New rule to apply to banks

Banks Face $100 Billion of Writedowns on Level 3 Rule

By John GloverNov. 7 (Bloomberg)

-- U.S. banks and brokers face as much as $100 billion of writedowns because of Level 3 accounting rules, in addition to the losses caused by the subprime credit slump, according to Royal Bank of Scotland Group Plc. The Financial Accounting Standards Board's rule 157 will make it harder for companies to avoid putting market prices on securities considered hardest to value, known as Level 3 assets, Royal Bank's chief credit strategist Bob Janjuah in London wrote in a note today. The new rule is effective Nov. 15. ``This credit crisis, when all is out, will see $250 billion to $500 billion of losses,'' Janjuah said. ``The heat is on and it is inevitable that more players will have to revalue at least a decent portion'' of assets they currently value using ``mark- to-make believe.''

Wall Street's biggest firms have written down at least $40 billion as prices of mortgage-related assets dwindle because of record foreclosures. Morgan Stanley, the second-biggest U.S. securities firm, has 251 percent of its equity in Level 3 assets, making it the most vulnerable to writedowns, followed by Goldman Sachs Group Inc. at 185 percent, according to Janjuah. Morgan Stanley fell $3.63, or 6.7 percent, to $50.85 at 2:14 p.m. in New York. The New York-based bank is down 24 percent this month. New York-based Goldman Sachs dropped 3.2 percent to $216.08. Morgan Stanley may write down $6 billion of assets, David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, said yesterday. Merrill is Healthiest Citigroup Inc., which this week said losses from subprime assets may be $11 billion, has 105 percent of its equity in Level 3 assets, Janjuah wrote. The New York-based bank fell 2.51 percent to $34.20, a four-and-a-half year low. Merrill Lynch & Co., which wrote down $8.4 billion of subprime mortgage debt and other debt securities, has Level 3 assets equal to 38 percent of its equity ``and may well come out of all of this in the best health,'' Janjuah said. Merrill lost 4.36 percent at $53.91.

``If you look at the writedowns just at Citi and Merrill already it's about $20 billion, so $100 billion may be on the conservative side globally,'' said Sajiv Vaid, who manages the equivalent of about $10.5 billion of corporate debt at Royal London Asset Management in London, a unit of the U.K.'s biggest customer-owned insurer.

The losses are likely to hurt shareholders more than bondholders because the banks may be forced to sell stock to raise additional capital, Vaid said. `Unobservable' Inputs Banks may be forced to write down as much as $64 billion on collateralized debt obligations of securities backed by subprime assets, from about $15 billion so far, Citigroup analysts led by Matt King in London wrote in a report e-mailed today. The data excludes Citigroup's own projected writedowns.

Under FASB terminology, Level 1 means mark-to-market, where an asset's worth is based on a real price. Level 2 is mark-to- model, an estimate based on observable inputs and used when there aren't any quoted prices available. Level 3 values are based on ``unobservable'' inputs reflecting companies' ``own assumptions'' about the way assets would be priced. ABX indexes, which investors use to track the subprime-bond market, are showing ``observable levels'' that would wipe out institutions' capital if the benchmark's prices were used to value their Level 3 assets, according to Janjuah.

The indexes have tumbled this year because investors expected rising numbers of borrowers to default on home loans, cutting the cash flowing to the bonds that package the mortgages. Lehman Brothers Holdings Inc. has the equivalent of 159 percent of its equity in Level 3 assets, and Bear Stearns Cos. has 154 percent, according to Janjuah's note, called ``Bob's World: Feast and Famine.''

Why people are miserable at work

Reasons for being miserable at work

By Lucy Kellaway

Published: November 11 2007 14:53 | Last updated: November 11 2007 14:53

(FT) Every unhappy family is unhappy in a different way. Every unhappy worker is unhappy in much the same way.

The first is a dubious generalisation made by the greatest of novelists, Leo Tolstoy. The second is a slightly less dubious one made by a novelist who isn’t great at all. Indeed Patrick Lencioni is a management consultant who has just written a business parable, The Three Signs of a Miserable Job, which, though of no literary merit, is outselling Anna Karenina on Amazon by about 100 to one.

According to this book, we are miserable at work for three reasons. The first is anonymity – we feel no one cares that we are there. The second is immeasurability – we don’t know if we are doing a good job or not, and the third is irrelevance – we feel that our work doesn’t matter much one way or another.

Mr Lencioni argues that all three causes are on the rampage and that we are in the middle of a “misery epidemic” in which three-quarters of all workers hate their jobs. All is not lost, however. Misery, he says, is largely the fault of line managers, and if only they could remember what it felt like to be miserable as a worker they could fix it.

For a start, I don’t accept that we are facing misery on this scale. As a business agony aunt I actively go out touting for misery and so the people who come to me are a skewed sample. But even of these only about half seem genuinely miserable at work.

Even if he were right about the extent of the misery he isn’t quite right about the causes. Last week I had supper with an old friend of mine and we spent a nice hour or two discussing misery. He has done all sorts of jobs and has been miserable in quite a few. I have also had various spells at work where I have felt less happy than Pollyanna, say. We both agreed that our own agony levels peaked long before we ever set foot in an office.

For pure misery, being a first-year undergraduate takes some beating. All three of Mr Lencioni’s conditions were writ large in Oxford in 1978. We were miserable because we were anonymous – nobody cared where we were. We were miserable because we had no way of knowing if we were doing well: we read out our essays to bored dons who would yawn while fellow students fidgeted. And we were miserable because, freed from the compulsion of school, we looked for purpose in our studies and found none. (I think I was also miserable because I had split up with my boyfriend but that was another matter.)

But then we grew up. We no longer really expected meaning and measurement, or at least made do with them in very small doses. We found, when we got our first office jobs, that they had a lot to be said for them. For a start you get paid. This is not only nice in itself, but it does give work a purpose, and one not to be sneezed at.

To search for a deeper meaning beyond this is a dangerous thing. The harder one looks for meaning at work the less likely one is to find it. Is there meaning in writing columns? No, of course there isn’t. But if people quite like reading them and I quite like writing them, that seems reason enough to do it.

As for anonymity, the simple fact of getting paid shows that someone does care you are there. If they didn’t, they wouldn’t pay you to show up. And, as for not knowing how you are doing, this isn’t a problem in most offices. Thanks to endless assessments people are told how they are doing rather too often if anything.

Instead I think the three things that make workers miserable are rather more basic. They are the work, the people and the general environment. The work can be misery-inducing by being too much or too little, too boring, too difficult or too easy.

The people can be wrong in an assortment of ways: lazy, spiteful, bullying or just dull and too depressed themselves to spread much cheer. The environment can be stultifying, unhealthy, too political and so on.

Mr Lencioni reckons one reason managers are bad at making their workers feel better is that they have forgotten what it felt like to be starting out.

I think there is a better reason. Management is one of the most intrinsically miserable jobs there is. Managers find it hard to make the lives of their underlings any better because they are too miserable themselves.

