Friday, January 23, 2015

EU Believes Apple, Fiat Tax Deals Broke Rules

BRUSSELS—European Union regulators explained why they think tax deals granted to Apple Inc. in Ireland and Fiat SpA in Luxembourg constituted illegal state support—the next stage of an investigation that could result in the companies paying huge sums in extra taxes to the governments concerned.
In documents released Tuesday, the EU laid out the reasoning behind its decision to open formal tax investigations in June. While the probes are in their early stages, a final ruling against the tax deals could result in back taxes being owed by Apple, Fiat, Starbucks Corp. and potentially other companies.
The announcements are likely to set off alarms for a swath of multinationals and funds operating in Europe, particularly those that, like Fiat, arrange their financing and treasury operations through Luxembourg, experts said. 
"Taxpayers across Europe will be reviewing their affairs carefully in the light of this development to make sure they are robust to challenge," said Neal Todd, a partner with Berwin Leighton Paisner LLP in London.
In a hard-hitting letter to the Irish government published Tuesday, the European Commission, the 28-member bloc's central antitrust authority, said it had reached the "preliminary view" that tax deals struck with Apple in Ireland in 1991 and 2007 constituted state aid. 
"The commission is of the opinion that through those rulings the Irish authorities confer an advantage on Apple," the letter said.
A spokesman for Apple said the company had "received no selective treatment from Irish officials over the years," and that its tax payments "in Ireland and around the world have increased tenfold" since 2007. "We're subject to the same tax laws as the countless other companies who do business in Ireland," the spokesman said.
At issue are the tax rulings, or so-called comfort letters, sent by governments to multinationals to give clarity on how a specific tax will be calculated. These would be illegal if they gave selective advantages to some companies.
The commission said it had specific doubts—based on an analysis of exchanges between representatives of Apple and the Irish tax authorities—about the methods used to calculate taxes payable by two of Apple's subsidiaries in Ireland: Apple Operations Europe and Apple Sales International.
AOE manufactures personal computers and provides other services to Apple subsidiaries in Europe, the Middle East and Africa, and ASI procures finished Apple products from third-party manufacturers and sells them to overseas distributors.
In its letter, the commission said the costs attributed to AOE appear to have been "reverse engineered" to arrive at a specific taxable income. The regulator also says that excerpts from conversations between Apple and the Irish authorities indicate the reduction of Apple's tax rate after a certain threshold "would have been motivated by employment considerations."
Apple employs more than 4,000 people in Cork, Ireland, where all its Irish subsidiaries are based.
The Cupertino, Calif.-based company paid less than €20 million ($25.4 million) in taxes in Ireland for each of the years 2010-2012 through the two Irish subsidiaries that the commission has focused on, according to the commission's letter.
Apple set aside about $12 billion for U.S. federal and state income taxes in fiscal 2013, on sales of $62.7 billion in the Americas, according to a filing with the U.S. Securities and Exchange Commission. The company, which doesn't break down revenue by country, set aside just $1.1 billion for foreign income taxes over the same period, on sales outside the Americas of about $88 billion. It reported foreign pretax earnings of $30.5 billion that fiscal year. 
Apple could be asked to pay up to $200 million in back taxes, said Heather Self, a tax partner at Pinsent Masons LLP in London. She said the company could also agree to pay a smaller amount to settle—or pay nothing if Ireland offers a robust defense.
The commission doesn't fine countries for providing illegal state aid.
An Irish government spokesman referred to previous comments saying Ireland was "confident that there is no breach of state-aid rules" in the Apple case.
In a parallel development, the commission also published its letter to Luxembourg's government on Tuesday, saying it had reached the "preliminary" conclusion that a tax decision concerning Fiat amounted to state support for the car maker, and the regulator had "doubts" about the deal's conformity with EU law.
That investigation is potentially more significant than the Irish probe due to the large number of funds and other companies that are based in Luxembourg and could be affected by future investigations, experts said. The EU's probe has also spread to Amazon.com Inc. 's operations in Luxembourg and other companies operating there, according to a person familiar with the matter.
The EU's state-aid rules are meant to prevent governments from offering sweetheart tax or subsidy deals to companies that distort competition inside the bloc.
The EU has also said that it was seeking information from the governments of Belgium and the U.K. in separate tax enquiries. The EU said the documents requested from the U.K. related to its overseas territory of Gibraltar.

