Multiple profit warnings issued despite low expectations, confirms new report

BY Fraser Tennant

A high proportion of UK quoted companies have issued profit warnings during Q1 2016, despite a substantial downgrade in profit expectations made at the end of Q4 2015, according to a new EY report published this week.

The 76 profit warning issued by companies during the first quarter of this year, although down from 77 in the same quarter of 2015, are largely being attributed to falling oil prices, although volatility, competition and sector disruption are also serving to dent expectations.

Drilling down, in the 12 months to the end of Q1 2016, the EY Profit Warnings report reveals that 17.2 percent of UK quoted companies issued profit warnings compared with 16.5 percent at the same point in 2015. Furthermore, the FTSE sectors with the highest percentage of companies warning in Q1 2016 are: oil equipment, services & distribution, mobile telecommunications and electronic & electrical equipment, all at 50 percent.

These warnings, says the EY report, are the result of the volatile start to 2016, which has created uncertain and difficult conditions for companies reliant on the contract cycle. The report also confirms that although action has been taken by central banks to tackle market concerns, the global economy is still struggling to build momentum.

“Resilience and flexibility remain vital in these markets and we expect to see companies maintain their focus on operational improvement, and on capital and portfolio management,” said Alan Hudson, EY’s head of restructuring for UK & Ireland. “Outside a major shock, a further dive in expectations makes a further profit warning peak unlikely. However, the level of profit warnings is unlikely to dip too low while there is still so much uncertainty in the outlook and significant potential for misreads.”

Overall, Mr Hudson suggests that volatile, uncertain, complex and ambiguous are apt descriptions of the current outlook, especially in view of the current economic environment.  He said: “The year began with volatility in spades, until central bank action and rising oil prices inspired a late quarter rally. The ambiguous outlook gives potential for misreads and we’re unlikely to see a significant drop in the number of UK profit warnings, despite the drop in expectations and sustained growth.”

However, despite the gloom, Mr Hudson suggests that there is the potential for significant upside – “if the clouds clear in 2016".

Report: Uncertain times: analysis of profit warnings Issued by UK quoted companies Q1 2016

Energy XXI files for Chapter 11

BY Richard Summerfield

Energy XXI has become the latest oil & gas producer in the US to file for Chapter 11 bankruptcy protection. According to a statement, the company hopes to eliminate more than $2.8bn worth of debt during its restructuring.

Court documents filed in Houston, Texas note that prior to the filing the company had agreed a deal to secure a $1.45bn debt-for-equity swap with a group of its bondholders.

Energy XXI, which employs around 300 people, will continue to honour employee and vendor payments as it has sufficient liquidity of around $180m of cash on hand. Energy XXI will also be able to utilise funds generated from ongoing operations to support the business in the ordinary course during the financial restructuring process.

Much like many of its rivals, Energy XXI has been struggling to keep its head above water for some time; since the collapse of crude oil prices, it has been forced to slash its budget by almost half, reduce costs, cut its workforce from nearly 500 last year, and divest assets. However, these measures appear to have been insufficient. The price of crude has hovered around $40 for some time, and, according to data from Reuters, it needs to be at least $60 for Energy XXI to break even.

In March the company announced that it was delaying an interest payment due on debt of one of its subsidiaries, a decision that began a 30 day grace period. However, discussions between the company and a number of its major unsecured creditors are believed to have begun in summer 2015. At the end of February, the company said it had been warned it could be delisted from the Nasdaq Stock Market as a result of ongoing financial difficulties.

In order to execute the Chapter 11 restructuring, Energy XXI entered into a restructuring support agreement with holders of more than 63 percent of the company’s secured second lien 11.0 percent notes. The agreement will facilitate the removal of all of the company’s debt other than its first lien reserve based loan facility.

Energy XXI must file a reorganisation plan by 16 May and have it approved by the judge overseeing the case by 8 August.

News: Energy XXI Files for Bankruptcy After $5 Billion Expansion

Brexit impact on the financial services sector

BY Richard Summerfield

As 2016 progresses, the UK is heading into a period of doubt around its membership in the EU. The June referendum on Britain’s place in the bloc is approaching, and the only certainty is that no one is certain what exactly will happen should the country opt to leave.

In the latest in a number of papers concerning the referendum, TheCityUK and PwC have teamed up to present a report detailing the potential impact of a ‘leave’ vote on the UK’s financial services sector. Given the country’s reliance on the financial services space as a cornerstone of the national economy, the report does not make for pleasant reading.

According to the report, 'Leaving the EU: implications for the UK financial services sector', Britain could lose up to 100,000 jobs in the financial services space by 2020. Brexit could also reduce the sector's contribution to the national economy by up to £12bn.

The report echoes claims made by PwC in a paper published in March. Chris Cummings, chief executive of TheCityUK, said “Major firms from across the world come to London to access Europe’s single market, bringing with them jobs and investment. While Brexit may not be ruinous for the UK economy, it does risk damaging the UK-based financial services sector, particularly over the short term, delaying investment decisions and reducing activity. It also threatens the overall competitiveness of the UK as a place to do business.”

