Staircase To Heaven                                                                                     11 June 2020

Dubai developer Croesus Holdings has been locked out of two of their completed low-rise projects, valued at US$ 27 million, in Majan, by Dubai Walls Contracting over a dispute relating to costs. Apparently, this is the latest of a number of potentially damaging disputes between the two major stakeholders in the sector – developers and construction companies. In this case, the developer has indicated its willingness to settle the dispute over differences between completion certificates and the developer’s estimates. It is reported that both projects have been sold to a third party and the deal may turn sour, if there is no early settlement, and if it has to go down the legal route, there could be a delay of up to eight months.

Dubai dropped two places to 23^rd in Mercer’s Cost of Living Survey of 209 global cities, with its neighbour Abu Dhabi dropping six positions to 39^th. Using New York as the base measure, the ranking records prices of hundreds of items in ten categories over the past three months to May. The five most expensive locations were Hong Kong, Ashgabat (Turkmenistan), Tokyo, Zurich and Singapore. The cost of living is the cheapest recorded in the emirate in five years, driven by a softer real estate sector and subsequent deflation.

 Mercer also posted that 69% of GCC companies plan to adjust one or more elements of their compensation and benefits policies to partially alleviate the damage caused by Covid-19. It seems that the majority of companies have introduced salary cuts, intending for them to remain in place until at least September. However, sectors, including travel and retail, that saw revenue almost dry up when lockdown was introduced in mid-March, have had to take drastic action including, retrenchment, furloughing and putting staff on unpaid leave. It is reported that 28% of UAE companies have already brought in salary cuts.

This week, Emirates announced a further round of redundancies, following an earlier one on 31 May, as the realisation for the need of a leaner entity becomes more apparent; no figures were released but is thought to include all divisions. The world’s biggest long-haul airline, with a 60k payroll, including a reported 21k cabin staff and 4k flight deck, has already reduced wages and grounded most of its passenger fleet to preserve cash. As with other major airlines, Emirates has to cut costs to remain viable; two major cost drivers are fuel and payroll and, as the airline can do little, (maybe a little hedging),  on the price of aviation fuel, it has to focus on culling staff numbers. The Dubai government indicated in March that it would financially support the airline because Emirates is such an integral player and probably the main contributor to the success of the emirate’s economy.

Tata Asset Management is the latest international group to open an office in DIFC, as it tries to expand its business, which includes mutual funds, portfolio management services, alternate investment funds and offshore funds in the MENA region. The company, a subsidiary of the 150-year old Indian conglomerate, has more than US$ 27 billion worth of assets under its management. Last year, its new base, DIFC, saw a 25.4% increase in the number of firms to over 2.4k, including 737 active global financial firms, up 18.0% on the year.

Dubai Islamic finalised a US$ 1 billion five-year sukuk, with an attractive 2.95% profit rate, that had the order book top US$ 4.5 billion, with 170 interested investors which indicates that Dubai is still a – and maybe the – place to consider for international investors. The sukuk was issued as a drawdown under DIB’s US$ 7.5 billion Trust Certificate Issuance Programme, which is listed on Euronext Dublin and Nasdaq Dubai. Earlier in the year, DIB acquired its rival Noor Bank to become one of the largest global Islamic banks, with more than US$ 74.8 billion in assets.

Commercial Bank of Dubai, 20% owned by the Investment Corporation of Dubai, becomes the latest UAE lender to extend foreign ownership of its shares to 40%, from 20%. According to its chief executive, Bernd van Linder, “it will allow us to broaden our investor base as well as sustain capital inflows in the UAE.” Earlier in the year, both the Dubai Islamic Bank and Abu Dhabi Islamic Bank, lifted their foreign ownerships to 40%.

In order to widen its reach and become a bigger and more diversified conglomerate, it has been decided that Meraas will become part of Dubai Holding which “is set to combine a complementary suite of services and expertise to diversify the economy and maximise their competitiveness in the global marketplace”.  Last year, Meraas, which already has a presence in several sectors including real estate, healthcare, retail and hospitality, signed a US$ 1.4 billion agreement with Canada’s Brookfield Asset Management to manage and grow a portfolio of retail assets.

