Liam Proud

$100 billion breakup of Dutch lender ABN Amro in 2007 by Royal Bank of Scotland.

Credit Suisse and a string of US regional banks failed last year. In this Exchange podcast, Stanford Professor Anat Admati argues that lenders’ equity buffers are punier than they seem – and that fixing the problem needn’t cause a credit crunch.

CVC floated beauty retailer Douglas, whose shares fell, while EQT received a warmer welcome for skincare group Galderma. In this Viewsroom podcast, Breakingviews columnists explain how to interpret the mixed message for private equity groups sitting on $3 trln of unsold assets.

People who know Patrick Drahi characterise him as a ruthless and meticulous strategist. Yet creditors fighting the telecom tycoon in France seem to think the Moroccan-born entrepreneur is unprepared for battle. Which side is right could ultimately determine who controls a key part of the transatlantic Altice empire, currently straining under $60 billion of debt. The odds favour Drahi.

Bailing out. It’s barely a year since the Swiss government arranged an emergency rescue of Credit Suisse by rival UBS. Swiss Finance Minister Karin Keller-Sutter wants to avoid another debacle. Proposed reforms, unveiled on Wednesday, should make big lenders less prone to a crisis. Yet there’s little progress on the question of whether the enlarged banking behemoth could fail without government support.The 209-page government document is a comprehensive review of what happened to Credit Suisse in March last year and why post-2008 rules to end taxpayer bailouts did not work. It floats some sensible fixes, like beefing up the powers of financial watchdog FINMA, which currently cannot issue fines.For UBS boss Sergio Ermotti and his shareholders, the most eye-catching element is a proposal to make the $100 billion group hold more capital. An information sheet accompanying the report, which states that an increase would be “significant”, knocked 3% off the Zurich-based bank’s shares on Wednesday. Keller-Sutter proposed a new “forward-looking” supplement to the common equity Tier 1 ratio, based on supervisory discretion and regular stress tests.Swiss regulators may also close some loopholes in capital rules that flattered Credit Suisse’s ostensibly healthy ratios. One idea is that banks deduct from their capital the full value of assets which would be worthless in a liquidation, like proprietary software and deferred tax claims. Another requires UBS to fully fund stakes in foreign subsidiaries with an equivalent amount of equity at the parent. A mismatch in this area made it harder for Credit Suisse to wind down or sell its accident-prone investment bank.These changes make it less likely that UBS will get into trouble. But they do not resolve the question of what happens if it does. Swiss authorities last year wrote off Credit Suisse securities worth $17 billion to smooth the UBS rescue. However, they stopped short of using their post-2008 toolkit for winding down failing lenders.The report offers some convincing reasons. The next step in a full-on resolution would have been bailing in Credit Suisse’s $60 billion of loss-absorbing bonds. But that might have caused debt investors to offload similar securities, destabilising other banks. Second, it’s far from clear the move would have calmed Credit Suisse customers.This is not a hypothetical question for Keller-Sutter and her successors: Swiss authorities have twice come to the rescue of the country’s biggest lenders in the past 15 years. If things go wrong with UBS in future, there will be no domestic white knight, while the bill for taxpayers from any bailout will be even larger.Yet investors appear to see few dangers. Ermotti’s bank has about $107 billion of unsecured debt that’s designed to absorb losses in a crisis. One of the bigger bonds trades with a relatively modest 5.7% yield – roughly the same as when it was issued in early 2023. In Switzerland, the too-big-to-fail problem seems to be alive and well.Context NewsThe Swiss government on April 10 said UBS and three other systemically important banks will face tougher capital requirements to shield the country's wider economy from any future failures. In a report, prompted by the collapse of Credit Suisse in March 2023, the government pitched 22 measures for direct implementation. It stopped short of saying how far stricter capital requirements should go. The increase in requirements for UBS will be 'substantial, especially if UBS were to retain its current size and structure, or even grow,' it noted in an explanatory document. UBS shares were down 2.6% at 27.11 Swiss francs as of 1448 GMT on April 10.

