It befits a provider of stock market plumbing that we only tend to notice float stabilisation managers when things go wrong. Yet the inquest into Deliveroo’s flop IPO has drawn overdue attention to their role.
To summarise, finding a flotation price is a messy affair. Little is fixed until the very end of the bookbuilding process, meaning underwriters tasked with selling the stock want flexibility and the promise of a safety net. An overallotment option known as the greenshoe, providing for the sale of an extra block of shares, ought to provide both.
In the case of Deliveroo, stabilisation manager Goldman Sachs was given an option to draw down an extra 38.5m of new shares at any point within 30 days from when trading started last week. These greenshoe shares would enlarge Deliveroo’s share issue by 10 per cent and raise an extra £150m or thereabouts for the company, before costs.
Goldman also agreed a separate option with Accel Partners, a long-term Deliveroo investor, to borrow up to the same number of shares. This stock needs to be handed back at the end of the 30-day stabilisation period.
Using borrowed stock gives the underwriters wriggle room. Most importantly, it allows them to sell more shares than allocated. Backstopped by Goldman’s loan, underwriters to Deliveroo’s IPO were able to sell up to 110 per cent of the shares to be issued.
After trading begins, the stabilisation manager has two ways to square off what is in effect a short position. When the market price is above the flotation price, triggering the greenshoe will deliver enough shares to match the number borrowed. If the stock slips lower it can leave the greenshoe alone and buy for cheaper in the secondary market.
Here, in theory, is a risk-free product. Strong initial demand for its stock allows a company to raise extra capital via the greenshoe, generating bigger commissions to the underwriters that got the pricing wrong. And if the price flops the stabilisation manager can cover its loan with market purchases on which it extracts a trading profit (which it may or may not pass to the company), These purchases are artificial demand that helps damp losses. Everyone’s happy.
So what went wrong?
In the past week, the City has been rife with speculation about tensions between Deliveroo’s underwriters over whether to pull the float. Threatening to withdraw is a proven strategy whenever the price wanted does not match the one investors offer: its power is how banks have long resisted a push to provide hard underwriting, where they guarantee proceeds before starting the bookbuilding process.
But Deliveroo was hamstrung — not just by early investors wanting to sell but by its elevation into a political good news story about the London market. Pricing also lacked flexibility: a fundraising agreed in January had put the headline value on the company at just over $7bn, which was widely seen as the reserve value.
In the end, according to people involved, support was blown away because underwriters had tapped all available demand. Their clients paid up for Deliveroo expecting priority treatment for the underwriter’s next float. After them there was no one.
As a result, the stock dropped immediately to the assumed reserve value when trading began. Goldman ended up absorbing nearly a quarter of the value of shares traded during the first two days of trading in a failed attempt to prop up the price, the FT reported this week.
While Deliveroo is an oddity, its flop highlights wider questions about the value of over-allotments options.
A growing body of academic research suggests greenshoes do little to calm volatility or stem IPO underpricing. Recent papers from Patrick M Corrigan, associate professor of Law at University of Notre Dame, set out evidence that greenshoes incentivise underwriters to get float prices wrong, either to maximise the overallotment value or to profit on grey-market trading.
Yet greenshoes have been part of the scenery for so long that investors rarely question their inclusion, even though they are the ones ultimately footing the bill. It’s about time that greater scrutiny was given to what has for underwriters been a risk-free bet.
Photographing an era of car culture
It’s a book more than four decades in the making — spurred on by the pandemic. “I carried around the idea of the book for years,” said photographer Thaddeus Holownia, the creative mind behind “Headlighting 1974 – 1978.”
Soon to be released, it features portraits of everyday people with their cars. Like the title suggests, Holownia captured these photos between 1974 and 1978, but he did so without thinking he would compile them into a book. That idea only came later.
At the time he was taking the images it was the heyday of automobile manufacturing. “That certainly had an influence on my thinking of being aware of the mechanical age and people’s relationship with their cars,” said the visual artist, publisher and teacher.
Holownia didn’t know it at the time, but he was capturing a snapshot of car culture in the 1970s. He took photographs of about 50 people with their vehicles — everything from a custom Boat Tail Bentley to a Ford Model A and a Chevrolet Monte Carlo. There’s even a police cruiser: a 1974 Plymouth Satellite.