Management is all about getting people to do things that they don’t want to do. So it is difficult, if not well nigh impossible. It is about coming in early and leaving late. The work of a manager is never done. It is one thing after another and another. Being a manager means not minding about being disliked. It means being lonely and having no one inside the company to moan to.

Only on the broadest thesis is Mr Lencioni right: the answer to misery may well be better management. Stated thus it is pretty obvious. The hard bit is how to make managers better at managing. If I knew the answer to that I wouldn’t be writing columns like this. I would be out there with my sleeves rolled up making the world happy for office workers.

3i NAV advances

3i Net Asset Value Advances 27% Amid Credit Turmoil (Update5)

By Edward Evans

Nov. 8 (Bloomberg) -- 3i Group Plc, Europe's biggest publicly traded private equity firm, said the net value of its assets rose 27 percent in its fiscal first half even as rising borrowing costs crimped the pace of leveraged buyouts.

Net asset value rose to 1,007 pence a share in the six months to Sept. 30 from 792 pence in the year-earlier period, Chief Executive Officer Philip Yea said on a conference call with reporters today. That beat the 981 pence average forecast of three analysts surveyed by Bloomberg News.

Yea is boosting infrastructure and growth-capital investments to increase returns while allocating less to buyouts as banks struggle to clear, or syndicate, a backlog of leveraged loans. After a record $579 billion of takeovers in the first half, the pace of buyouts has slumped by almost 50 percent, according to data compiled by Bloomberg.

``In terms of summer's dislocation in the leveraged finance markets, the effect on mid-market hasn't been as pronounced as at the large end,'' Yea, 52, said today. ``We weren't as reliant on big underwritten syndications as the top of the market.''

3i reaped 1.04 billion pounds ($2.2 billion) from selling investments including Aibel Ltd., a Norwegian offshore oil and gas service provider, and Care Principals, a chain of British nursing homes it sold to a Qatari fund for 270 million pounds in July. That rate of realizations may now slow, the company said.

Less Debt

The firm spent 1.23 million pounds on new investments in the first half including stakes in Deutz Power Systems, Eltel and Bestinvest, a British investment adviser. That's more than double the 598 million pounds 3i spent in the same period last year. The firm spent more on so-called growth capital investments than buyouts.

The effect of rising U.S. subprime-mortgage defaults on consumer and business confidence is ``yet to be fully played out,'' Yea added. The firm is also using less debt to fund its buyouts.

``Some of the wonderful terms we saw in the first half of last year, like covenant-lite loans, toggles, they're gone,'' 3i's buyout chief Jonathan Russell told analysts on conference call. ``They were lovely at the time. We've returned to a state of reality.''

3i shares were unchanged at 1,016 pence in London, valuing the company at 3.9 billion pounds. The stock has dropped 17 percent since touching a high of 1,236 pence in May as buyouts slowed.

Analyst Ratings

Of the six analysts who rated 3i shares this year, five recommend investors ``buy'' the stock and one advises them to ``hold'' it, according to data compiled by Bloomberg.

3i raised 700 million pounds in a March initial public offering of a fund that targets infrastructure investments. By August, the fund had invested half that money in projects such as oil and chemical storage facilities. 3i is preparing to raise $1 billion for a fund for infrastructure in India.

Growth-capital investments are typically minority investments in companies worth up to 1 billion euros ($1.5 billion). 3i typically invests cash to fund takeovers or boost growth by expanding overseas.

Started after World War II by Prime Minister Clement Attlee to invest in small businesses, 3i looks for undervalued or out- of-favor companies or start-ups that promise rapid growth. The company raised a 5 billion-euro buyout fund last year.

Microcap listings in Singapore

Stamford Law Corporation
Singapore: SGX Revamps SESDAQ Alternative Investment Market (AIM) equivalent listings in Singapore
30 October 2007
Article by Suet Fern Lee

On 23 May 2007, the Singapore Exchange (the “SGX”) released a public consultation paper on changes to its listing rules and its two boards. The proposal is to transform SESDAQ into a sponsor-supervised regime, introducing a model similar to London’s Alternative Investment Market, which has met with significant success. This change is aimed at promoting investor confidence and attracting smaller and fast-growing companies, local as well as foreign, to list on the SGX. Besides the proposed changes to SESDAQ, the SGX will also revise the entry criteria to the Main Board which will focus on the larger and more established companies, creating a clear delineation between the two boards. This is emphasized by a market capitalization limit of S$150 million at the point of the initial public offering (“IPO”) of the listing applicants for the new board.

Under the new board, there is neither a requirement for an operational track record nor any financial entry criteria for all listing aspirants. They will instead be supervised by independent sponsors which will be corporate finance firms or investment banks. These sponsors will decide on the suitability of the company for listing and will review the entire admission and IPO process. Market quality will be maintained by the SGX’s direct regulation over the sponsors via stringent admission and on-going obligatory rules. The additional requirement of continual sponsorship post-listing will help ensure that the companies have guidance in their early years and maintain minimum standards throughout listing.

Another significant change for the new board is that listing aspirants will no longer have to issue a prospectus. Instead, the companies will have to produce an Offer Document, which, as proposed by the SGX, will not have to be registered with the Monetary Authority of Singapore (the “MAS”). In a mirror of the lodgement process for prospectuses with the MAS, the Offer Document will be publicly posted on the SGX website two weeks prior to the listing, for public comment. The disclosure requirements for an Offer Document are proposed to be that of the same as that currently applicable, and the contemplation is for prospectus liability under current securities laws to apply to the Offer Document. The expectation is that this would shorten the listing process and facilitate new IPOs for the new board. It is also believed that handing the admission and IPO process over to sponsors will reduce costs for the IPO aspirant and also minimize the risk of an IPO being aborted.

For existing SESDAQ companies, there will be a transition period of at least two years for them to appoint sponsors and comply with the new rules. The SGX also intends to waive listing fees for three years commencing from the adoption of the new rules by existing SESDAQ companies as an added incentive.

We believe that the new changes signify a bold new direction for the old SESDAQ. We are greatly excited about the potential of this new board and will be looking to actively participate in the development of this new market. The consultation paper is available on www.sgx.com from 23 May 2007 to 20 June 2007.

Change in tax structures for Indian SPVs

India: Venture Capital Funds: End Of An Era
08 November 2007
Article by Sakate Khaitan and Radhika Iyer

The Indian real estate sector has attracted investments from numerous quarters, including offshore jurisdictions. Offshore funds have led the pack of investors by utilising tax efficient structures spanning across jurisdictions. However, as a result of certain changes introduced in the Budget 2007, investors have been compelled to revisit their strategies related to structuring of investments in Indian realty sector. This article examines the impact of these fiscal changes in the long term structural strategy of funds.