Dubai Holding owns major companies including the Jumeirah Group (with twenty-four hotels in their portfolio), Dubai Properties and the Tecom Group that owns and operates ten sector-focused business clusters, including Dubai Internet City and Dubai Media City. Dubai Properties has numerous developments in JBR, Business Bay, Dubai Creek and Dubailand. The tie up with Meraas will expand its portfolio by adding resorts, like Pearl Jumeirah and Jumeirah Bay, as well as other projects such as City Walk, La Mer and Bluewaters Island.

This week, the DIFC invested in four “innovative” FinTech start-ups – Sarwa, FlexxPay, Now Money and Go Rise – in pre-series A to series A funding from the free zone’s US$ 27 million FinTech Fund that was rolled out last year. The hub, whose main aim is to improve the personal finances of regional residents, is considered to be in the top ten global FinTech hubs. The initial financing will assist these four start-ups with their expansion plans. Sarwa is a roboadvisory wealth management entity, whilst Now Money helps low income employees, by providing payroll services to regional companies and app-based accounts with physical debit cards and remittance options. FlexxPay is a cloud-based B2B employee benefits platform and Go Rise offers migrant workers affordable insurance options, retirement planning and the ability to pay for products in instalments.

Still in negative territory, Dubai’s non-oil private sector economy moved higher from 41.7 to 46.0 in May, at a time when restrictions started to be lifted, with a softer pace in both output and new business. However, one of the main drags continues to be weak consumer demand, at a time when further declines were seen in travel/tourism (posting a sharp fall for the third month in a row), construction (reporting its steepest slump in new work) and wholesale/retail. Although consumer confidence has been badly dented, during the lockdown, and will take time to return to pre-Covid-19 levels, there is every chance that the only way seems to be up for the Dubai economy. At the same time, the UAE’s PMI data nudged 2.6 higher to 46.7.

In a bid to build its market share, Islamic insurance company Dar Al Takaful has invested almost US$ 60 million is acquiring competitor Noor Takaful, in a deal that has already received the regulatory approval of the Securities and Commodities Authority and the UAE Insurance Authority. The cash deal will be bank-financed. Noor Takaful is part of Noor Investment Group, which in turn is owned by the Investment Corporation of Dubai, which earlier in the year sold Noor Bank to Dubai Islamic Bank. The fragmented insurance sector, which comprises sixty-two traditional and Islamic operators, thirty of which are listed on local markets is ripe for consolidation. Last year, these listed companies posted a 22.0% increase in combined net profit to US$ 436 million, as their gross written premiums came in 8.3% higher at US$ 6.5 billion.

In 2019, Embattled Drake & Scull reversed its terrible figures of a year earlier, by posting a US$ 71 million profit on revenue which dipped 14.7% to US$ 186 million, with other income generating US$ 36 million; last year, it reported that it had combined losses of almost US$ 1.4 billion. Its chairman, Shafiq Abdelhamid, commented that the company had been “dealing with the huge losses recorded in 2018, and the burden left by the previous management.” In 2019, DSI initiated legal action against the former management and started a major debt restructuring programme. That year also saw a 16.0% reduction in its negative equity to US$ 1.1 billion and the MEP-focused company had a backlog of US$ 170 million.

The bourse opened on Sunday 07 June and, 144 points (7.5%) higher the previous three weeks traded up 64 points (3.1%), to close on 2,039 by 11 June. Emaar Properties, up US$ 0.06 the previous three weeks, was US$ 0.07 higher atUS$ 0.78, whilst Arabtec, down US$ 0.03 the previous five weeks, was US$ 0.01 higher at US$ 0.16. Thursday 11 June saw the market trading at 552 million shares, worth US$ 81 million, (compared to 310 million shares, at a value of US$ 84 million, on 04 June).

By Thursday, 11 June, Brent, up US$ 8.74 (11.6%) the previous three weeks, has had its day in the sun and closed US$ 2.15 (5.4%) lower on US$ 38.03. Gold regained most of the previous week’s US$ 20 (1.1%) loss, gaining US$ 18 (1.0%) on the week to close on Thursday 11 June, at US$ 1,733.

It has been confirmed that BP will slash 10k jobs, (14% of its workforce and 30% of its top 400 positions), as Covid-19 continues to maul the global economy; it joins other petro-giants, such as Royal Dutch Shell, Chevron and Marathon Oil, who are all readying themselves to slim down as they prepare for a major transition in the sector. These redundancies do not apply to BP gas stations, who had already seen a pay rise in April. The gravity of the situation is demonstrated by the fact that 36.4% of BP’s US$ 22.0 billion annual costs are manpower-related and that in Q1, its net debt jumped by US$ 6.0 billion; it is spending a lot more than it earns.

