UK financial services optimism falls but stronger times lie in wait, claims new survey

BY Fraser Tennant

Optimism fell across the UK financial services sector in the three months to September 2017, despite a broad expansion of business volumes and expectations of stronger quarters to come, according to a survey published this week.

The quarterly survey of 94 financial services firms by the Confederation of British Industry (CBI) and PwC found that while banks and building societies were markedly less optimistic, finance houses, life insurers and investment managers were more optimistic than they had been in the previous three months.

Among a number of key findings, the survey found that: (i) 12 percent of firms said they were more optimistic about the overall business situation compared with three months ago, while 18 percent were less optimistic, giving a balance of minus 6 percent; (ii) 28 percent of firms said that business volumes were up, while 15 percent said they were down, giving a rounded balance of plus 13 percent (this compares with plus 44 percent in June); and (iii) to the quarter to December, growth in business volumes is expected to accelerate, with 34 percent of firms expecting volumes to rise next quarter, and 7 percent expecting them to fall, giving a balance of plus 27 percent.

“While demand in the sector is expected to hold up in the near-term, we cannot ignore the fact that optimism has dropped in almost every quarter for the past two years,” said Rain Newton-Smith, chief economist at the CBI. “With Brexit uncertainty affecting the wider economy, it is vital that substantive progress is made during the next round of Brexit negotiations, so that transitional arrangements can be agreed and businesses can make decisions now about investment and employment that will affect economic growth and jobs far into the future.”

In terms of the future of the financial services sector, survey respondents stated a need for action – including preserving access to talent and ensuring internationally focused regulation – on a number of fronts to ensure that the UK remains a leading financial centre.

Andrew Kail, head of financial services at PwC, concluded: “The financial services sector is at a crossroads. The way ahead is uncertain, particularly as Brexit negotiations are yet to be resolved. A coordinated action is now required by government, financial services firms and regulators to ensure the continued future success of the industry and its customers.”

News: British banks' pessimism in worst run since financial crisis

Cyber criminals increasingly deploying sophisticated malware as attack tools, warns report

BY Fraser Tennant

Cyber criminals across the globe are increasingly deploying sophisticated malware such as adware and ransomware to attack companies, warns a new report by Check Point Software Technologies Ltd.

In ‘Global Cyber Attack Trends 2017’, Check Point notes that the global cyber landscape in 2017 appears to have picked up where 2016 left off, with cyber threats emerging on a monthly basis that are increasingly sophisticated, featuring new capabilities and distribution methods.

Among the key trends identified in the report are: (i) nation-state cyber weapons are now in the hands of criminals; (ii) the line between adware and malware is fading, and mobile adware botnets are on the rise; (iii) macro-based downloaders continue to evolve; (iv) a new wave of mobile bankers has arrived on Google Play undetected to infect users; and (v) threat actors are continuing to sell new malware-as-a-service though several platforms, increasing the risk of data breaches.

Also highlighted in the report are today’s most prevalent examples of global malware and ransomware and the regions of the world which attackers target most often.

Acccording to the report: “2017 is shedding light on a new trend – simple, yet highly effective malware families are causing rapid destruction globally. The samples are distributed by unknown threat actors, yet wield high-end attack tools and techniques developed by elite nation-state actors. In addition, massive theft operations, such as the infamous Shadow Brokers leak of tools allegedly developed by the US National Security Agency (NSA), have led to some of the world’s most sophisticated malware ending up in the hands of unskilled attackers.”

Also analysed is the impact of the WannaCry and NotPetya ransomware which has affected public infrastructure as well as medical facilities around the world, with the report noting that many of these attacks could have been blocked had the proper security measures been in place.

“Even with WannaCry and NotPetya making global headlines, most organisations continue to rely on a strategy of detection and response after an attack has occurred as their primary means of defence,” continues the report. “Unfortunately, 99 percent of organisations still have not put in place the fundamental cyber security technologies available to prevent these types of attacks.”

To keep ahead of cyber threats, the report advises companies to stay alert and concludes: “To provide organisations with the best level of protection, security experts must be attuned to the ever-changing landscape and the latest threats and attack methods to keep their security posture at the highest standard.”

Report: Global Cyber Attack Trends 2017

Toys ‘R’Us files for Chapter 11 as heavy debt and online shopping switch take their toll

BY Fraser Tennant

As a result of a heavy debt load and a consumer switch toward online shopping, toy retailer giant Toys ‘R’Us has voluntarily filed for Chapter 11 bankruptcy protection in the US and Canada.

In addition to the filing in the US Bankruptcy Court for the Eastern District of Virginia in Richmond, VA, the company’s Canadian subsidiary intends to seek protection in parallel proceedings under the Companies’ Creditors Arrangement Act (CCAA) in the Ontario Superior Court of Justice.

Toys ‘R’ Us intends to use the court-supervised proceedings to restructure its outstanding debt and establish a sustainable capital structure that will enable it to invest in long-term growth.

The company’s operations outside the US and Canada, including its approximately 255 licensed stores and joint venture partnership in Asia, which are separate entities, are not part of the Chapter 11 filing and Companies’ Creditors Arrangement Act (CCAA) proceedings.

The vast majority of the approximately 1600 Toys ‘R’Us and Babies ‘R’Us stores around the world – which are mostly profitable – continue to operate as usual.