Fire district consolidation

See my blog from June 8, 2011 about conversation I had with a city councilor where I talked about consolidation of services as the costs did not make sense and that is what happened in Australia in the 90's. Aivars Lode

Tuesday’s election results were historic for taxpayers who have clamored for more than a decade to consolidate Collier County’s empire of separate fire districts.
In each of four fire districts with a say in mergers, voters supported consolidating by percentages ranging from 61 percent to 70 percent.
Mergers passed to combine East Naples and Golden Gate fire districts and to blend North Naples and Big Corkscrew fire districts. This creates opportunities to trim administrative costs while adding frontline personnel and quick response equipment.
Taxpayers will save by not needing a new fire administration building in East Naples, projected to cost $5 million or more, because the merged district can use Golden Gate’s new headquarters. In the northern part of the county, the merger prevents separate districts from having to build two stations not far from one another on opposite sides of the boundary.
Benefits in North Naples-Big Corkscrew include reducing the number of chiefs, cutting costs, and redirecting the savings into front-line personnel and equipment. The merger is projected to save taxpayers $2.3 million in the first five years.
More than two-thirds of voters in a 2010 straw ballot supported the idea that independent fire districts in Collier County and other districts operated by county government should merge. Tuesday’s results are a welcome call to end fire district fiefdoms in Collier County.

Regulators fine global banks $4.3 billion in currency investigation

I identified this back in July of 2012, and now fines are being levied. Aivars Lode

http://aivarslode.blogspot.com/2012/07/special-report-after-libor-where-will.html


By Kirstin Ridley, Joshua Franklin and Aruna Viswanatha
LONDON/ZURICH/NEW YORK (Reuters) - Regulators fined six major banks a total of $4.3 billion for failing to stop traders from trying to manipulate the foreign exchange market, following a yearlong global investigation. 
HSBC Holdings Plc, Royal Bank of Scotland Group Plc, JPMorgan Chase & Co, Citigroup Inc, UBS AG and Bank of America Corp all faced penalties resulting from the inquiry, which has put the largely unregulated $5-trillion-a-day market on a tighter leash, accelerated the push to automate trading and ensnared the Bank of England.
Authorities accused dealers of sharing confidential information about client orders and coordinating trades to boost their own profits. The foreign exchange benchmark they allegedly manipulated is used by asset managers and corporate treasurers to value their holdings.
Dealers used code names to identify clients without naming them and swapped information in online chatrooms with pseudonyms such as "the players", “the 3 musketeers” and “1 team, 1 dream." Those who were not involved were belittled, and traders used obscene language to congratulate themselves on quick profits made from their scams, authorities said.
Wednesday's fines bring total penalties for benchmark manipulation to more than $10 billion over two years. Britain's Financial Conduct Authority levied the biggest penalty in the history of the City of London, $1.77 billion, against five of the lenders.
"Today's record fines mark the gravity of the failings we found, and firms need to take responsibility for putting it right," FCA Chief Executive Officer Martin Wheatley said. 
He said bank managers needed to keep a closer eye on their traders rather than leaving it to compliance departments, which make sure employees follow the rules.
The investigation already has triggered major changes to the market. Banks have suspended or fired more than 30 traders, clamped down on chatrooms and boosted their use of automated trading. World leaders are expected to sign off on regulatory changes to benchmarks this weekend at the G20 summit in Brisbane, Australia.
In the United States, which has typically been more aggressive on enforcement than other jurisdictions, the Department of Justice, Federal Reserve and New York's financial regulator are still probing banks over foreign exchange trading. 
EXASPERATION
Regulators said the misconduct at the banks ran from 2008 until October 2013, more than a year after U.S. and British authorities started punishing banks for rigging the London interbank offered rate (Libor), an interest rate benchmark. 
The foreign exchange probe has wrapped up faster than that investigation did, and Wednesday's fines reflected cooperation from the banks. Britain's FCA said the five banks in its action received a 30 percent discount on the fines for settling early.
The U.S. Commodity Futures Trading Commission ordered the same five banks to pay an extra $1.48 billion. Swiss regulator FINMA also ordered UBS, the country's biggest bank, to pay 134 million francs ($139 million) and cap dealers' bonuses over misconduct in foreign exchange and precious metals trading.
The U.S. Office of the Comptroller of the Currency fined the U.S. lenders a total of $950 million. It was the only authority to penalize Bank of America.
Wednesday's settlement, said it had pulled out of talks with the FCA and the CFTC to try to seek "a more general co-ordinated settlement" with other regulators that are investigating its activities.
The FCA said its enforcement activities were focused on those five plus Barclays, signaling it would not fine Deutsche Bank AG. 
The CFTC declined to comment on whether it was looking at other banks.
Britain's Serious Fraud Office is conducting a criminal investigation, and disgruntled customers can still pursue civil litigation.
RBS, which is 80 percent owned by the British government, received client complaints about foreign exchange trading as far back as 2010. The bank said it regretted not responding more quickly. 
The other banks were similarly apologetic.
BANK OF ENGLAND
The currency inquiry struck at the heart of the British establishment and the City of London, the global hub for foreign exchange dealing.
The Bank of England said on Wednesday that its chief foreign exchange dealer, Martin Mallet, had not alerted his bosses that traders were sharing information.
The British central bank, whose governor, Mark Carney, is leading global regulatory efforts to reform financial benchmarks, has dismissed Mallet but said he had not done anything illegal or improper.
It also said it had scrapped regular meetings with London-based chief currency dealers, a sign the BOE wants to put a distance between it and the banks after the scandal.
Shares of banks involved in the settlement were down slightly Wednesday afternoon. Bank of America dipped 0.2 percent, JPMorgan fell 1.6 percent, and Citi was 0.6 percent lower.
RBS was down 1 percent, HSBC was down 0.3 percent, and UBS was down 0.1 percent in after-hours trading.
(1 US dollar = 0.9630 Swiss franc)
(Additional reporting by Steve Slater, Huw Jones, Jamie McGeever, Clare Hutchison and Matt Scuffham in London and Katharina Bart in Zurich; Writing by Carmel Crimmins and Emily Stephenson; Editing by Alexander Smith, Anna Willard, David Stamp and Lisa Von Ahn)