To take the portraits, he used a large-format 8-inch by 20-inch Gundlach Banquet camera — with a creative twist. “It’s an accordion box with a lens on one side and film on the other side,” he said. “I was pretty broke, so I started using photographic paper (instead of film), and the sensitivity of paper is much less sensitive to light so the exposures were done with a lens cap rather than a shutter.”
That meant he could only take four photographs at a time and then he’d have to find a dark room (often a motel bathroom) to reload. “I had to be very careful in what I chose to photograph — it’s a different kind of a process than what people are used to today.”
Because of this process, his subjects would embrace the moment and pose seriously with their vehicles, “so there was a very different kind of feeling about making those portraits,” Holownia said.
Some people posed behind the wheel, some in front of the car. One gentleman with a 1939 Packard limousine stood behind it because he didn’t want to ruin the lines of the vehicle.
“I let them pose however they wanted to,” Holownia said. “People loved their cars, and the process was a participatory process.”
This was also his first solid artistic venture into photos, and eventually he shared these works and went on to start a photography program at Mount Allison University, located in Sackville, N.B. It also meant he could now afford to switch from photographic paper to real film.
Recently retired, Holownia now spends his time at his studio in Jolicure, N.B., where he works on projects like “Headlighting.” Over the years, he’s shown these car images in Canada, the U.S., Mexico and Germany. “Wherever it’s shown, people love it and it’s gotten better with time,” he said, adding that these cars are now considered antiques. “As a group of portraits, it really defines an era of car culture.”
Holownia, whose photographs can also be seen in the National Gallery of Ottawa and the Spencer Museum of Art in Kansas (where many of the original photos were taken), started thinking about turning the exhibit into a book about 30 years ago. But it was during the pandemic’s rolling lockdowns that he decided to turn this vision into reality.
Everything about the book is an ode to cars. It’s spiral-bound, on bookbinding boards with black ink embossed directly into the boards. “It has this mechanical feel about it,” Holownia said. It’s also 12 by 18 inches, honouring the size of the negatives. “When you open it, it’s a two-page spread so it’s linear like a highway.” While he doesn’t name the people in the photographs, he provides the year and model of each vehicle.
At the front of the book, there’s a self-portrait of Holownia with a friend next to their vintage GMC panel van and Studebaker R10 in Toronto’s Distillery District in 1974, when the area was still abandoned and run down. Now his photography from the same era is hanging in the Corkin Gallery in the Distillery — coming full circle.
The book will be distributed by Goose Lane Editions this summer or can be purchased at halownia.com.
Source by [author_name]
Three auto-themed products to splurge on this week
The Tread 2 wristwatch is made by former British specialty-car builder Devon Motor Works, which is now called Devonworks. The timepiece, available in several colours and models, uses four miniature motors attached to a series of drive belts that control the hour, minute and second readouts. All of the action, which is visible through the watch’s bulletproof-glass casing, is controlled by a battery-powered microprocessor. The cost of the watch starts at $12,500 (U.S.) and is available at devonworks.com.
A tent above
Montana-based Go Fast Campers claims its 35-kilogram hard-shell (both roof and floor) pop-up style Superlite Roof Tent is the lightest on the market. The 50- by- 90-inch (127- by- 238-centimetre) interior dimensions provide space for two adults and the side curtains that cover the interior mesh screens are made from polyester. When the tent is not needed, the quick-connect latches are designed for easy removal from the vehicle. The tent retails for $1,300, with $100 for the optional ladder and $299 for the mattress. More details can be found at gofastcampers.com.
Gearheads will love this Ford engine model kit from Makerhaus. This 1:3 scale model of the high-performance 289-cubic-inch V-8 that Ford installed in the first Mustangs moves via three AA batteries (not included). The cooling fan spins, the crankshaft turns, the pistons move up and down and the spark plugs appear to fire using red-tipped LED lights. There is even an electric sound module that produces a simulated engine growl. A collector’s manual covering the history of the Mustang V-8 is also included with the 200-piece kit. The model retails for $185.95 at makerhaus.biz.
