Business Headlines

Benchmark crude for September delivery was up 31 cents to $70.91 a barrel by late afternoon in Singapore in electronic trading on the New York Mercantile Exchange. On Monday, the contract fell 33 cents to settle at $70.60.

Crude has stuck near $71 a barrel for a week as traders look for clues about the health of the global economy and oil demand. The Dow Jones industrial average fell 0.3 percent on Monday and Asian indexes were mixed in early trading Tuesday.

“Crude has been highly correlated to equities,” said Christoffer Moltke-Leth, head of sales trading for Saxo Capital Markets in Singapore. “We may see a test of $75 soon, but then I think there will be a correction next month in stocks and therefore crude.”

A two-day meeting of the Federal Reserve starts Tuesday. This week the U.S. government will also report July retail sales and several major retailers will announce their second quarter results.

“I’m afraid the global fiscal stimulus is going to slowly fade,” Moltke-Leth said. “And personal consumption in the U.S. is still a big problem despite all the stimulus.”

In other Nymex trading, gasoline for September delivery rose 1.26 cents to $2.04 a gallon and heating oil was steady at $1.93. Natural gas for September delivery gained 4.1 cents to $3.68 per 1,000 cubic feet.

In London, Brent prices rose 16 cents to $73.66 a barrel on the ICE Futures exchange.

China Exports & Lending Falls

By Bloomberg News

Aug. 11 (Bloomberg) — China’s exports and new loans tumbled in July and industrial output rose less than estimates, underscoring government concern that the world’s third-biggest economy is yet to establish a solid recovery.

Exports fell 23 percent from a year earlier, the customs bureau said. Industrial production gained 10.8 percent, the statistics bureau reported. New loans plunged to 355.9 billion yuan ($52 billion), less than a quarter of June’s level, the central bank said.

China will maintain a “moderately loose” monetary policy and “proactive” fiscal stance to bolster domestic spending in the face of slumping exports, Premier Wen Jiabao said Aug. 9. New loans fell as the government and banks moved to avert bad debt and bubbles in stocks and property after a record $1.1 trillion of lending in the first half helped drive a 7.9 percent economic expansion in the second quarter.

“There’s an element of fragility in the recovery,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale in Hong Kong. “The government needs an appropriately loose monetary policy.”

The yen rose against the euro and the dollar as investors sought safety because of the weaker-than-estimated output number and the export decline. The Shanghai Composite Index closed 0.5 percent higher, taking this year’s increase to 79 percent. Appliance manufacturer Qingdao Haier Co. and spirits maker Kweichow Moutai Co. climbed as the statistics bureau said retail sales rose 15.2 percent, more than estimates.

Topping Growth Target

China’s economy will grow 9.4 percent this year, topping the government’s 8 percent target, Goldman Sachs Group Inc. said yesterday. The credit boom and a 4 trillion yuan stimulus package helped General Motors Co. to report a 78 percent increase in vehicle sales in China in July.

Urban fixed-asset investment for the seven months to July 31 climbed 32.9 percent, the statistics bureau said. That was less than a 33.6 percent gain through June and the 34 percent median estimate in a survey of 22 economists.

“The fixed-asset investment number is worrying because government-sponsored investment is a pillar of the recovery,” said Tao Dong, chief Asia-Pacific economist at Credit Suisse AG in Hong Kong. “This set of data should postpone any thought of more aggressive tightening; the economy is slowing down a little bit.”

Solid Foundations

Policy makers cautioned this month that a recovery is not yet on solid foundations and central bank Governor Zhou Xiaochuan said July 28 that the nation will take its cue from the U.S. on when to end economic rescue efforts.

The Bank of Japan left its key lending rate unchanged today, citing “downside risks to economic activity” and South Korea held its benchmark at a record low, with Governor Lee Seong Tae saying a recovery faces “some uncertainties.”

The gain in industrial production in China compared with a 10.7 percent advance in June and economists’ median forecast for an 11.5 percent increase.

The export decline matched economists’ estimates and was the third biggest since China’s shipments began to shrink in November last year. China Shipping Container Lines Co., the country’s second-largest carrier of sea-cargo boxes, forecast last month a first-half loss on weaker global demand.

