Prudential – AIA deal: A deal of epic proportions

By Damon Yeo

Two international brands which Singaporeans will be familiar with are to become one very soon, after Prudential PLC agreed to buy AIA (Asian insurance arm of AIG) for a whooping US$35.5 billion. The deal is a direct aftermath of financial crisis over the past few years and will change the face of the insurance industry forever.

Background

Before the financial crisis in 2007, American Insurance Group (AIG) was the by far the largest underwriter of commercial and industrial insurance in America and has an unrivalled presence in Asia (ex-China).

All these changed on 16 September 2008. The Group suffered a credit rating downgrade and overnight it was required to post huge amounts of collaterals. It did not have enough cash reserves to do so and it immediately faced the threat of bankruptcy.

The United States Federal Reserve Bank (Fed) considered the possible impact of the meltdown of AIG and decided to rescue it with a US$85 billion loan, just days after deciding to let investment bank Lehman Brothers die a natural death.

Soon after that, AIG’s financial woes had become clear. Prior to 2008, it had begun to dabble in the high-risk-high-return business of monoline insurance, where they underwrote insurance on risky and complex credit-linked financial structures. By Sept 2008, banks and investors who had bought insurance from AIG had begun making multi-billion claims from the insurer whose cash reserves are running thin. Financial Armageddon happened and AIG needed to be saved.

With AIG being technically nationalised, the Fed’s long term plan for it was to wind it down over time and sell off parts of it to recover the amount of bailout.

AIA was the most lucrative piece of business owned by AIG. Since early 2009, there had been speculation that AIG had planned for an initial public offering (IPO) for this Asian unit but it was always clear that Prudential PLC, a rival British insurer, was interested. This announcement concluded a negotiation process which had lasted almost a year where there was much haggling over the price Prudential will pay.

The acquisition in numbers

The amount Prudential had to pay AIG is quite staggering. On the day the deal was announced, Prudential’s market capital was just above £15 billion. This is just two-third of the amount which they are expected to pay AIG.

To raise that cash, the British insurer is expected to undertake a rights issue to raise £20 billion (the rest will be paid to AIG in terms of securities). There are already reports that Prudential might approach Temasek Holdings to support this fund raising exercise.[1] If Temasek decides to step in, it will become a shareholder of Prudential. GIC already holds a 0.5% of the British insurer.

And if this rights issue is carried out as planned, it will be the largest UK fund-raising ever.

AIA has approximately 320,000 agents and 24,000 employees in the Asia-Pacific region and this deal will absorb all of them under Prudential umbrella. AIA has 23 million in-force life policies, all of which will be transferred to Prudential as well.

The new business is expected to shift the Group’s profits from Asia from 46% to 88% – realigning Prudential’s geographical focus almost entirely.

The impact

British economy

Interestingly, since the announcement of this deal, Prudential’s shares had fallen 18%, wiping almost £2 billion off its market capitalisation. The market certainly expressed pessimism on this deal. Part of this is probably because of the failures of previous multi-billion takeovers, like that of RBS over ABN-Amro.

Over the same period of time, the British Pound fell to new lows against the US dollars as investors expect a significant future outflow of Pound to purchase dollars for this deal.

On a side note, this takeover by Prudential is actually a refreshing change for British companies on the whole. Over the past decade or so, traditional British companies and brands had been sold to overseas buyers, including the likes of Jaguar, Lotus, Manchester United and more recently, Cadbury. However, with the British financial institutions, they had been gobbling up overseas businesses. This deal will further accelerate the shift of focus of the British economy to financial services and away from manufacturing.

Singaporeans

For policy holders of both insurers, change is unlikely to come overnight. As with most other massive takeovers, rebranding will come slowly. In the near future, consumers will still likely to see the presence of two different insurance brands. AIA, despite all the woes of its parent company, is still a strong brand name in Asia, with almost 90 years of history. Prudential may decide to keep it and operate it as a standalone, like how DBS had managed POSB to date.

The bigger change in store is probably for the ten thousand or so Singaporeans whose livelihoods are linked to either insurer. According to statistics, there are about 3,500 Prudential Financial Consultants and 4,000 from AIA operating in Singapore. TR had managed to speak to a couple of them but it appears that even to them, the plans for the merger are not crystal clear at the moment.

Kelvin, 29, who has been with AIA for over 8 years told us, “What we heard about this deal is from the media. There has not been much information from management. We were told that it is ‘business as usual’.”

It is probably fair to say that details of how the merger will work for Consultants like Kelvin is still not being finalised. As with many mergers, the finishing touches on the realignment of ground operations may take years to complete. However, what are always inevitable in mergers are overlaps and redundancies, especially for non-sales staff of the insurers.

Note: Do you work for Prudential / AIA? Are you a policy holder of either insurer? What do you think of this deal? We will like to hear from you so do leave us comments.

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[1] http://online.wsj.com/article/BT-CO-20100303-703828.html?mod=WSJ_Deals_LEFTLatestHeadlines

About the Author Damon is a proud graduate of Nanyang Technological University with a degree in Accountancy. He is currently working in the finance department of a UK Bank.

Investment in UBS by GIC – a Chronicle of a Disaster in the Making

By Damon Yeo

It was mid-December 2007 [A] when the Government of Singapore Investment Corp. (GIC) made a whooping 11 billion Swiss francs (S$13.8 billion) investment in UBS.

There was news earlier in the summer of 2007 about how the US housing market was showing signs of slowing down, but some of the major financial institutions were still raking in record profits and numerous equity indices were nearing their all-time highs.

UBS was amongst the first of the banks to show signs of cracking. A day before GIC announced its investment, the bank had just announced a write-down of US$10billion[1] and the money raised was necessary to maintain its capital ratio and ease market fears of its stability.

As GIC became the largest single shareholder of the Swiss giant (circa 9%), deputy chairman and executive director Dr Tony Tan said in a statement that GIC had “confidence in the long-term growth potential of UBS’s business, particularly in the global wealth management business”.[2]

The word “long-term” does not have a fixed definition, but in the world of finance and markets, anything longer than five years is generally considered “long-term”.

