The Singapore Daily

By SG Uncle Trader

October NODX numbers were – to put it mildly – crap. But going by the bubbly sound bites from economist calls, it seems that Singapore – which incidentally has the world’s highest trade-to-GDP ratio of 370% - is “recovering” purely because we will soon see STI at 2800 and Ang Mo Kio condos at $1,500 psf, never mind the fact that we’re in our 18th consecutive month of trade decline.

From the BT “Momentum stalls as Oct exports plunge”

It’s no wonder that Singapore’s economic planners are unsure of the economic recovery – and wary of pulling back the stimulus measures.

After two months of upward momentum – up 1.2 per cent in August and 2.9 per cent in September – Singapore’s domestic exports minus oil (NODX) stumbled in October and fell sharply.

The seasonally-adjusted 12.6 per cent month-on- month drop was the biggest since December 2002.

The BT editor, of course, had to throw in the obligatory “Singapore recovering because things are getting worse at slower pace” caveat into the article. To wit:

On a brighter note, last month’s NODX – a key leading indicator – posted a smaller decline from a year ago, keeping up with the year-on-year improvement made since January, when the NODX plunged by a record 35 per cent.

The future is so bright, I gotta wear shades. So, with the benefit of my cool pair of Lei Pan glasses (a Chinese copy version of its more famous counterpart) let’s take a closer look at the Oct numbers from IE:

1. Total trade down 12.4%

Total exports (i.e. imports + exports) decreased by 8.9%, after the 19% contraction in the previous month. So not only has exports gone down, we’re now importing less as well – down by 16% in October 2009.

2. NODX continues to decline, but economists say “we shouldn’t drive using the rear view mirror”

Great advice, Mr. Economists. But since you have been wrong about everything that matters to the wealth of the middle class in Singapore over the last few years or so, we’re not about to bet our farm on your ability to find your ass with your hands. So we’ll stick with the rear view mirror for now, since that’s at least accurate.

I’ve said it before, and I’ll say it again: if you thought last Xmas was bad, wait till you see this year’s. Everything in the US and Europe is pointing to a really really awful Yuletide season.

3. The key electronics pillar is crumbling like a scene from “2012″, but with less star power.

Even John Cusack can’t save this one: On a YoY basis, electronic NODX contracted by 14%, same as the decline in the previous month. According to IE: “The decrease in electronic domestic exports was largely due to lower domestic exports of parts of ICs, disk drives and ICs.”

Here’s a detailed account of how the biggest economies of the world are doing, and why they are getting so darn tightfisted with their money.

The Europeans are in the midst of a depression, but really, no one cares, unless you were a Singaporean exporter to that part of the world. According to the IE, “NODX to the EU 27 contracted by 22 per cent in October 2009, after the 15 per cent contraction in the previous month, because of decreases in both electronic and non-electronic NODX. Electronic NODX to the EU 27 contracted by 36 per cent in October 2009, after the 37 per cent decline in the preceding month.” Staggering.

More than 17% of the workforce in the US is either unemployed or underemployed, so it’s not surprising that they don’t feel the need to load up on the next iteration of the iPod. From IE, “NODX to the US decreased by 11 per cent in October 2009, after the 4.7 per cent decline in the previous month, due to lower electronic NODX. Electronic NODX to the US declined by 30 per cent in October 2009, after the 6.2 per cent decrease in the previous month”

China, supposedly the bright spot in the world economy, turns out to be interested only in buying SPC and Noble Group from Singapore, instead of big screen plasma TVs.  “NODX to China decreased by 6.5 per cent in October 2009, after the 15 per cent decline in the previous month, due to lower electronic and non-electronic NODX. Electronic domestic exports to China decreased by 12 per cent in October 2009, after the 42 per cent decline in the previous month.”

As we’ve pointed out before, the decline is structural, not cyclical – The electronics industry in Singapore is in terminal condition. Expect more large-scale retrenchments by elec manufacturers as they move out in the next budgeting cycle.

***

SG Uncle Trader, who spends much of his daily life attempting to divide by zero, unwinds by providing an independent and skeptical view on financial and economic issues that affect Singaporeans, with a special focus on the ongoing Global Financial Crisis.

November 20th, 2009 | Category: Daily Money | Leave a comment

Share placements (aka corporate-sponsored jacking of the punter/minority shareholder) are taking Singapore by storm. A recent announcement by MI-Reit, from the BT, attests to this growing trend: “Big recapitalisation exercise at MI-Reit” (from BT):

MACARTHURCOOK Industrial Reit (MI-Reit) has announced a slew of measures to recapitalise and refinance its debts and contractual obligations. It has proposed to raise gross proceeds of $217.1 million through the issue of new units to AMP Capital Holdings and ‘cornerstone investors’ and followed by a rights issue. In addition, it has secured credit agreements for a term loan of $175 million and a bridge loan of $39.9 million.

Under the unit placement, AMP Capital is buying a 16.1 per cent stake in MI-Reit for $22 million. MI-Reit will issue 78.6 million new units to AMP Capital at $0.28 each. The issue price is at a 31.7 per cent discount to the closing price of $0.41 on Thursday.

MI-Reit is also issuing 142.9 million new and fully underwritten units to certain ‘cornerstone investors’, including 9.8 million units to its principal sponsor AIMS Financial Group at $0.28 apiece. The gross proceeds of $40 million will be partially used to meet a contractual obligation to pay $90 million for a private lot at 1A International Business Park.

