But the PE industry faces a formidable refinancing cliff in the coming years, says Bain Capital in its Global Private Equity Report 2010 (free pdf)
Selected excerpts:
Energy and healthcare topped a recent poll of sectors where PE fund managers and their advisers expect to see significant levels of investment over the coming year. Both had been among industries that increased their share of total PE deal making during the rising PE market of 2003 to 2007, and they look poised to continue their ascent.
Hot geography: Asia-Pacific. The smaller impact of the credit crisis on Asia-Pacific’s markets and the better prospects for economic growth continued to make the region attractive to PE investors during the downturn. Even as PE contracted globally from 2007 to 2009, Asia-Pacific’s share of investment nearly tripled from about 8 percent to 23 percent.
Hot asset class: Distressed investing. The tough economy and challenging debt conditions of 2008 and 2009 created some of the most favorable investment opportunities in the distressed debt market, including debt trading, loans-to-own and restructurings.
The most fertile targets for distressed investing will likely be in those hard-hit sectors such as discretionary spending on consumer goods, like luxury products, and media and entertainment. Companies in these areas will continue to need substantially more outside funding over the next two to three years or risk greater probability of default.
Creating value through activist ownership is becoming the most important differentiating capability. Deal returns were 3.6 times the original investment in situations where early post-acquisition work was undertaken—well above the industry average of 1.4 times.
Refinancing challenges: The biggest challenge for the high-yield bond and leveraged loan markets—and consequently for the PE market—is the looming refinancing cliff (also commonly referred to as the refinancing wall). Investors’ limited capacity to absorb a growing supply of refinancings may severely crimp the borrowing needed to finance new PE deals—and the shortfall will begin to show up in 2010, when the market starts to climb the base of the cliff.
Over the next five years, issuers of speculative-grade debt (including PE-backed borrowers) will need to refinance roughly $850 billion in maturing debt denominated in US dollars—$500 billion of it in the form of leveraged loans and $350 billion in high-yield bonds. The refinancing obligations will start off slowly in 2010, amounting to less than $50 billion; but they will rise steeply through 2014, when some $355 billion will come due. The steepest cliff wall will be in the leveraged loan market between 2012 and 2014, when more than 85 percent of loans outstanding mature. Most of that debt is owed by PE-sponsored companies.
Technorati Tags: Asia-Pacific-region, energy, Healthcare, junk-bonds, leveraged-loans, luxury-goods, media and entertainment, private-equity, PulseCheck
Vigorous competition may hold the key helping the energy industry innovate to respond to climate change, according to a new book.
Harvard Business School’s Rebecca M. Henderson and Richard G. Newell of Duke University examine four particularly innovative sectors of the U.S. economy: agriculture, chemicals, life sciences, and information technology. These four sectors have been extraordinarily important in driving recent economic growth. Henderson and Newell describe why accelerating innovation in energy could play an important role in shaping an effective response to climate change.
An effective innovation system has three key elements: accelerating demand for new technology; institutions that support abundant generation and dissemination of fundamental scientific and technical knowledge; and a vibrant, competitive private sector.
“The last, but perhaps the most striking finding from our histories is the importance of vigorous competition in promoting innovation. In life sciences, in chemicals and in IT, our authors suggest that the combination of appropriate antitrust, intellectual property and standards policies created an environment in which there was the creation of a “market for technology” and extensive entry. In contrast, in the case of agriculture the authors hold that the worldwide consolidation of the industry –attributed largely to the need to consolidate IP holdings – may act as a serious constraint on innovation. More broadly, every sector has been characterized by a lively “innovation ecosystem” that both eagerly incorporates the results of publicly funded research and supports private sector experimentation. We suspect that creating such an ecosystem in clean energy could be a key contributor to accelerating innovation in the sector.”
An excerpt is available here.
Technorati Tags: climate-change, energy
As it raises its forecast for global energy demand, the International Energy Agency has issued a timely study of the prospects for second-generation biofuels, with a special focus on forestry and agricultural residues.