With UBS it never rains – it pours

Since that fateful day for GIC, UBS’s fortunes had gone from bad to worse.

Throughout 2008, rival banks began to report massive losses, but very few had worse results than UBS. The Board reacted by changing the management team and the new management team introduced cuts across the board, from staff numbers to bonuses.

All the cuts had very little impact and in April 2008 [B], the bank’s ratings were downgraded by major rating agencies. This essentially increased the bank’s borrowing costs in the open market and further damaged its reputation of being a stable Swiss bank. The losses were mainly from its investment banking and trading arm, but alarmed customers in its wealth management division were leaving the bank.

In October, the bank had little choice but to turn to the Swiss central bank for assistance. [C] In an unprecedented move, the usually non-interventional Swiss Central Bank technically bailed out UBS via an agreement to ‘ring-fence’ US$60billion of UBS’s illiquid (and poor quality) assets.[3]

By then it was clearer to the markets – UBS has dabbled in the US sub-prime mortgage markets more actively than any other of their European rivals and was hurting from it.

For the entire 2008 financial year, the bank lost a total US$17billion, the largest loss in Swiss corporate history. Only Citibank, Wachovia, Merrill Lynch and Bank of America had lost more in this crisis.[4]

An Imminent Collapse?

While the losses were staggering, it still can be said that with the backing of the Swiss government, UBS remains stable financially, at least in the short term.

However, the viability of the bank’s business model in the long run was thrown into uncertainty in Feb 2009.[D]

It was announced that that the bank had been made liable to pay a $780million to the taxman in the United States to settle an investigation into its operations.[5] They had also initially agreed to divulge the identities of some of their clients who had used the bank to park their wealth offshore to evade taxes in the US.

Since the Middles Ages, Swiss banks had leveraged on their reputation to protect identities of their clients to lure wealthy customers, who are willing pay huge fees to the bank. UBS, in particular, was a massive player in the murky world of private wealth management. By helping rich Americans set up offshore accounts right under the noses of the taxman, the bank had approximately earned over $200million annually.

At time of writing, the case between the US tax authorities and UBS is still ongoing. The American government wants the bank to reveal all of the clients they had ever helped to evade tax, but UBS is negotiating to only disclose some of these Americans and not all. This high profile case had involved the governments from both countries and is now turning into a diplomatic issue.

This is a classic case of a catch-22 for UBS. On one hand, if they do back down and hand in the details of their clients to the US government, they will lose more customers in its wealth management business. They can no longer charge higher fees than their rivals because they no longer have that competitive edge over them. In business terms, the bank’s critical success factor will be lost. The bank may almost have to restart its wealth management business from scratch, in a market already saturated with other banks.

On the other, if UBS decides not to co-operate, the US Courts may revoke their banking licence in the country all together. No statistics and figures are required to show how a global bank like UBS will suffer if they are not allowed to trade and operate in the world’s largest economy.

Last week, Swiss Justice Minster warned that UBS may fail if no agreement was reached.[E][6] The headlines may be sensational, but she may not be exaggerating. If UBS does not suggessfully negotiate past this hurdle in the short-term, there will be no “long-term” future to talk about and Dr Tony Tan’s words will haunt GIC forever.

GIC has no management involvement in UBS, so will not be directly implicated in this court case. However, if UBS does fail, the entire S$13.8bn invested will likely go down the drain (less any amounts recovered upon liquidation).

S$13.8bn. That is nearly S$3,000 for every man, woman and child from Tuas to Changi in the island of Singapore.

Table 1: UBS share price since Dec 2007

(A) GIC invests in UBS

(B) UBS credit ratings cut

(C) Swiss Central Bank intervention

(D) Announcement of UBS legal case VS US Tax authorities

(E) Swiss Justice Minister warns of UBS collapse

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[1] www.msnbc.msn.com

[2] Forbes

[3] Times Online

[4] www.thebanker.com

[5] NY Times

[6] Times Online

Other  articles by Damon Yeo:

>> GIC’s investment in Stuyvesant Town: Unraveling the mystery

>> The demise of Dubai: How the mighty have fallen

>> The minimum wage: pros and cons

>> HDB’s 2 billion dollar deficit: More questions than answers

>> Singapore v Hong Kong

>> DBS and a series of ‘unfortunate events’

>> Sale of Chartered – An Anatomy

>> 3rd most competitive nation in the world and what it means to the average worker

About the Author:

Damon is a proud graduate of Nanyang Technological University with a degree in Accountancy. He is currently working in the finance department of a UK Bank

Being the second freest economy in the world – What does it mean to Singaporeans?

By Damon Yeo

 For 2010, the Singapore economy has been named as second freest economy in the world, after Hong Kong by the Heritage Foundation. Since 2000, our economy has consistently scored about 87 by the foundation, a considerably high score according to this index.

So, what does this study mean for the average working class Singaporean? If you do not have time to finish reading the article, here is the answer: very little.

Well to be fair to the study, which had been carried out annually since 1995, it was not set out to measure the overall well-being of an average citizen in any given economy. Instead it just specifically measures how freely an individual can work, produce and consume as well as how freely the government allows labour, capital and goods to move around. It does not measure how much an individual has to start with.

The index measures ten separate broad areas of economic freedom and a maximum score is 100 for every area.  

Government Spending

One area to determine economic freedom is by looking at how much the government spends. The concept is that the less the government spends, the less economic distortions there will be in the market. In this benchmark, an economy where the government spends nothing at all will get a score of 100.

 Compared to other economies in the world, Singapore is ranked second. Only Myanmar has a ‘better’ score (possibly due to corruption). As expected, Scandinavian economies with generous welfare benefits are heavily penalised in this area – Sweden is ranked third last and Denmark fifth last.

 Quite clearly, this benchmark illustrates the inverse relationship between (the lack of) government spending and economic freedom.

 However, bear in mind that low level of spending by the Singapore government does not necessarily indicate neglect of provision of public goods – it could also represent the lack of unemployment benefit payouts and efficiency.

