“Descending Into A Farce”: Chaos Erupts After Stiffed UniCredit Bondholders Get Fat-Fingered Payment
Step aside Citigroup, and your erroneous $500MM transfer to Revlon bondholders: there is an even dumber “fat finger” in town.
Late last week the financial world was shocked when Andrea Orcel, the new CEO of Italy’s second largest bank UniCredi, decided not to make a €30MM debt coupon payment on the grounds that the bank made a loss last year, even though investors had been assured of the cash. Then, on Tuesday, the financial world was even more shocked when the news broke that despite the bank’s decision, some bondholders said they had received notice of payment after all. And while UniCredit insists it didn’t pay it, raising Citigroup-esque dejavi questions about how the payment was made, Orcel’s calculated show of strength has “rapidly descended into a farce“, according to Bloomberg.
What happened?
It all started last Friday when UniCredit made the shocking decision to skip the payment of coupons on some financial instruments, in a U-turn that sent he bond in question into a tailspin and hurt some other debt sold by Italy’s No. 2 bank. Just back in February, when presenting full-year results, Finance Chief Stefano Porro had told analysts the bank expected to pay a coupon on the legacy bond it issued over a decade ago, as well as on Additional Tier 1 bonds. But a spokesman on Friday said UniCredit would not do so after posting a 2.79 billion euro ($3.4 billion) loss last year.
As Reuters noted, UniCredit has withheld coupon payments on the CASHES notes in the past after ending the year in the red, but the latest decision, taken by new Chief Executive Andrea Orcel barely a month after his arrival, took bond investors by surprise.
However, some bond investors were even more surprised when they woke up on Tuesday to find that their bank accounts had been properly debited with the required coupon payment from the UniCredit bonds.
Initially there was much confusion who was responsible for the payment or where it came from, even if the confusion was understandable: the 2.98 billion euro bond’s complicated structure meany that there are several players involved, and the error could have come from any one of them. The CASHES, short for Convertible and Subordinated Hybrid Equity-Linked Securities, have different banks serving as depository and fiduciary for the instruments.
The confusion went away this morning when we learned that Euroclear – Europe’s largest bond custodian and settlement agent of securities transactions – said it had mistakenly credited client accounts with funds for a coupon payment on UniCredit bonds that the bank had decided not to honor. The flub by Euroclear added a fresh – and confusing – twist to the surprise decision by new UniCredit Chief Executive Officer Andrea Orcel not to pay the debt coupon of about 30 million euros.
In response, the bonds fell 0.5 cents on the euro to about 51.2 on Wednesday, while UniCredit shares fell 0.6% to 10.29 euros as of 10:38 a.m. in Milan. The bank’s Additional Tier 1 bonds, a newer-style capital security, were little changed. The CASHES are quoted almost 10 cents on the euro lower than prior to the news of the coupon skip last week.
“It’s embarrassing for them of course, even if it isn’t their fault,” said Jerome Legras, a managing partner and head of research at Axiom Alternative Investments. “But the truth is this happened because they took everyone by surprise.”
For Orcel, the fat finger debacle is denting what would have been another signal of a high-energy start to his tenure. In just over a month in charge the Italian has already slimmed down the management ranks and cut down on co-head structures to simplify decision making – all while embroiled in a high profile court case in Spain over millions of dollars in lost pay.
In any case, now that the source of the mistake has been isolated, the question is what happens next: does UniCredit pull a Citigroup and try to recover the funds (it didn’t work too well for Citi), or does it slink away with its tail folded between its legs.
it would raise questions over whether investors will need to return the funds — and who will be on the hook for the payment if not.
“Even if it isn’t their fault, but of the depositary or fiduciary bank, the timing is very unfortunate,” said Paola Biraschi, an analyst at CreditSights. “They already incurred some reputational damage given the inconsistent market communication around the intention to pay the coupon. Investors will now want to understand the reasons behind the alleged payment of the coupon. And if any money was transferred, I imagine they will attempt to claw it back from bond holders.”
Since a clawback appears unlikely especially in the aftermath of the Citi cash study, an angry UniCredit may just take out its anger and frustration on more bondholders and refuse to pay future coupons. According to Bloomberg, given the notes’ terms the bank could also skip the next three coupons, even though UniCredit took steps last year to update terms of the CASHES allowing it to pay the coupons after reporting a loss or without distributing a dividend.
The notes are a legacy of the financial crisis, highly complex securities issued more than a decade ago. Investors in this type of legacy bond contend not only with unpredictable decisions by lenders, but also labyrinthine regulations and often-tortuous terms that can be interpreted in different ways. As Bloomberf notes, They’ve already been the subject of controversy after a London hedge fund accused the bank of boosting its capital strength by misclassifying them. The issue fizzled after the European Banking Authority sided with the bank, saying it found “no clear evidence” to support the hedge fund’s claim.