It is this suggestion of delaying investment decisions and reducing activity which may be most damaging to the financial service industry and London’s position as a global economics hub. Will foreign firms want to maintain a ‘European’ presence in a country outside of the EU?

Major US firms Goldman Sachs and JPMorgan have already issued warnings about the potential impact of a Brexit on their UK operations. "We believe that a key risk to London retaining its status as a financial hub is an exit by the UK from the EU. In common with financial institutions across the City, our ability to provide services to clients and engage in investment activities throughout Europe is dependent on the passport that London-based firms enjoy to operate on a cross-border basis within the Union. If the UK leaves, it is likely that the passport will no longer be available, thereby forcing firms that wish to access EU markets to move their operations to within those markets", the American firms told the Parliamentary Commission on Banking Standards.

TheCityUK and PwC report goes onto suggest that the financial sector would still grow should the UK leave the EU, however the value of the sector’s activity would be lower in 2030 than it would be should the country remain inside the EU.

Report: Leaving the EU: implication for the UK financial services sector

Crude awakening: oil price falls following failure of OPEC talks

BY Fraser Tennant

The price of oil has fallen after a meeting of the world’s major oil producers – the Organisation of the Petroleum Exporting Countries (OPEC) – ended in failure. 

The meeting, held in Doha, Qatar on 17 April with most (but not all) OPEC members present, had intended to sign a deal to cap oil output. However, it concluded with no agreement being made – an outcome which is being largely attributed to tensions between Saudi Arabia and Iran.

Prior to Doha, Saudi Arabia had demanded that Iran sign up to the deal to freeze oil productions, but Iran (a non-attendee) is unwilling to do so and has stated that it will continue to increase output following the lifting of a number of sanctions.    

In a statement, the Iranian government said that as it was “not going to sign anything” and was "not part of the decision to freeze output”, it had decided not to send a representative to the OPEC meeting.

“It doesn’t come as a huge surprise to me that the talks could not reach a conclusion, given Iran and Saudi Arabia’s previously stated positions, which they stuck to," said Clare Munro, a partner at Brodies LLP and head of the firm’s oil and gas team in Aberdeen, Scotland. “However, it does demonstrate the pressure on the various countries involved, which leads me to believe that at some point a deal will be achieved."

Just a few days prior to the aborted talks, Brent crude had climbed to a four-month high of just under $45 per barrel – an increase that reflected global market hopes that a deal to cap oil output would hold crude oil production at the January 2016 level and slow the oversupply.

Ms Munro continued: “Although the oil price did suffer a set-back, Brent remains above $40, which is better than where we have been for most of the year so far.”

Addressing the failure of the OPEC meeting, Dr Mohammed Bin Saleh Al-Sada, Qatar’s minister of Energy and Industry, said his administration respected the Iranian position and that the freeze “could be more effective if major producers, be it from OPEC members like Iran and others, as well as non-OPEC members, are included".

Ultimately, the major oil producers concerned required “more time” to agree a deal, admitted Dr Al-Sada.  

News: Oil Plunges After Output Talks Fail Amid Saudi Demands Over Iran

US online alternative finance market jumps 200 percent in 12 months confirms new report

BY Fraser Tennant

The US online alternative finance market generated more than $36bn in funding in 2015 - an increase of more than 200 percent - according to a report published this week by KPMG, the Cambridge Centre for Alternative Finance and the Polsky Center at the Chicago Booth School of Business.

In ‘Breaking New Ground: The Americas Alternative Finance Benchmarking Report’, researchers have analysed online alternative finance activity across the Americas, exploring the impact of online alternative finance activity on the marketplace lending space and how online unsecured lending has rattled the banking world.

Among the report’s key findings is that financial technology (FinTech) has exploded in just two years, from a total market size of $4.5bn in 2013 to $36.5bn in 2015 – with the US making up 99 percent of this total. US businesses are also increasingly getting involved in alternative finance, to the extent of $6.8bn in 2015 alone, as compared to the 2013/2014 total of $10bn.

Furthermore, this level of growth is only expected to accelerate as disruptive new FinTech companies emerge to transform the landscape of the banking industry.

"The emergence of new FinTech companies will continue to transform the financial services sector," said Fiona Grandi, national leader for FinTech at KPMG LLP. "The pace of disruption is sure to accelerate, forging the need and appetite for collaboration among incumbents and non-bank innovators."

The report also points to several game-changing drivers of transformation that are impacting the banking industry, including: (i) speed: the use of algorithmic technology, credit decisions and underwriting now takes minutes, not days; (ii) transparency: investors and borrowers alike gain visibility into the loan portfolios, including risks and rewards; (iii) customer-centric: platforms bring the ‘brick and mortar’ branch into the on-demand and mobile application generation; and (iv) data: platforms have re-engineered the definition of credit worthiness, with FICO still being a factor, but no longer the only factor.

“These changes are permanent benchmarks that banks must now rise up to meet,” added Ms Grandi. “You may argue whether today’s unicorns will be here tomorrow; however, the shift towards the digital bank is indisputable.”

Report: Breaking New Ground - The Americas Alternative Finance Benchmarking Report