Imports fell 14.9 percent, leaving a trade surplus of $10.63 billion.

‘Modest Disappointment’

The industrial production figure suggested the economy “started the third quarter on a slightly softer tone,” Ben Simpfendorfer, a Hong Kong-based economist for Royal Bank of Scotland Plc, said in a Bloomberg Television interview. “It’s a modest disappointment.”

July’s new loans were the least since the government dropped quotas limiting lending in November last year and pressed banks to support a 4 trillion yuan stimulus package. None of 11 economists surveyed forecast such a low number. M2, the broadest measure of money supply, rose 28.4 percent.

Loans growth was in keeping with the moderately-loose monetary policy, the state-run Xinhua News Agency quoted an unidentified central bank official as saying in a report on a government Web site.

New loans are usually higher in the first half of the year and in March, June and September, the official said.

China Construction Bank

China Construction Bank Corp., the nation’s second-largest bank, will cut new lending by about 70 percent in the second half to avert a surge in bad debt, President Zhang Jianguo said last week.

“We noticed that some loans didn’t go into the real economy,” Zhang, 54, said in an Aug. 6 interview at the bank’s headquarters in Beijing. “I feel that some industries are expanding too rapidly. For example, housing prices are rising too fast, and housing sales are growing too fast.”

UBS AG said in a July 31 note that the scale of China’s new lending in the first half was “neither sustainable nor necessary.” New loans of 300 billion yuan to 400 billion yuan a month in the second half would be “more than enough” to support the nation’s recovery, the report said.

Consumer prices fell 1.8 percent last month from a year earlier, the biggest decline since 1999, the statistics bureau said today. They were unchanged from the previous month. Producer prices dropped a record 8.2 percent.

Moodys Taking a Hard Look @South Korean Companies

By Jungmin Hong

Aug. 11 (Bloomberg) — South Korean companies may struggle to sustain “encouraging” results as the local currency rises, the global recession lingers and the impact of a government stimulus program wanes, Moody’s Investors Service said.

The ratings company said it is cautious about Korean companies’ ability to build on their first-half performance in the near to medium term as exporters including Hyundai Motor Co. and Samsung Electronics Co. may face a stronger currency. Samsung last month reported its biggest quarterly profit in two years, while LG Electronics Inc. had record quarterly earnings.

The Korean won has appreciated more than 25 percent against the U.S. dollar since March 2, while exports fell for a ninth month in July as demand from China, the U.S. and Japan weakened, and won’t rise again until October, the government said Aug. 1.

The Korean won is “highly volatile” and many companies rely on exports that are vulnerable to any worsening of the global economic downturn,” Moody’s said in a report today.

Negative outlooks on a number of companies are unlikely to change in the short term, Moody’s said.

China’s demand for consumer goods and petrochemicals, a resilient Korean economy, a moderate rebound in global demand and supply disruption in some industries helped Korean companies in the first half, Moody’s said.

Competitiveness

South Korea’s economy expanded last quarter at its fastest pace since 2003, boosted by 167.1 trillion won ($137 billion) of government stimulus spending in the first six months of 2009.

“Korea’s larger corporate issuers’ recent results are encouraging as they benefit from improving domestic market conditions and ongoing competitiveness abroad,” said Chris Park, senior analyst at the credit assessor, in today’s report.

Improving market sentiment enabled even lower-rated Korean companies to access domestic markets for funds, Moody’s said.

South Korea’s economy grew 2.3 percent in the second quarter, boosted by the stimulus package and a rebound in securities and real estate markets that benefited retailers such as Lotte Shopping Co. and Shinsegae Co., as well as Posco, South Korea’s largest steelmaker, and GS Engineering & Construction Corp., according to the report.

Moody’s predicts the nation’s economy will contract 1.8 percent this year before growing 3.3 percent in 2010.

China Continues To Increase Oil & Iron Ore Stockpiles

By Bloomberg News

Aug. 11 (Bloomberg) — China bought record volumes of oil and iron ore in July as automakers, steel producers and builders expanded output to meet rising demand driven by the nation’s $586 billion stimulus spending.