 Labour Freedom

 Our economy also ranks number one in the Labour Freedom benchmark. This benchmark measures six different factors, including hindrance to hiring additional workers, difficulty of firing redundant employees and mandatory severance pay. Broadly speaking, if companies in an economy can hire additional workers easily, fire redundant workers easily and pay very little (or no) severance pay, this economy is defined as free.

 This benchmark obviously measures economic freedom from the perspective of the corporations and not the workers.

 A previous article has already discussed this extensively. This report, which is done independent of World Economic Forum’s report on Competitiveness, reaffirms the fact that corporations are “well-treated” in Singapore, at the expense of workers themselves. This particular benchmark will be uncomfortable reading for many Singaporeans who lost their jobs during the current recession.

 This labour freedom is likely achieved by the tripartite relationship (government, unions and workers), which had been often championed as a comparative advantage of our economy.

 Monetary Freedom

 This particular benchmark in the study measures price stability and level of price controls in an economy. The study deems that If prices are stable (ie low inflation) and the government does little to interfere with market prices, the economy is free.

 Singapore is ranked relatively high at ninth for this benchmark, behind economic powerhouses like Japan, Hong Kong and Switzerland.

 However, the overall level of government involvement in Singapore’s economy is very different from that of the rest of these countries. More than 80% of Singaporeans own properties sold to them by the government and through Temasek Holdings, the government has significant interests in a large number of companies listed on the Straits Times Index. In a nutshell, the Singapore government can impose much more effective price controls than most other developed economies.

 Despite its ability to, the study has shown that the Singapore government has done little to control prices in Singapore. This somewhat explains the exponential increase in prices of HDB flats in Singapore.

 There will be debate on whether price controls have desirable effects on the society (not economy) in general, but it is clear from here that our government has chosen not to control prices.

 All in all, this report from the Heritage Foundation tells us very little what we don’t already know. For many a years now, the Singapore economy has been a great role model for all other countries in the world, but the bigger question is – how much had that benefitted workers in Singapore?

 

Other  articles by Damon Yeo:

>> GIC’s investment in Stuyvesant Town: Unraveling the mystery

>> The demise of Dubai: How the mighty have fallen

>> The minimum wage: pros and cons

>> HDB’s 2 billion dollar deficit: More questions than answers

>> Singapore v Hong Kong

>> DBS and a series of ‘unfortunate events’

>> Sale of Chartered – An Anatomy

>> 3rd most competitive nation in the world and what it means to the average worker

About the Author:

Damon is a proud graduate of Nanyang Technological University in 2004 with a degree in Accountancy. He is currently working in the finance department of a UK Bank

GIC’s Investment in Stuyvesant Town – Unravelling the Mystery

 By Damon Yeo

 Government Investment Corp (GIC)’s massive S$1 billion loss on their Stuyvesant Town investment is shrouded in much mystery.

Before the news of a default broke out, very few outside of the GIC framework actually knew that our national sovereign wealth fund actually had an open position in this upmarket New York real estate. There was no mention of this investment in GIC’s annual report 2008/09 and if you search for “Stuyvesant” on GIC’s official website site, a nil search is returned (try it).

 What is Stuyvesant Town? 

Together with Peter Cooper Village, Stuyvesant Town is a large residential development in Manhattan, New York City. It was completed in 1947 and covers an area of 80 acres (about 80 football fields), has over 8,500 apartments in 35 blocks of building. Almost 25,000 people reside in this development.

 In 2006, Metropolitan Life, who had owned this development since 1947, decided to cash in and sell it off to a joint venture between Tishman Speyer Properties (a real estate company) and BlackRock (an asset management company). Eventually, the deal was transacted at US$5.4billion, the largest deal for a single American property in modern times.

 The $5.4bn deal was not a popular one

 In 2006, during the impending sale of Stuyvesant Town, many of the tenants organised groups to actually protest against it. Many of them felt that with the sale, the new owners are likely to convert the entire development into an upmarket one and thus the community spirit shared amongst the existing tenants will be lost.

 In fact, this group did manage to organise a separate buyout bid and came within S$100million of that of the Tishman / BlackRock joint venture. After the deal was concluded, there was continued distrust between prominent tenants and the new owners. Blogs (such as this) were set up by tenants to vent their frustration on the new owners.

 The deal was a complex one

 This $5.4billion deal is by no means a straightforward one. Tishman Speyer and BlackRock brokered the deal, but each only invested S$112.5million into the investment. Thereafter, they entered S$3billion mortgage loan with Wachovia Bank and a $1.4billion of mezzanine debt.

 The investment in Stuyvesant Town was then repackaged with other commercial loans and sold as securities to a host of investors. This list of investors includes our very own GIC, Allied Bank of Ireland, the Church of England and a host of other banks. The largest investor is Freddie Mac and Fannie Mae (both bailed out by the US government in 2008), with almost $2bn in stake.

 These investors are not ranked equally when it comes to debt repayment. The most “senior” holders will always be the first to be repaid when the most “junior” will absorb the first losses. To compensate the risk, junior debt holders are paid much higher interest. This is structure is very similar to Collateral Debt Obligations (CDOs), a widely publicised exotic financial product during the early days of the current financial crisis (which some claimed to be the catalyst of the crisis in the first place).

 In this particular deal, it was revealed that Fannie Mae and Freddie Mac own the most senior tranche of this debt. It is not disclosed where GIC sits in terms of seniority with respect to the other investors. What is clear is that this investment is worthless to GIC if the value falls below $2bn.

 The deal was a risky one

 Right from the beginning, many observers have noted that the 2006 deal was a very risky one. Some analysts had labelled it a $5.4billion bet from the start.

 It was noted that at the existing mortgage levels, the investors were never going to receive enough repayments cover the initial cash outlay. The deal will only be worthwhile if real estate prices maintained at 2006 levels and the owners managed to increase rental rates a few folds over the next few years.

 In March last year, it was clear that future rental increase is going to be difficult when the Supreme Court in New York ruled that rents were wrongly raised. The landmark court ruling was a hammer blow to Tishman, BlackRock and all investors of the deal.