Structure
Offshore funds used Indian venture capital funds ("VCF") as their India-based conduits to channel investments into Indian companies engaged in the business of real estate during the last two years. The choice of VCFs as entities for structuring the Indian end of investments was tax-efficient because of the benefit of a "pass-through" status available to VCFs under the Indian tax laws pre 2007. (Indian VCFs, whether existing or newly organized, who wish to avail of the tax benefits available to venture capital funds under the Indian Income Tax Act, must register with the SEBI under the VCF Regulations and comply with the SEBI Venture Capital Fund (Regulations), 1996. )

VCUs were earlier not allowed to invest in real estate sector. Real estate featured in the negative list where VCU were disallowed from making investments. However, in April 2004, amendments were introduced in the SEBI Venture Capital Fund Regulations 1996, which took off the Real Estate from the negative list, thereby allowing the VCUs to make investments into the real estate sector. The pass through benefits were already available to these VCFs. Hence, the offshore funds lapped up the opportunity and began utilizing VCFs as the preferred vehicle for making investments in real estate.

An illustration of a typical offshore fund piggybacking an Indian VCF is as follows:

Investors pool funds together to form a Special Purpose investment vehicle ("SPV") based in an appropriate treaty jurisdiction like Mauritius or Cyprus. The SPV then seeks registration as a Foreign Venture Capital Investor ("FVCI") with the Securities and Exchange Board of India ("SEBI"). Once the SPV is registered as a FVCI the SPV then invests into a SEBI registered Indian VCF, which in turn invests into a Venture Capital Undertaking (VCU) i.e. an Indian operating company engaged in the real estate sector.

The main advantages of this structure was as follows:

The FVCI did not need to meet the minimum capitalisation requirements as prescribed for investments into a non-banking financial company (a VCF is classified as such under existing regulations).

Ease of exit due to non-application of pricing guidelines for sale to resident Indians and lower lock-in requirements if the VCU is seeking listing for FVCIs.

The Indian VCF being a domestic entity had no restrictions in investing into the Indian real estate sector.

Beneficial tax treatment pre 2007 budget.
Though the above structure was for sometime typical in nature it will be necessary to clarify that presently FVCI registrations in India are not easily accorded to real estate focused FVCIs, due to the divergent views taken by SEBI and RBI. According to the RBI, FVCI investments should not be permitted in the real estate sector. Consequently, though the FVCI regulations do not prohibit investments in the real estate sector, the RBI has been slow to approve applications of real estate focused SPV’s for FVCI status. Under such circumstances, in the event the Fund seeks to register itself as FVCI, it is likely that the Fund may not receive FVCI registration until the aforesaid issue is resolved. Further, there is also some debate as to whether or not a simple FVCI structure is tax efficient and can claim all treaty benefits.

Tax treatment of structure:

Pre 2007 budget
As per the provisions of section 115U of the Income Tax Act 1961 ("ITA"), a VCF qualifying for exemption under section 10(23FB) of ITA is not required to withhold any tax in India on the income distributed by it to its investors. Any income distributed by such VCF is chargeable to tax in the hands of the investors in the same manner as if it were the income of the investors, had they made such investments directly in the Indian operating company and for this purpose income received by the investor is deemed to be of the same nature and in the same proportion as it is in the hands of the VCF.

A VCF is typically expected to earn income by way of dividend, interest or capital gains. Tax implications prior to the change in tax code in 2007 was as follows:

Dividend was exempt from tax where the Indian operating company had paid Dividend Distribution Tax ("DDT") on such dividend.
Interest on loan, being a rupee denominated loan, was taxed at the rate of 41.82% while Interest income in respect of borrowings in foreign currency was taxed at the rate of 20.91% (assuming treaty does not provide for lower rate e.g. Mauritius treaty).

Capital gains was exempt from tax as the SPV was usually based in a jurisdiction where treaty benefits is available and care was taken that the gain did not form part of the Permanent Establishment (PE) of the SPV in India.

However, this preferred structure took a hit because of the certain provisions being introduced into the ITA by the Budget of 2007.

Post 2007 budget
As stated above Section 10(23FB) of the ITA exempted any income of a registered VCF from income tax. This tax exemption under section 10(23FB) when read in conjunction with section 115U of the ITA, established the pass-through status of VCFs registered with SEBI. Accordingly, pre-2007 Investors in VCF’s were liable to tax in respect of the income received by them from the VCF in the same manner as it would have been, had the investors invested directly in the VCU.

Thus, under section 115U income from VCFs was taxed in the hands of the investors at the time receipt of distributions from the VCF. However, if the FVCI was based in a territory through which the investor could seek treaty relief, the gains from investments could have been sheltered resulting in an effective tax rate of 0% on capital gains.

In 2007 the Government moved to close this loophole and thorough the Finance Act of 2007 restricted the pass-through status of VCFs to investments in certain specified sectors, namely: biotechnology; information technology relating to software and hardware development; nanotechnology; seed research and development; research and development of new chemical entities in the pharmaceuticals sector; dairy; production of bio-fuels, and hotel-cum-convention centres.

Accordingly, since real estate business is now not a specified business qualifying for tax pass through status, income from investments by the VCF in Indian portfolio companies engaged in real estate business are now taxable as below:

If the VCF is regarded as a determinate trust, its income shall be taxable in the hands of the trustees of the VCF as per section 161 of the ITA and the tax shall be levied upon and recovered from the Trustees in the like manner and to the same extent, as it would be leviable upon and recoverable from the investors (beneficiaries) in the SPV. For this purpose, treaty benefits available to SPV may have to be taken into consideration for computing tax liability of the VCF.

Accordingly, the tax consequences on the income of the VCF proportionate to the share of the SPV in such income would be (on account of the application of the Treaty, read with the provisions of the ITA) as follows:

capital gains resulting from the sale of Indian securities (listed or unlisted) issued by the VCU will not be subject to tax in India;
dividends on shares received from the Indian Portfolio Companies on which dividend distribution tax has been paid will be exempt from tax;

interest income from Indian securities in respect of borrowings in Indian rupees will be taxed at the rate of 42.23% where income of the SPV is more than Rs. 10 million and at 41.2% where income is up to Rs. 10 million (assuming treaty does not provide for lower rate e.g. Mauritius treaty).

If however, treaty benefits are not available, the income of the VCF proportionate to the share of the SPV in such income would be as follows:

Gains earned on the transfer of shares and other listed securities held for a period of 12 months or less are termed as short-term capital gains. The taxation of both long term and short term capital gains under the ITA would be as follows:

Long-term capital gains arising on transfer of listed equity shares on a recognised stock exchange in India will usually be exempt from tax in India;

Short-term capital gains arising on transfer of listed equity shares on a recognised stock exchange in India is taxed at the rate of 10.558% where income of SPV is more than Rs.10 million and 10.3% where income is up to Rs. 10 million.

Short term capital gains arising on a sale of listed equity shares not executed in a recognised stock exchange in India and other Indian listed securities is taxed at the rate of 42.23% where income of the SPV is more than Rs. 10 million and at 41.2% where income is up to Rs. 10 million. In respect of long term capital gains, while the benefit of the indexed cost of acquisition will not be available for computing such gains, it could be contended that such gains will be taxable at the rate of 10.558% or 10.3% as the case may be and not at the rate of 21.115% or 20.6%.