Bombardier, with plants in Northern Ireland employing 3.6k, has announced that it would be cutting 2.5k global jobs, within its aviation division; most of the redundancieswill be in its home base, Canada. The lockdown saw the NI operation wound down, but with the easing of rules, currently 50% are back at work. However, it seems that the NI operation is still up for sale, following a company announcement in May 2019. Bombardier is expecting a 30% slump in business jet deliveries in 2020.

PCP Capital Partners have begun a US$ 19.5 billion civil claim against Barclays in relation to an investment deal with Qatar, accusing the bank of hiding the terms of a lucrative deal with the Gulf state. It seems that the UK bank had agreed to a US$ 2.4 billion 2008 unsecured loan to Qatari parties but concealed this information from all other stakeholders, including PCP who had introduced UAE investors to Barclays, who “subscribed” to invest £3.25 billion. The terms were supposedly the same for both investors, but it seemed that this may not have been the case. Barclays reportedly agreed to pay an US$ 320 million additional fee for advisory services and a “yet further fee of US$ 80 million” and provided “an entirely unsecured loan” of US$ 2.4 billion. Barclays capital-raising operation in the Gulf, of US$ 4.8 billion from Qatar and US$ 4.2 billion from Abu Dhabi, saved it from a UK government bailout. This case was brought after four of the bank’s executives were acquitted after an eight-year criminal probe and trial which ended in February.

Just Eat Takeaway.com has agreed to acquire Grubhub for $7.3 billion in a deal that creates one of the world’s largest meal-delivery companies. Uber had been in merger talks for some time with Grubhub but there were doubts that it would be acceptable to US regulators, as well as other issues remaining unsettled. They had even agreed on a ratio, valuing Grubhub’s shares at 1.925 to Uber’s 1.0.  Grubhub had started in 2004 and in 2013 merged with Seamless to become a dominant force in the online food delivery sector but has since gone through difficult times. It has seen its US market share drop in recent times to just 23%, third behind DoorDash, the current leader, and Uber. Jitse Groen started Takeaway in 2000 in The Netherlands and, only two months ago, finally acquired Just Eat for US$ 8.0 billion, following UK regulatory approval. It is well known that industry profit margins, if they do exist, are wafer thin; even though both Grubhub and Uber posted 8% and 52% revenue hikes, to US$ 1.6 billion and US$ 4.7 billion respectively, both companies posted net losses. There is no doubt that consolidation is the only route to viability and profitability in this very competitive market.

There are reports that The Restaurant Group has decided that up to 120 of its 600 UK outlets will not open after the lockdown, with the resultant loss of 3k jobs. The group, which currently has 22k employees on furlough, owns Frankie & Benny’s and Garfunkel, with the former expected to bear most of the redundancies. The group also owns the Wagamama chain and some pubs but these are not expected to be impacted at this time. Earlier in the year, and before the onset of coronavirus, the company’s Chiquito’s fell into administration which then saw the permanent closure of 75% of its eighty outlets.

Other UK retailers were in trouble this week, following a big queue of already failed retail names. Quiz reported that it would go into administration, closing all its 82 outlets before buying them back so it can negotiate better rental terms with its landlords. 10.1% of the 915 employees will face redundancy. The retailer was in trouble well before the onset of Covid-19, as less people were shopping in their stores. Meanwhile, Monsoon Accessorize said its current structure was “unviable”, following the lockdown, and has put its assets into administration. Interestingly, it has sold the assets to a business controlled by Peter Simon, the founder and owner of the chain. The new set-up will renegotiate with landlords to obtain improved rentals for its 162 shops – and if successful safeguard 2.3k jobs.  This is just the tipoff an iceberg -there is worse to come for the UK High Street.

Despite Inditex posting its first ever quarterly loss, as its revenue sank 44.1%, year on year, to US$ 3.7 billion, resulting in a US$ 450 million deficit, it did see its April online sales surge 95%. The owner of Zara, as well as the Bershka and Pull & Bear brands, is now looking at a future that will see online sales rising from its current 14% to 25% in 2022. During that time period, as well as closing 1k smaller stores, it plans to invest almost US$ 1.0 billion on big, centralised stores and its online platform.