Source by [author_name]
How do I create an emergency kit for my car?
Having an emergency kit in your vehicle that you can rely on in an accident or roadside emergency should not be an afterthought, said Stephan LaLonde, a senior sales manager at CARFAX Canada. “Speaking for myself and my family, and it is a must. We always have an emergency kit in our vehicles,” he said. An emergency kit should include items related to your vehicle’s operation, the weather conditions you may encounter and your own safety. “A kit should be a year-round concern, but there will be seasonal additions to the kit,” LaLonde said. He added those items should remain in your vehicle throughout the year but if you do remove something you should replace it before the seasons change.
Among the kit items CARFAX recommends for your vehicle’s operation are jumper cables and a tire puncture seal and inflator. It is also suggested your kit include a folding shovel, ice scrapper, duct tape, road flares or a warning light, a road map, fire extinguisher and dry sand or kitty litter. “Kitty litter or sand is one of those things that will help you if you are in a situation where you need traction, like you are stuck in snow,” Lalonde explained.
Items to ensure your personal safety include blankets, winter hats and gloves, a flashlight and extra batteries, pen and paper, bottled water and energy bars or non-perishable food. A first-aid kit, whistle, roll of paper towels and a candle in a deep can with matches is also recommended. “If you are in your car, and it is 40-degrees below outside, that candle will create a little bit of heat,” Lalonde said. He added that people often forget to include a blanket. “When you get in an accident, if shock sets in, you want to keep warm.”
Lalonde said to store your kit where it makes sense for the type of vehicle you drive. It should also be accessible. “Most cars today have a folding back seat, so the trunk is accessible should there be an incident,” he said.
Many companies and organizations, including Home Depot, Canadian Tire and the Canadian Red Cross, sell pre-packaged kits. Each might include a slight variation on what is recommended as well as optional items, such as a seat belt cutter, tow rope or even an extra cellphone.
Source by [author_name]
The bright spot in strained bond markets
Troubled companies are thin on the ground these days. That has been good news for investors in an important corner of the financial system.
Owning the debt of the riskiest companies in the US and Europe has provided positive returns so far this year for fixed income investors, a rare bright spot in the vast universe of publicly traded debt.
By contrast, holders of higher quality bonds sold by governments and companies have experienced negative returns during 2021. That has been driven by expectations of higher interest rates as inflation and economic growth pick up. As rates rise, existing bonds are less attractive to investors compared with new debt offerings.
The disparity in performance between high and lower quality debt may appear strange given that the overall rise in bond yields this year might be expected to hit strained companies more. An explanation rests in how markets behave once an economic recovery is under way.
As corporate default risk abates, shares and debt sold by so-called “junk-rated” companies with lower quality balance sheets rally sharply — as was seen in 2009 and 2003 when high yield appreciated sharply in value in the wake of defaults peaking and recessions ending.
“Default rates have fallen a lot and companies have refinanced their debt at lower rates and if we get the expected rebound in profits, high yield can hold up into next year,” says Adrian Miller, chief market strategist at Concise Capital, an asset manager specialising in small company debt.
Indeed, this week, Fitch Ratings forecast a decline in the expected rate of speculative rated company defaults this year to 2 per cent from 3.5 per cent in 2021. The pace of defaults has eased markedly from a projected 5.2 per cent a year ago and is nowhere near the peak of 14 per cent seen in 2009.
With reduced fear of default, the higher fixed rates of borrowing that are paid by lower quality companies suddenly look attractive compared with the relatively meagre offerings by blue-chip rated bonds.
This week, BlackRock said demand for income in the high-yield market from investors contributed to their strong client flows during an impressive first-quarter performance by the asset manager.
The need for income helps explain another oddity about the current high-yield market. The risk premium or spread associated with owning the lowest quality credit has shrunk markedly versus that of US government bonds.
The spread has eased towards the lowest levels seen during the post financial crisis decade. Moreover, it has occurred after a record $140bn of junk bond debt was sold during the first three months of the year. Bank of America forecasts $475bn of debt sales in 2021, a 10 per cent increase from a record-breaking 2020.