Ireland Rejects US Plan For Global Minimum Tax, Will Keep 12.5% Rate
Following reports that an agreement between the G-7 and the White House on a global minimum corporate tax rate is almost ready, Ireland – which isn’t a G-7 member, but is a member of the OECD and the EU, and therefore must also assent to these changes – is speaking out against a new minimum level agreed to by the White House.
According to Sky News,Ireland has no plans to increase its 12.5% corporate tax rate, which is already one of the lowest in the developed world, and which has been a tremendous boon for its economy. The latest iteration of the agreement as envisioned by the US set the global minimum rate at more than 15%.
While the OECD is supportive of proposals for a global minimum corporate tax, it has also pointed out that reforms should also include more clear treatment of where and how taxes are assessed.
Irish Finance Minister Paschal Donohoe said that he had “significant reservations” over American plans to encourage countries around the world to adopt a minimum corporate tax rate in order to prevent companies from shifting their profits and avoiding payments in future, especially as President Biden tries to engineer one of the biggest tax hikes in decades.
In an interview with Sky News, Donohoe said “we do have really significant reservations regarding a global minimum effective tax rate status at such a level that it means only certain countries, and certain size economies can benefit from that base – we have a really significant concern about that.”
The international agreement being hammered out by the US and the G-7 would be the biggest such overall in a century, when the current rules on international corporate taxes were hammered out. Back then, it was much more difficult for corporations to use accounting and legal loopholes to reduce their tax burden.
Today, it’s commonplace for companies to shift billions of dollars of profits around the world to countries with lower tax rates, something the Biden administration has vowed to combat. The US is planning on raising its own corporate tax rate to 28% from 21%, and is increasing the rates for American companies working overseas. And the UK has its own plans for tax hikes.
Donohoe’s comments will raise the stakes during negotiations at the upcoming G-7 summit in England. The OECD has been pushing for corporate taxation reform for many years, and the US proposal for a global accord is building off of that.
Of course, if Ireland refuses to lower its tax rate, that will make it extremely difficult for the UK to agree to the US plan, since British firms are already seeing unprecedented pressure to move across the border and back into the EU single market.
“I absolutely support and will be making the case for our 12.5% tax rate,” Donohoe said. “I believe a rate like that – a low rate – should be a feature of an agreement in the future. “Our friends and partners in the United States understand our concerns in these matters, but the best kinds of partnerships – the best kinds of friendships – are ones in which you can talk about these matters openly and engage with each other, professionally, and that’s what we’re going to be doing.”
The US has already pitched concessions like surrendering more tax revenue from American tech giants that operate internationally. Apparently, whatever they’re offering, it’s not going to be good enough for Ireland, which essentially holds the power to scuttle a global agreement simply by making its neighbors unwilling to tolerate Ireland’s notoriously low tax rates.
In other words, just when US diplomats were proclaiming to the press that a deal was as good as done, it looks like talks have a long way to go.
Iran Bans Crypto Mining As Blackouts Grow Into Summer: “85% Of Mining Farms Are Unlicensed”
On Wednesday Iranian President Hassan Rouhani announced efforts to combat the growing trend of rampant and unpredictable blackouts experienced across parts of the country of over 80 million people at the start of a hot summer, particularly in already strained major cities. By many accounts what was somewhat already a “norm” under American sanctions has come early this year – namely the sporadic blackouts, increasingly angering the population just ahead of a key presidential election in June.
“The ban on the mining of cryptocurrencies is effective immediately until September 22… Some 85 percent of the current mining in Iran is unlicensed,” Rouhani said in a cabinet address aired by state TV.
There are an estimated 50 officially licensed mining farms sucking up a total of at least 200 megawatts of power, according to the most recent analysis. Iran’s state-controlled power generation company recently made public its data showing colossal increases in energy consumption far beyond this – mostly due to miners, leading to a nationwide strain that includes periodic blackouts, indeed confirming mining operations that far exceed the aforementioned 50 legal large-scale operations.
“Rouhani said legal crypto mining operations in Iran consume about 300MW of electricity, which is very insignificant. But illegal operations consume up to 2,000MW,” Al Jazeera noted of the speech announcing legislation enacting the four month ban.
Rouhani did, however, appear to make a passing acknowledgement of the benefit to the country that crypto mining represents (which reportedly netted the country over $1 billion a year in recent years amid its isolation), saying “Now everybody has a few miners laying around and are producing Bitcoins” – which reportedly got some laughs out of top officials, but at the same time slammed illegal mining as coming at the cost of the citizenry’s well-being.