 Coupled by the collapse of the residential house prices throughout the United States, the market value of Stuyvesant Town fell to an estimated S$1.8billion at the turn of the year.

 The default is the beginning of things to come

 Tishman and BlackRock’s default on the interest payment is the beginning of things to come.

 It seems that the debt holders (including GIC) had decided to demand payment, meaning that it could lead to foreclosure. Under a foreclosure, Tishman and BlackRock will be forced to liquidate (sell) the investment and use the proceeds to pay back the investors (in the order of seniority mentioned above).

 Also, there is speculation that this is a ploy on Tishman and BlackRock’s part to obtain a government bailout from the Barack Obama’s administration. After all, the government had bailed out Freddie Mac and Fannie Mae. There is a chance that it will step in here to save this joint venture from the mess.

 However, under both scenarios, there is little suggestion that GIC will be able to recoup a single cent from this massive investment.

 Source: Bloomberg

Other  articles by Damon Yeo:

>> The demise of Dubai: How the mighty have fallen

>> The minimum wage: pros and cons

>> HDB’s 2 billion dollar deficit: More questions than answers

>> Singapore v Hong Kong

>> DBS and a series of ‘unfortunate events’

>> Sale of Chartered – An Anatomy

>> 3rd most competitive nation in the world and what it means to the average worker

 

About the Author:

Damon is a proud graduate of Nanyang Technological University in 2004 with a degree in Accountancy. He is currently working in the finance department of a UK Bank. He is also a regular contributor at redsports.sg.

The Weekend Football Preview

Match of the Weekend
9 Jan
Birmingham City VS Manchester United

In most other seasons, this match would have been quite a straight forward one for the visiting Red Devils. However, this is no other season and Birmingham City is currently the form team in the country.

Alex McLeish comes into this game on a run of 11 Premier League games without defeat, having earning points off Liverpool and Chelsea over the course of that run.

A lot of players in the current team deserve praise, but one player who has been really making the headlines is on-loan goalkeeper Joe Hart. City has the best defensive record in the division beside Chelsea and Hart’s performance the sticks had been crucial. Manchester City is his parent club and he will have an added incentive here to perform against United.

United had just lost to Leeds United in the Third Round of the FA Cup last weekend and will be keen to brush away memories of that embarrassment.

The defending champions’ form at the moment can be at best described as patchy, but yet they remain very much in title hunt, just two points away from league leaders Chelsea.

Birmingham is likely to sit deep and attack on the break so the onus will be on United to break them down. As a defensive unit, the Blues are solid and should be hold on for a point here.

Birmingham City 0 Manchester United 0

The Next Big One
10 Jan
Liverpool VS Tottenham

This game is termed a “six-pointer” for two teams deemed to be fighting for the fourth place finish in the Premier League.

Tottenham had already beaten the Reds once this season, on the opening day of the season. Another victory here at Anfield will definitely be a huge psychological boost for Harry Redknapp’s side.

Spurs have kept five consecutive clean sheets coming into this game and confidence is high. This is of course stark contrast to the mood in the Liverpool camp.

Despite two consecutive Premier League wins, Liverpool have not been playing well. Last weekend, they were again outplayed by Championship side Reading in the FA Cup and were lucky to take the tie to a replay.

That said, Spurs have not won at Anfield in the league since 1993. Both sides may have to settle for a point a piece here.

Liverpool 1 Tottenham 1
Elsewhere on the Continent
10 Jan
Juventus VS AC Milan

The two most successful clubs in Italian club history faces off in Turin as both try to close the gap on leaders Inter Milan.

On the manpower front, the sides are on the opposing end of the scale of fortunes.

AC Milan welcomed the arrival of their loan signing David Beckham on Wednesday as they thumped mid-table side Genoa 5-2 in a league game. Like last season, Beckham is expected to spend three months with the Rossoneri as he maintains his fitness level.

Juve on the other hand, had just lost striker David Trezeguet to an ankle injury. Despite only starting half of the team’s fixtures this season, Trezeguet is the leading goal scorer with seven goals so his absence will be felt.

AC Milan is the side on the up and is capable of winning here.

Juventus 1 AC Milan 2

Other Predictions:
Hull City 1 Chelsea 1
Arsenal 2 Everton 1
Burnley 0 Stoke 0
Fulham 2 Portsmouth 0
Sunderland 2 Bolton 0
Wigan 1 Aston Villa 2
West Ham 2 Wolves 2
Manchester City 3 Blackburn 0

Where is the support, Singapore?

Poor crowd support adds salt to wound as Lions succumbed to Iran

A meagre crowd of 7,356 turned up at the Kallang National Stadium on Wednesday as Singapore lost 3-1 to Iran in the penultimate match of the 2011 Asian Cup Qualification Group E.

 The Iranians were the quicker of the two to settle down and took a swift 2-0 after just 13 minutes. Hadi Aghily opened the scoring from the spot after 10 minutes and his team-mate Mehrzad Madanchi doubled the lead from the edge of the box two minutes later.

Iran could have added to that lead after some naive defending from the home side but it was skipper Noh Alam Shah who found the net to cut the deficit in the 31^st minute. Alam Shah, who is now plying his trade in Indonesia, headed home from a Shaiful Esah corner.

There was all to play for after half-time and Singapore kept the pressure up by increasing the tempo against the visitors. However, they were again found wanting in defence in the 63^rd minute, when Iran counter-attacked from defending a corner and striker Gholamreza Rezaei beat custodian Hassan Sunny with a delicate chip.

The last half hour saw the Lions struggle to keep possession and create any opportunities as Iran sat back on the two-goal cushion to seal the three points.

The result, coupled by a goalless draw in Bangkok between Thailand and Jordan in Bangkok meant that qualification is essentially out of our hands. Thailand will qualify for the 2011 Asian Cup as long as they beat Iran in Tehran. To qualify, Singapore must hope that the Thais drop points and better their result in Amman (Jordan) in the final match of the group.  

The final group game will be played on 3 March.