The ability of companies to raise debt in such amounts and not send interest rates markedly higher reflects the seemingly insatiable demand for income by investors betting on defaults staying low with a robust global economic recovery in the wake of the pandemic.
Still, the speed and extent of the rally in high yield debt does little to allay long term concerns that the credit market has run well ahead of underlying fundamentals for low quality companies.
It comes amid a low rate of capacity utilisation by US companies. In previous decades, this reflected plenty of slack in the economy and thereby indicated mounting challenges for companies.
Marty Fridson, chief investment officer at Lehmann Livian Fridson Advisors, says there is hidden distress in the high-yield debt market. He says that even better rated companies have been pushed beyond fair value on the back of the huge support by the US Federal Reserve for markets and the flow of credit.
That Fed intervention should leave investors wary about the eventual longer term consequences. There remains considerable doubt as to the extent of the post-pandemic recovery beyond this year for indebted companies.
Fitch, for example, has a slightly higher 2022 default rate forecast than this year, “reflecting uncertainty around the sustainability of the demand recovery for some sectors”. This is partly due to the persistence of digital trends that has challenged a number of sectors.
Tracy Chen, portfolio manager at Brandywine Global, an investment boutique of Franklin Resources, says: “Business models will change after Covid and there are still a lot of companies being supported by accommodative policies.
“Stimulus and infrastructure spending is good for certain sectors. Longer term we are less bullish on high yield.”
This view reflects doubts as to whether stimulus provides some companies with a new lease of life, or delays an eventual debt reckoning.
“Prior to Covid, investors were very cautious about credit and talking about the end of the cycle,” says Chen.
“There is a case that a bigger default cycle has been delayed and that it occurs over the next 12 to 18 months, once the stimulus measures have ended.”
Dalton Kellett entering 2021 IndyCar season with a new attitude
To do just about anything well in life, be it journalism, politics or long-haul trucking, you need confidence that you can do the job well.
Dalton Kellett of Stouffville races cars for a living, Indy cars specifically. He is starting his second year in the big league, the NTT IndyCar Series, which opens its season tomorrow at Barber Motorsports Park outside Birmingham, Ala.
And, as he told me during a telephone interview recently, he’s got a whole new attitude going into 2021. “I feel like an IndyCar driver now,” Kellett said. “I’m in a position now to know what I want out of the car. I needed the experience I gained last year to get to that point. I’m excited.”
Last year, he knew he was the new kid on the block at A.J. Foyt Racing team and didn’t make waves. He kept his mouth shut and listened and — except for the Indianapolis 500 — didn’t crash the car, which is what’s expected of rookies.
And the fact he survived and made a good enough impression on the Foyt team for them to offer him a full-time ride for 2021 (he shared the car with veteran Tony Kanaan last year) has given him the confidence to start making his presence felt.
Having a new teammate isn’t hurting either, particularly since said teammate happens to be one of the best racing drivers in the world, Sebastien Bourdais. More about all that in a moment.
First, for those of you not familiar with Kellett, he’s 27, came up through karting and the Road to Indy minor-league series, and has done some sports car racing in addition to the single seaters he’s concentrating on now. And while he was climbing the racing ladder, he graduated from Queen’s University in Kingston with a degree in engineering physics.
The highlight of his apprenticeship years came in 2018 when he won the pole for the Indy Lights Freedom 100 race at the Indianapolis Motor Speedway. This was no small task, as the driver he edged out for the coveted starting position was none other than fellow IndyCar racer Pato O’Ward.
Last year — his first with the Foyt team — he only raced on the road and street courses, the one exception being the Indianapolis 500. Which was a shame because his strength to date has been on oval tracks. He qualified 24th (out of 33) for last year’s “Greatest Spectacle in Racing,” outqualifying veteran drivers like three-time winner Helio Castroneves, Simon Pagenaud and F1 star Fernando Alonso. He was heading for a potential Top Ten finish when unknown racer Ben Hanley forced him to back out of a pass attempt and that put him up the track and into the wall. His best finishes the rest of the season came at a Detroit double-header where he was 20th both times.
Kellett is determined to do better this year and is expecting that Bourdais will be a big help.
