Weekend reading links

1. Ananth points to the stunning shift in the market for leveraged loans,

Right now roughly 78% of the more than $1 trillion in outstanding U.S. leveraged loans are cov-lite, compared to just 29% in 2007, at the peak of last credit cycle (and just before the financial crisis). Cov-lite loans place fewer restrictions on a borrower than do traditionally structured credits... the average discounted recovery rate on cov-lite loans undertaken before 2010 is 78%. That figure drops to 56% for cov-lite loans originated in 2010 and after...

2. As the 5G telecommunications spectrum auctions beckon, Mobius Philippose raises the inevitable questions around winner's curse,

The recommended price for the 5G spectrum on offer is over seven times of what was discovered in a recently held auction in South Korea for 3,500 MHz spectrum. 

At the recommended reserve prices, the Telecom Regulatory Authority of India (TRAI) estimates the auctions would be worth over ₹5 trillion, or as much as $78 billion. Mobius feels that given their troubled balance sheets, the high reserve prices are likely to deter telecom providers from bidding for spectrum. 

I am inclined to agree with his view, but not the conclusion that keeping reserve prices high "shows that the regulator and the government don’t care much about the financial health of surviving telcos".

3. SEBI has a draft proposal to deepen capital markets in India by mandating corporates with outstanding long-term borrowing greater than Rs 100 Cr and with credit rating of AA and above to raise 25% of borrowings through corporate bond market. It is proposed for implementation from 1 April 2019, would be on a "comply or explain" mode for the first two years, and would have fines ranging from 0.2-0.3% of the shortfall.

Tamal Bandopadhyay has a nice article which highlights some of the concerns. 

According to a recent analysis by Care Ratings, as of March 2017, the credit limit of such borrowers was 1.5 times the amount of loans actually taken. The Care analysis finds that 106 large companies with over ₹ 10,000 crore credit limit in March 2017 sourced 47% of funds from banks and 16 of them have never entered the bond market. From a group of 42 companies with bank credit limit between ₹ 7,500 crore and ₹ 10,000 crore, 11 never raised money from the bond market...

In a rising interest rate scenario, companies prefer to borrow from banks where the cost is relatively lower than the bond market which reacts fast to rising rates. In the first quarter of current fiscal year, ₹ 66,997 crore has been raised from the market against little over ₹ 1.48 trillion in the year-ago quarter. The volume of gross issuance was ₹ 6.4 trillion in 2017 but dropped to ₹ 5.8 trillion in 2018 and will reduce further in the current year given the rising yields...

Currently, the bond market is dominated by AAA issuers and the issuances by A-rated entities are a measly 2%. The key reasons for the lack of appetite for the A and lower-rated companies’ papers (a bond is considered investment grade if its credit rating is BBB- or higher by Standard & Poor’s or Baa3 or higher by Moody’s) are that most of the investment regulations either do not permit investment in private corporate bonds with rating lower than AA and, even where it is permitted, discouraged through regulatory interventions.

4. Dani Rodrik makes the case to reform WTO to make it accommodate more diversity, 

Negotiated at a time of neoliberal triumphalism, WTO reached inside the border to constrain domestic policies in subsidies, health and safety and intellectual property. Any domestic regulation with an adverse impact on imports could now be treated as a trade restriction. Subsequent trade agreements went further, prioritising trade and foreign investment over domestic concerns. Western policymakers tend to think of today’s global trade rules as neutral and impartial, treating all participants fairly. But trade agreements are political documents, reflecting the interests of dominant coalitions. Multinational corporations, international banks and Big Pharma play a particularly important role in shaping them. It is no surprise that long-term concerns about development, or indeed labour rights and the environment, are given short shrift... When trade threatens to undermine domestic labour standards, fiscal systems, or investments in advanced technology, rich nations should be just as entitled to privilege these concerns over imports and foreign investment...  

If the WTO has become dysfunctional, it is because our trade rules have over-reached. A fair world trade regime would recognise the value of diversity in economic models. It should seek a modus vivendi among these models, rather than tighter rules.

The point being made is less about a justification of China as a case for flexibility within international  trade frameworks, but more about allowing the freedom for individual countries to respond to trends which are genuinely detrimental to their interests.

5. Global tourism has been growing at an explosive pace,

International tourism rose from fewer than 300 million trips in 1980 to some 500 million in 1995, before exploding to 1.3 billion trips in 2017—a number that’s expected to rise to 1.8 billion in 2030.

And China has been the main driver,

China also accounts for an estimated 80 percent of the growth in tourism spending over the past 10 or so years.

6. NYT chronicles Mawlynnong, the cleanest village in India.

7. One of the less discussed problem mounting up across the US and now UK (and elsewhere too) is the financial crunch faced by local governments and its impact on their ability to continue the delivery of regular civic and utility services. Sample this from UK,

Central government funding for local authorities has been reduced in real terms by 49 per cent between 2010-2011 and 2017-18, according to the National Audit Office, parliament’s spending watchdog. Nearly half of England’s 353 local authorities recorded real-terms falls in their reserves between March 2015 and March 2017, according to an FT analysis conducted earlier this year

With economic stagnation, declining or stagnant median incomes, widening inequality, rise of part-time jobs, and so on, cuts in important civic services and consequent pressure to pay for them could be adding fuel to the fire of discontent that feeds populist politics.

8. There is no bigger market failure than in the market for audit services. Talk about the illusion of competition and conflicts of interest in that market,

No fewer than 98 per cent of FTSE 350 constituents (the largest companies on the UK market) have their books vetted by one of KPMG, EY, Deloitte or PwC. In the US, the figure is 99 per cent for the S&P 500... Conflicts are often hidden discreetly beneath the surface. Accountancy firms are not required to be open about the consulting work they provide to companies, from pension and tax advice, to advising on pay policies or restructuring. These ancillary activities can often be much more lucrative than a plain audit contract (which, in addition to legal risk, also limits a firm’s ability to bid for non-audit business)... While situations where conflicts restrict large companies to considering at best two, or in some cases one, of the Big Four are rarely public knowledge, they are relatively routine.

And the conflicts can be egregious,

PwC was recently confirmed as the “delivery partner” to the regulator, Ofwat, for its next price review in 2019, This involves vetting industry business plans to determine appropriate prices. PwC undertook the previous price review in 2014, at a time when it audited or advised no fewer than nine of the UK’s 19 water companies. This time its role is more modest. But it remains statutory auditor to three firms, including the UK’s largest, Thames Water, and provides services to several more. Prem Sikka, professor of accounting at the University of Essex, said of the situation: “Such links will no doubt be exploited to attract clients and say that the firm will show you how to duck and dive and negotiate the regulatory environment. Firms can’t serve more than one master and must be banned from having their fingers in all pies.”

There are also more pernicious forces at work that deter smaller rivals from competing for audit contracts,

Across Britain’s largest listed companies, 61 of the 100 audit committee chair positions at the end of last year were held by Big Four alumni, according to Accountancy Daily. The ties that bind the Big Four to big business extend beyond the boardroom, to the worlds of politics and regulation. This creates a feedback loop that reinforces the giants’ dominance as their connections give them a powerful advantage when bidding for public or private work.

Wholesale break-up of the Big Four or separation of consulting and audit business or selection of the audit firm by a regulator, stock exchange or government are ideas under discussion to address the problem.

9. Finally, comparing China, India, and Vietnam,

“In China, the government can do everything; in India they can’t do anything,” says Huynh The Du, a lecturer at Saigon’s Fulbright University. “In Vietnam it’s somewhere in between: sometimes the government can’t do things because of the resistance of the people.”