 

Poor Crowd Support

 Despite being a crucial game in the qualifying group, a poor crowd turned out for the game. The 7,000-odd crowd meant that the 55,000 capacity National Stadium looked sparse and hardly any atmosphere could be generated. This is a stark contrast to July last year, when a full house crowd paid over-the-top to support Liverpool FC in a meaningless friendly.

A 300-odd crowd of flag-waving Iranians seated in the Grand Stand managed to generate more noise and atmosphere throughout the game. At the full-time whistle, the Iranian fans cheered as their team sealed their passage to the 2011 Asian Cup, while there was little reaction from the Singapore fans – most of which simply stood up and headed for the exits.

As the game is telecast “live” on national TV, it is likely that many fans had chosen to stay home on a mid-week evening rather than make their way to Kallang. It can be also argued that the mainstream media had failed to generate enough hype through their various means to advertise and promote this match to the general public.

That said, the fans who did bother to turn up did not appear to the most fervent of the lot. The apathy of the crowd at Kallang on the night irked Ko Pohui (of Bolasepako.com) so much that he labelled them “spectators” and not “fans”. Pohui also added in his diatribe that the lack of support is partly to be blamed for the failure of the team to perform.

Football in Singapore is that of a classic chicken and egg issue. Whilst some have argued that there is no support because the quality of our national team is not up to the mark, the reverse is true as well.

For this match, our national team did not disgrace us. Despite the clear gulf in quality, the boys gave their all in a game which they were never expected to get anything out of in the first place.

However, the crowd certainly did us no favours at all. It proved that only the arrival of big name Premier League teams can produce a sell-out crowd at the National Stadium nowadays. Be it Goal 2014 or Goal 2018, Singapore football fans are not ready to qualify for any World Cups, even if the national team may be.

 [www.bolasepako.com is the brainchild of Pohui, who has been supporting the Singapore national team for over 20 years. It has been active since 1996 and covers various aspect of domestic football in much detail]

The Weekend Football Preview

The Weekend Football Preview

By Damon Yeo

 The Key Game to Watch

2 Jan 2010

Reading VS Liverpool

FA Cup action kicks off this weekend with 32 Third Round matches being played across England. This is of course the round where 44 sides from the top two tier of English football enter the competition and it can be said that it is when the real action begins.

 There are three all Premier League fixtures in this round, but the most intriguing tie of this round is the one at Madjeski Stadium, where struggling Championship side Reading takes on Liverpool.

 The home side is a team in transition this season, after long-time manager Steve Coppell left the club last summer. Promising manager Brendan Rodgers took over the helm but he too left in the middle of December after a dreadful start to their season.

 Going into this fixture against Liverpool, the Royals sit just two spots above the drop zone in the Championship and have the worst home record in the division. They have also only scored nine times at home this season - also the least amongst their peers. Scoring goals is a huge problem for Reading this season, after they lost their attacking duo of Stephen Hunt and Kevin Doyle to Premier League teams in the summer.

 For the visitors Liverpool, this competition presents the best chance of any silverware at all this season. A lot have been said about the Reds’ torrid season thus far, but they did end 2009 with some reprieve, winning 1-0 at Aston Villa to close the gap on them in the Premier League.

 On paper, Liverpool is by far the stronger of the two sides. The real question is if Rafael Benitez will field a strong side here, given the hectic Christmas fixtures. It will not be a surprise should Benitez decide to rest Fernando Torres or Steven Gerrard, or even the both of them, given that Liverpool’s next league game is against Tottenham Hotspurs on the 10^th of January.

 Cup game brings out the best of teams, even the two teams here which are both struggling for form. Liverpool appears to be the hungrier side here, as they are almost desperate to have a good FA Cup run to appease the fans. The game will be tight, but the Reds should nick it.

 Reading 1 Liverpool 2

 

If You Have Time for One More

3 Jan 2010

Manchester United VS Leeds United

 Another interesting fixture of the Third Round is Leeds’ visit to Old Trafford. Traditionally, these two teams are strong rivals, but because of Leeds’ demise over the years, the rivalry had died down somewhat.

 The visitors may be playing two tiers below United, but they are the form team of the country. They currently lead League One by eight points and have the best points-per-game ratio among all the 92 clubs in England so far.

 Under Simon Grayson, Leeds is a combative side that work hard for possession and hassle their opponents at every opportunity. They will do that again at Old Trafford, but to be honest the defending Premier League champions get that kind of treatment from most visitors.

 United is likely to rest several players and give some of their youngsters a run-out. Even the second stringers should have no issue seeing off Leeds here.

 Man United 2 Leeds 0

 

From Outside of England

3 Jan 2010

 With most other European leagues enjoying a winter break, the focus is shifted back to the Old Firm Derby in Glasgow. This traditional New Year’s Day fixture with be the 386^th official meeting between the two rivals and Rangers hold the advantage of 154 victories over Celtic’s 138.

 Rangers are also the form team of the Scottish Premier League, winning their previous six games. Last Wednesday, they just demolished Dundee United 7-1, with striker Kris Boyd bagging five goals to overtake Henrik Larsson as the SPL all-time top-scorer.

 Domestically, all signs are positive for Rangers thus far this season, despite a poor showing in the Champions League. If they do win at Parkhead, they will stretch their lead at the top of the table to a staggering ten points at the half-way mark of the season.

 Celtic are playing good football under Tony Mowbray but are struggling to produce the results this season. Rangers should see them off here.

 Celtic 0 Rangers 2

 

Other Predictions

 FA Cup 3^rd Round

Tottenham Hotspur 3 Peterborough United 0

Middlesbrough 1 Manchester City 3

Stoke City 3 York City 0

Milton Keynes Dons 1 Burnley 1

Nottingham Forest 1 Birmingham City 1

Aston Villa 1 Blackburn Rovers 0

Portsmouth 0 Coventry City 0

Sunderland 3 Barrow 0

Wigan Athletic 1 Hull City 1

Everton 2 Carlisle United 0

Fulham 3 Swindon Town 1

Chelsea 4 Watford 0

West Ham United 0 Arsenal   3

Tranmere Rovers 0 Wolverhampton Wanderers 0

 

Copyright © The Temasek Review, 2009

About the Author:

Damon is a proud graduate of Nanyang Technological University with a degree in Accountancy. He is currently working in the finance department of a UK Bank. He is also a regular contributor at redsports.sg.