Capital gains arising on sale of unlisted Indian securities is taxed at the rate of 21.115% or 20.6% for long-term gains and at the rate of 42.23% or 41.2% in case of short-term gains.

However, if the VCF is regarded as a discretionary trust or to be carrying on business then the entire income of the VCF would be taxed at the maximum marginal rate i.e. at the rate of 33.99%, and such distribution on which tax has already been paid by the trustees would not be subject to tax in the hands of the SPV.

Impact of change
The change in tax laws has made the typical structure mentioned above inefficient due to the following reasons:

Treaty benefits may be lost because of non-availability of pass through status to the income of VCF.

Effective increase in hurdle rates as distribution from VCF’s are now post tax rather than pre-tax, thereby reducing fund managers carry.
Impact of tax being brought forward as tax is now chargeable in the VCF’s hand rather than in investors’ hand on distribution. This also makes the reinvestment provisions, if any, in placement memorandums in most respects redundant.

Conclusion
Given the above the added administration and transaction costs of a VCF cannot now be justified making the use of VCF’s inefficient. Accordingly, we now see most funds avoiding the VCF route and making investments into the real estate sector directly in compliance with existing foreign direct investment regulations.

Fed signals higher interest rates after 25bps cut

Some BOJ Members Said Low Rates Caused Subprime Rout (Update1)

By Mayumi Otsuma

Nov. 5 (Bloomberg) -- Bank of Japan board members said the U.S. subprime mortgage collapse was caused by keeping interest rates too low, signaling their intention to increase the world's lowest borrowing costs to prevent investment bubbles.

Some of the nine members said a ``long period'' of global monetary easing had led to ``excessive financial behavior'' that resulted in the U.S. home-loan crisis, according to minutes of the Sept. 18-19 board meeting published today in Tokyo.

The Bank of Japan is concerned that keeping its key interest rate at 0.5 percent risks seeding future asset bubbles. The subprime crisis was caused in part by investors who wanted higher returns amid low global interest rates buying securities linked to loans to people with poor credit histories. Defaults on the loans caused a shortage of credit and led to losses at banks including Citigroup Inc. and Merrill Lynch & Co.

The Bank of Japan is saying ```look, the risks we're talking about, that's what hit the U.S.,''' said Jan Lambregts, head of Asia research at Rabobank International in Hong Kong. ``All good central banks are forward-looking but they're caught between the short-term circumstances and long-term risks.''

The central bank last week kept its benchmark rate on hold and cut its forecasts for this year's economic growth and inflation. Governor Toshihiko Fukui said ``downside risks'' for the Japanese economy are rising as U.S. growth slows and financial markets remain volatile.

`Not a Slogan'

Still, Fukui said last week that Japan's ``very low'' rates need to rise gradually as the economy expands. Failure to do so would encourage excessive investment that may lead to swings in economic growth, he said on Oct. 31.

``This is not just a slogan. We're serious about this view,'' he said.

Most members at the September meeting said they're watching the employment situation, home prices and banks' willingness to lend to determine the strength of U.S. consumer spending.

A few members said they need to carefully check whether financial markets and the U.S. economy will affect the bank's outlook for Japan's growth and inflation, the minutes show.

Policy makers at the meeting agreed on their basic view that Japan's interest rates need to be raised gradually according to developments in the economy and prices.

One member said the bank has time to examine the influence of financial-market turmoil and global economic growth on the Japan economy.

Another board member said the bank shouldn't hesitate to raise interest rates as long as it's confident Japan's economy will keep growing in line with policy makers' predictions.

Dollars falling out of favour

Supermodel Bundchen Joins Hedge Fund Managers Dumping Dollars

By Bo Nielsen and Adriana Brasileiro

Nov. 5 (Bloomberg) -- Gisele Bundchen wants to remain the world's richest model and is insisting that she be paid in almost any currency but the U.S. dollar.

Like billionaire investors Warren Buffett and Bill Gross, the Brazilian supermodel, who Forbes magazine says earns more than anyone in her industry, is at the top of a growing list of rich people who have concluded that the currency can only depreciate because Americans led by President George W. Bush are living beyond their means.

Even after the dollar lost 34 percent since 2001, the biggest investors and most accurate forecasters say it will weaken further as home sales fall and the Federal Reserve cuts interest rates. The dollar plummeted to its lowest ever last week against the euro, Canadian dollar, Chinese yuan and the cheapest in 26 years against the British pound.

``We've told all of our clients that if you only had one idea, one investment, it would be to buy an investment in a non- dollar currency,'' said Gross, the chief investment officer of Pacific Investment Management Co. in Newport Beach, California, and manager of the world's biggest bond fund. ``That should be on top of the list,'' said Gross, whose firm is a unit of Munich-based insurer Allianz SE.

The dollar fell 0.8 percent last week to $1.4505, the weakest since the euro started trading in 1999. It lost 2.8 percent against the Canadian dollar to 93.51 cents and 1.8 percent versus the pound to $2.09. The Fed's U.S. Trade Weighted Major Currency Dollar index tumbled to 76.3, from 112.89 in January 2004.

Bundchen's Demands

BNP Paribas chief currency strategist Hans-Guenter Redeker, the most accurate foreign-exchange forecaster last quarter in a Bloomberg survey, said the dollar may drop to $1.50 per euro by year-end. The median estimate of 44 strategists surveyed by Bloomberg is for the currency to end the year at $1.43. Among those surveyed last week, the forecast ranges from $1.42 to $1.50.

When Bundchen, 27, signed a contract in August to represent Pantene hair products for Cincinnati-based Procter & Gamble Co., she demanded payment in euros, according to Veja, Brazil's biggest weekly magazine. She'll also get euros for the deal she reached last October with Dolce & Gabbana SpA in Milan to promote the Italian designer's new fragrance, The One, Veja reported. Bundchen earned $33 million in the year through June, Forbes reported in July.

``Contracts starting now are more attractive in euros because we don't know what will happen to the dollar,'' Patricia Bundchen, the model's twin sister and manager in Brazil, said in a telephone interview in September from Sao Paulo. She declined to discuss details of the arrangements last week, as did Anne Nelson, Bundchen's agent in New York at IMG Models.

Dollar Support

Procter & Gamble's Sao Paulo-based external relations director for Brazil, Andre Quadra, said he couldn't give details of the Pantene contract because of a confidentiality agreement.

Analysts in a Bloomberg survey expect the dollar to strengthen in coming months as stronger-than-forecast reports suggest U.S. consumers will keep the economy out of recession. Payrolls grew by 166,000 in October, double the median forecast of economists in a Bloomberg survey.

The dollar will rise to $1.43 per euro this year and $1.35 by the end of 2008, according to the median estimate in the survey.

``So far the data has shown the U.S. economy may not be slowing to the extent the majority of the market had expected,'' said Omer Esiner, an analyst at currency-trading company Ruesch International Inc. in Washington who expects the U.S. currency to strengthen to as much as $1.38 per euro. ``That could temper policy easing down the road and lend support for the dollar.''