Wednesday, January 14, 2015

Dollar’s Updraft Taxes CFOs

An unexpected surge by the U.S. dollar is causing headaches for finance chiefs.
Not only did the currency’s strength weigh on year-end earnings, but it is clouding this year’s outlook, complicating corporate borrowing and pension accounting. It is even shaking CFOs’ belief the Federal Reserve will raise interest rates in 2015.
As the dollar rises, it lowers the value of revenue companies take in overseas and makes U.S. exports costlier and less competitive. Both factors can have a big impact on corporate results. The S&P 500 companies, for example, rely on foreign markets for over 45% of their sales.
In last year’s third quarter, North American and European companies recorded $8 billion in currency losses, according to FiREapps, which advises companies on managing currency risk.
Since then, the dollar has continued to rise. The WSJ Dollar Index has climbed more than 7.5%, hitting a roughly 11½-year high this month. The index tracks the dollar against a basket of 16 currencies, including the euro, the Japanese yen and the British pound.
The dollar’s surge has been driven by expectations that the Fed will raise U.S. short-term interest in the coming months, as well as a flight to safety as economies in Europe and Asia falter.
To protect against currency fluctuations, many companies hedge their bets with contracts that lock-in exchange rates. Some of their foreign units also make their goods or buy supplies abroad to avoid importing parts from the U.S. The stronger dollar makes those imports costlier. 
But those strategies offer only limited protection.
On Jan. 20 International Business Machines Corp. will report a blow to year-end earnings because its hedges didn’t provide enough cover, said finance chief Martin Schroeter during a conference call with analysts on Oct. 20. In addition, IBM’s management has thrown out its forecast for the year. 
IBM had said it would chalk up adjusted profit of $20 a share in 2015, but it plans to lower its projection this month. “We have some real macro headwinds in the form of a strong dollar,” Mr. Schroeter said.
Oracle Corp. last month told investors that its revenue would have risen 7% in the quarter ended Nov. 30 had the dollar’s value been stable. Instead, the software company reported half that growth.
Oracle co-CEO Safra Catz said the currency effect was double what she expected three months earlier. She added that the strengthening dollar would reduce Oracle’s profits in the current quarter by about four cents a share, and that the currency’s “unusually high volatility” made even that figure iffy.
The rapidly declining value of the ruble, meanwhile, has made it difficult for Apple Inc. to set prices in Russia, prompting the gadget giant to halt online sales of its products there. Currency fluctuations also led Apple to raise its prices for app downloads in Canada, the European Union and Russia, a step it has rarely taken. General Motors Co. stopped delivering vehicles to its Russian dealers. 
Apple CFO Luca Maestri warned investors in October that the rising dollar was “becoming a significant headwind” in the fiscal first quarter ended in December. The company is slated to report quarterly earnings on Jan. 27.The dollar’s movement is making it riskier for American companies to borrow money in foreign markets.
Verizon Communications Inc. sold $5.4 billion of bonds in Europe last year, but the telecom company would think twice about doing something like that again soon, said CFO Fran Shammo.
That’s because Verizon swaps the foreign debt into dollars via contracts with banks, which take on the risk of exchange-rate changes. But, if the dollar value of that foreign debt falls too far, the company might have to put up cash as collateral under the terms of those contracts.
“That’s real cash,” said Mr. Shammo. “So we have to manage the risk and not just raise as much as we want outside the U.S.”
Of course, the strong dollar can be a boon for some businesses. Networking-gear maker Ciena Corp. , for example, saved $15.4 million on research and development costs in Canada last year because of the weaker Canadian dollar.
Demand for the dollar also has helped drive down U.S. interest rates. Worried about Europe’s economy and emerging markets, investors have snapped up dollars to buy U.S. Treasury notes. That’s pushed yields on the 10-year Treasury note below 2%, which has seldom occurred since the summer of 2013.
Corporate-bond yields fell to an average of 3.02% last week, down from 3.27% this time last year, according to Barclays PLC.
Although falling yields make it cheaper for companies to borrow, they are playing havoc with corporate pension plans.
Declining interest rates more than doubled pension deficits to $343 billion at the 40% of the Fortune 1000 companies that have defined-benefit pension plans and December year-ends, according to consulting firm Towers Watson.
“We might have a growing gap in pension funding,” if rates drop, said Carol Roberts, CFO of International Paper Co. The paper and packaging company’s pension plan had a $2.2 billion funding deficit at the end of 2013.
International Paper also been taking accounting losses from a Russian joint venture, which reports finances in rubles that must reflect current exchange rates. It recorded a $70 million accounting loss during the third quarter.
“In the world we live in today,” Ms. Roberts said, “we just expect volatility.”
Corrections & Amplifications
IBM Chief Financial Officer Martin Schroeter said during an Oct. 20 conference call with analysts that the company’s earnings would take a hit from the stronger dollar. An earlier version of this article failed to note when Mr. Schroeter spoke. 
—Maxwell Murphy and Shira Ovide contributed to this article.