The Demise of Dubai – How the Mighty Have Fallen

By Damon Yeo

An empire of sand castles, a mirage of El Dorado, a house built with a pack of cards – call it whatever you fancy but the reality is now evident – Dubai is crumbling under the weight of the financial crisis and collapse is imminent.

It is fair to say that Dubai’s fall from grace did not happen overnight. Over the last year or so, economists in the Europe and America had been predicting that the autonomous state would succumb but the worst was confirmed only on 25 November, when Dubai World asked for six-month grace period for their debts due in December this year. In the world of credit, this constitutes to a credit event and the creditors hold the right to decide if they will agree to the deadline extension or call for a default.

While the global economy slowly absorbs the full impact of Dubai’s downfall, it is perhaps important at this stage to attempt to identify what had gone wrong at Dubai.

The Property Bubble Burst

Like many other economic downturns over history, an asset bubble burst was one of the main catalysts of the current crisis in Dubai.

Unlike in the States or the UK, a property price index was only developed for Dubai in early 2009 and it is difficult to quantify the magnitude of the initial property boom and its subsequent crash.

However, it is known that the property boom was largely driven by megaprojects. Ambitious projects like the Palm Islands, the World and the Burj Dubai were all commissioned between 2004 and 2005. Burj Dubai is expected to open in January next year, but works on the Palm Islands and the World appeared to have grinded to standstill.

In late 2008, Bloomberg began to run reports on the vulnerability of the Dubai property markets. Deutsche Bank estimated that property prices have fallen by over 50% since August 2008 and will continue to dip another 15% to 20% in the coming twelve months. Investors who bought properties in the last two or three years are definitely in negative equity now, with little hope of returning into the black in the near future.

Dependence on Foreigners

The expansion of Dubai was largely driven by the influx of foreigners since the late 1990s. According to latest data, the population of 2.2million in Dubai was made up of nearly 83% non-nationals. Foreigners took up various jobs across various levels of the economy, from construction labourers and waiters to company CEOs and hotshot bankers.

Many of them were attracted to the Emirate because it offered an income tax-free environment and a relatively low cost of living.

Problems arose when the credit crunch hit Dubai. As construction projects slowed, large number of Indian and Pakistani labourers returned home. Other bankers, lawyers and accountants who were laid off by companies left almost immediately. These foreigners did not have kinship or any other sort of attachment to Dubai, hence could pack up and leave the city overnight.

The sudden departure of expats inevitably has a herding effect on those that remain. Businesses catering specifically to wealthy foreigners shut to avoid further losses, dampening the once renowned vibrant night life. The state of the economy hence suffers a downward spiral as people left the city in numbers.

Draconian Laws

Others have pointed out in retrospect that Dubai’s draconian law around failure to pay off debts is another reason for its eventual downfall.

Debt payment delay is a criminal offence, even for foreigners who work in the country. It is noted that one can go to prison even for a bounced cheque.

When times are good, very few take note of this particular law, since few are in debt to start with. When the times turn sour, people start delaying their repayments to credit card companies and reality hit them hard. There are expats in jail at the moment because of this.

This is contributing factor to why many foreigners leave it in such a rush. There are numerous reports on luxurious cars being left abandoned at airport car parks as expats literally flee Dubai as fast as they could. Most of them will not return ever again, as they face possible jail time once they set foot onto the country.

Sense of Invincibility

Pride comes before a fall. The most damning factor for Dubai’s demise in my humble opinion is the sense of invincibility which had surrounded the economy all this while.

From Dubai ruling family’s perspective, they wanted to expand Dubai at all cost. They were hungry for more wealth and status all the time. Through their various investment vehicles, Dubai made ambitious acquisitions globally. Their relentless pursuit of expansion meant that at times, they had made questionable investments, financed mainly by debt.

One of their most dubious investments was their US$5 billion stake in MGM Mirage, a casino and developer company based in Las Vegas, in 2007 (it is controversial as well because Muslims are forbidden to gamble). Barely two years on, the entire investment decimated in value as MGM struggled to deal with falling patronage to their chains of casinos because of the credit crunch. In March this year, Dubai World filed a lawsuit against the former owners of MGM when the latter started to report that they may not be a going concern.

For all other investors of the Dubai dream, they had foolishly believed that Dubai was too big to fail. They believed that no matter what happens, Abu Dhabi, Dubai’s richer and more influential brother, will step in to provide support. After all, Abu Dhabi holds 9% of the world’s oil reserve.

However, the relationship between the two states had never always been cordial. As recent as the 1940s, there had been armed conflicts between the pair. Abu Dhabi had never explicitly stated that it would provide financial support to Dubai – it was only assumed by most investors.

This misaligned optimism and a false sense of security had allowed Dubai World to chalk up US$60 billion worth of liabilities in the form of bonds issued, loans and other payables to various investors ranging from sovereign funds, hedge funds and multinational banking corporations.

The Road Ahead

The immediate impact of this piece of news was to send shockwaves across all major equity indices globally, although within a few days, most of them had rebounded after various reports assured investors that actual impact on the financials was not as grave as firstly thought.

What is to follow will be anyone’s guess. One thing for sure is that the Dubai dream is well and truly over. The Emirate has lost its status and reputable as a rock solid investment with infinite future opportunities. The state and any of its linked companies will find it difficult to acquire funding and loans cheaply in years to come and with that, the rate of expansion has to decelerate.

The bigger question now is – will any lessons be learnt from this?

Sources:

1) Blomberg

2) BBC

3) Wall Street Journal

Other articles by Damon Yeo:

>> The minimum wage: pros and cons

>> HDB’s 2 billion dollar deficit: More questions than answers

>> Singapore v Hong Kong

>> DBS and a series of ‘unfortunate events’

>> Sale of Chartered – An Anatomy

>> 3rd most competitive nation in the world and what it means to the average worker

About the Author:

Damon is a proud graduate of Nanyang Technological University in 2004 with a degree in Accountancy. He is currently working in the finance department of a UK Bank. He is also a regular contributor at redsports.sg.