As we previously detailed, both private and public crypto mining has exploded in Iran over the past few years, putting it according to one recent study among the top ten bitcoin mining countries in the world – accounting for 4.5% of all bitcoin globally – primarily as a means of paying for imported goods and as an easily available way to soften the impact of sanctions amid a hard cash shortage – also given foreign currencies are hard to come by as a result of the prior US-led economic war against the Islamic Republic.
Here’s a sneak preview of the upcoming #Elliptic Guide to Sanctions Compliance in Cryptocurrencies:
While Iran has relied on ‘legal’ and authorized mining farms to soften the US sanctions blow, it’s in recent months cracked down on private and undisclosed operators seeking to profit from state subsidized electricity.
And now with the Islamic Republic on the cusp of achieving a renewed JCPOA nuclear deal in Vienna, and with sanctions expected to quickly be rolled back including vitally on the oil and banking sectors, priorities are shifting, also as a presidential election is set for June, and further as Tehran appears to be following China’s example.
Dutch Court Orders Shell To Aggressively Cut Carbon Emissions In Landmark Decision
There’s been a lot of speculation this year about what it might take for western governments like the US to meet the carbon emissions targets laid out in the Paris Accords, which President Biden has enthusiastically rejoined. One study by the IEA concluded that all oil and gas firms would have to halt new projects in order to achieve net-zero emissions by 2050.
While progressives increasingly demand more aggressive change, moderate Democrats and Republicans have long insisted that markets would naturally wean society off of its dependence on fossil fuels as renewables, nuclear and other alternatives to fossil fuel become more affordable. As COVID led to a memorable drop in demand that sent spot oil prices into negative territory last spring, investors have made clear that ESG investing and carbon credits are growing increasingly popular, alongside divestment movements. A recent runup in gas prices has also helped spur interest in alternatives.
However, over in Europe, EU courts are stepping in to force one of the world’s biggest energy companies to accelerate its green commitments. Royal Dutch Shell has just lost a landmark case brought by environmental activists in Dutch courts in the Hague. The court ruled that the company must cut its greenhouse gas emissions more aggressively: by 2030, Shell’s net carbon emissions needed to be 45% lower than 2019 levels. The FT said the ruling could have “far-reaching consequences” not just for Shell, but for its competitors as well. Though Shell said it expects to appeal the decision.
Previously, Shell had promised to reduce its greenhouse gas emissions by 20% within a decade, and to net-zero before 2050.
If it stands, the ruling would set a precedent for similar cases against the world’s biggest corporate polluters who could now be exposed to similar lawsuits that could force an ESG reckoning that oil firms have repeatedly tried to delay.
Judge Alwin, who handed down the decision on Wednesday, said it would require the company to accelerate “a change of policy” from Shell that could “curb the potential growth of the Shell group”.
“The interest served with the reduction obligation outweighs the Shell group’s commercial interests,” she added.
The big change here is that until now oil companies have mostly faced lawsuits related to environmental damages that they specifically caused, like an oil spill. Now, court rulings could allow activists to influence energy company policy more directly, with courts threatening massive fines if the firms don’t comply.
One analyst who spoke with Bloomberg said the decision could have far-reaching ramifications for oil companies.
“This is big news for carbon emitters everywhere, not just in the oil industry,” Angus Walker, an environmental lawyer at BDP Pitmans in London, said. “This may spread from large emitters to small, and from the Netherlands to other countries, at least in terms of challenges, if not successful ones.”
Shell has poured billions of dollars in investment into low-carbon energy, including electric vehicle charging, hydrogen, renewables and biofuels. Even so, the firm has insisted it wouldn’t set targets for fossil fuel reduction targets saying they would be arbitrary given that demand is the ultimate factor. Other firms, like European rival BP, have agreed to reduction targets, thought whether they will be met remains to be seen.
Shell’s lawyers argued in its case that society and the market must change before Shell does. But the judge countered that the company “must do more than monitoring developments in society and complying with the regulations in the countries where the Shell group operates.”
And although Shell had no input and never agreed to the Paris Climate Accord, Judge Alwin ruled that the company must still shoulder the burden since the Netherlands, which is one of its parent companies, has agreed to the deal.
“Companies have an independent responsibility, aside from what states do,” Judge Alwin said in her decision. “Even if states do nothing or only a little, companies have the responsibility to respect human rights.”
The ruling followed a legal campaign led by Milieudefensie, the Dutch wing of activist group Friends of the Earth, which celebrated the decision, with one spokesman for the group declaring it “a monumental victory” for the climate movement.
After nearly 18 months of punishing anyone who suggested that COVID-19 might have originated in a Wuhan lab, Facebook has decided to stop removing posts which claim the virus was man-made or manufactured, a company spokesperson told Politico on Wednesday.