Basket case. People who know Patrick Drahi characterise him as a ruthless and meticulous strategist. Yet creditors fighting the telecom tycoon in France seem to think the Moroccan-born entrepreneur is unprepared for battle. Which side is right could ultimately determine who controls a key part of the transatlantic Altice empire, currently straining under $60 billion of debt. The odds favour Drahi.The 60-year-old, who moved to France as a teenager, is Europe’s answer to John Malone, the so-called “cable cowboy” known for his success in rolling up U.S. pay-TV businesses with financial structures of mind-boggling complexity. Drahi’s assets span broadband, mobile and media businesses in France, the United States, Portugal and Israel, as well as auction house Sotheby’s and a quarter of Britain’s $14 billion BT.The problem is that Drahi largely built his empire with aggressive borrowing. Privately held Altice France’s net borrowings at the end of 2023 were 6.4 times the EBITDA it generated that year. At Altice International, which includes operations in Portugal and Israel, the multiple is 4.7 times. Most large European telcos operate with much less leverage.Meanwhile, valuations are in the doldrums. The European telecom sector trades at a little over 5 times last year’s EBITDA, according to LSEG data, implying that Drahi’s two continental businesses have little or no equity value. The market capitalisation of Altice USA, a listed cable operator in which he controls a roughly one-half economic stake, has shrivelled to around $1 billion, from $20 billion in late 2020.Interest payments already swallow up the lion’s share of the operating cash flow that Drahi’s European businesses generate. And that’s with a relatively benign weighted average interest rate of 6%. Altice France and Altice International have chunky debts coming due in 2027, which they will have to refinance at much higher rates – assuming they can borrow at all.The problems are most acute in the French business, where Drahi last month unveiled his gambit to turn things around. Longtime lieutenant Dennis Okhuijsen, once a treasurer at John Malone’s Liberty Global, told bondholders they may have to accept haircuts to get leverage down to 4 times EBITDA. That implies slashing more than $10 billion from the unit’s $26 billion net debt pile. Creditors were stunned: Drahi had previously laid out a plan to cut borrowings by selling assets including a media business, a data centre operator, and a fibre broadband unit. Now, he is proposing that debtholders take all the pain instead.Hard cellThe creditors have mobilised for a fight, forming two broad groups. One camp is mostly composed of holders of the secured debt, which has an overall face value of almost $22 billion. The other group includes more unsecured creditors, who in total are owed $4.5 billion. Both are confident of bringing Drahi to heel. Their core argument is that his shuffling of assets creates personal criminal liability under French law if Altice France becomes insolvent. In that scenario a judge could decide that Drahi had committed “l’abus de biens sociaux”, effectively the misuse of company assets.Creditors reckon Drahi will want to avoid a court-run restructuring process that would probably kick off if Altice France and its lenders fail to agree. Given the company’s extreme leverage, he would probably lose his equity stake in the business. Bondholders feel that Drahi is underprepared and has opened Pandora’s box, one investor told Breakingviews.Yet Drahi holds several important cards. Unsecured creditors also have good reasons to avoid a court-run restructuring process as they would also risk losing everything. That’s because the company’s secured debt alone is 5.3 times its 2023 EBITDA, exceeding a fair valuation multiple for the slow-growing company.The tycoon has negotiating leverage over the secured creditors, too. He is effectively threatening to siphon off the proceeds of Altice France’s asset sales, which could amount to $6 billion or more, by taking advantage of a provision in the company’s debt documents known as a “builder basket”. This allows a borrower to move money – or entire businesses – out of the reach of creditors. The basket’s maximum size grows over time, and CreditSights analysts reckon Drahi’s receptacle at Altice France may have reached $20 billion. Drahi has this leeway thanks to loose covenants in Altice’s bond documents, which according to one credit investor surpass a thousand pages – twice as long as peers.The risk for secured creditors is that Drahi continues to move assets beyond senior bondholders’ grasp, reducing the value of their security. If they’re wrong about his personal liability under French law, it might be too late to do anything else.Ample bandwidthThese considerations make a compromise the most rational outcome for all. Bond prices point to the possible discounts borrowers may have to accept. Altice France’s various secured credits currently trade at between 70% and 90% of face value, while unsecured notes trade at roughly 30% to 40% of par. All in all, the market price of Altice France’s bonds is about $6.4 billion less than their face value, according to Breakingviews calculations based on LSEG data.Drahi could take advantage of that gap by buying back Altice France’s unsecured debt at a discount and swapping the secured notes into bonds with a lower face value. That would get him more than halfway to his new leverage target. The tycoon could then release any remaining asset-sale proceeds from the builder basket, further reducing debt. In the process, he would restore some value to his troubled empire. With net debt reduced to 4 times EBITDA, and assuming a valuation of 5 times, Altice France’s equity would be worth more than $4 billion.Even if he could pull off such a manoeuvre, Drahi would still have other problems. Indeed, shaking down creditors at Altice France could spook lenders to Altice International and Altice USA, making it harder to refinance those borrowings when they come due. He has no better options, though. Besides, the premise underpinning Drahi’s entire credit-fuelled shopping spree was that debt markets would be there when he needed them. He’s been right so far, and it’s too early to say for sure that investors have developed longer memories.Context NewsAltice France executive Dennis Okhuijsen on March 20 said the telecommunications group expected its lenders to help reduce the company’s leverage by accepting haircuts on outstanding debt worth 24 billion euros. Options include swapping existing bonds or loans for new instruments that have a lower face value, or Altice buying back debt at a discounted valuation, he said. The company, controlled by founder Patrick Drahi, wants to reduce its net debt to less than 4 times EBITDA, from 6.4 times at the end of 2023.