Key Findings:
- There is a considerable potential for the production of second-generation biofuels. Even if only 10% of the global agricultural and forestry residues were available in 2030, about half of the forecasted biofuel demand in the World Energy Outlook 2009 450 Scenario could be covered – equal to around 5% of the projected total transport fuel demand by that time.
- To ensure a successful deployment of second-generation biofuels technologies requires intensive RD&D efforts over the next 10-15 years.
- The technical development will mainly take place in OECD countries and emerging economies with sufficient RD&D capacities like Brazil, China and India.
- In many developing countries, the framework conditions needed to set up a second-generation biofuel industry are not currently sufficient. The main obstacles that need to be overcome include poor infrastructure, lack of skilled labour and limited financing possibilities.
Agricultural and forestry residues should be the feedstock of choice in the initial stage of the production, since they are readily available and do not require additional land cultivation.
- Investments in agricultural production and infrastructure improvements would promote rural development and can significantly improve the framework for a second-generation biofuel industry. This will allow developing countries to enter second-generation biofuel production once technical and costs barriers have been reduced or eliminated.
- The suitability of second-generation biofuels for countries’ respective needs has to be evaluated against other bioenergy options. This should be part of an integrated land use and rural development strategy, to achieve the best possible social and economic benefits.
- Capacities should then be built slowly but continuously in order to avoid bottlenecks when the new technologies become technically available and economically feasible. To ensure technology access and transfer, co-operation on RD&D between industrialised and developing countries as well as among developing countries should be enhanced.
- More detailed research is still needed to ensure that second-generation biofuels will provide economic benefits for developing countries. This research includes a global road map for technology development, an impact assessment of commercial second-generation biofuel production, and improved data on available land. Additionally, more case studies could enable further analyses of local agricultural markets, material flows, and specific social, economical and environmental benefits and risks in developing countries.
Technorati Tags: Biofuels, energy, residues
Oxford Analytica has a useful analysis of the widely divergent forecasts of oil supply and demand and the controversy surrounding allegations that the International Energy Agency’s figures overstate supply in order to keep prices down.
Excerpts from Oil projections for 2030 vary widely
If pessimistic oil supply forecasts are accurate, the world faces a major energy shock in the medium term. The oil-consuming countries’ watchdog, the International Energy Agency, is accused of massaging long-term forecasts to dispel such disquiet.
In its World Energy Outlook (WEO) 2009, released last month, the International Energy Agency (IEA), as part of its business-as-usual reference case, predicted that world oil supply would grow to 106.4 million barrels per day (b/d) by 2030. In earlier WEOs, the IEA predicted potential growth considerably above 120 million b/d
Sweden’s Uppsala University in November published a report based on analysis of the 2008 IEA World Energy Outlook, estimating that this is a gross overestimate, and a realistic figure for 2030 would be 75 million b/d
Cambridge Energy Research Associates (CERA) last month released a report predicting that world oil supply can reach 115 million b/d by 2030, and post-peak decline will not be sudden and dramatic. Rather, a high-level of plateau production can be sustained for some time.
There is no reason to assume IEA objectivity. Despite its ‘international’ nomenclature, it represents OECD oil consuming and importing countries. This is consistent with highlighting future oil supply threats — primarily lack of investment, which is the constant IEA mantra — and overstating future oil supply potential, as it appears to have done in the past.
The IEA has a bias towards overestimating demand (to encourage investment and access to resources) and supply (to mitigate higher price expectations)
The IEA is not alone in making assumptions, nor is its position the most extreme.
Reports do not take the view that there is a shortage of hydrocarbons as a geological resource. What is unsaid is revealing:
- The possibility that Saudi Arabian and other OPEC members’ stated proven reserves are exaggerated is not discussed, though there are strong grounds to believe that they may be inaccurate.
- OPEC proven reserves are not verified independently and have the unique but unlikely characteristic of remaining constant from year to year — newly proven reserves exactly match annual production.
- When increases have occurred, they have been dramatic and not matched by exploration activity in the preceding year.