Sunday, January 11, 2015

How Crude Oil’s Global Collapse Unfolded

So much for the notion of peak oil, which was popular a few years ago. Aivars Lode
By Russell Gold
Since the 1970s, Nigeria has sent a steady stream of high-quality crude oil to North American refineries. As recently as 2010, tankers delivered a million barrels a day.
Then came the U.S. energy boom. By July of this year, oil imports from Nigeria had fallen to zero.
Displaced by surging U.S. oil production, millions of barrels of Nigerian crude now head to India, Indonesia and China. But Middle Eastern nations are trying to entice the same buyers. This has set up a battle for market share that could reshape the Organization of the Petroleum Exporting Countries and fundamentally change the global market for oil.
On Friday, crude prices dropped to their lowest level in five years after the International Energy Agency cut its forecast for global oil demand for the fifth time in six months. That signaled to investors that the world economy would struggle in the coming year, sending the Dow Jones Industrial Average tumbling by 315.51 points, or 1.8%, to 17280.83. That’s the Dow’s biggest weekly percentage loss in three years.
Since June, the IEA has cut its demand forecast for 2015 by 800,000 barrels, while it says U.S. oil output will rise next year by 1.3 million barrels a day.
The drop in global oil prices from over $110 a barrel to under $62 on Friday has been portrayed as a showdown between Saudi Arabia and the U.S., two of the world’s biggest oil producers. But the reality is more complex, involving Libyan rebels and Indonesian cabdrivers as well as Texas roughnecks and Middle Eastern oil ministers. It reflects both the surging supply of crude and the crumbling demand for oil.
And the oil-price plunge may not end soon. Bank of America Merrill Lynch says U.S. oil prices could drop to $50 in 2015.
The roots of the price collapse go back to 2008 near Cotulla, Texas, a tiny town between San Antonio and the Mexican border. This was where the first well was drilled into the Eagle Ford Shale. At the time, the U.S. pumped about 4.7 million barrels a day of crude oil.
In 2009 and 2010, the global economy improved, demand for oil increased and crude prices rose, creating a large incentive to find new supplies. In Cotulla and elsewhere, U.S. drillers answered the call. “There was, for lack of a better term, an arms race for oil, and we found a ton of oil,” says Dean Hazelcorn, an oil trader at Coquest in Dallas.
Today, two hundred drilling rigs blanket South Texas, steering metal bits deep underground into the rock. Once drilled and hydraulically fractured, these wells yield large volumes ofhigh-quality oil; at the moment, the U.S. is producing 8.9 million barrels a day, thanks to the Eagle Ford and other new oil fields.
Americans aren’t pumping more gasoline or otherwise using up all that new crude, and under U.S. laws dating back to the 1970s, it has been almost impossible to export.
As a result, American refineries snapped up inexpensive crude from Texas and North Dakota, using it to replace oil from Nigeria, Algeria, Angola and Brazil, and almost every other oil-producing nation except Canada.
OPEC sent the U.S. 180.6 million barrels in August 2008, a month before the first Eagle Ford well; in September 2014, it shipped about half that, 87 million barrels. That is about 100 fewer tankers of crude arriving in U.S. ports. They went elsewhere.
For a long time, it seemed like the world’s growing appetite for oil would soak up all the displaced crude. By 2011 prices began to hover between $90 and $100 a barrel and mostly stayed in that range.
But earlier this year, another trend began to come into focus, catching Wall Street energy analysts and other market watchers by surprise. In March, many analysts predicted global demand for crude oil would grow by 1.4 million barrels a day in 2014, to 92.7 million barrels a day. 
That prediction proved wildly optimistic.