The move comes after the Wall Street Journal reported that three lab workers at the Wuhan Institute of Virology were hospitalized in late 2019 with symptoms consistent with the virus – building on previous reporting by the Washington Post‘s Josh Rogin. Both articles cast doubt on the mainstream media’s unsupported claim that COVID-19 jumped from bats to humans through an intermediary species – as opposed to the far more plausible theory that the virus escaped from a lab known formanipulating bat coronaviruses to better infect humans, in the same town which became ground zero for the pandemic. As we noted last week, there were veryobviousclues to anyone able to think for themselves.
As the mainstream media parroted CCP talking points throughout 2020 and punished anyone who strayed from the official narrative, Facebook banned Zero Hedge articles and policed COVID ‘disinformation’ based on the word of so-called “fact checkers” who insisted that the new disease could only have emerged via yet-to-be discovered animal intermediaries.
Of course, one of Facebook’s “fact checkers” alsoworked at the Wuhan lab, and was defending her former colleagues in a giant undisclosed conflict of interest.
Meanwhile, Politifact was caught quietly editing an article ‘debunking’ the lab-leak hypothesis.
I never want to hear about Politifact. Ever. Never. Ever. I’m going to use these two screencaps if anyone ever cites that source. pic.twitter.com/5EPgpxEgiW
Some of the stealth edits that Vox made to its article debunking “conspiracy theories” that Covid-19 originated in a lab leak between its original publication in March 2020 and now. pic.twitter.com/RYxZ2B81mc
No apologies. No introspection. Just spineless stealth edits and quiet policy changes such as Facebook’s recent decision. Perhaps most disturbing is the complete rejection of the lab-leak hypothesis by the MSM, social media giants, and liberal leaders because President Trump promoted it.
What’s more, last night we learned from CNN that President Biden canceled aTrump-era State Department investigation into the origins of COVID-19, which also sought to determine whether China’s biological weapons program may have played a role in the pandemic. According to the report, it was met with internal opposition from officials who thought it was simply a politicized witch hunt to blame China for the virus.
After news broke of Biden’s pro-China decree to cancel the investigation, his administration scrambled to do damage control, announcing that US intelligence agencies have 90 days to “redouble” their efforts to find out the virus’ origin and report back.
Facebook flip-flop
As Politico notes, “Facebook announced in February it had expanded the list of misleading health claims that it would remove from its platforms to include those asserting that “COVID-19 is man-made or manufactured.” The tech giant has updated its policies against false and misleading coronavirus information, including its running list of debunked claims, over the course of the pandemic in consultation with global health officials.”
Now, according to a spokesperson, the origin language has been stricken from that list due to the renewed debate.
“In light of ongoing investigations into the origin of COVID-19 and in consultation with public health experts, we will no longer remove the claim that COVID-19 is man-made from our apps,” said the spokesperson in an email. “We’re continuing to work with health experts to keep pace with the evolving nature of the pandemic and regularly update our policies as new facts and trends emerge.”
Now maybe they can unblock ZeroHedge posts and realize they have no place as the arbiters of anything.
Apple Seeks ‘Experienced BizDev Manager’ To Negotiate Alternative Payments Partnerships, Must Have ‘Crypto Experience’
Apple is looking to hire an ‘experienced’ business development manager to spearhead Alternative Payments partnerships for the company’s Apple Wallets, Payments and Commerce (WPC) team, in a sign that the technology giant is getting more serious about mainstreaming cryptocurrencies for practical purposes.
The Apple Wallets, Payments, and Commerce (WPC) team is seeking an experienced Business Development Manager to lead Alternative Payments Partnerships. We are looking for a proven professional in global alternative and emerging payment solutions. We need your help forming partnership framework and commercial models, defining implementation paradigms, identifying key players and managing relationships with strategic alternative payment partners. This position will be responsible for the end to end business development, including screening partners, negotiating and closing commercial agreements and launching new programs.
The ideal candidate will have more than 5 years of experience working in or with alternative payment providers, “such as digital wallets, BNPL (buy now, pay later), Fast Payments, cryptocurrency and etc..” They will also need to have “Deep knowledge of the alternative payments ecosystem, understanding the complexities of funds flow, roles/responsibilities for settlement, relevant regulations and industry standards and the wide spectrum of FinTech products.“
As Coindesk’s Danny Nelson notes, “Apple has long maintained an ironclad grip over payments, especially in its App Store, which has never accepted customers’ crypto and forces all catalog apps to use Apple’s commerce rails and play by Apple’s rules.”
That tightly-controlled ecosystem is the focus of a blockbuster court fight launched by Fortnite developer Epic Games. Epic alleges Apple’s rules violate antitrust laws and stifle payments innovation. App developers could accept “bitcoin or other cryptocurrencies” if not for Apple’s restrictions, Epic claimed in the suit.
Apple has made no public statements about its plans for the crypto space. -Coindesk
Meanwhile, according to MacRumors, Coinbase included an Apple Pay logo in a recent update regarding its Coinbase Card. Perhaps negotiations have already begun?