There is agreement that crude oil is a finite resource, and production eventually will hit an inflexion point, after which output will decline irreversibly. CERA sees this post-2030, the IEA and UKERC between now and 2030-31, while Uppsala suggests the peak probably has passed.
The key differences are the rate at which production can be increased, and the decline rate of existing and future fields.
Technorati Tags: energy, IEA, oil, oil reserves
Guest Post by Noam Neusner
The Obama administration is counting on nuclear power to be “an important factor in getting us to a low-carbon future,” says Energy Secretary Steven Chu. But that statement, so direct and clear in the abstract, does little to address the biggest problem plaguing the nuclear industry: What’s to be done with the radioactive spent fuel rods that these plants produce as waste? In other words, by opting for nuclear energy, which represents a carbon-free alternative to coal-firing and oil-burning utilities, are we trading one potential environmental disaster for another?
Nuclear power supporters had long hoped that the solution to the nuclear waste problem could be found in a storage facility hollowed out of Yucca Mountain, deep in the Nevada desert roughly 80 miles north of Las Vegas. But questions about Yucca’s long-term ability to keep radioactivity from leeching into groundwater energized nuclear opponents, as well as nearby residents and Nevada political leaders. Soon after taking office, President Obama defunded the project.
Pending another solution, the roughly 60,000 tons of nuclear fuel waste currently in the U.S. is stored on-site at nuclear plants, either in subsurface canisters or in secure “ponds” filled with boric acid. If this approach continues much longer, it could cost Washington a lot of money: Utilities have successfully sued the federal government for failing to provide a permanent storage solution after they ponied up roughly US$30 billion in fees paid over several years to fund the Yucca project.
Indeed, untangling the nuclear waste problem may be more a matter of economics than of location. As of now, states have no real financial incentive to collect and store spent nuclear fuel, and doing so has serious downsides, including expensive environmental litigation and other unwelcome possibilities. But states’ resistance could ease if the U.S. adopted an intriguing option: a price-to-store system — nuclear waste’s version of cap and trade. That would not only address the storage problem, but also provide a new business opportunity by creating a market for long-term storage sites and nuclear waste reprocessing.
A cap-and-trade system for storing radioactive waste may be the best means to wake up a critical but moribund industry.
Under the price-to-store approach, utilities operating nuclear plants — currently, there are 104 reactors in 31 states, and 26 more reactors under consideration — would be compelled to buy spent-fuel vouchers with the annual environmental impact fees they pay each year to federal regulators; these fees now total close to $800 million a year. The vouchers would then be given to states operating federally regulated, long-term waste disposal sites; in turn, the states could redeem the vouchers for federal dollars.
Although most states might initially reject the idea of having nuclear waste within their borders, the participation of only a handful of states would be required to develop a market. And in reasonably short order, the price to store nuclear waste could become even attractive enough to make Nevada think twice about its not-in-my-backyard response to Yucca.
The full article is available here.
strategy+business is published by the global commercial consulting firm booz&co
Technorati Tags: cap-and-trade, energy, nuclear-power
Following the recent approval by the US House of Representatives of a climate change bill, the world now appears set on an irreversible path toward a dramatic expansion of carbon trading. Oxford Analytica takes a look at carbon emissions legislation around the world in a new report.
“OxAn expects carbon markets to triple in size by around 2012: “The establishment of new national emissions trading schemes in countries including the United States, Australia and New Zealand combined with continuation of the European Emissions Trading Scheme (EU ETS) will be the main drivers of this growth. Japan and Canada, though more cautious, are also in a position to move quickly towards a regulated ETS.”
The appeal of emissions trading lies in the way it simultaneously supports innovation and entrepreneurship with the desire of regulators to set tight standards.
“Unlike taxation, it has clear goals, which can be easily communicated by politicians to the public and provides useful signals in international cooperation. While the economic crisis has added weight to industry concerns of the impact of increased climate regulation, existing carbon markets continue to expand in scope and new national markets will be implemented in the United States, Australia and New Zealand in the next few years.”
