Geely chairman builds $9bn stake in Germany’s Daimler

Chinese automaker Geely CEO Li Shufu has bought a near 10-percent stake in Mercedes-Benz maker Daimler, making him the German group's largest single shareholder. (AFP)
Updated 24 February 2018
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Geely chairman builds $9bn stake in Germany’s Daimler

BEIJING: The chairman of Chinese carmaker Geely has built up a 9.69 percent stake in Mercedes-Benz owner Daimler, filings showed on Friday, an aggressive move designed to open the door for an industrial alliance between the two automakers.
Two sources familiar with the thinking of Li Shufu said his move to accumulate the stake, which has a market value of $9 billion, was motivated by the “dramatic transformation” under way in the automotive industry.
His strategic goal was an alliance with Daimler, which is developing electric and self-driving vehicles, to respond to the challenge from US players Tesla, Google and Uber, who are all working on their own driverless cars.
“This is what Chairman Li has envisioned. He thinks maybe one or two or three manufacturers that exist today will survive in this new competition,” one of the sources said, requesting anonymity because of the sensitivity of the matter.
“He thinks existing manufacturers should unite and invest in the future and become one of the two or three companies that will survive.”
Zhejiang Geely already owns Volvo Cars, LEVC, the maker of London’s black cabs, a 49.9 percent stake in Malaysian automaker Proton, a $3.3 billion stake in Volvo Trucks and flying car start-up Terrafugia.
Mercedes-Benz already has an industrial alliance to develop cars and trucks with Renault-Nissan, which owns a 3.1 percent stake in Daimler, and has announced plans to build electric cars with existing Chinese joint-venture partner BAIC Motor Corporation.
The stake purchase followed an initial approach last November, when Li sought to buy a Daimler stake as a way to access Mercedes-Benz technology for electric cars and trucks, including battery technology, to help Geely comply with a Chinese crackdown on pollution.
Geely sees potential in Daimler because it is developing high-speed Internet connections for autonomous cars at a time when Li believes satellite-based Internet connections could become more important for the auto industry, the source further explained.
Sources at the time told Reuters that Geely had asked Daimler to issue new shares so that it could buy a stake, but the Germans turned down the offer saying they did not want to dilute existing shareholders.
Li changed tactics and quietly accumulated shares. The 9.69 percent stake is the biggest single holding in the maker of luxury cars, trucks and vans, according to Thomson Reuters data.
“Daimler is pleased to have won a new long-term investor who is convinced of the innovation power, strategy and the potential of Daimler going forward,” the German company said on Friday.
“Daimler knows and respects Li Shufu as a Chinese entrepreneur of particular competence and forward thinking.”
Chinese investors in German technology companies have previously opted to take a consensual approach, buying incremental stakes in companies such as Kuka and Kion, typically after long consultation with management and other stakeholders.
The source said that Daimler and Geely had not held concrete talks about how to structure a potential joint venture, adding: “You know we have to become a stakeholder in order to engage.”
Geely’s move to become one of Daimler’s largest shareholders hit some speed bumps in recent weeks — an issue that has not been completely resolved, one of the sources familiar with the talks said.
Swedish truck maker AB Volvo, in which Geely took a stake late last year, has been objecting to Geely’s potential move on Daimler, one of the world’s largest commercial truck makers by sales, due to anti-trust concerns.
“We will protect interests of both companies by abiding laws in the country and the company’s governance structure. We are not seeking to have a controlling power in Daimler. We are just one of the investors in that given company,” the source said.
The size of the holding accumulated by Li raises questions about how he was able to buy the stake without first alerting the German markets regulator that he had surpassed the 3 percent and 5 percent ownership thresholds.
In early February, Geely began courting Germany’s automotive establishment with a carefully timed public relations campaign. Li gave a video statement to Germany’s Car Symposium, an annual automotive congress held in Bochum which is attended by senior automotive leaders.
Li underlined that Geely’s stewardship of the Swedish carmaker Volvo brand had contributed toward “growth and prosperity” in Europe.
His statement was followed by a keynote speech held by Geely board member Carl-Peter Forster, a former BMW board member and the former head of German carmaker Opel.
Forster explained that in the areas of electromobility and autonomous driving there should be more cooperation.
“We are in competition with one another, but should cooperate in areas where it makes sense,” Forster told the audience.