Minimum Wage – The Good, the Bad and the Truth

By Damon Yeo

The Bad about Minimum Wage

The term “minimum wage” can almost be labelled as “dirty” in Singapore. For a long time, the government had insisted that having a minimum wage in place could do more harm than good. In a recent Straits Times report, MM Lee had noted that every country that has set a minimum wage over what the market will bear has found that the move cuts jobs and that Singapore’s aim is to create as many jobs as possible.

In the world of economics, the view is subscribed by many economists.

The purists argue that minimum wage laws are distortions to the market equilibrium and will theoretically increase unemployment. Adam Smith’s famous invisible hand theory will mean that artificial setting of price (wage) floors makes allocation of resources inefficient.

In Singapore’s context, the administration of any minimum wage policy will have spill-over effect on our immigration policies. Minimum wage policies cannot apply solely to Singaporeans, as this will make employers turn to cheaper foreign labour. However, if these policies were to be applied to PRs and migrant workers as well, we will see a further influx of foreign workers to our shores, since they are expected to pick up even higher pay then before.

Another area of concern is inflation. For 2008, inflation was 6.5%. A minimum wage policy is likely to have a bigger impact on construction, food and the general service industry (these industries are generally where workers are paid less). Prices of houses, food and most household items are likely to increase as cost of the labour providing them goes up with minimum wage.

The Good about Minimum Wage

Naturally, minimum wage laws have their supporters as well.

The loudest of voices on this side of the debate comes from those who fight to increase the standard of living for the poorest and the most vulnerable class in society. A minimum wage policy will ensure that the so-called “bottom” ten percentile of the society will still be able to earn enough to sustain a respectable lifestyle. Naturally, this will reduce the income gap between the richest and the poorest of the nation.

Others have noted that a minimum wage law does not add burden to the government. Unlike welfare benefits, cash payouts or tax credits to the poor, this policy will not require the government to increase its spending.

Some have argued that a minimum wage will improve the work ethic of those who earn very little as the higher pay helps motivate them more. It also encourages employers to have a tougher labour screening process, ensuring that better quality staff is hired as they now have to pay more for each employee. In Singapore, this may help raise the quality of the service industry – an area which had particularly deteriorated over the years.

The Truth about Minimum Wage

The first ever minimum wage policy was set in state of Victoria in Australia way back in 1824. It was enacted in 1904 and the British were the first to conduct studies on the effects of the minimum wage in 1907. United States, the symbol of big conglomerates and capitalism, first introduced the Federal minimum wage in 1938 and it has been in place ever since.

As of 2009, Singapore is only one of 10% of the nations in the world not to have any law or regulation of some sort in terms of minimum wage. It may come as a surprise, but even countries like war-torn Afghanistan, Iraq and the Democratic Republic of Congo have some sort of national law to set the minimum wage employers must pay (whether they are actually enforced is another matter).

And amongst those that 10% of nations that do not have a national law on minimum wages are all of the Scandinavian countries and others like Switzerland and Germany. However, in these countries, trade unions are renowned to be particularly strong (and definitely independent of any government influence) and wages are usually set by collective bargaining between the unions and the employers. It is worthy to note that in most of the Scandinavian countries, the disparity between the rich and poor is the narrowest in the world.

While acknowledging that there are studies out there to prove otherwise, there has been extensive research done to show that in fact there is a positive correlation between (a higher) minimum wage and level of employment (ie unemployment went down in places with a higher minimum wage). From a behavioural point of view, it can be argued that people are more motivated to find work if the minimum that they can earn is higher.

On the argument on reduction of competitiveness with a minimum wage, let’s not forget that while Singapore is the third most competitive economy in the world without such a policy, nine others in the top ten have some sort of minimum wage policy or notably very independent and strong trade unions.

Furthermore, a minimum wage policy is unlikely to affect a majority of the industries where Singaporeans are employed by multinational overseas companies. From an international perspective, there is little to suggest that such a policy will hurt our competitiveness. After all, it is not the lifestyles of high-earning lawyers, bankers and accountants that will be changed by such a policy – it is that of lowly paid cleaners, hawker assistants and construction workers.

In the United Kingdom, the minimum wage first became legislation in 1999, under the Labour government. There was much debate from the public, unions and the Opposition prior to its implementation, but research afterwards has showed that this new Act definitely did not increase level of unemployment in the country. Let’s also not forget that over the decade just passed, London surged ahead of her European counterparts to become a leading global financial centre (something Singapore is aspiring to be).

The people who first came about with the idea of a minimum wage had one motivation in mind – to protect individual workers from being exploited by factory owners for the benefit of more profits. From whichever angle you look at this, you must admit that this motive can only be a good thing, akin to the abolition of slavery.

With Singapore slowly creeping up the list of the most expensive cities of the world, the time is now for us to relook into enacting a minimum wage policy to start protecting those who might have already been exploited, even if not intentionally, by circumstances.

Sources:

1) David Card and Alan B. Krueger, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania,” American Economic Review, Volume 84, no. 4 (September 1994), pp. 774-775.

2) www.ilo.org/public/english/protection/condtrav/pdf/infosheets/w-1.pdf

3) Waltman, Jerold. “The Politics of the Minimum Wage.” University of Illinois Press. 2000

Other articles by Damon Yeo:

>> HDB’s 2 billion dollar deficit: More questions than answers

>> Singapore v Hong Kong

>> DBS and a series of ‘unfortunate events’

>> Sale of Chartered – An Anatomy

>> 3rd most competitive nation in the world and what it means to the average worker

About the Author:

Damon is a proud graduate of Nanyang Technological University in 2004 with a degree in Accountancy. He is currently working in the finance department of a UK Bank. He is also a regular contributor at redsports.sg.

HDB’s $2 billion dollar deficit – More Questions than Answers

By Damon Yeo, Business Correspondent

HDB’s latest financial report reviewed that the Statutory Board had made a $2bn deficit for the financial year running from 1 April 2008 to 31 March 2009. The deficit had doubled since the previous period.