Vikas Dwivedi, energy strategist with Macquarie Research, says a widespread deceleration of global economic growth sapped some demand. At the same time, several Asian currencies weakened against the U.S. dollar.
The cost of filling up a gas tank in Indonesia, Thailand, India and Malaysia rose, just as these countries were phasing out fuel subsidies. In Jakarta and Mumbai, drivers cut back.
“The fact that supply growth was strong shouldn’t have taken anybody by surprise,” Mr. Dwivedi says. But demand for oil “just fell off a cliff. And bear markets are fed by negative surprises.”
Rising supply and falling demand both put downward pressure on prices. Throughout the summer, however, fears of violence in Iraq kept oil prices high as traders worried Islamic State fighters could cut the countrys oil output.
Then two events tipped the market. In late June, The Wall Street Journal reported the U.S. government had given permission for the first exports of U.S. oil in a generation. While the ruling was limited in scope, the market saw it as the first crack in a long-standing ban on crude exports. Not only was the U.S. importing fewer barrels of oil, it could soon begin exporting some, too. This news jolted oil markets; prices began to edge down from their summer peaks.
On July 1, Libyan rebels agreed to open Es Sider and Ras Lanuf, two key oil-export terminals that had been closed for a year. Libyan oil sailed across the Mediterranean Sea into Europe. Already displaced from the U.S. Gulf Coast and eastern Canada, Nigerian oil was soon replaced in Europe, too. Increasingly, shipments of Nigerian crude headed toward China.
Oil prices began to decline. By the end of July, a barrel of U.S. crude fell below $100. In early September, the IEA, a Paris-based energy watchdog, noted there had been a “pronounced slowdown in demand growth.” A month later, oil prices fell below $90 a barrel.
By the middle of September, Petroleum Intelligence Weekly, a widely read industry newsletter, said both sides of the Atlantic Ocean were “awash in oil.” Nigeria, it declared, “needs to find new customers for its light, sweet crude streams in Asia.”
Saudi Arabia didn't want Nigeria to develop long-term relationships with refinery buyers in Asia. In late September, the kingdom decided to shore up its hold on them by, effectively, holding a sale. The Saudis cut their official crude price in Asia by $1 a barrel; within a week, Iran and Kuwait did the same.
Two weeks later, the IEA again lowered its full-year projection of demand growth by 200,000 barrels a day to a meager annual increase of 700,000 barrels, nearly half of what it expected at the beginning of the year. Oil prices fell nearly $4 a barrel on the news.
At this point, the oil market appeared to be in free fall. Of the 23 trading days in October, the price of crude fell by more than $1 on eight days. It rose by $1 on one day. Traders’ attention turned to OPEC, which has traditionally played the role of market stabilizer by cutting production when prices fall and raising production when prices rise. Many OPEC members, reliant on the cash oil brings in to pay for generous social programs, didn’t want to cut.
Saudi Arabia’s powerful oil minister, Ali al-Naimi, was silent for weeks. The country had been burned in the past when it cut its oil output, only to see other countries continue to pump—and steal its customers.
And it was already feeling competition, says Abudi Zein, chief operating officer of ClipperData, a New York firm that tracks global crude movement. Colombia, which historically has sent most of its oil to the U.S., is finding its biggest buyer this year is China, a critical market for OPEC, he said.
“For the Saudis, Asia is their growth market,” Mr. Zein says. “The Nigerians and Colombians are being kicked out of their natural markets in North America. Saudi had to do something.”
At its regular meeting in Vienna in late November, the cartel kept production unchanged. U.S. and European oil prices fell another $7 per barrel.
On Wednesday, Mr. al-Naimi, the Saudi Arabian oil minister, was asked whether OPEC would soon act to cut exports. “Why should we cut production?” he asked. “Why?”