Apple Seeks ‘Experienced BizDev Manager’ To Negotiate Alternative Payments Partnerships, Must Have ‘Crypto Experience’
Apple is looking to hire an ‘experienced’ business development manager to spearhead Alternative Payments partnerships for the company’s Apple Wallets, Payments and Commerce (WPC) team, in a sign that the technology giant is getting more serious about mainstreaming cryptocurrencies for practical purposes.
The Apple Wallets, Payments, and Commerce (WPC) team is seeking an experienced Business Development Manager to lead Alternative Payments Partnerships. We are looking for a proven professional in global alternative and emerging payment solutions. We need your help forming partnership framework and commercial models, defining implementation paradigms, identifying key players and managing relationships with strategic alternative payment partners. This position will be responsible for the end to end business development, including screening partners, negotiating and closing commercial agreements and launching new programs.
The ideal candidate will have more than 5 years of experience working in or with alternative payment providers, “such as digital wallets, BNPL (buy now, pay later), Fast Payments, cryptocurrency and etc..” They will also need to have “Deep knowledge of the alternative payments ecosystem, understanding the complexities of funds flow, roles/responsibilities for settlement, relevant regulations and industry standards and the wide spectrum of FinTech products.“
As Coindesk’s Danny Nelson notes, “Apple has long maintained an ironclad grip over payments, especially in its App Store, which has never accepted customers’ crypto and forces all catalog apps to use Apple’s commerce rails and play by Apple’s rules.”
That tightly-controlled ecosystem is the focus of a blockbuster court fight launched by Fortnite developer Epic Games. Epic alleges Apple’s rules violate antitrust laws and stifle payments innovation. App developers could accept “bitcoin or other cryptocurrencies” if not for Apple’s restrictions, Epic claimed in the suit.
Apple has made no public statements about its plans for the crypto space. -Coindesk
Meanwhile, according to MacRumors, Coinbase included an Apple Pay logo in a recent update regarding its Coinbase Card. Perhaps negotiations have already begun?
Most Illinoisans are unaware, but their General Assembly is poised to pass a resolution for a state constitutional amendment, the consequences of which are hard to overstate. It would vastly expand union power, permanently, particularly public union power that is already extreme.
Limited media coverage so far characterizes the amendment mostly as an attempt to permanently ban right-to-work and lock in current worker protections. That would be bad enough, since the majority of states are now right to work including nearby competitors Wisconsin, Michigan, Indiana and Iowa. And Illinois is already an outlier in how much power it has given to public unions, particularly in collective bargaining rules.
But that’s just the start. Think hard about what the short amendment, shown here, would do.
Read it and consider the following:
The first sentence, by itself, creates a new, personal constitutional right. That right would take all covered matters described in that sentence out of the hands of the legislature and local governments, subjecting it all, instead, to collective bargaining.
Both the scope of that right and the rules for how the collective bargaining would be conducted are sweeping and open-ended. Note in particular that all matters of “economic welfare” would be forced into collective bargaining, and those matters of economic welfare apparently need not be tied to the workplace (though that’s not entirely clear).
What isn’t a matter of “economic welfare”? Practically nothing. The Chicago Teachers Union has attempted in the past to include matters like affordable housing in its bargaining. Under the amendment it would clearly have a strong case for demanding any number of such policies as part of its contract negotiations. Same for any other union.
The broad, new right would override extensive law already in place. Today, public union negotiation is covered by the lengthy Illinois Public Labor Relations Act and the Illinois Education Labor Relations Act. Private unions are governed by both federal and state law.
But constitutional rights trump all state law, so claims based solely on the new amendment would be asserted. Public unions would have a field day in Illinois courts. The amendment would throw everything open to a new standard that only the courts would define, and we know that Illinois’ political courts routinely rule as unions want.
The second sentence is irrational surplus on its face. Since a constitutional right is already created by the first sentence, why bother saying that “no law shall be passed” that contradicts the things for which a constitutional right is already created in the first sentence? Note also that there’s no reference to existing rights, so this is not about locking in current law. The key is that first sentence, which creates something entirely new.
One example of how the amendment would work is pension reform. Suppose the legislature some day goes back to the courts to try again claiming the facts have changed (as they already have) since the courts last ruled against reform. Or perhaps the composition of the Illinois Supreme Court changes in favor of reformers. As before, the legislature would then pass a reform bill that the unions wouldn’t like. But the unions, under the amendment, would answer that reforms could only be made through collective bargaining. It wouldn’t be a matter legislation could change. The amendment would thereby create an additional bar to pension reform, just as it would to any other change in labor law.
Trial lawyers, too, would have a field day with the amendment. Because the proposed amendment is so open-ended and horribly worded, the claims they might assert would be limited only by their imagination.