`Moving to Asia'

Buffett, whom Forbes in April ranked as the world's third- richest person behind Bill Gates and Carlos Slim, told reporters in South Korea last month that he is bearish on the U.S. currency.

``We still are negative on the dollar relative to most major currencies, so we bought stocks in companies that earn their money in other currencies,'' Buffett said Oct. 25. Buffett, 77, is chairman of Omaha, Nebraska-based Berkshire Hathaway Inc.

Jim Rogers, a former partner of investor George Soros, said last month he's selling his house and all his possessions in the U.S. currency to buy China's yuan.

``The dollar is collapsing,'' Rogers said last week in an interview. ``I'm moving to Asia because moving to Asia now is like moving to New York in 1907 or London in 1807. It's the wave of the future.''

Better Returns

The dollar is falling as investors seek better returns outside the U.S. Developing Asian nations including China and India will grow 9.8 percent this year, compared with 1.9 percent for the U.S., the International Monetary Fund said last month.

China, India and Russia accounted for half the global expansion over the past year, and the euro region will expand 2.5 percent in 2007, outpacing the U.S. for the first time since 2001, the Washington-based IMF estimates.

``The world has learned to live with a weak dollar,'' said Jay Bryson, a former Fed analyst who is now a global economist in Charlotte, North Carolina, at Wachovia Corp., the fourth- largest U.S. bank. ``It's not worried. it doesn't rely on the U.S. as much as it once did.''

Bryson forecasts the dollar will weaken to $1.50 per euro by the end of June.

The U.S. currency dropped in the past two months as the Fed cut its target rate for overnight loans between banks twice to keep a decline in home sales from starting a recession. The rate was reduced by three quarters of a percentage point to 4.5 percent, including a quarter-point last week. The National Association of Realtors trade group in Washington said on Oct. 10 that existing home sales may fall 11 percent this year.

Housing Recession

Lower rates have made yields on U.S. debt less attractive. At 3.36 percent, U.S. two-year Treasuries yield 0.26 percentage point less than German government bonds of similar maturity. The last time Treasuries yielded less than bunds was 2004.

The weaker currency has cushioned the U.S. economy during the worst housing recession in 16 years. Gross domestic product grew at an annual rate of 3.9 percent in the third quarter, the most in more than a year, the Commerce Department said Oct. 31 in Washington.

The five-year, 67 percent drop against the Canadian dollar has made it cheaper for fans from Toronto to drive the 110 miles (177 kilometers) to Orchard Park, New York, to watch the Buffalo Bills play football.

Canada Day

Canadians account for 11 percent of the team's season tickets this year, up from 6.5 percent in 2005, according to Scott Berchtold, the Bills' vice president of communications. At yesterday's annual Canada Day game, a record 23 percent of the sellout crowd of 73,967 fans were from Canada, he estimated.

``When the Canadian dollar was down around 65 cents, we didn't get anybody,'' Ralph Wilson Jr., the team's owner, said in an interview. ``When the dollar fell, we starting getting some people.'' The Canadian dollar bought 61.76 U.S. cents in 2002.

The dollar's drop also makes American goods cheaper abroad. U.S. exports were a record $138.2 billion in August, government data show. Net exports added 0.93 percentage point to U.S. gross domestic product last quarter, offsetting a 1.05 percentage point drag from housing, government data show.

``As long as the dollar's decline doesn't trigger inflation, it's a good thing, helping the U.S. economy to stay out of recession,'' said Robert Mundell, a professor at Columbia University in New York who won the Nobel Prize for economics in 1999.

Wealthy Clients

The Commerce Department's price index for personal consumption expenditures excluding food and energy rose 1.8 percent in September from a year earlier, the same as in August. The Fed forecasts the index will increase 1.75 percent to 2 percent next year.

Wealthy clients at San Francisco-based Union Bank of California have doubled their deposits in foreign currencies to $60 million the past two months as a hedge against a decline, said Bradley Shairson, head of currency and derivatives at the bank.

U.S. investors bought $198 billion in foreign securities this year through August, 72 percent more than in the same period last year, Treasury Department data show.

That's the same strategy as sovereign wealth funds run by the largest exporters and oil producers, including China, Singapore and Qatar, said Stephen Jen, head of currency research at New York-based Morgan Stanley.

The funds may grow to $17.5 trillion by 2017 from $2.5 trillion now and shift more than $500 billion out of the dollar in the next three years in search of better returns, he said.

``We're all thinking about diversifying out of the dollar,'' said Jen, who is based in London. ``It's a very logical thing.''

Dated article on roll-ups

High Rollers
A new generation of financial hot-shots are making their fortunes on roll-ups -- risky consolidations of IPOs. The risks are even greater for the CFO in the middle.
Joseph McCafferty
CFO Magazine
April 01, 1998

The day before last Thanksgiving, then-39-year-old financial whiz Jonathan Ledecky pulled off a bold deal. He went to the public equity markets and raised half a billion dollars for his company, Consolidation Capital Corp., in an initial public offering. What made this deal so brazen was not just that Consolidation had yet to earn a dime. In fact it had no revenues, no assets, no operating history, and no identity. Ledecky hadn't even settled on an industry for his new venture. He raised the capital in a blind pool on the strength of his reputation alone.
That reputation rests on his ability to build so-called roll-ups. These are companies created to consolidate fragmented industries by gobbling up small mom-and-pop businesses. But unlike regular consolidations, in which strong industry leaders buy up weaker rivals, roll-ups are started from scratch.

Here's how it works: A promoter like Ledecky finds between 5 and 10 private companies in the same industry that agree to sell their businesses for cash and stock from the proceeds of an IPO that has yet to occur. The IPO and the merger of the founding companies occur simultaneously. Using its stock as currency, the new company continues the acquisition binge in the hope of eventually creating a national power-house that will dominate the industry.

Roll-ups are red hot on Wall Street. At last count, about 90 roll-ups had gone public since one of the first, U.S. Delivery Systems Inc., debuted in 1994, including 50 in 1997 alone. And the frenzy continues, with an average of 5 coming to market each week.
Also called "poof" companies because of the way they seem to materialize out of thin air, roll-ups are consolidating such industries as funeral homes, dry cleaners, flower wholesalers, bus lines, home builders, and air-conditioning repair services. In fact, roll-ups have popped up in every fragmented industry.

But the risks in these deals are as great as the rewards. "There are so many hurdles to overcome that it is very difficult to pull these deals off," says Patrick Sullivan, partner in charge of acquisition advisory services for Coopers & Lybrand LLP in Los Angeles.
That hasn't stopped Ledecky and those like him from trying. They are financial cowboys, '90s style. But unlike 1980s' corporate raiders T. Boone Pickens and Carl Icahn, who made a killing preying on conglomerates and selling off their pieces, these cowboys make money by putting the pieces together. In that sense, roll-ups are the reverse of the leveraged buyouts of the '80s. Sullivan calls them "leveraged buildups," because they leverage equity to build the company.