“Today marks the dawn of a new era at Toys ‘R’Us where we expect that the financial constraints that have held us back will be addressed in a lasting and effective way,” said Dave Brandon, chairman and chief executive of Toys ‘R’ Us. “Together with our investors, our objective is to work with our debtholders and other creditors to restructure the $5bn of long-term debt on our balance sheet, which will provide us with greater financial flexibility to invest in our business, continue to improve the customer experience in our physical stores and online, and strengthen our competitive position in an increasingly challenging and rapidly changing retail marketplace worldwide.”

Furthermore, the company has received a commitment for over $3bn in debtor-in-possession (DIP) financing from various lenders, including a JPMorgan-led bank syndicate and certain existing lenders, which, subject to court approval, is expected to immediately improve the financial health of Toys ‘R’ Us and support its ongoing operations during the court-supervised process.

Serving as principal legal counsel to Toys ‘R’ Us is Kirkland & Ellis LLP, while Alvarez & Marsal is serving as restructuring adviser and Lazard is serving as financial adviser.

Mr Brandon concluded: “We are confident that these are the right steps to ensure that the iconic Toys’R’Us and Babies ‘R’Us brands live on for many generations.”

News: Toys 'R' Us files for bankruptcy protection in US

InsurTech investment increases in Q2 2017 as reinsurers wise up to opportunities

BY Fraser Tennant

Global investment in InsurTech rose sharply in Q2 2017 as reinsurers become more open to its potential for transformation rather than disruption, according to a report out this week.

In ‘InsurTech – the new normal for (re)insurance’, PwC notes that investment in InsurTech by global insurers, reinsurers and venture capital firms surged by 247 percent to $985m, compared to Q2 2016 ($398m). The first three months of 2017 saw $283m of InsurTech funding.

Furthermore, the report predicts the rate of funding and investment will continue at a similar level and highlights an uptick in interest in InsurTech from the reinsurance industry as sentiment turns from fear to bullishness, and from scepticism to collaboration.

“A change has happened in insurance and it is hugely encouraging to see both insurers and reinsurers increasingly view InsurTech as an enabler rather than a competitor,” said Patrick Maeder, EMEA insurance consulting leader at PwC. “This uptick in enthusiasm is vital to ensure the industry engages with innovators to help shape its own success. Neither party can survive this wave of disruption on its own and collaboration between experienced industry players and new ideas and technology will result in new products, reduced costs and more engaged customers.”

Although 82 percent of reinsurance companies say they plan to partner with InsurTechs, including a new wave of start-ups, to explore how new technologies and talent groups can help them play a leading role in transforming their industry, concern about disruption and loss of market share remains. “InsurTech innovators have rapidly established themselves as the backbone of innovation in this industry but reinsurers should not be overly concerned about startups directly disrupting their product offerings,” continues Mr Maeder. “They should instead focus on what makes their business unique and where they see future growth coming from.”

The report also notes that startups are focused less on disrupting the entire industry and more on redesigning specific areas of the value chain, which provides reinsurers with an opportunity to foster a culture of collaboration, embrace the innovative potential within their businesses and ultimately modernise the industry.

Mr Maeder concluded: “Reinsurers then need to find the best way of directly working with this new wealth of tech-savvy talent to place themselves at the heart of what will undoubtedly be a transformation for their business and the wider industry.”

Report: ‘InsurTech – the new normal for (re)insurance’

M&A rebound predicted

BY Richard Summerfield

For a number of reasons, the first half of 2017 saw fairly constrained levels of M&A activity, according to a new report from Clifford Chance. However, despite this relative paucity, a flurry of M&A activity in the final half of the year could be on the way.

The report, 'A Global Shift: September 2017', cites a 42 percent drop in outbound Chinese dealmaking, increased antitrust deal scrutiny and a ‘wait and see’ approach being adopted by many multinationals in the face of heightening global geopolitical chaos as the largest roadblocks holding up progress in H1 2017.

Chinese restrictions on capital outflows, designed to limit “irrational” acquisitions overseas in certain industries including real estate, hotels, movie studios, entertainment and sports clubs, were announced in August as the government published outbound investment guidelines. These guidelines have had a butterfly effect in overseas markets where sellers have become increasingly wary of Chinese bidders and their ability to close transactions. As a result, there has been a sharp decrease in Chinese outbound activity.

Heightened antitrust concerns in certain key markets have been equally damaging. With competition authorities in Europe and Asia toughening their stance on dealmaking, particularly when there is a large data element to deals. There has been a focus on procedural infringements throughout 2017 with authorities increasingly willing to levy significant fines.

“Globally, we are seeing increasing proliferation of inconsistent merger control procedures and greater scrutiny of foreign takeovers on non-competition grounds. Navigating these complexities requires careful planning, understanding of local sensitivities and early identification of remedies,” said Nelson Jung, an antitrust partner at Clifford Chance.

However, there are reasons to be cheerful. An overabundance of dry powder in the private equity industry is driving activity as investors look to capitalise on the upheaval caused by global geopolitical uncertainty.

There are also a number of surging industries. The consumer, retail and leisure sector has seen considerable activity, with larger deals driving a 9 percent rise in the industry's share of dealmaking compared to 2016. The real estate and healthcare industries also recorded a notable uptick.

US M&A in the first half of the year is more or less flat from H1 2016; however, M&A activity in Europe has been healthy, with an 8 percent increase compared to H2 2016. Europe has benefited from investment from the US, as well as intra-European investment.

Report: A Global Shift: September 2017