“He joined our team at the end of last season,” Kellett said, “and he made his presence felt immediately. He was very exacting from a setup standpoint and it was interesting to watch how he pushed the team to give him what he wanted. He’s got 15 years of experience (in Indy cars, sports cars, F1) to draw on.
“As a result, I’ve found myself more assertive. While giving feedback to engineers (during tests), I find that I’m definitely more confident and able to say, ‘This is what I want.’”
Kellett not being a rookie anymore is probably a good thing, because two of the most famous racing drivers in the word are first-timers and will likely hog most of the IndyCar publicity this year. Seven-time NASCAR Cup champion Jimmie Johnston, who’s padding his CV by driving a part-time schedule in IndyCar for Chip Ganassi, and Romain Grosjean, who moved to IndyCar from Formula One after his employer, Haas F1, didn’t renew his contract.
Has Kellett bumped into them yet?
“I haven’t met Grosjean,” he said, “but I’ve been around Jimmy and I know him enough to say, ‘Hi.’ I think both of them have the will and the experience to drive the car to the point of being competitive. I think Grosjean will have a bit of an easier time because of his open-wheel experience in Europe; the F1-to-IndyCar jump is probably easier than NASCAR-to-IndyCar.
“I hope Jimmie does well, though. He’s certainly putting in the effort. All-power to him,” Kellett said. “They’re both world-class drivers and I think it’s great for the series and it will be great racing against them, that’s for sure. I’m looking forward to that and I hope I beat them.”
And how does Kellett expect to do this season, overall. Can he win a race?
“I’ll be trying but you have to be realistic. I think in terms of milestones and benchmarks. The first milestone would be to start off in at least the Top 20 in the series and stay there. As I climb higher, I want to stay there rather than falling back. I want to be consistent,” he said. “As a race driver, though, your first benchmark is your teammate, particularly on the road courses. If I can be on pace, within a couple of tenths of Sebastien’s times, with his experience, I’ll be pretty happy.”
And what about the Indianapolis 500?
“Indy is the one race that everybody wants to win. But it’s still important to focus on the process (where you work up to speed gradually) and not get caught up in all that. I’d like to qualify a little better – we probably should have trimmed a little more than we did last year but when you’re a rookie, you don’t want to take too many big swings.
“But to qualify in the Top 10 or Top 15 would be an improvement from last year and I’d like to put myself in a position to be fighting for a good finish at the end. I’d be happy with that.”
Source by [author_name]
City regulation: robocops can create post-Brexit advantage
The City of London needs to up its game to compensate for Brexit losses. That is one reason to welcome Friday’s push for more “RegTech” — regulatory technology — by the Square Mile’s governing body. Technological advances involving data science, machine learning and cloud computing have opened up new approaches to dealing with regulatory risk.
The predicted Brexodus of financial assets and jobs is under way. Banks and insurers have transferred £900bn of assets, just under 10 per cent of the UK’s total. Staff moves have so far reached 7,400, according to consultancy New Financial. It is not all one way. Up to 500 EU-based firms are expected to open a UK office. But the toll on the City is likely to increase in coming years.
Lingering hopes that the UK would be granted more market access in return for an agreement on supervisory “equivalence” have largely faded. That creates an opportunity, as well as a cost. There is some room for manoeuvre.
The UK wants to make its approach to regulation a competitive advantage. It aims to strike a balance between the EU’s detailed, prescriptive approach and the patchy US one, shown up by the Archegos Capital blow-up. Advocates of RegTech claim that it can play a part by enabling real-time market surveillance and helping to predict where risks will emerge. That could make supervision more preventive and less reactive.
Such claims should be treated with caution. The UK’s “light touch” financial regulation in the noughties did not end well. But RegTech can reduce risks and improve efficiency. It could also result in a modest reduction in compliance costs — about £500m, or 0.05 per cent of the annual total, for Britain’s top five banks, according to RT Associates.
There is no silver bullet to deal with Brexit woes. RegTech will not transform demand by itself. But the City needs to consider all possible ways that it might boost its appeal.
The Lex team is interested in hearing more from readers. Please tell us what you think of “RegTech” and the post-Brexit City in the comments section below.
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