After leaving the retail investor lying face up in main street, bleeding from multiple stab wounds, MI-Reit then turns around and asks “You wouldn’t happen to have any spare change on you, would you?”, by issuing a two-for-one rights issue:

Following these placements, MI-Reit will undertake a two-for-one rights issue, which is also fully underwritten. It will issue 975.6 million new units at $0.159 apiece to raise $155.1 million. The proceeds will be used to pay down debts and acquire properties from AMP Capital.

‘The transactions are critical for MI-Reit and will restore MI-Reit to a stable platform,’ said Nicholas McGrath, CEO of the Reit manager. ‘The key benefits will outweigh the dilutive effects of the transactions on MI-Reit’s distribution per unit and net asset value per unit, and are in the best interests of unitholders.’

Yippie Kai Yay, MI-Reit retail shareholders.

Why share placements are the best way to screw retail investors

Granted, managers do raise funds for good reasons: e.g. to buy good and cheap properties in anticipation of an upturn in the economy. In the financial pecking order, acquisitions and investments are typically carried out via retained earnings first (the easiest and most hidden, though normally not a REIT path), debt (comes naturally to REITs given their huge store of collateral), followed by equity (the least optimal path, not only because it is the most expensive, but also for reasons stated below)

Here’s how existing retail investors get jacked:

1. Massive discounts on placements shares: “Management and the placement agent agree that in order for placement to be successful, so big discounts are required to attract them.” However, the discount is a huge cost to the company and existing shareholders, in effect moving wealth from current shareholders to new shareholders and financial intermediaries, without creating any new value, and sending a strong signal to market that shares are way overvalued. AMP 1, MI-Reit shareholders 0.

2. Same product, different price: Assuming prices are discounted future cash flows, any share placement discounts mean that the new placement shareholders are receiving higher returns than current shareholders. If MI-REIT reneges on its promise to make new investments, then any higher returns for placement shareholders have to come from existing ones. (2-0). If MI-REIT makes new investments, placement shareholders enjoy higher risk premiums then the current shareholders even though both undertake the same risk. (3-0)

3.  Drive by jacking: Share placements can be rushed out in 3 to 14 days days, compared to cash calls which can take up to 3 months. What’s worse, SGX has relaxed regulations on offer price discounts earlier this year, which makes it even easier to mug the retail investor: an EGM is unnecessary if the discount is anywhere south of 20%.

Unfortunately, as refi start cropping up in the midst of tight credit markets, placements seem to be most popular way forward in 2009, knocking cash call off the perch for 2009.From BT: “Placements knock out rights issue in 2009″

The rights issue must, ironically, be feeling rather wronged. Used frequently by companies at the beginning of the year before the market had rallied, rights issues have been unceremoniously cast aside in favour of share placements.

‘We have definitely seen an increase in share placements, since the second half of this year. With improved market sentiment, companies are more willing to raise funds via share placements,’ said Serene Seow, CIMB’s head of equity capital markets.

‘Earlier in the year, right issues were more popular, as the market conditions then had not been conducive for share placements.’

In a volatile market that has risen with unsettling alacrity since March, the share placement has also outclassed its lumbering peer.

Rights issues take about two months to complete from the announcement date, compared to two weeks for a placement exercise.

‘Also, rights issues require financial support from the controlling shareholders, and there may be takeover issues for consideration in some cases,’ said Ms Seow.

The share placement’s offer information statement, which runs over 50 pages and lists the finer details of the placement and company’s financials, usually takes two weeks to be developed, but can be rushed out in three days, according to industry insiders.

After the in-principle approval by the SGX, which takes about seven market days, things move at a fairly rapid clip – the new shares could be issued the next day and listed the day after that.

From the retail investor’s standpoint, it remains to be seen who wins in a placement deal.

To begin with, existing shareholders are not afforded the option of buying the shares like they are in a rights issue, and face the unappealing prospect of share price dilution.

Clouding the crystal ball further, the SGX relaxed regulations on offer price discounts to the share price earlier this year.

‘Now, the company can save time without having to go through an EGM if the discount is more than 10 per cent, but less than 20 per cent. The time from negotiation to market for these deals has been shorten significantly. This should bode well for the market,’ said Mr Ding.<;p>

This could backfire on firms, another equity capital markets insider noted. ‘With this regulation, everyone is going to squeeze the listed firms for a discount of no less than 20 per cent.’

Regardless of whether the placee is Temasek Holdings or a faceless investor, the undisputed champions of this year’s round of share placements have been the placement agents.

Merrill Lynch Singapore got a 1.25 per cent cut of the Noble group placement in September which will yield gross proceeds of $1.2 billion, according to Bloomberg data.

Placement fees this year have ranged from one per cent for Credit Suisse and Nomura Singapore in the $102.4 million Raffles Education Corporation placement, to 5 per cent for Sterling Coleman in the $14.3 million China Animal Healthcare deal.

Like the Donna Summer song, placement agents stress that they work hard for the money.

Yes, printing out a mail-merge form in 3 days is pretty hard work. Give that Merrill Man a Tiger! Meanwhile, we weak hands can only clasp them together, and pray that share placements result in upward price movements.

***

SG Uncle Trader, who spends much of his daily life attempting to divide by zero, unwinds by providing an independent and skeptical view on financial and economic issues that affect Singaporeans, with a special focus on the ongoing Global Financial Crisis.

November 12th, 2009 | Category: Daily Money | Comments (1)