Eight hundred jobs are at risk, with news that the UK arm of Victoria’s Secret, with 25 shops, has gone into administration; most of the employees were furloughed, prior to the appointment of Deloittes as administrators. The chain, famous for its fashion shows and edgy lingerie, had already been reeling from changing consumer tastes and weakened spending even before the advent of Covid-19 and had been branded as sexist, outdated and lacking diversity. The last annual reports, for February 2019, posted an operating loss of US$ 205 million. All shops will remain closed, as the administrators either find a suitable buyer or negotiate with landlords for lower rents; however, on-line trading remains open. Victoria’s Secrets is not the only fashion firm struggling, as both Cath Kidston and Laura Ashley have called in administrators since the beginning of coronavirus.

Mulberry is planning to cull 25% of its 1.4k global workforce, as a result of the impact of Covid-19, and with the ongoing prospect of social distancing measures, allied with reduced tourist and footfall levels,  its income would continue to be affected. The 49-year old high-end fashion band has 120 outlets in 25 countries and ships its luggage and handbags to 190 countries. Earlier this year, Sports Direct’s Mike Ashley, who also owns Frasers Group retail business, bought a 12.5% stake in the Somerset company which also runs concession outlets within the House of Fraser and also throughout the John Lewis’s department stores.

There are reports that there could be a mega pharma merger in the offing between AstraZeneca and rival drug maker Gilead Sciences. With the UK-based firm valued at US$ 140 billion, along with Gilead’s valuation of US$ 96 billion, this could turn out to be the biggest ever health-care deal on record. AstraZeneca has developed treatments for conditions from cancer to cardiovascular disease, whilst Gilead has recently had its coronavirus drug, remdesivir, approved by the US Food and Drug Administration. Not only would this merger, if it were to go through, be almost triple the 2019 Bristol-Myers Squibb’s US$ 74 billion takeover of Celgene, it would be in the top ten M&As in history. Over the past twelve months, the share values in both companies have headed north – the UK drug maker by 41% and the US potential partner up 19%, but still a third lower than its 2015 highs. To date, 2020 has proved a disappointing year for M&As, with volumes already 45% lower year on year, including only US$ 100 billion worth of deals in April and May – it lowest two-month total this century.

One of the biggest sectors to have been ravaged by Covid-19 has been aviation, as passenger traffic has ground to a halt. The scale of the damage can be gleaned from IATA’s two latest forecasts. In February, the world body, with 290 member airlines, estimated that 2020 global airline revenues would decline by US$ 29 billion; its latest figures have risen to a massive US$ 419 billion. This is 50% lower, year on year, driving losses to US$ 84 billion, as passenger numbers halve to 2.25 billion. Covid-19 will be responsible for erasing fourteen years of growth returning the airline sector to 2006 levels.

Most major airlines have already instigated redundancies that seem to range from 15% to 30%, whilst many have already been recipients of state aid. They include the likes of Air-France-KLM – US$ 11.0 billion, American – an estimated US$ 10.0 billion, Cathay Pacific – US$ 5.0 billion, Delta – US$ 5.4 billion, Lufthansa – US$ 10.1 billion, Norwegian – US$ 1.6 billion, Southwest – US$ 3.2 billion and United – US$ 5.0 billion. It appears that many airlines have already started the painful task of culling staff numbers, with percentages of between 15%-30%. Lufthansa, for example, has said that it will cut over 16% of its 135k global payroll. In the UK, 25k of staff belonging to BA, Ryanair and EasyJet are on government furlough and 39k jobs are at risk. To date, BA has announced cuts of 12k (28.6%), Ryanair – 3k and EasyJet 4.5k – 30%.

Because of its reliance on its services sector, which makes up 75% of the country’s economy – and was badly hit by lockdown measures – the OECD considers that the UK will be the hardest hit of all major economies, coming out of the pandemic. According to their survey, the UK will see an 11.5% slump this year, (and 14.0% if a second wave occurred), slightly worse than some of the EU economies including Germany, France, Spain and Italy. In April, the UK economy shrank by 20.4% – the largest ever monthly contraction – and by 10.4% for the quarter ending 30 April. The fall is estimated to be triple that of the decline seen at the time of the GFC in 2009.