The king of consolidators is H. Wayne Huizenga, owner of the Florida Marlins baseball team. Huizenga pioneered the technique by rolling up garbage-truck businesses to create Waste Management Inc., the nation's largest waste company. He went on to create the largest video chain, Blockbuster Video, and is trying to work his magic on the auto retail industry through Republic Industries Inc.
Now promoters have taken the concept to the next level, with roll-up IPOs. Ledecky, who created one of the earliest and now largest roll-ups, U.S. Office Products Co. (USOP), has since created three more--USA Floral Products Inc., a flower distributor; Consolidation Capital; and UniCapital Corp., a consolidator of commercial leasing firms that filed to go public in February. These three were all done in the past year, while Huizenga took 25 years to get to his third.

The man with the most notches on his belt, though, is Steve Harter, chairman of Notre Capital Ventures II, a Houston-based investment bank. Harter has six bronze bulls, awarded by the New York Stock Exchange when a company is listed there, to prove it. He sharpened his skills doing M&A work for Arthur Andersen LLP and, later, analyzing acquisition candidates for Allwaste Inc., a Houston environmental-waste company. After orchestrating the U.S. Delivery roll-up, he completed five more, including some of the most successful yet. Coach USA Inc., a roll-up in the motor coach industry, went public in May 1996 at $14 a share and has more than doubled to a recent close of $38. Another of Harter's creations, Metals USA, is up 60 percent, to a recent high of $16 since its initial offering last July.

Harter also started Comfort Systems USA Inc., which is out to consolidate the air conditioning and heating industry; Physicians Resource Group Inc., a consolidator of ophthalmology practices; and his most recent IPO, Home USA Inc., a consolidator of mobile-home retailers that went public last November.

FEES THAT MATCH THE P/EsClearly, the success stories are alluring. But roll-ups have their critics. Among them, oddly enough, are the stronger players, who take aim at less-scrupulous copycats. "There is a tremendous amount of financial alchemy going on," says Harter. What concerns them is that roll-ups can be a house of cards. After the IPO, the roll-up continues to acquire companies, using equity it raised at high P/E ratios to buy smaller private companies that trade at lower multiples. This arbitrage helps maintain the roll-up's high ratio and the acquisition binge; it's a machine that feeds itself.

But P/Es are as much about investors' perceptions as about earnings. If investors come to doubt that earnings can be sustained, the multiple will come down, throwing sand into the gears. And it's virtually a foregone conclusion that every industry will ultimately run out of suitable acquisition candidates. Yet consolidators almost always cite the arbitrage as the key to their strategy. "It is the concept," says Ledecky. "It's a gerbil wheel." At that point, investors in roll-ups will have to worry whether their company can effectively manage what it owns.

Trouble is, roll-ups often lack experienced management teams. "Roll-ups tend to be headed by executives who have experience in roll-ups, but not in the industry," says Samuel Hayes, a finance professor at Harvard Business School. That, he says, can be a recipe for disaster. Indeed, some observers contend that once traditional measures of performance are applied, like comparison of same-store sales or other measures of operational growth, lofty P/E ratios will fall back to earth even before a roll-up runs out of potential targets.

"Fueling growth by buying companies with lower P/E ratios has long been discredited as a strategy that has no rationale," says Geoffrey Brooks, an assistant professor at the University of Pennsylvania's Wharton School. He cites the failure of diversification in the 1960s as a prime example. Jeffrey Evans, vice president of research at Credit Lyonnais Securities (U.S.A.) Inc., agrees. "It's the greater-fool theory. At some point it has to stop, and someone is left holding the bag." Often that includes the CFO.

Consider Fine Host Corp. The Greenwich, Connecticut-based food-service firm set out to consolidate small players that run concessions and cafeterias at universities, corporations, and sports arenas. It went public in the summer of 1996 at $12 a share and shot up to $43 by the fall, buoyed by a flurry of acquisitions. But in April 1997, the CFO, Nelson A. Barber, was suddenly demoted to treasurer, and by October analysts were complaining about a lack of information. In December, the stock fell 64 percent when the company removed Barber and its CEO, Richard E. Kerley. The company later admitted it had recognized some income before it was earned and incorrectly capitalized certain expenses, and restated earnings back to 1994, incurring losses instead of profits. The Securities and Exchange Commission is conducting an informal investigation.

In many cases, though, the promoters and underwriters make a killing whether the roll-ups bear fruit or not. "The people who financially engineer these deals make an enormous amount of money," says Patrick Hurley, partner and M&A director at Howard, Lawson & Co., a Philadelphia investment bank. He says that the promoters get a large equity stake for a very small up-front investment. "If they have been able to sell stock, they've made money whether the roll-up succeeded or not." (Often they are locked into agreements that prevent them from selling for 12 to 18 months.) Up-front fees for underwriting, accounting, and legal services are also high due to the complexity of the deals. Hurley estimates that total managers' fees related to completed roll-ups, including the management fee, underwriting fee, and selling concession, are about 50 percent higher than for normal IPOs.

When roll-ups do go wrong, the underlying problem is most often a focus on the financial engineering at the expense of improving operating efficiencies. "The biggest risk in this whole phenomenon is that acquirers lose sight of the nuts and bolts," says Evans. "They just buy things to buy them." Perhaps this point is best illustrated by the title of the keynote presentation, "It's Easier to Buy 'Em Than to Run 'Em," at the upcoming second annual Industry Roll-Ups Conference, a how-to course on the strategy.

CONFLICT-RIDDEN?Some roll-up cowboys seem to have problems handling the conflicts of interest that can arise. Consider Ledecky. One of the companies he merged into USOP as it went public was Sharp Pencil, of which he himself was majority owner. Although he used $17.6 million of the February 1995 IPO proceeds to, in effect, buy himself out, Ledecky did not think it necessary to get an independent appraisal of Sharp's value, according to USOP's prospectus. Ledecky, who denies any conflict of interest, says he got the same multiple for Sharp Pencil as the other founding companies. "They were all valued in the same way. Everyone negotiated the deal together." Still, investors had little way of knowing whether the price was fair, because none of the financial information about Sharp in USOP's prospectus was audited, according to the filing.

Ledecky's conflicts of interest didn't end once he paid himself for Sharp. He took Consolidation Capital public even while serving as chairman of USOP and USA Floral. That raised the risk that he would make acquisitions for Consoli-dation Capital that might have as easily served USOP's and USA Floral's interests. "[Management] may have conflicts of interest in determining to which entity a particular business opportunity should be presented," says Consolidation Capi-tal's prospectus. And even if USOP, USA Floral, and Consolidation Capital weren't competing for the same businesses, Ledecky's time and attention could not be fully devoted to the interests of either or any of the companies, a factor that was also noted in the prospectus. Ledecky announced his resignation as chairman of USOP in January, effective this month.

