BusinessDay 06 Mar 2018

Tuesday 06 March 2018
C002D5556
FINANCIAL TIMES
COMPANIES & MARKETS
@ FINANCIAL TIMES LIMITED 2015
BUSINESS DAY
A3
Replacing Libor proves harder
in practice after scandal
Floating interest rate benchmark remains a pivotal
part of the financial system
PHILIP STAFFORD
Abolishing a tarnished
benchmark reference rate
such as Libor is proving
far harder in practice and
comes in spite of regulators
pushing the market towards
adopting a replacement.
The floating interest rate remains a
pivotal part of the financial system and
today contracts worth a notional $240tn
use Libor for establishing the cost of
payments on corporate business loans,
credit cards, auto loans and derivatives
such as interest rate swaps, according to
consultants Oliver Wyman.
As authorities seek a replacement
benchmark, they want a rate based
on frequent transactions and one
that does not require a component
that assesses bank creditworthiness,
as Libor does.
From April, the UK and US will
begin publishing rates for an alternative
sterling and dollar benchmarks
respectively.
Europe, though, has issues. Last
month it abandoned a review of
Eonia, a risk-free overnight rate,
because that was seen as unlikely
to meet the EU’s new standards on
benchmarks from 2020 — now just
17 months away.
So far, the debate has largely
involved regulators and banks that
contribute daily Libor submissions,
with both keen to move away from the
Activity in Britain’s services sector
grew at its fastest rate for four
months in February as stronger
global growth drove demand for business
services.
In the sector’s latest survey of purchasing
managers, companies also
reported the biggest jump in new orders
since May 2017 over the month, driven
by new business-to-business work.
But businesses cautioned that
stretched household budgets kept domestic
consumer spending weak, with
average UK wages failing to keep pace
with rising prices last year.
Overall the IHS Markit/CIPS purchasing
managers’ index for services
rose to 54.5 in February from 53.0 in
January. Anything above 50 indicates
an expansion. Analysts had expected
only a modest increase to 53.3.
However, Monday’s survey, combined
with weak data from similar reports
of managers in the manufacturing
and construction sectors last week,
suggest that the UK economy has not
grown much since the end of last year.
Chris Williamson, chief business
economist at IHS Markit, said: “The
PMI surveys so far collectively point to
the economy growing by nearly 0.4 per
cent in the first quarter to indicate that
a resiliently steady pace of expansion
has been maintained.”
Companies reported that cost
pressures eased in February, falling to
their lowest level for a year-and-a-half.
status quo. The views of end users and
consumers has been less prominent,
but that is now changing.
For European reforms to be successful
(ie not upend the market), the
ECB’s Benoît Cœuré recently said a
broad-based consensus beyond industry
working groups is needed and
should “include the wider financial
sector community’’.
The danger here is that such a
group articulates some uncomfortable
truths. Chief among them is that
benchmarks thrive and endure because
they serve a useful purpose. In
Libor’s case it offers stable, predictable
payments known months in advance.
Second is the problem changing
all the existing contracts, especially
bonds, that reference Libor. It is “a
very big question unanswered”, as FCA
chief Andrew Bailey acknowledges.
An audience vote last week at the
Structured Finance Industry Group
in Las Vegas, attended by 7,000 institutional
investors, indicated the
majority were in favour of preserving
an enhanced form of Libor, according
to a person present.
At that event, Tim Bowler, president
of IBA, the Libor administrator,
reassured them that it would continue
to improve the benchmark, based on
market feedback from more than 1,000
stakeholders.
Perhaps banks and regulators see
an end to Libor around the turn of the
decade. It may well live on.
UK services grow at fastest rate
in four months in February
Survey of purchasing managers shows companies reporting biggest jump in new orders since May
GAVIN JACKSON
However, they also said that they were
facing a growing backlog of work due to
the difficulty of finding skilled workers.
Rising domestic costs due to a tight
labour market have been cited by the
Bank of England as justification for
a possible interest rate rise later this
year, even as higher inflation brought
on by the fall in the value of the pound
begins to fade.
However, Samuel Tombs, chief UK
economist at Pantheon Macroeconomics,
said the survey pointed to slowing
growth, and inflation was likely to be
lower than forecasted by the BoE.
“The [Monetary Policy] Committee
might feel it has invested too much reputational
capital to hold back from raising
rates in May, but the data won’t support
a series of hikes this year,” he said.
Other figures published on Monday
suggested that new car sales declined
more slowly in February than in the
previous month.
Car sales fell by 2.8 per cent compared
with the same month the previous
year, an improvement on the 6.3
per cent year-on-year drop in January,
according to data collected by the
Society of Motor Manufacturers and
Traders.
Economists have used new car sales
as an indicator of British consumers’
appetite for making big purchases in the
wake of the EU referendum, although
the sector is also coping with other
challenges, such as a shift away from
diesel towards electric cars and changes
to taxation.
Useful: Libor offers stable, predictable payments known months in advance © Bloomberg
Axa to buy Bermuda-based XL Group for $15.3bn
Deal gives French company more access to commercial property and reinsurance
DAVID KEOHANE AND
OLIVER RALPH
French insurer Axa is to buy
Bermuda-based XL Group in
a $15.3bn deal that cements its
position as one of the world’s biggest
property and casualty insurance
companies.
It will also give it more access to
markets such as commercial property
and reinsurance in the latest step in
chief executive Thomas Buberl’s plan
to change the shape of the business.