I have focused so far on the proposed amendment’s impact on public unions for two reasons.
First, let’s just stipulate that much of Illinois’ problems derives from their excessive influence over Illinois government, because every informed Illinoisan knows that.
Second, the powers behind the proposal have basically admitted that it’s intended to benefit public unions. Sen. Ram Villivalam (D-Chicago) is lead sponsor of the measure in the Senate.
As reported by Capitol News Illinois, Villivalam said it would have minimal impact on private-sector workers because the National Labor Relations Act governs organizing and collective bargaining in the private sector. He said the intent was to protect the right to collective bargaining that is already established under the Illinois Public Labor Relations Act and the Illinois Education Labor Relations Act, and those are for public unions.
Villivalam’s admission is probably right, but he’s wrong to disregard the impact the amendment might also have on private sector labor.
One lawyer we heard from on that is Jeff Risch, who chairs the labor and employment group at the SmithAmundsen law firm. He primarily represents small and mid-size employers that occasionally are able to voluntarily reach agreements to remain union-free. The amendment would apparently make that impossible, he said, by giving any employee a constitutional right to bargain collectively. For that and other reasons, “This amendment will seal Illinois’ fate forever,” he says.
Also, much of private sector collective bargaining is controlled by federal law. Insofar as the amendment purports to override it, complex questions of preemption would have to be litigated, which is another mess the amendment would create.
To summarize, drafters of the proposal have made it deliberately and deceptively ambiguous and misleading, but also radically broad and open-ended. By creating a new constitutional right for themselves and their agenda they would be throwing a cluster bomb toward everything in their way. The amendment’s full impact may not be entirely certain but it would, for sure, clear a path to new, unimagined public union power.
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The Illinois Senate has already passed the resolution and it has passed out of committee in the House. The House is likely to vote on the resolution this month. The amendment would then be presented to voters for approval in the 2022 election.
Global Chip Hub Taiwan Hammered By Triple Blow Of Drought, Blackouts And COVID Surge
The calm of a sunny May afternoon in Taiwan was broken by what the Nikkei describes as a crescendo of smartphones buzzing due to a national emergency alert: electricity blackouts were coming due to a malfunction at a power plant in the south of the island. People had no time to prepare. There were more than 30 reports of people being trapped in elevators half an hour after the warning in the capital city.
“I was talking to my clients… but our building suddenly blacked out. The air conditioning as well as WiFi crashed completely, so I went home early,” a manager with the surname of Lin working in the Neihu Science Park in Taipei, where many top tech companies have offices, told Nikkei Asia. “Many traffic lights on my way home were out and my home was dark too.”
“We could only use candles and have instant noodles for dinner, and there was no hot water for showers,” a resident in the southern city of Tainan told Nikkei. “It’s been like living in ancient times.” Or Texas during a cold blast.
More than four million households on the island, which has a population of 24 million, were affected by six rounds of rolling one-hour power suspensions on May 13 before power was fully restored around 8 pm. Taipower, the state-owned electricity operator, said human error at Hsinta Power Plant in the southern city of Kaohsiung caused a malfunction in the power grid, tripping four generators and cutting about 13 megawatts of electricity supply. This dragged Taiwan’s total power supply below a critical security level and triggered the outages.
The nation’s phones buzzed again just four days later with another blackout warning. That evening, up to 659,000 households had their power cut. Taipower said that, with temperatures warmer than usual, there was a shortage of electricity supply because they had not anticipated demand for electricity to be so high.
“Power demand at 2:09 p.m. broke another historic record in May and the demand around 7:30 p.m. was far higher than usual in the evening,” Taipower said in a statement.
The two blackouts did not affect Taiwan’s crown jewel semiconductor industry. But they still put production continuity at risk because chipmakers like Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp said they experienced a sudden voltage dip, which could have a small impact on semiconductor production, industry sources said.
After the two massive power outages, Taiwan endured another small-scale power suspension in Taipei City on Friday and experienced temporary power generator malfunctions at two separate coal-fired power plants on Sunday and Monday respectively.
Maintaining production is crucial at a time of global chip shortage, with political tensions and pandemic-induced lockdowns affecting supply chains and remote working increasing demand for electronic devices.
The outages have triggered serious concerns over whether the island’s electricity infrastructure is sufficient to sustain its booming economy.
Taiwan’s economy grew more than 8% in the January-March quarter from a year earlier. National Development Council Minister Kung Ming-hsin said the island could see economic growth of more than 5% in 2021, the highest in more than a decade, if “all industrial production can stay intact.”
The power problems come as Taiwan sees a surge in local COVID cases, after being a model of COVID control in 2020.
The government has raised the alert level for the whole island, demanding that all schools close for two weeks and urging businesses to adopt contingency plans such as asking employees to divide into groups and work from home. The administration of President Tsai Ing-wen said on Monday it is considering extending the two-week level 3 alert — one stage below a de facto lockdown — after reporting more than 3,000 local cases in just nine days.
