Peer-to-peer evolution

BY Richard Summerfield

Peer-to-peer lending has, over the course of the last decade, established itself as one of the fastest growing areas of FinTech; however, the process has also evolved into the increasingly popular marketplace lending. 

It is important to note that today’s marketplace lending has gone beyond merely matching lenders to borrowers (although this type of peer-to-peer lending is still popular in a number of markets, chief among which is China). Instead, marketplace lending has become, according to a new report from PwC, a “broad range of financing activities that cross asset classes and investor types”. The report, 'From idea to innovative market leader: A roadmap for sustainable marketplace lending growth', also notes that “marketplace lending has become a viable business with enough promise that many traditional financial institutions big and small have taken notice and are beginning to actively respond".

The evolution of marketplace lending has been swift. Marketplace lenders have evolved from merely offering unsecured consumer and small business loans and are now able to provide new forms of innovation well beyond their traditional lending markets.

PwC classifies marketplace lenders as any non-bank organisation that is primarily a digital operation. Marketplace lenders are generally unfettered by a past of traditional banking and are typified by their dynamism and agility, particularly compared to their traditional peer-to-peer rivals.

Marketplace lenders, according to the report, usually progress through a four-stage roadmap which consists of: (i) building a foundation; (ii) refining their core lending business; (iii) expanding and innovating; and (iv) looking beyond core lending.

However, as they progress through this framework, it is imperative that companies be mindful of the risks inherent in operating in the marketplace lending space. Companies face myriad risks if they do not keep refining their business and expanding and innovating continuously. Given how quickly the market moves, new platforms are always looking to emerge and disrupt incumbent businesses with even newer technology and innovations. If companies are not careful, the disrupters can quickly become the disrupted.

Report: From idea to innovative market leader: A roadmap for sustainable marketplace lending growth

Halliburton and Baker Hughes announce termination of $28bn merger

BY Fraser Tennant

Oilfield services giants Halliburton Company and Baker Hughes Incorporated have terminated their $28bn merger agreement following a far-reaching regulatory review.

The review, which involved both US and European antitrust regulators, culminated in the US Department of Justice (DOJ) stating last month that it intended to block the deal.

In a statement, the DOJ explained that the deal would have resulted in just two dominant entities in this business: the newly formed company (Halliburton and Baker Hughes) and Schlumberger, the world's largest oil services company.

"The companies' decision to abandon this transaction — which would have left many oilfield service markets in the hands of a duopoly — is a victory for the US economy and for all Americans," said US attorney general Loretta E. Lynch.

The DOJ statement also opines that the merger would have "raised prices, decreased output and lessened innovation in at least 23 oilfield products and services critical to the nation's energy supply".

The merger, originally valued at $34.6bn, was first announced in November 2014.

“While both companies expected the proposed merger to result in compelling benefits to shareholders, customers and other stakeholders, challenges in obtaining remaining regulatory approvals and general industry conditions that severely damaged deal economics led to the conclusion that termination is the best course of action,” said Dave Lesar, chairman and chief executive of Halliburton, one of the world's largest providers of products and services to the energy industry.

As part of the termination of the merger agreement, Halliburton is to pay Baker Hughes a termination fee of $3.5bn by Wednesday 4 May 2016.

“Today’s outcome is disappointing because of our strong belief in the vast potential of the business combination to deliver benefits for shareholders, customers and both companies’ employees,” said Martin Craighead, chairman and chief executive of Baker Hughes, a leading supplier of oilfield services, products, technology and systems to the worldwide oil and natural gas industry.

Continued Mr Craighead: “This was an extremely complex, global transaction and, ultimately, a solution could not be found to satisfy the antitrust concerns of regulators, both in the United States and abroad.”

News: Halliburton and Baker Hughes scrap $28bn merger

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