“It is a unique opportunity to shift
our profile from being exposed to
financial risks to being exposed to
insurance risks,” he said.
M&A activity has been gathering
pace in the insurance world this year.
Already AIG has agreed to pay $5.6bn
for Bermuda-based Validus, while Japan’s
SoftBank has been in talks about
taking a stake in Swiss Re.
Last year Axa announced the IPO
of its US business, which is heavily
exposed to the financial markets and
vulnerable to the sort of risks Mr Buberl
is trying to move away from.
“This is a combination for growth.
Axa has a small operation in the field
that XL represents. We have €2.3bn of
revenue, they have $15bn so there is
not much overlap . . . this deal represents
lots of potential,” said the chief
executive.
“This transaction is a unique strategic
opportunity for Axa to shift its
business profile from predominantly
life and savings business to predominantly
property and casualty business,
and will enable the group to become
the number one global property and
casualty commercial lines insurer
based on gross written premiums,”
added Mr Buberl.
The all-cash deal at $57.60 a share
represents a premium of 33 per cent
to XL Group’s closing share price on
March 2 2018, according to Axa.
Axa shares were down 7 per cent in
morning trading on Monday.
The French insurer will fund the
deal, which was reported over the
weekend, using €3.5bn of cash at
hand, €6bn from the planned US IPO
and related transactions and €3bn of
subordinated debt.
The flotation was announced last
May and is likely to happen in the coming
months. There had been debate
around whether the cash raised would
be used to fund acquisitions or for share
buybacks.
However, Mr Buberl said he was not
keen on buybacks. “Buybacks mean
you have no entrepreneurial ideas any
more, and I’m full of entrepreneurial
ideas,” he said.
Mr Buberl had said that proceeds
from the float could be used for acquisitions
but that Axa was “not looking
at tiny deals or very large deals. We
are looking for deals worth €1bn to
€3bn and for that we need financial
flexibility.”
Analysts at Goldman Sachs said
that “longer term, we believe there is a
clear strategic logic to the transaction,
which would expedite Axa’s shift in
business mix towards a greater reliance
on technical earnings and reduced
market sensitivity”.
They added that the deal “could potentially
reduce its financial flexibility
for a period”.
UBS analyst Colm Kelly was more
sceptical: “We think this is not an
obvious fit for Axa. Historically, Axa
has grown via bolt-on acquisitions to
achieve scale, not large scale M&A,”
he said.
Mike McGavick, who has been XL’s
chief executive for the past decade,
will stay on as a special adviser to Mr
Buberl.
Mr McGavick said: “In Axa, we have
found like-minded partners committed
to the absolute necessity to innovate
and move this industry forward.”
The deal is expected to close in the
second half of 2018. JPMorgan advised
Axa on the deal and Morgan Stanley
advised XL.
Wall Street to open mixed, steel stocks set to rise again
PETER WELLS
US stocks look set to open
mixed on Monday, following
gains in Europe but declines
in Asia.
Futures tip the S&P 500 to open
7.5 points lower at 2,683, while the
Dow Jones Industrial Average is expected
to open up 28 points to 24,445
while the Nasdaq 100 is expected to
start roughly flat at 6,804.
US steel stocks look set to contin-
FCA fines former Deutsche Bank trader for attempting to rig Libor
MARTIN ARNOLD
The UK financial watchdog
has fined a former Deutsche
Bank trader £180,000 for
attempting to manipulate the Libor
interest rate benchmark and
banned him from working in any
regulated financial activity.
The Financial Conduct Authority
said Guillaume Adolph
had made at least 20 requests to
Deutsche’s Libor submitters to
change the Swiss franc and Japanese
yen figures they contributed
to setting overall Libor rates to
benefit his own trading positions.
ue firming in the wake of President
Donald Trump’s announcement last
Thursday that he planned to impose
heavy tariffs on steel and aluminium
imports.
In pre-market trade, Nucor was
up 0.9 per cent, US Steel was up 0.4
per cent and AK Steel gained 0.9 per
cent. Aluminium producer Alcoa
was flat.
Mr Trump tweeted on Monday
morning that the “Tariffs on Steel
and Aluminum will only come off
He also “took his own trading
positions into account” when
acting as Deutsche’s primary
Japanese yen Libor submitter and
took into account the requests of a
trader at another bank when making
his submissions.
The London Interbank Offered
Rate underpins hundreds
of billions of dollars of loans and
hundreds of trillions of derivatives
around the world. Last October,
the Bank of England said the financial
markets’ reliance on Libor
created a significant risk to UK
financial stability.
Some big investment banks
if new & fair NAFTA agreement is
signed”, referring to the US’s trade
pact with Canada and Mexico. “To
protect our Country we must protect
American Steel! #AMERICA FIRST”.
Overall, US metals names have
gained at the expense of their global
peers since Thursday.
European stock markets were up
between 0.2 per cent and 0.6 per cent
in the wake of Italy’s general election,
while London’s FTSE 100 was up 0.2
per cent during lunch.
— including Deutsche — and
interdealer brokers have paid almost
$10bn in fines to authorities
around the world while a handful
of traders have gone to jail on
Libor-rigging charges. Mr Adolph
worked at Deutsche from 2008 to
the end of 2011.
The FCA said: “Mr Adolph
acted recklessly, and therefore
with a lack of integrity, in deliberately
closing his mind to the
risk that his behaviour in relation
to the submission of Swiss franc
and Japanese yen Libor rates was
contrary to proper standards of
market conduct.”