Friday, January 2, 2015

Oil-Glut Move Spurs Further Losses

So much for peak oil, huh. Aivars Lode

Crude Hits a Three-Year Low in Wake of Lower Saudi Prices; Bearish Hedge Funds Find a Winner

By Christian Berthelsen, Rob Copeland, and Nicole Friedman

Oil prices plunged to new lows Tuesday on renewed concerns about a global supply glut, extending a selloff that has rattled financial markets, driven down shares of energy companies and stoked alarm among government officials.
Saudi Arabia’s surprise price cut for its U.S. oil deliveries this week has driven the latest swoon, with U.S. oil prices down 4% since the announcement. The move suggests the world’s largest oil exporter is more concerned with maintaining production volume and market share than shoring up prices through output cuts, experts say. 
Some nimble investors are making money off the steep slide. Hedge-fund managers including Pierre Andurand and the team of George “Beau” Taylor and Trevor Woods are among those who have reaped profits by correctly predicting rising global crude-oil output would overwhelm the market and send prices lower. They placed bets, known as shorts, that prices in the futures market would fall and were guided by research that closely tracked the flow of physical oil from wells and pipelines to storage tanks and refineries, according to people familiar with their trading strategies.
Many traders say Saudi Arabia’s action to protect its market share means the Organization of the Petroleum Exporting Countries, a group that controls about 40% of global oil output, is unlikely to take steps to curtail production at its Nov. 27 meeting in Vienna. 
“Prices are going to be under downward pressure in almost any scenario,” said Lawrence Goldstein, a director of the Energy Policy Research Foundation, which receives funding from the oil industry.
Many oil-producing countries both inside and outside OPEC rely on oil-related revenues to fill their coffers, and the sharp selloff is sparking worries about budget shortfalls and financial instability. Saudi Arabian Oil Minister Ali al-Naimi is making a rare trip this week to Venezuela and on Wednesday is set to meet privately with Venezuelan Foreign Minister Rafael Ramírez, the country’s former oil czar, diplomats said.
In the U.S., the implications of lower oil prices are mixed. Cheaper crude is a boon for the U.S. economy, with drivers saving about $250 million a day on gasoline compared with in early summer, according to AAA. This leaves consumers with money to spend on other items just as the holiday shopping season starts. The national average retail gasoline price is $2.97 a gallon, the lowest since December 2010.
On the flip side, the latest decline in oil prices spilled over into stocks for a second day in a row, weighing on shares of oil companies and helping drag the S&P 500 into negative territory for the day Tuesday.
As a whole, hedge funds and other investors are still bullish on oil prices, based on the latest data from the U.S. Commodity Futures Trading Commission, which doesn’t cover oil’s latest leg down. But they have cut those bullish bets on U.S. oil prices by 34% since mid-June, according to the CFTC.
Oil markets have bounced back from steep selloffs in the past, meaning recent gains reaped from falling oil prices could reverse quickly.
Still, some big-name fund managers are joining the bearish camp. Paul Singer , founder of Elliott Management Corp., which oversees $25 billion, expects oil prices to fall for several years thanks to strong U.S. supply, according to an investor letter.
Among the biggest beneficiaries of oil’s decline have been specialized and relatively small hedge funds focused on sophisticated energy bets. Few have been as bearish as Taylor Woods Capital Management LLC, the $932 million hedge-fund firm run by Messrs. Taylor and Woods and backed by Blackstone Group LP. As crude plunged, Taylor Woods’s fund soared 8% in October, erasing its annual loss. It is now up about 5% for the year, according to people familiar with the results.
Late in 2013, Taylor Woods bet on a decline in prices in the oil-futures contract for December 2014 delivery on the New York Mercantile Exchange. December 2014 crude is currently the near-term contract, which ended Tuesday at its lowest price since October 2011. Around the time the firm placed the trade, the price was in the low $90s, according to people with knowledge of the trade. 
Now, many traders are watching a quirk in the futures market that appeared on the heels of the Saudi announcement. The Nymex oil price for December delivery dropped below that for January delivery on Monday, a sign some investors see as a harbinger of even lower prices to come. The last time this happened was in January.
Andurand Capital Management LLP bet against both Nymex and Brent futures in early October, when it became clear to him that Saudi Arabia was unlikely to cut output. Mr. Andurand’s $300 million fund was up 6% in October, bringing 2014 gains to 5% through Monday. 
“I try not to be limited by any long-term view,” Mr. Andurand said. “The market has changed.”
Anuraag Shah, a veteran of the powerhouse Louis Dreyfus Commodities Group, started betting on lower oil prices this past spring via his nearly $100 million Tusker Capital LLC hedge fund, and he was temporarily burned as prices marched higher.
“When we first started talking about it in May, no one wanted to hear about it,” he said. He added shorts of oil-company stocks, a risky bet that could have compounded his wins, or losses. Tusker gained more than 20% last month and is now up about 15% this year.
Though crude is rapidly approaching Mr. Shah’s original target of $75 a barrel, he expects the price to drop well into 2015.
— Kejal Vyas and Alexandra Scaggs contributed to this article.