Liquidity squeeze hits sukuk sector

Updated 12 December 2018
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Liquidity squeeze hits sukuk sector

  • US interest rate rises and the end of the Federal Reserve’s quantitative easing program have lessened dollar availability
  • Investors from developed markets are more reluctant to park their money in assets from further afield because the returns they can achieve nearer to home are increasing

BARCELONA: Shrinking liquidity as central banks rein in years of ultra-loose monetary policy is crimping both demand for sukuk as well as supply.
Last year, issuance of Islamic bonds, or sukuk, reached a record high of $95.7 billion, up from $68 billion in 2016, according to S&P Global Ratings, which forecasts 2018 issuance will total up to $80 billion.
US interest rate rises and the end of the Federal Reserve’s quantitative easing program have lessened dollar availability, while the European Central Bank’s decision to lower and then stop its own bond-buying program in December is exacerbating liquidity constraints.
“Liquidity that used to be channelled to the global sukuk market is becoming scarcer and more expensive,” said Dr. Mohamed Damak, senior director and global head of Islamic Finance (Financial Services Research) at S&P Global Ratings, who estimates Europe and the US provide 20-40 percent of sukuk investment.
“That will impact the capacity of sukuk issuers to the tap the sukuk market over the next 12 months.”
Investors from developed markets are more reluctant to park their money in assets from further afield because the returns they can achieve nearer to home are increasing in line with higher rates and a strong dollar.
“Whereas before when there was so much liquidity, investors were almost desperate in the hunt for yield and sukuk. Now, they’re a bit more discerning and spreads on emerging markets, including sukuk instruments, have started to widen,” said Khalid Howladar, managing director and founder of Dubai’s Acreditus, a boutique risk, ratings, regulatory and Islamic finance advisory practice. “You’ll see more discrimination coming into sukuk pricing.”
In the first nine months of 2018, sukuk issuance in Gulf Cooperation Council (GCC) countries totalled $26.9 billion, down from $39.8 billion in the prior-year period, according to S&P. GCC sovereign issuance fell by nearly half over the same period to $14.8 billion from $27.9 billion, although issuance by regional corporations rose 2 percent to $12.1 billion.
The decline in government sukuk issuance is partly due to the rebound in oil prices, analysts said, with crude now trading at more than $70; Gulf governments had historically funded their spending through energy receipts and conventional bank lending, with little need to issue debt, but the slump in oil prices from mid-2014 forced a rethink.
Saudi Arabia began issuing debt for the first time since the 1990s after falling into deficit and has now sold $11 billion of sukuk — $9 billion in April 2017 and $2 billion in September 2018, plus $41 billion of conventional bonds since 2016, according to Reuters. These have helped Saudi Arabia fund its budget shortfall, while the Kingdom has also spent some of its foreign reserves, which fell from 2.75 trillion riyals at 2014-end to 1.90 trillion riyals in September 2018.
Although now less of a necessity, Saudi Arabia and other Gulf governments may issue more sukuk do so in order to support their fledgling Islamic capital markets.
“Bahrain, Oman and to a lesser extent Saudi (Arabia) are still facing deficit pressures,” said Howaladar. “But nonetheless, the pressure is less and so that borrowing urgency has diminished.”
Bank lending has always dominated the market, but the private sector is increasingly keen on diversifying its funding sources so as to not be as dependent on banks, he said. “Globally, Islamic banks are growing faster than their conventional counterparts, so whether you want to do a sukuk or Sharia-compliant financing the bank market is still open,” added Howaladar. “Bond and sukuk markets get more attention, but banks are still able to offer Sharia-compliant financing for their customers.”
UAE sukuk issuance has grown in 2018, rising to $6.4 billion as of Sept. 23, versus $3.3 billion in the prior-year period, according to S&P. The country’s markets regulator this year issued new sukuk regulations that have helped bolster supply, said Raffaele Bertoni, head of fixed income investment at Kuwait-based Gulf Investment Corporation, a supranational financial institution co-owned by the six nations of the GCC.
A large part of the UAE’s 2018 issuance is from real estate companies seeking to optimize their financing structure with a better mix of sukuk and bank debt ahead of Dubai hosting the multibillion-dollar Expo 2020, he said.
“Several new real estate projects are in the last phase of completion, and sukuk represents an efficient and more convenient financing structure compared to conventional bonds or even bank loans,” Bertoni added.
Corporations that prefer sukuk funding due to religious considerations will continue to issue Sharia-compliant debt despite the growing expense, said Sharjil Ahmed, a Dubai-based Islamic finance specialist and fintech strategist.
“But other issuers who opted for sukuk because of attractive pricing may shift to wherever they can obtain cheaper funding,” he said.
As well as tightening liquidity, a lack of standardised Sharia regulations and geopolitical concerns have slowed sukuk issuance in 2018.