MRI UNDER SIEGELedecky isn't the only roll-up artist to have engaged in questionable self-dealing. Gary Siegler, chairman of Medical Resources Inc. (MRI), a consolidator of medical imaging centers that went public in 1993, is also accused of indiscretions. The company is facing lawsuits related to questionable payments it made to 712 Advisory Services, a company Siegler controlled. Former managers allege that the advisory firm didn't earn the $1.5 million it was paid in cash and securities to advise on a number of MRI's acquisitions in 1997. Also, the ex-managers contend that Siegler arranged for MRI to take a $3 million stake in a private plane, which they claim was unnecessary. They allege that Siegler, who earned his wings working for Carl Icahn in the 1980s, wanted the plane for private use.

In early November, CFO John O'Malley was fired, and two other executives, chief operating officer William Farrell and general counsel Gary Fields, resigned after they raised the matter with the board and called for Siegler's ouster. They have since filed whistle-blower lawsuits. The company disclosed the departure of its CFO in a press release that also warned of earnings shortfalls, causing the stock to tumble to 83/4 from a high of 205/8 just a month earlier.

The company has launched an internal investigation, and is also being investigated by the New Jersey Attorney General's office, according to company filings.

WHY STOP AT OFFICE SUPPLIES?If Ledecky and Harter are the two founding fathers of roll-ups, their strategies couldn't be more different. Ledecky is a hands-on manager, often taking the position of chairman, while Harter builds the roll-ups and lets others with more experience in the industry run them. Harter likes to move slowly, focusing on integration of the acquired companies; Ledecky moves fast to build up a big organization as quickly as possible. Perhaps nowhere is that more evident than at USOP.

Sharp Pencil was one of six privately owned office-supply companies that Ledecky put together. But he didn't stop there. Two years and 220 acquisitions later, USOP was a member of the Fortune 500, with $3.8 billion in revenues. The stock had gone from $7.50 at the offering to a high of $27 in the summer of 1996. "It was crazy," says Donald Platt, senior vice president and CFO of the Washington, D.C., company. Of course, Platt relied heavily on outside resources, including a team of lawyers and accountants, to get the deals done.

Within these 220 acquisitions, are there no bad apples? "Not yet," says Platt. "We restricted them to well-managed, profitable companies. At worst, we would still be making money."

The trouble was, after grabbing that many companies, USOP had a patchwork of firms in six different businesses, including office supplies, travel, coffee sales, printing, and even educational supplies. The idea was to focus on the customer and provide one-stop shopping for corporate purchasers, rather than a tight industry niche.

At the pace Ledecky was moving, however, it was nearly impossible to attain significant economies of scale. Little integration was accomplished. Once purchased, in fact, a company was pretty much left alone. Ledecky not only kept existing management teams intact; he insisted they remain, locking them in with long-term agreements. Even the names of the companies were unchanged. And in only a few cases were warehouses and other overhead shared. "If you start to consolidate too quickly, you make the wrong decisions," says Platt. And buying well-run businesses left little room for improvement. Any integration they did do failed to increase margins. As a percentage of revenues, gross profit actually decreased from 28.1 percent for the nine months ended January 25, 1997, to 27.9 percent for the nine months ended January 24, 1998.

Without improving efficiency, USOP needed to keep up the acquisition pace to continue growing and keep the P/E ratio high. "Stock value is important. If you don't trade at a healthy multiple, using your stock as currency has less value," says Platt. "It absolutely feeds on itself. Success breeds success."

Until something finally gives. Without enough acquisitions or internal growth to drive earnings, USOP started to stumble. The stock fell to $16 at the end of 1997 from a high of $27.

In January, the company conceded that it could no longer sustain the current strategy, and reversed course. It decided to spin off four of the units--travel services, printing, educational supplies, and technology--and focus on its core businesses of office supplies, furniture, and beverages. And the executive who replaced Ledecky at the helm, Thomas Morgan, plans to do exactly what his predecessor couldn't: integrate with the aim of increasing efficiency through economies of scale. Just to be safe, the company also tapped the debt market for an additional $800 million to help fund a $1 billion stock buyback.

HELP WANTEDHarter has taken a different approach. In contrast to Ledecky, he intensely scrutinizes each acquisition and integrates each purchase completely into the organization. And he focuses on industries that have much to gain from better management, increased purchasing power, and increased efficiency. "If the customer doesn't benefit at the end of the day, you haven't created value," says Harter.
But he, too, has stumbled on occasion. Take, for instance, Physicians Resource Group (PRG), which Harter established as a roll-up in June 1995 to consolidate ophthalmology practices nationwide. It quickly grew from 10 practices at the outset to 177 by the fall of 1997. But costs grew even more rapidly. In the third quarter of 1997, the company reported a loss of $18.4 million, even though revenues grew to more than $100 million from $60 million a year earlier. Harter refused to comment on PRG's problems, but Richard D'Amico, PRG's chief administrative officer, admitted to the Dallas Morning News, "We grew too fast." Last November the company, now the largest eye-care group of practices in the nation, announced it was holding off on any more acquisitions, closing 14 of its troubled practices.

It is a common occurrence in roll-ups, says George Koo, an analyst with Burnham Securities Inc., in New York. "They move too quickly, projections aren't conservative enough, and costs get out of control." That's created plenty of opportunities for acquisition-minded CFOs. "In a roll-up, each of the things a CFO focuses on--raising capital, making acquisitions, improving operations, and talking to Wall Street--is at a fever pitch all the time," says Mike Kirksey, senior vice president and CFO at Metals USA, a Houston-based consolidator of metals processing firms. Perhaps the consolidation trail wouldn't have been so rough for PRG if it had had a strong CFO. For the two and a half years the company has been public, there have been no less than three finance chiefs.

"The CFO is crucial to the success of a roll-up," adds Kirksey. "The complexity requires someone with the skill to do the deals, but also to make them work, operationally."

Harter turned to Kirksey, former vice president of strategic planning at Keystone International Inc., a publicly traded valves and controls manufacturer in Houston, when he wanted to consolidate the metals-processing industry. Along with CEO Arthur French, also from Keystone, they created Metals USA. In any roll-up he starts, Harter has used professionals from the industry to run the business, though he has sat on four of his six companies' boards. "My ego doesn't need to be called 'chairman,'" he says.

THE GOLDEN GOOSEHarter at least has learned from his mistakes. Has Ledecky? He claims so. "One of the things I learned from U.S. Office Products is to focus," he says. But he already may be forgetting that lesson. In January, just days after USOP announced it was reversing its consolidation strategy and instead spinning off four separate roll-ups, Ledecky announced his plans for Consolidation Capital. The company will provide a variety of services to retail and office-building owners, including pest control, landscaping, and equipment maintenance. In February, it announced plans to acquire seven electrical contractors for $138 million, half of which would come in Consolidation Capital stock. When the acquisition is completed, Consolidation will be the fourth-largest electrical contractor in the United States. In a time when focusing on a niche is the standard, that will be a hard sell on Wall Street.

Eventually, many roll-ups will go the way of the LBO. When the stock market turns down, they will have a harder time using equity for acquisitions no matter how profitable they are. The cowboys themselves fear that day will come even sooner, as their corporate cattle drives fall victim to their own success.

