join it, their share of the institutional lending market will fall.
J.C. Penney Co. (JCP), the retailer that’s working to rebound from its worst sales year, will offer fewer safeguards to lenders on its $1.75 billion financing.Surge in Commercial lending Raises Bubble Worries
The five-year covenant-light deal, which is being arranged by Goldman Sachs Group Inc., won’t include financial maintenance requirements that typically prevent borrowers from loading up on debt, according to a regulatory filing today.
There was a time when robust growth in U.S. commercial loans was seen as a good sign for the economy, but this year a double-digit surge is being seen as a red flag.Return of the Silly Season
U.S. banks reported $1.53 trillion in commercial and industrial loans in the first quarter, a 12 percent year-over-year gain.
Bankers and analysts say this big gain in C&I lending looks more like an early asset bubble than an economic breakout. The banks reported double-digit gains in 2011 and 2012, too.
Mid-size companies and publicly traded corporations are not using the loans to grease the skids of the economy for expansion. Instead, they're mostly getting cheaper credit lines or refinancing the replacement of obsolete factory equipment by dictating easy terms to banks clamoring for their business.
"With so much liquidity, banks feel a lot of pressure to make loans," said Mariner Kemper, chairman of UMB Financial Corp, a Kansas City, Missouri-based bank with $3.2 billion in outstanding C&I loans.
"There's deterioration in covenant terms and pricing and that's potentially the kind of behavior that drives a crisis."
Douglas Bryant, a senior lender for Wells Fargo in New England, calls the C&I lending shift the "return of the silly season."
"Any well-known company with a credit need is called on by a half a dozen or so banks," Bryant said. "These companies are offering very aggressive term sheets on price and loan covenants."
Bryant said banks today are lucky to get one or two strong covenants on a loan. Covenants allow banks to restructure loans if a company fails to meet projections on leverage, cash flow and debt service, for example. But with more leeway on those financial metrics, a company can get deeper into trouble before it breaks a covenant, exposing banks to greater losses.
"A company can deteriorate a significant amount before you get back to the table to restructure the loan," Bryant said. "We used to get as many as five strong covenants."
China's economy grew at its slowest pace for 13 years in 2012 and so far this year economic data has surprised on the downside, bringing warnings from some analysts that the country could miss its growth target of 7.5 percent for this year.Pollyanna View
"Growth remains unconvincing and the momentum seems to have lost pace in May," Louis Kuijs, an economist at RBS, said in a note. "The short-term growth outlook remains subject to risks and we may well end up revising down our growth forecast for 2013 further."
May exports to both the United States and the European Union - China's top two markets - both fell from a year earlier for the third month running.
Imports fell 0.3 percent against expectations for a 6 percent rise as the volume of many commodity shipments fell from a year earlier.
The volume of major metals imports, including copper and alumina, fell at double-digit rates. Coal imports fell sharply.
Economic growth slipped to 7.7 percent in the first quarter, down from 7.9 percent in the previous quarter. Both the International Monetary Fund and the Organization for Economic Co-operation and Development cut their forecasts for China's economic 2013 economic growth in May, to 7.75 percent and 7.8 percent, respectively.
But the further loss of momentum in the April and May could prompt the central bank to try to give the economy a lift, said Jian Chang, China economist for Barclays in Hong Kong.
"We had expected an L-shaped economic recovery in China and that the growth would stabilize at around 7.9 percent," Chang said.
"We now think China's growth will stabilize at around 7.6 percent (this year). The possibility for the central bank to cut interest rates is now rising," Chang said.
“Florida’s repeal of its RFS sends a chilling message that companies developing advanced biofuel and other biotechnology innovations are unwelcome in the state,” said Brent Erickson, executive vice president of BIO’s Industrial & Environmental Section.I am all in favor of research, as long as taxpayers don't have to pay for it. And mandated ethanol standards come at enormous cost.
“Companies have invested more than $215 million in Florida over the past five years to develop commercial-scale advanced biofuel projects. These projects have generated nearly 1,000 high skill new jobs in the state,” Erickson continued. “Florida’s bioscience industry has monitored the state’s commitment to policies that drive investment and development of new industries. Florida’s biotech sector comprises more than 5,100 companies that employ more than 78,000 Floridians, contributing to the state’s job growth over the past decade.
It looks like ethanol – especially when blended into gasoline – is facing some pushback. Florida has decided to repeal its Renewable Fuel Standard, which had required all gasoline sold in the state to be blended with nine-to-10 percent ethanol or other alternative fuels.Ethanol Debacle Heats Up
Florida Governor Rick Scott just signed into law HB4001, which repeals the state's Renewable Fuel Standard as of July 1, 2013. The bill was passed by the Florida House and Senate in April. The Florida Renewable Fuel Standard Act took effect December 31, 2011 and required all gasoline sold by terminal suppliers, importers, blenders or wholesalers (i.e., those up the supply chain) to be blended. These parties were also required to submit a monthly report to the Department of Revenue on the numbers of gallons of blended and unblended gasoline sold. Retail gas stations had not been expressly prohibited by state law from selling or offering unblended gasoline, Green Car Congress reports.
In his signing statement, Scott called the state's Renewable Fuel Standard, "a state mandate on Florida businesses that is duplication of the Federal Renewable Fuel Standard and inconsistent with the efforts to reduce the regulatory burdens that have helped Florida create over 330,000 new private sector jobs in the past two years."
The state of Maine is going in a similar anti-ethanol direction. Legislators are concerned about the damaging impact ethanol blend going up to 15 percent in gasoline (E15) could have on engines and the environment. They approved a bill by more than a 3-to-1 margin that would ban ethanol blends in Maine, as long as two other nearby states do the same. State leaders also supported a resolution asking the government to ban E15 altogether.
This summer we can expect the Environmental Protection Agency (EPA) to set new targets for US ethanol use while the policy comes under massive criticism. The market has been unkind to the ethanol mandate, and we’re not sure how the EPA is going to now attempt to push through a higher blend ethanol in fuel—above the 10%/gallon, when ethanol supplies aren’t there.
So the new targets to be released this summer will require a bit of a re-think, and the EPA will have to decide how to resolve the issue, which could mean a lowering of targets or an elimination of them altogether.
Refiners and ethanol producers are up in arms over the mandate, which is already threatening to cause fuel shortages and higher prices for consumers—along with higher food prices thanks to the diversion of corn for the ethanol blend.
Of course, the beneficiaries of the EPA’s ethanol targets—primarily the corn-growing states—are hoping there won’t be any lowering of the requirements, but the market clearly sees things differently.
Those trading in Renewable Identification Markets (RINs)—otherwise known as ethanol credits—are also hoping the largesse of the forced mandate continues. The more difficult it becomes to blend low supplies of ethanol with gasoline, the more valuable these RINs become for traders. And the opposition to increasing this mandate from 10% is making the RIN market more vulnerable. For this year, it looks like refiners will be able to meet the ethanol requirements—with help from RIN credits—but next year looks impossible.
What will the EPA’s summer target be? No one’s quite sure yet, including the EPA, so it’s impossible to predict, but we’re inclined to think that the market will convince them that the planned 2014 target of 18.15 gallons of ethanol (up from this year’s 16.5 gallons) is unrealistic.
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