Thursday, January 1, 2015

Dollar’s Surge Pummels Companies in Emerging Markets

When everyone thought the low dollar was an issue, it lulled issuers into a false sense of security and made them forget about the foreign exchange risk. Aivars Lode

From Brazil to Thailand, Firms That Sold Bonds in Dollars Now Face Steep, Even Staggering Costs
By Ian Talley and Anjani Trivedi
The soaring U.S. dollar is squeezing companies in emerging markets from Brazil to Thailand that now face higher costs on roughly $1 trillion in bonds sold to investors before the greenback’s surge.
For 2014, the dollar is on track to gain more than 7% compared with a group of emerging-market currencies tracked by the Federal Reserve Bank of St. Louis. As the rise ripples through economies around the world, it is causing particular pain at firms in emerging markets that issued bonds in dollars instead of local currency.
The dollar’s rise means it costs more to make regular bond payments and pay off outstanding bonds as they mature. That is starting to hurt earnings at many companies, will likely force some to dip into emergency reserves and could trigger defaults on some corporate bonds, analysts warn.
To some economists, the mounting pressure evokes memories of currency crises in Asia and Latin America during the 1980s and 1990s, when the strong U.S. dollar helped trigger slides in economic growth and prices for real estate, commodities and other assets.
“The investor community is becoming very much one-way or crowded toward retrenching to the U.S.,” says Nikolaos Panigirtzoglou, global markets strategist at J.P. Morgan Chase & Co.
Many of the same countries are vulnerable again now, but few analysts and investors foresee a full-blown crisis.
More than two-thirds of the outstanding corporate bonds in emerging markets are considered high-quality by major rating firms, meaning they carry a low default risk.
Meanwhile, some companies have been trying to shield themselves from possible harm by issuing at least some bonds in their home country’s currency. “I don’t think it’s a systemic issue,” says Samy Muaddi, a portfolio manager at mutual-fund giant T. Rowe Price Group Inc.
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In 2014, companies in emerging markets issued a record-high $276 billion of dollar-denominated bonds as of Tuesday, according to Dealogic. Such sales soared after the financial crisis as borrowers took advantage of rock-bottom interest rates set by the Federal Reserve and other central banks.
Countries also have flocked to dollar-denominated bonds, saddling those governments with higher debt-service costs as the dollar rises. Analysts say many countries generally are in a stronger position to withstand the dollar’s pain because their reserves are larger than in previous crises.
Overall, companies and sovereign-debt issuers have $6.04 trillion in outstanding bonds, up nearly fourfold since the 2008 financial crisis, according to Dealogic, a financial-data provider.
Fourth-quarter results due in January from companies throughout the world will begin to show how much the soaring U.S. dollar is hurting companies in emerging markets.
Earnings at many companies in Latin America will likely be hit, says Eduardo Uribe, who oversees corporate-debt assessments there for bond-rating firm Standard & Poor’s Ratings Services, a unit of McGraw Hill Financial Inc.
Many emerging markets also are being pummeled by falling prices for commodities such as oil and slower economic growth. Bond markets in emerging-market countries recently suffered one of their worst selloffs since the financial crisis, based on a Barclays PLC index of emerging-market debt in dollars.
The Indonesian rupiah, Chilean peso, Brazilian real and Turkish lira are near multiyear lows. Mexico’s central bank bought pesos earlier this month to keep the depreciating currency from pushing the economy into a funk.