Oil imports jumped 18 percent to 19.6 million metric tons, and iron ore purchases rose 5 percent to 58.1 million tons from a month ago, the Beijing-based customs said today on its Web site. The second-largest energy user and biggest iron ore buyer spent a combined $13.8 billion on the commodities.

Public-work spending and a credit boom have lifted industrial output, boosted revenue at General Motors Co. and spurred a 60 percent jump in property sales. Refiners and mills including China Petrochemical Corp. and Baosteel Group Corp. may be stockpiling commodities in anticipation of rising prices.

“This is a very bullish number and supportive for global oil prices,” said Gordon Kwan, head of regional energy research at Mirae Asset Securities Ltd. “Successive months of robust automobile sales following the implementation of the economic stimulus measures” have triggered the oil import boom, he said.

Crude oil futures in New York rose 0.2 percent to $70.74 a barrel at 1:16 p.m. Singapore time. Iron ore for immediate delivery advanced 9.2 percent to $104.1 a ton for the week ended Aug. 7, according to The Steel Index.

Rio Tinto Group, the world’s second-largest exporter of iron ore, is seeing strong demand driven by China and its operations are running “flat out,” Sam Walsh, head of the business, said today in Melbourne.

Steel Revival

Crude steel production in China, the world’s biggest maker, surged 13 percent last month to 50.7 million tons, the National Bureau of Statistics also said today in Beijing. That’s the third consecutive record monthly high, according to Bloomberg data. Iron ore is used in steelmaking.

“Iron ore restocking pushed up the imports and prices as the stimulus package drives up steel demand,” said Helen Wang, a Shanghai-based analyst with DBS Vickers Hong Kong Ltd., “Steelmakers have the motivation to ramp up production with higher steel prices.”

Benchmark Chinese steel prices have soared 30 percent since April, and Baosteel can’t meet “explosive” demand, JPMorgan Chase & Co. said last week. The steel revival has hampered China’s ability to bargain down iron ore prices paid to Rio, Vale SA and BHP Billiton Ltd.

The economy will grow 9.4 percent this year, more than the nation’s 8 percent target, Goldman Sachs Group Inc. said.

Stockpiling Commodities

Still, China today published data showing exports and new loans tumbled in July and industrial output rose less than estimates, adding pressure for policy makers to maintain spending in the world’s third-biggest economy.

“There’s an element of fragility in the recovery,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale. “The government needs an appropriately loose monetary policy.”

China may be building inventories of iron ore and oil, analysts said.

“Demand recovery alone cannot justify the imports surge last month,” Wang Aochao, the chief oil analyst at UOB-Kay Hian Ltd., said by telephone in Shanghai. “China, as a price taker, is building inventories betting on crude prices to gain. Record imports also supplement weak domestic production.”

Shipments May Fall

Net crude oil imports in July rose to a record 19.2 million tons, according to the customs data. Crude output fell 0.3 percent to 16.14 million tons last month.

Iron ore shipments may fall later in the year because of the “high inventories,” said Geoffrey Cheng, a Hong Kong-based analyst with Daiwa Institute of Research.

Iron ore inventories at China’s major ports have risen 29 percent to 75.2 million tons on Aug. 7, reaching the highest since a record 75.5 million tons last September, according to figures from the Beijing Antaike Information Development Co.

Imports of oil products, including gasoline and diesel, dropped 8.6 percent to 23.4 million tons in the January-July period and stood at 3.8 million tons last month from 3.34 million tons in June. Oil-product exports jump 31 percent to 12.57 million tons in the first seven months and stood at 2.15 million tons last month, today’s data show.

—Winnie Zhu, Helen Yuan. With reporting by Rebecca Keenan in Melbourne. Editors: Tan Hwee Ann, Ang Bee Lin.

Distressed Takeovers Soar

By MIKE SPECTOR and JEFFREY MCCRACKEN

The brutal recession is opening up the landscape to vulture investors as never before.

New data show that distressed-debt deals — in which creditors use their debt positions to seize ownership of troubled companies — are running close to double the pace of 2008. Some 140 of the deals have been struck during 2009, compared with 102 transactions for all of last year, according to data provider Dealogic. Those figures also include corporate takeovers, encompassing a wide array of transactions related to bankruptcies, restructurings, recapitalizations or liquidations.

