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Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: More leverage, higher dividends: is the money wall set to tumble? House prices hit new high, but ‘there is no bubble’ claim those who love to see house prices rise. Retire? Me, never.


More leverage, higher dividends: is the money wall set to tumble?

According to the ‘FT’ drawing on a report produced by S&P Capital IQ, private equity groups have been renegotiating debt, and they have been doing it big time. In the US, renegotiated private equity group debt in the year to September was worth $110 billion. With three and half months to go before the end of the year, that is already 25 per cent up on 2012.

As for Europe, refinancing volumes are up 60 per cent, and are worth 10 billion euros, which is the highest level since 2007. See: Leveraged buy-out groups refinance record debt 

In March the Bank of England said: “The average maturity of UK LBO [leveraged buy-out] debt is around seven years. Given that the peak in debt issuance was around 2007, there is a significant ‘hump’ of maturities from 2014… As it currently stands, £32 billion of LBO debt is expected to mature in the period 2014–15, with a further £41 billion in the period 2016–18.” See Risk of new banking crisis: could private equity be the next sub-prime? http://blog.share.com/2013/03/14/risk-of-new-banking-crisis-could-private-equity-be-the-next-sub-prime/15164

Back then the Bank of England was warning that as private equity debt expires we may see a wave of defaults. Some were comparing private equity debt with sub-prime mortgages in 2007. That comparison may or may not be valid, but what is clear is that many private equity firms are striking now, while rates are low and money is relatively easily to raise to roll-over debt.

This may be problem in a few years’ time when this debt expires. We may even see a new crisis sooner as those private equity companies which are unable to roll-over debt find themselves dangerously exposed as rates rise.

It does, however, support an argument made here many times of late that we are entering a sweet spot for leveraged corporate deals, whether they be renegotiated debts or new debts to fund new deals.

And dividends rise

Back to the S&P Capital IQ report, as well as renegotiating debt private equity firms have paid themselves $40 billion in euros so far this year too. It is not clear whether the dividend payments have come from profits generated by the firms they own, or from profits generated as debt is refinanced at record low interest rates, which means companies can increase debt without increasing debt payments.

At the other end of the corporate scale, that is to say from leveraged to cash rich, Microsoft has announced a 22 per cent increase in its dividend and a $40 billion share buy-back programme. The dividend yield at the current share price yields around 3.4 per cent.

Microsoft is a classic example of one of those corporate giants with so much money it does not know what to do with it. It has $77 billion in cash sitting on its balance sheet, and made around $5 billion in net income in its latest quarter.

Sitting on cash it not normally considered to be good corporate practise. But in times of uncertainty, you can see why companies are reluctant to spend, or indeed give some of that money to shareholders.

But as things turn, companies may start releasing some of that cash, and in the process other companies will come under pressure to follow suit.

The combination of companies at last beginning to release some of their cash holdings, while we enter that sweet spot for leveraged deals, may well force equities up to new record highs.

House prices hit new high, but ‘there is no bubble’ claim those who love to see house prices rise

It seems that when it comes to house prices the world is divided into two: those who love it when house prices rise and those who hate it.

Many of the UK’s more sensational newspapers belong to the first of those two schools of thought. During the early days of the recession of 2008, the ‘Daily Express’ ran a number of front page lead stories proclaiming that house prices were still rising. In reality, what was happening was that on a month on month basis they were falling, but because 12 months’ worth of data makes up the year on year changes, the annual rate was still rising. That’s the way maths works during the early stages of a downturn; year on year data can still point to growth. It is hardly headline news, yet headlines news is what it made.

This time around the angle is different. According to data from the ONS, house prices across England are now at a record high. The average price is now 0.9 per cent up on the 2008 peak. The figures have been distorted by London and the South East, but in other parts of England and across the rest of the UK prices are still some way off the previous peak.

In the year to July, says the ONS, UK house prices rose by 3.3 per cent. “Property price bubble is a MYTH,” headlined the ‘Daily Mail’, which described the rise in prices as “modest”.

The ‘Mail’ has fallen into precisely the same trap as the ‘Express’ fell for in 2008, but working in reverse. Right now house prices are rising, month on month, but it will take time for this to fully show up in the annual data. Between July and December last year, house prices across the UK fell, so we only need to see modest month on month increases in house prices for the annual rate to rise quite considerably between now and the end of the year.

There is a wider point. The UK is still in a downturn, real wages are still falling, house prices to incomes are above the historical average, yet house prices are rising. By the end of this year annual house price inflation may well pass 5 per cent. That prices are rising at such times is both remarkable but easy to explain.

The combination of record low interest rates and easier availability of credit, courtesy of George Osborne, is virtually guaranteeing that house prices will rise.

On the back of this, consumer spending will rise (savings fall), construction will rise, and more jobs will be created.

But what those who seem to think that rising house pries is good overlook is what might happen when rates rise, and baby boomers retire, and find they need to downsize to fund their retirement.

Unless the rise in house prices is accompanied by an even faster rise in real wages, we are just building up problems for the future.

Retire? Me, never.

The results are in. HSBC has been questioning 16,000 people across the world – or across 15 countries, anyway.

In the UK 19 per cent of those questioned said they don’t think they will ever be able to afford to retire. For the US, the number was 18 per cent. But in Brazil it was just 5 per cent.

In case you are interested here is the full breakdown: UK (19 per cent), US (18 per cent), Canada and Singapore (17 per cent), Egypt (16 per cent), Australia (15 per cent), India (13 per cent), Hong Kong (12 per cent), France (12 per cent), Taiwan and UAE (10 per cent), Malaysia (9 per cent), China  and Mexico ( 7 per cent) and Brazil ( 5 per cent).

As for those who have retired, no less than 38 per cent said that financially they had not prepared adequately.

Christine Foyster, head of wealth management at HSBC, said: “People want to slow down in later life and, while some welcome the chance to stay economically active, many may not. Whereas some people regard a comfortable retirement as a natural entitlement, for a growing number this is not the case.”

She added: “Today’s workers should prepare for retirement as early as possible to have some certainty for retirement. Life is full of reasons to prioritise short term spending over longer term planning, but the sooner people start saving, the less likely they will have to rely on working in old age.”

Ummm, some might find those comments above a tad patronising, but let’s let that pass. You know, sometimes it ain’t that easy, especially when for millions of Brits their wage is rising less than inflation – and for many not even nominal wages are rising.

Oh well, at least house prices are heading upwards.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees


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