More pressure will come if the Fed raises interest rates next year for the first time since 2006. Luca Paolini, chief strategist at Pictet Asset Management, says the firm reduced its exposure to emerging-market corporate bonds a few months ago on concerns about a potential slide. “There may be a lot more volatility next year, and we can’t rule out some credit event that can generate a lot of panic,” he says.
Fears are swirling about Russia, where the ruble has swung sharply as the economy struggles under the weight of Western sanctions and lower oil prices. Lubomir Mitov, chief European economist at the Institute of International Finance, a banking trade group, forecasts “a widespread wave of corporate defaults” in Russia next year.
As investors shift from currencies, stocks and bonds in emerging markets to dollars, the move threatens to depreciate local currencies even more.
A Christmas tree in front of the Petronas Twin Towers in Kuala Lumpur, Malaysia. The landmark includes the headquarters of state-run oil and gas company Petroliam Nasional Bhd., or Petronas, which is being hurt by the U.S. dollar's rise against the ringgit. About 70% of the company's debt is denominated in U.S. dollars. European Pressphoto Agency
The stronger dollar also pushes the cost of new borrowing higher. Prices for bonds issued by Russia’s OAO TMK, one of the world’s largest pipe makers, that are due in 2018 are down by more than 30% since late October. Bond prices move in the opposite direction from borrowing costs.
In the U.S., the stronger dollar hurts exporters by increasing their production costs compared with foreign rivals and shrinking their non-U.S. profits when converted into dollars. The dollar’s rise makes imports more attractive to American consumers.
Top officials at the International Monetary Fund and the Bank for International Settlements, two of the world’s leading financial institutions, have warned that the exchange-rate turmoil could lead to corporate defaults and asset-price busts around the globe. Some analysts expect the IMF to lower its five-year growth forecast for emerging markets.
Brazilian sugar producer Virgolino de Oliveira SA is struggling with its debts as sugar prices fall. Ratings firm Fitch Ratings, a unit of Hearst Corp. and Fimalac SA, warned this month that the Brazilian company will likely default in the coming months on debt that includes dollar-denominated notes. The company didn’t respond to requests for comment.
Malaysia’s state-run oil and gas company, Petroliam Nasional Bhd., or Petronas, said in its third-quarter results that the dollar’s rise against the ringgit was partly to blame for lower quarterly revenues. About 70% of the company’s debt is in U.S. dollars, and its bond yields spiked as the ringgit fell nearly 9% in the past six months.
The financial hit was bad for Malaysia’s government, which collects major revenue from oil and gas sales.
Shweta Singh, a senior economist at research firm Lombard Street Research, expects the dollar to keep climbing as the U.S. economy strengthens and emerging markets keep struggling to rev up economic growth. As a result, “the debt burdens of emerging markets will intensify,” she says.
If problems deepen, they could bruise investors who poured money into emerging markets and are still holding on to those investments. The bond-sale boom was fueled by investors who roamed the world seeking higher returns after the financial crisis, including from dollar-denominated bonds.
But overall investments in emerging markets by outsiders have grown so huge that it would be hard during a jolt for investors to sell without pushing those markets sharply lower, many analysts say.
—Nicole Hong contributed to this article.