Through the mill. Chunky acquisitions tend to destroy shareholder value, numerous studies have found. It’s therefore understandable that investors often take fright when a company they own launches a takeover bid. Sometimes that scepticism obscures a good thing, however – as International Paper’s purchase of UK-listed packaging peer DS Smith might show.The transatlantic pairing, agreed on Tuesday, was sealed on Friday when rival bidder Mondi dropped out of the race. The Memphis, Tennessee-based victor is handing DS Smith investors 0.1285 of its own shares in return for each one they hold of the target’s, implying an equity offer of almost $7.4 billion based on undisturbed share prices.The worry for International Paper chair and outgoing CEO Mark Sutton is that investors seem wary. His share price is down by more than a tenth since March 25, the last trading day before the public approach. That’s reduced the real premium on offer for DS Smith to 30%, rather than the original 48%. The rest of the paper and packaging sector has dropped, but not by as much as the acquiror.The slide is arguably surprising since the combination will create annual cost savings of around $500 million, according to International Paper. Those synergies have a net present value of $3.4 billion, based on Breakingviews calculations using a 25% tax rate, 10% discount rate and the buyer’s estimated integration costs of $370 million.True, Sutton is effectively paying away two-thirds of that value to DS Smith since the undisturbed bid premium over the target’s share price was equivalent to about $2.4 billion. But there should still be about $1 billion worth of goodies left for International Paper itself. Sutton’s shareholders seem not to believe it.Investors may see the cost-cut estimate as overcooked, or they may mistrust cross-continental empire building. Even if only two-thirds of the synergies came through, however, International Paper’s return on the investment would be about $950 million in four years’ time, using Visible Alpha consensus operating profit estimates for DS Smith of $935 million and a 25% tax rate. That’s a near-10% return on investment. Assume all the synergies materialise, and the return is a handy 11%.It’s worth considering the alternative. Peers like Smurfit Kappa and WestRock are pairing up, in a sector that generally rewards scale. Forgoing a deal, for International Paper, would come with risks of its own. At least Sutton hasn’t left himself strategically boxed in.

Tighter monetary policy has delivered a giant boost to Europe’s long-suffering lenders. It may then seem surprising that BNP Paribas on Thursday cited the prospect of rate cuts later this year as a positive. The explanation is partly specific to bank’s 2.7-trillion-euro balance sheet. But it also shows that slightly looser money is nothing to worry about for rivals including Deutsche Bank and Barc

Private-equity moguls are ruthless capitalists, except when sharing out profits. Buyout shops often pool their 20% cut of the upside from running a fund, known as carried interest or “carry”. In doing so, they effectively socialise the winning and losing bets across a team.

Half Marks. HSBC is a singular beast. The $167 billion bank is listed and headquartered in London, but makes most of its money in Asia, with clients ranging from Hong Kong savers to giant Western companies. No one possesses the long list of skills that would make them the perfect fit to run the group. That makes choosing its next CEO an exercise in compromise for Chair Mark Tucker, who is considering both internal and external candidates to replace the departing Noel Quinn.Investors and people who know HSBC agree the perfect boss would be a readily available proven executive with experience of Western and Asian markets, and a solid understanding of the bank’s $3 trillion balance sheet and HSBC’s idiosyncratic culture. Headhunters working on such complex assignments often quantify candidates’ credentials across different factors. It’s an instructive exercise.Breakingviews has graded potential internal and external CEO candidates by assigning them a score from nought to five in six different categories. None of them score full marks. Chief Financial Officer Georges Elhedery does best: his current role exposes him to everything from UK mortgages to Mexican trade finance. However, he hasn’t lived permanently in HSBC’s core market of Hong Kong or had sole responsibility for a key business line.Other internal candidates – like retail and wealth boss Nuno Matos, investment banking head Greg Guyett and commercial boss Barry O’Byrne – score better on those fronts, but less well on others. Their experience at HSBC has focused on either the consumer or wholesale side.By definition, none of the internal contenders has ever led a bank. If that matters most to Tucker, he could look at UniCredit CEO Andrea Orcel, Lloyds Banking Group’s Charlie Nunn or Helen Wong, who runs Singapore’s OCBC. The latter two CEOs have the benefit of previously working for HSBC.But hiring from outside means compromising on availability. Rival executives will have non-compete clauses, which usually means lengthy gardening leave. The same is probably true for Simon Cooper, another HSBC alumnus who recently stepped down as head of corporate and investment banking at rival Standard Chartered. A long wait is not ideal for HSBC, which has not given investors financial guidance for 2025, and whose shareholders want to know what the growth plan is when interest rates fall.The biggest test for any new boss will be dealing with rising tensions between China and the West while navigating HSBC, which has rejected numerous outsiders in the past. Working with Tucker, who is choosing his third CEO in less than seven years, is another challenge. The only consolation is that the ideal candidate probably does not exist.