The deals are valued at $84.4 billion altogether, dwarfing the $20 billion figure from 2008. And they involve companies from virtually every nook of the U.S. economy, from auto-parts maker Delphi Corp., to retailer Eddie Bauer and hotel chain Extended Stay America.

In many of these cases, debtholders aren’t concerned about getting monthly payments, but rather using their debt positions to angle for ownership. It’s the equivalent of a bank making a loan to a homeowner with the intent of foreclosing on a delinquent mortgage. Such strategies have been around for years and are known in financial circles as “loan to own” or “vulture” deals. But never have they occurred with such volume and velocity, say bankers and lawyers.

Today’s lenders are “increasingly hedge funds who are thinking about a loan-to-own strategy,” said Barry Ridings, the vice chairman of U.S. investment banking at Lazard Freres & Co. LLC. At troubled companies that can’t pay their debts, boards find that ceding control to lenders is “the best way to maximize value,” Mr. Ridings said.

More

• Wall Street’s B-List Firms Trade on Bigger Rivals’ Woes
• The Game: The Two Sides of Verizon’s Deal Making
• A Look Back: New Breed of Hardball Investors Makes Loans, Takes Control
  12/12/06

The deals are changing how Wall Street bankers and lawyers work. These days, M&A lawyers are increasingly collaborating with their firms’ bankruptcy practices and Wall Street restructuring shops. Rather than working with a suitor that wants to buy a company for cash or stock, they now work with groups of creditors who want to convert the debts into ownership of a crippled company. The new cliché among restructuring professionals: Bankruptcy is the new M&A.

That was on display in June, when hedge fund Elliott Management took bigger stakes in a loan used to fund Delphi while it was in Chapter 11 bankruptcy proceedings. That move effectively helped block other investors who wanted to take over Delphi.

Ahead of its June bankruptcy filing, theme-park operator Six Flags Inc. reached a deal with lenders, including Silver Point Capital and Beach Point Capital, to exchange debt for a 92% stake in the new company when it emerges from Chapter 11.

The opportunities for similar deals are likely to increase. Bank of America Merrill Lynch estimates that about $145 billion in debt could default this year, followed by about $130 billion next year and $120 billion the year after. Default rates are hovering around 10%, up from around 4% in 2008 and less than 1% in 2007, when credit was easy and the economy strong.

“This will continue for three to four years with all of the bank debt that comes due,” said Scott Levy, head of distressed mergers and acquisitions at Bank of America Merrill Lynch. “The absolute dollar value of projected defaulted debt is six or seven times as much” as in the recession of the early 1990s.

Some of the biggest turnover is in real estate. Maguire Properties Inc., one of the largest office-building owners in Southern California, said Monday it is giving up control of seven buildings due to “imminent default” on the loans backed by those properties. The company has struck a deal to turn over one of the buildings, which is located in Irvine, Calif., to LBA Realty, a real-estate company that bought its debt at a discount.

And unlike traditional deals conducted in secret, bankruptcy courts usually subject transactions to public scrutiny. Southwest Airlines Co., for instance, recently said it would offer a competing bid to take Frontier Airlines Holdings Inc. out of bankruptcy proceedings — after a judge approved an initial deal for the carrier to be bought by Republic Airways Holdings Inc.

Distressed deals often include hardball tactics. Earlier this year, Integra Telecom Inc. Chief Executive Dudley Slater met with Michael Leitner, a managing director at Tennenbaum Capital Partners LLC and significant holder of the telecommunications firm’s junior debt. Mr. Slater explained that Integra remained profitable, but that flat earnings meant a looming debt-covenant violation. Senior lenders wanted high interest rates to restructure the company’s $1.3 billion of debt. Today, Tennenbaum and other junior lenders are poised to own Integra, after exchanging $700 million of debt for equity stakes in an out-of-court restructuring.

Mr. Leitner said he wanted to work with stakeholders to do what was best for Integra’s capital structure. Turning the company over to debtholders proved Integra’s only recourse, Mr. Slater said. “Life is always better when you have options and in this case, we didn’t have options,” he said.

—Lingling Wei contributed to this article.Write to Mike Spector at [email protected] and Jeffrey McCracken at [email protected]

Printed in The Wall Street Journal, page A1