"I have seen guys try to put these things together with mass mailings and Internet sites," says Harter. Fair warning for CFOs tempted to saddle up.

Chinese shipbuilders raising more equity - anticipating slower order books?

Chinese shipbuilders plan IPOs
By Raphael Minder in Hong Kong and Jamil Anderlini in Beijing
Published: October 31 2007 22:03 Last updated: October 31 2007 22:03

(FT) At least seven Chinese shipbuilders are planning share offerings, underlining China's efforts to build up its domestic fleet and branch out into the construction of more advanced vessels. The largest of the anticipated initial public offerings is likely to come from state-owned China Shipbuilding Industry Corporation (CSIC), which wants to raise about $900m on the Chinese mainland A-share market, according to bankers familiar with the situation. The other major state-owned shipbuilder, China State Shipbuilding Corporation (CSSC), is considering a share sale in Hong Kong. The companies refused to comment.
Meanwhile, five privately owned shipbuilders – Jiangsu Rongsheng Heavy Industries, Sinopacific, Mingde Nantong, Yantai Raffles Shipbuilding and JES International – are also looking to sell equity in order to fund their expansion, according to people familiar with the situation. Sinopacific and Mingde confirmed they have IPO plans but refused to give details.
Chinese shipbuilders want to raise capital at a time when shipping activity is close to an all-time high. The Baltic Dry Index, a key measure of commodity shipping costs, has more than doubled in the past year. Gilbert Feng, assistant director of the Hong Kong Shipowners' Association, who visited China's two major state-owned shipbuilders, said: “New building orders are already full until 2010, so their executives certainly sound very confident.”
JES will begin its roadshow next week and is set to float in Singapore as early as the end of November, trying to raise as much as $300m from a share sale managed by ABN Amro. Sinopacific is hoping to raise about $660m next year in an IPO managed by Citic. Meanwhile, Chen Qiang, president of Rongsheng, said in April his company was planning to sell as much as 25 per cent of its equity in an IPO. However, Rongsheng is now in talks with private investors about selling a stake ahead of a IPO. Finally, Mingde has selected Deutsche Bank and Morgan Stanley to manage a listing in either Singapore or Hong Kong. The banks involved in the plans would not comment.
China recently overtook Korea, the world's leading shipbuilding nation, for the first time in terms of one specific measure – first-half ship orders in terms of deadweight tonnage. CSSC's goal is to double its shipbuilding output over the five years to 2010.

Baron bets on US infrastructure spending

Baron Turns to Road, Bridge Investments After Casinos (Update3)
By Nick Baker and Rhonda Schaffler

Oct. 31 (Bloomberg) -- Ron Baron, the investor whose stakes in casinos helped make his Baron Partners Fund the top performer among his peers, said U.S. spending on bridges and roads are creating some of the best investment opportunities in the world.

``For years America has underinvested by trillions of dollars in infrastructure,'' Baron, manager of $22 billion at Baron Capital Management Inc. in New York, said during an interview today. ``There is a tremendous amount of spending that has to be done.''

The 64-year-old investor said New Orleans flooding caused by broken levees in 2005 and Minnesota's bridge collapse in August will lead to more spending on public projects. That trend has already helped Baron holdings including Fastenal Co., the largest U.S. retailer of nuts and bolts, and MSC Industrial Direct Co., a marketer of repair supplies.

The $3.2 billion Baron Partners Fund has returned 21 percent this year, more than double the gain of the Standard & Poor's 500 Index. It's the No. 1 performer among 40 U.S. market- neutral funds, which aim to profit whether stocks rise or fall, according to data tracked by Bloomberg. Baron converted Partners from a hedge fund into a mutual fund four years ago.

The American Society of Civil Engineers said in 2005 that $1.6 trillion should be spent over five years to shore up the nation's infrastructure. Rehabilitation or replacement of the Tappan Zee Bridge north of New York City may cost as much as $14.5 billion, according to a report released in May by the Urban Land Institute and Ernst & Young LLP.

AIG Fund

American International Group Inc., the world's biggest insurer, said this week it raised $3.5 billion to take stakes in power plants, waste-treatment facilities and shipping terminals. Most of the firm's holdings are in North American infrastructure companies, including Ports America, the terminal operator Dubai- owned DP World sold under pressure from U.S. lawmakers in March.

Baron, whose office overlooks New York's Central Park, holds this bullish view of America even though he expects the U.S. to be surpassed. ``I'm sure China will be largest economy in 50 years,'' he said. ``As long as they don't screw up.''

U.S. economic growth unexpectedly accelerated last quarter, expanding at a 3.9 percent annual rate, the Commerce Department reported today. China, which contributes a tenth of global growth, has expanded more than 11 percent for three quarters. The Asian nation is the fastest growing among the world's major economies.

Fastenal, MSC

Shares of Fastenal, based in Winona, Minnesota, and MSC of Melville, New York, have each gained 24 percent so far this year. The S&P 500 has advanced 8.7 percent. The Morgan Stanley Capital International World Index of developed markets gained 13 percent, and MSCI's gauge of emerging markets surged 47 percent.

``America is a land of opportunity,'' Baron said. ``People come here to escape religious persecution, to own a home, for freedom. There's no other place in the world like it. In China, you say something bad about the government and they beat you up. In Russia, they put you in jail.''

That hasn't dissuaded Baron from investing in China. His biggest holding is Wynn Resorts Ltd., which runs a casino in Macau. The Las Vegas-based company yesterday reported a 94 percent plunge in third-quarter earnings even as revenue doubled from the Chinese resort opened last year. The company had a gain in the year-earlier period that inflated profit.

Wynn Investment

Wynn shares lost as much as 7.7 percent to $155 today in Nasdaq Stock Market composite trading. That trimmed the stock's increase this year to 65 percent.

Baron's firm has a 5.6 percent stake valued at more than $950 million, according to Bloomberg data. Baron paid about $15 a share on average, including stock acquired before Wynn's 2002 initial public offering, to accumulate that position. He anticipates Wynn shares will reach $300.

Wynn's chief executive officer, billionaire Steve Wynn, ``builds properties that attract people,'' Baron said. ``We are less focused on short-term earnings because we do not believe that matters. We believe that creating a sustainable competitive advantage is more important.''

Baron's $6.9 billion Growth Fund hasn't fared as well as the Partners Fund this year. Its 11.7 percent return was enough to beat only half of its peers.

WellCare Health Plans Inc. was among the fund's laggards. The Tampa, Florida-based health insurer's shares have tumbled more than 80 percent since Oct. 23 after Federal Bureau of Investigation agents and investigators from a Florida Medicaid fraud unit searched WellCare's headquarters.

Baron was the eighth-largest WellCare shareholder, regulatory filings show. The money manager said he sold his stake after the stock started dropping.

``Our faith in management was apparently misplaced,'' he said. ``We did not make any money, although we think the idea of being able to provide health care, provide access to older people who do not have access to health care is a good idea.''