US unemployment rates surprised the market by actually declining to 13.3%, as non-farm payrolls, including employment in the goods, construction and manufacturing sectors, rose 2.5 million. It was noted that there were marked labour market increases in sectors such as leisure and hospitality, construction, education and health services, and retail trade. This figure is a sure indicator that the economy is improving, and the economic Covid-19 impact may not be as bad as many experts had predicted. Friday’s surprise news impressed the markets, with all three major bourses up in 05 June trading – Dow by 3.15% to 27,111, S&P 2.62% to 3,194 and the Nasdaq by 198 to 9,814.

However, on Thursday, 11 June 2020, global markets went into decline, driven by fears that a second wave of the pandemic is a possibility and that would have an even more damaging economic effect than the first. Even if that were not to happen, there is a growing realisation that a global recovery will take a longer time than most analysts currently think. The three main US bourses had their worst trading day in weeks, with the Dow Jones Industrial Average down almost 7%. In Europe, there were 4% plus losses seen on all stock exchanges with 4% plus losses on the UK’s FTSE 100, the Dax in Germany and France’s CAC 40. There has been heavy selling on the Australian market after the ASX 200 had gained more than 27% since its late-March lows.

The US Labor Department reported that a further 1.5 million people filed new unemployment claims last week, so that there are still more than 30 million collecting benefits. Federal chairman, Jerome Powell, added a caveat to policymakers’ forecast that the unemployment rate could remain above 9% by the end of the year, adding that it could be optimistic.

The UK government has been accused of”a flagrant abuse of public money”. for handing out US$ 20 billion in cheap loans, with limited conditions attached, to fifty-three well-known firms that some may think should not have benefitted from the government’s largesse. They included US$ 1.2 billion to BASF, a German chemicals giant, US$ 2.4 billion to BA, US$ 720 million to each of Ryanair and EasyJet and US$ 360 to Hungary’s Wizz Air; other beneficiaries included M&S, Asos, John Lewis, Tottenham Hotspur and Nissan. The Bank of England’s Corporate Covid Financing Facility was set up, with the intention to assist companies, having a major impact on the economy, get through the crisis, whilst protecting thousands of jobs. It is noted that BASF only employs 850 in the UK and that BA, EasyJet and Ryanair have recently announced redundancies numbering 12k, 4.5k and 3k respectively.

Latest UK figures, as at 07 June, indicate there are 8.9 million workers covered by the government’s furlough scheme, equivalent to 25% of the country’s workforce, and costing the government to date US$ 25.5 billion. The Self-Employed Income Support Scheme, for self-employed workers, has had 2.6 million claims, costing US$ 9.0 billion, that is paid out every three months amounting to 80% of previous average profits. By October, the Office for Budget Responsibility estimates that it will have cost the government nearly US$ 150 billion – money that would not have been spent if Covid-19 had not arrived; this will equate to 15.2% of the UK economy.

As expected, Brexit negotiations are moving at a snail’s pace, to the point that the basic structure of what needs to be done has yet to be completed, with every possibility that the UK will finally leave the EU without an agreement. However, it seems that discussions are going well with other countries, such as the US and Japan, and there are hopes that several free trade deals will be on the table this year. Current figures show that trade with Japan topped US$ 38 billion, with 9.5k UK companies exporting to Japan. If negotiations are successful, it is hoped that it will make it easier for the UK to join the eleven-country Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which would boost its total trade access in the Asia-Pacific region.

Tomorrow Boris Johnson is to meet the presidents of the EU institutions and will repeat that the UK will not request a Brexit extension after 31 December, despite the end of June deadline to agree to a further delay of up to two years. No agreement would result in both sides having to trade on less lucrative WTO terms, which would include tariffs. In 2017, Michel Barnier, the chief EU negotiator, famously posted his schematic diagram known as the “Barnier staircase”, indicating that if Brexit went ahead “Britain would be treated like any other third country with no special favours”. He indicated that the UK would have to make do with a plain FTA (free trade agreement), similar to previous EU agreements with Canada and South Korea. Then the French diplomat held all the aces in the pack and was dealing to a weak and vacillating UK prime minister, who had previously voiced her Remain preference. Now the EU negotiator has ruled out the possibility of an FTA and seems to be dealing with a weak hand. Barnier’s staircase may well become Johnson’s Staircase To Heaven.