* * *
Another headache is Taiwan’s worsening water shortage. The island is suffering its most serious drought in more than five decades — another factor that may stymie economic growth.
Ministry of Economic Affairs officials on Wednesday described the drought as the “worst ever,” saying they planned to implement a new round of water-reduction plans from June should rainfall be insufficient. The affected cities include Hsinchu, where top chipmakers Taiwan Semiconductor Manufacturing Co. and United Microelectronics have headquarters. Taoyuan, a major hub of print circuit board production sites and home to Taiwan’s biggest memory chip maker Nanya Technology, is also included in water rationing plans.
The government also plans to impose stricter water supplies for major industrial users in the southern Taiwanese cities of Tainan and Kaohsiung, where TSMC operates its most cutting-edge plant. It has ordered several central cities, including Taichung, to suspend residential water use for two days a week since early April.
“It never rains but it pours,” a chip industry executive told Nikkei Asia.
“We suddenly face a chain of crises: we are short on water, and then we are short of electricity, and we are also short of vaccines amid surging local COVID cases,” the executive said. “The only thing we are not short of is business orders that are full and bright at least until the year end and beyond thanks to surging demand across sectors. But those orders cannot be fulfilled without sufficient water and electricity.”
Powertech Technology, the world’s biggest memory chip packaging and testing house, is based in Hsinchu, and some of its plants will be subject to a planned two-day suspension of water use for industry and residential use starting in June.
CFO Evan Tseng said the company stored water in its basement and could transfer some water between plants. “We now only offer bento boxes in our cafeterias and we don’t serve soup or noodles with soup as that could consume more water,” Tseng told Nikkei Asia. “So far we think production could still run normally.”
Powertech’s CEO told Nikkei in an interview that he expected the robust orders to last at least until the end of this year.
TSMC spokesperson Nina Kao told Nikkei Asia that the latest water-reduction plan would not affect the company’s production, but the company would “mobilize more water trucks” to support manufacturing to overcome the stricter water rationing. TSMC said in April that the global chip shortage could last until 2022 based on robust demand.
The water and power issues highlight some key vulnerabilities in basic infrastructure for Taiwan, one of the world’s most important sources of the advanced chips that power everything from cars to smartphones, computers and servers to games consoles.
Lin Faa-Jeng, dean of the college of electrical engineering and computer science at National Central University and adviser to the Executive Yuan, Taiwan’s administrative organ, told Nikkei Asia that Taipower had not anticipated the impact of climate change in making the weather so hot at this time of year.
“The power company has to adjust all the planning for annual maintenance and take into account some new factors that they had not considered… But I think the power supply will be alleviated when some annual maintenance on power generators is completed from next week.”
Chen Chao-shun, chair professor at I-Shou University and a specialist on power infrastructure, told Nikkei Asia the two massive blackouts were both due to a sudden loss of power supply that triggered the system’s automatic under-frequency load shed to protect the power grid.
“The two power outages were all related to the supply and the incidents highlight that Taipower needs to improve its capability to schedule backup generators to quickly support the system,” Chen said. “Taipower also has to readjust the system to keep vital equipment such as traffic lights and elevators operating. You can’t unexpectedly cut off the power and trap people in elevators.”
“Before Taipower can improve its agility to schedule power generation and respond to any sudden supply loss, we are likely to face a power suspension triggered by the automatic under-frequency load shed again this summer,” Chen said.
By way of contingency plans, the government has been drilling wells and building new water pipes to draw water from the north of the island to the south. But, while suppliers in the science parks are minimizing their use of water, the change is far from sufficient.
The water level is extremely low in the Nanhua Reservoir in the mountainous area of southern Taiwan — one of the key water reserves for Kaohsiung and Tainan Science Park. Areas of sand that used to be under water have been exposed under the tropical sun and are now sand dunes.
“It’s really too hot…the temperature can reach more than 40 Celsius around noon now and we haven’t seen a drop of rain in months,” a local resident told Nikkei Asia. “We are all worried that the water reserves here can only last for about a month.”
Multiple cities across Taiwan welcomed heavy rain on Monday afternoon, however, as of evening, the water reserve rate at the Nanhua Reservoir stood at just 8.8%, suggesting the water supply from this reservoir could last only 19 days without any rainfall, according to open data provider Taiwanstats, citing data from the Water Resources Agency.
Tsengwen Reservoir, another key water resource for Tainan Science Park and the largest in Taiwan, had a water reserve rate of just 6% as of Thursday, the data showed. The rate at Shihmen Reservoir, one of the key reservoirs that supplies northern Taiwan, dipped to 11.1% as of Thursday.