To fully understand the numbers behind HDB’s financial year, one must first understand that HDB is a statutory board of the Singapore government. Its objectives are clear – to provide affordable homes and create vibrant towns.

Profit-making is not one of the one of objectives. Its activities are historically funded by the government and hence a deficit should not come as a huge surprise.

This is perhaps why in HDB’s 38-page Annual Report, there was no mention of this deficit at all. The report went on to highlight HDB’s newest Build-to-Order (BTO) projects and the Lease Buyback Scheme. An entire page was also dedicated to showcasing a host of awards won by HDB in the aforementioned financial year, some of them handed out by fellow government agencies.

However, it is necessary to note that $2bn is by no means a small amount. Since its inception in 1960, HDB had obtained a cumulative government grant of $19.3bn.

$2bn is almost ten percent of this amount – meaning that this deficit had no doubt been one of the largest in the Board’s history. Also, this $2bn is essentially taxpayer’s money and for the purpose of accountability, financial statements should be examined to identify any inefficiency in the organisation.

First and foremost, on further inspection on the expenses incurred, it is noteworthy that HDB had stepped up on its effort to cut manpower costs over a period of difficult time in terms of the economy.

Overall, salaries and bonus were reduced by nearly 4% across the board. Actual number of employees actually increased over the same period of time, meaning that on the average, every HDB employee took home nearly $6,000 less over the year.

This pain is not just felt by the normal employees. Key management personnel in fact took home almost 10% less than the previous period.

 

Table 1: Manpower Cost – all

	2008/09	2007/08	YoY change
	$’000	$’000	$’000	%
Salaries and bonus	374,833	388,790	(13,957)	-3.59%
CPF contributions	37,860	39,497	(1,637)	-4.14%
	412,693	428,287	(15,594)	-3.64%

 

Table 2: Manpower Cost of key management personnel

	2008/09	2007/08	YoY change
	$’000	$’000	$’000	%
Salaries and bonus	5,623	6,307	(684)	-10.85%
CPF contributions	126	130	(4)	-3.08%
	5,749	6,437	(688)	-10.69%

 

That is, unfortunately the only piece of information which is consistent and easily explained by market conditions.

In a media briefing, HDB explained that the deficit was driven by more flats being sold (and these flats were being subsidised by the government), higher construction costs and more upgrading works.

Further scrutiny of the financial statements finds these explanations somewhat puzzling. As disclosed under home ownership segment of the report, we see that HDB sale proceeds from selling of flats had actually decrease by almost 57%.

This poses a few questions, naturally. Firstly, HDB had claimed that they had issued 2,000 more BTO flats in the FY09. This increase in the number of flats sold does not seem to be reflected in the sale proceeds decrease in the year.

Furthermore, since sale proceeds is a product of number of units sold and sale price, the decrease actually indicates a cutback in the number of flats sold by HDB in the year. (We know that prices could not have decreased, as we saw record prices over the period mentioned).

This leads to a bigger question – if HDB knows that house prices are increasing, should they not increase the supply of flats to cool the market and make housing more affordable? (one of their mission statements)

Also, assuming construction costs are all included in cost of sales [cost of sales are defined as costs incurred directly related to the purchase or production of the sales of an entity], it does not appear that they have increased materially.

As a percentage of the sales proceed, cost of sales had actually decreased in terms. Unless construction cost makes up the immaterial portion of cost of sales (unlikely), HDB’s explanation is not in line with the numbers we are seeing.

 

Table 3: Gross profit of Home Ownership Segment

	2008/09	2007/08	YoY change
	$’000	$’000	$’000	%
Sales proceeds	1,061	2,463	(1,402)	-56.92%
Cost of Sales	(993)	(2,389)	1,396	-58.43%
Gross profit	68	74	(6)	-8.11%
Cost of Sales (%)	93.6%	97.0%

 

Overall, it does appear that the increase in deficit for the year has driven a $972m increase in operating expenses of HDB in the current year. Table 4 sums up the material expenses incurred.

Upgrading costs did indeed increase by $197m, as explained by HDB to the media. However, as we know, upgrading is not 100% cost-free to homeowner. It may be highly subsidized but the homeowner does pay off part of the costs back to HDB. It is not further explained if these costs below include these payments from homeowners.

Impairments losses have increased more than 100-fold in the current year. A large portion of this is the impairment on the value on leasehold land (almost $100m).

There is no further explanation on this increase in impairment and it again appears odd prima facie. With property prices on the rise, it is thought that the value of freehold land is likely to remain similar in value or be re-valued upwards (though any upward revaluation cannot be taken through profit and loss under accounting rules).

Provisions for foreseeable losses also drove up expenses by almost $0.5bn. This element is likely to be where the increase in government subsidies comes is explained. Similarly, it appears odd to see a 58% increase when sales had fallen by 57%.

Both impairments and provisions are highly judgemental areas where management are required to make best estimates in current market conditions.

 

Table 4: Summary of material expenses

	2008/09	2007/08	YoY Change
	$’000	$’000	$’000	%
Upgrading, improvements and demolition	820,248	623,033	197,215	31.65%
Impairment losses on properties	117,806	1,067	116,739	>100%
Provision for foreseeable losses	1,236,944	783,757	453,187	57.82%
	2,174,998	1,407,857	767,141	54.49%

 

Reading through financial statements had left this writer with more questions than answers. There is no question on the integrity and truthfulness of the numbers as presented publicly, but more explanation and disclosure are required before anyone can examine the state of HDB finances critically.

[All tables taken from HDB Annual Report for Financial Year 2008/09]

 

Other articles by Damon Yeo:

>> Singapore v Hong Kong

>> DBS and a series of ‘unfortunate events’

>> Sale of Chartered – An Anatomy

>> 3rd most competitive nation in the world and what it means to the average worker

 

About the Author:

Damon is a proud graduate of Nanyang Technological University in 2004 with a degree in Accountancy. He is currently working in the finance department of a UK Bank. He is also a regular contributor at redsports.sg.

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