Wu Ray-shyan, executive vice president of the National Central University and a hydrology and water resources expert, said if the monsoon season did not bring sufficient rain this month, then Taiwan would have to wait until the typhoon season, which generally starts in July, to ease the drought.
“I don’t mean to be alarmist, but if typhoons are delayed, as they were last year, we will have to rely on groundwater resources,” Wu told Nikkei Asia. “Water supply not only needs management and conservation measures, but also an increasing capacity of storage facilities to meet demand, which is rising in tandem with economic growth.
“Taiwan is not like Israel, where the rainfall is really scarce. We [in Taiwan] sometimes on the one hand deal with floods in typhoon season and on the other hand deal with droughts…Taiwan’s problem is that we don’t have enough storage capacity to really store this rainfall,” Wu said.
On power infrastructure, the administration of President Tsai Ing-wen plans to phase out nuclear power by 2025 and to use natural gas and coal-fired power to fill the gap before the planned installation of solar and offshore wind power comes online.
The government is building a third and large natural gas terminal off the coast of Taoyuan to increase the use of liquefied natural gas as a key source of electricity. Local environmental groups, however, oppose the plan, meaning it could be delayed by years or forced to locate elsewhere on the island.
In 2020, Taiwan’s power usage reached 271.1 billion kilowatt-hours, up 2.1% from the previous year, while total power generation was 279.8 billion kilowatt-hours, according to Economics Ministry data released this month. Coal-fired electricity contributed 45% of the total power generated last year, while natural gas accounted for 35.7% and nuclear power 11%. Renewable energy, however, contributed a mere 5.4%.
The government forecasts that electricity demand will grow by 2.5% each year from 2021 to 2027, after factoring in inbound investments amid the U.S.-China trade war and the massive investment plans by semiconductor companies.
National Central University’s Wu said Taiwan needed better infrastructure planning for the long run.
“The last time Taiwan built large infrastructure for either power plants or reservoirs was a very long time ago,” Wu said. The last time a large reservoir was created was in 1994 when the Nanhua Reservoir, which supplies the Tainan Science Park, was dug, he added.
“Large infrastructure takes 10 or even 20 years from planning to completion,” he said. “What Taiwan needs is long-term development planning — undisrupted by the rotation of political parties — for utilities over the next 30 to 50 years.”
By Peter Garnry, head of equity strategy at SaxoBank
Summary:Chinese equities were rallying 3.6% today on signals from the Chinese government to curb inflationary pressures from rising commodity markets reducing inflation expectations and boosting the earnings outlook. US equities are currently valued at a valuation premium to Chinese equities which suggest historically that Chinese equities could outperform over the next 26 weeks. The two country’s technology sectors are equally valued on a 2-year forward basis on EV/EBITDA but with a valuation skew on Chinese technology mega caps making them more attractive on valuation. The long-term growth outlook is better for Chinese technology companies and thus we expect the market to begin leaning into Chinese technology stocks.
As we alluded to in today’s podcast, CSI 300 futures (tracking mainland China equities) broke out higher up 3.6% during the session. The Chinese government’s signaling that it would curb excesses in commodity prices pulled technology stocks globally higher as lower commodity inflation means less pressure on interest rates which in turn means less pressure discount rates on future cash flow. Lower input prices also lift future profit margins and earnings growth.
Chinese companies operate generally at lower profit margins and thus respond more to expectations about inflation and interest rates as the marginally change on profits are bigger for low margin businesses. China’s stimulus has also been limited this year as the country is enjoying the tailwind from stimulus in the US and Europe, but it is our expectation that as that growth momentum slows down the Chinese government will take over a launch more stimulus to keep the economy humming. This should underpin the earnings growth outlook for Chinese equities.
Last Friday, we wrote about how cheap mega cap Chinese technology stocks have become measured on FY22 free cash flow yield which is almost twice some of the largest US technology stocks. On a 2-year horizon Chinese technology stocks (Hang Seng TECH) are valued at the same equity valuation as US technology stocks (Nasdaq 100) which is cheap in a historical context because of the better growth outlook for Chinese technology companies. Broadening out the scope US equities are right valued at a 6% valuation premium to Chinese equities compared to a historical 5% discount for US equities.
Chinese equities were beginning to get back to their historical valuation premium over US equities in the beginning of the year, but the hedge fund Archegos’ collapse and the Chinese crackdown on the technology sector have for now negatively impacted investor sentiment. The current US equity valuation premium suggest that Chinese equities could outperform over the coming 26 weeks, but this prediction comes with a wide prediction interval and the key assumption of this trade is that Chinese equities will move back into premium. Helped by better growth outlook and a weaker USD we believe that is most likely the trajectory.
For inspiration on Chinese technology and consumer stocks looks at our China consumer and technology equity theme basket consisting of 40 stocks.