“Irrespective of the nature of the agreement reached at Copenhagen in December, carbon markets will continue to expand due to new national schemes. Implementation of such schemes in Australia, Canada and New Zealand will follow developments in the United States. The degree to which legislators look prepared to use trade sanctions against countries will shape carbon market development in Japan and other major emitters without plans for regulated markets.”
Technorati Tags: carbon-trading, climate-change, coal, energy, greenhouse-gases
McKinsey warns that oil prices could spike anew as soon as the world economy recovers, paced by growing demand in China, India and the Middle East.
“In the long term, our research suggests continued rapid growth in overall demand for energy, further boosting the importance of efficiency efforts,” McKinsey says in a new analysis.
From 2010 to 2020, assuming a moderate GDP downturn scenario, demand for energy will grow by 2.3 percent a year, nearly a full percentage point more than projections for 2006 to 2010.
“More than 90 percent of this demand expansion will come from developing regions, with China, India, and the Middle East leading the way. Five sectors within China—residential and commercial buildings, steel, petrochemicals, and light vehicles—will account for more than 25 percent of global energy demand growth. India’s light-vehicle, residential-buildings, and steel sectors and the Middle East’s light-vehicle and petrochemicals sectors will be other notable contributors to the growing demand for energy.”
“Lower oil prices and overall demand for energy because of the economic downturn are a temporary blessing that should not lull policy makers and businesses into a false sense of complacency,” McKinsey concludes. “Given our projections, it is essential that they step up their efforts now to secure that energy is used in more efficient ways.”
McKinsey also offers an interactive graphic of various energy demand scenarios.
Technorati Tags: china, energy, India, Middle East, oil, oil prices
While the gas market may be in the doldrums now, its medium-term prospects remain good as environmental policies favor further coal-to-gas switching in both developed and developing countries, according to Oxford Analytica. Security of supply concerns should also guarantee further expansion in LNG import capacity across a more diverse range of countries, a process boosted by the current low-price environment, OxAn says in Medium-term prospects are good for gas.
Demand for gas looks unlikely to recover until 2010, when cuts in supply and an expected bottoming out or recovery in industrial and power consumption bring the market back into balance from the supply glut it is currently experiencing.
However, in the long term, cheap gas prices will boost the attractiveness of gas relative to other fuels:
- Tensions between Ukraine and Russia over gas supplies have heightened Central and East European countries’ awareness of the need for alternative gas import options and this is likely to result in new liquefied natural gas (LNG) terminals for a region that currently has no LNG import facilities.
- Cheaper gas prices appear to be renewing the momentum behind developing countries’ LNG terminal building programmes, particularly in China, where increased gas imports remain an important element of energy policies designed to meet future demand and reduce reliance on coal.
- As power consumption growth returns, lower gas prices should also add to OECD interest in gas-fired power stations. Gas is also likely to be a big winner from the expected US cap-and-trade scheme governing ‘greenhouse gas’ emissions.
Technorati Tags: (lng), energy, natural gas
Fitch Ratings notes a significantly negative trend in U.S. Public Finance rating actions during the first quarter of 2009, accelerating a decline in municipal credit from 2008. This deterioration reflects the severe recessionary macro-economic environment, dislocations in the credit markets, and increased fiscal and liquidity pressures, Fitch said.
In 1Q’09, Fitch’s U.S. Public Finance group upgraded underlying ratings on only 40 credits totaling $12.9 billion in par value, while it downgraded underlying ratings on 56 credits totaling $84.2 billion.
This resulted in an upgrade-to-downgrade ratio of only 0.71:1 in terms of rating changes and a ratio of 0.15:1 on a par value basis. This was considerably worse than the annual ratios for 2007 and 2008, which were 3.67:1 in terms of rating changes and 8.6:1 in terms of par value and 1.59:1 in terms of rating changes and 5.13:1 in terms of par value, respectively.
Fitch notes also that last quarter saw the largest number of Fitch U.S. Public Finance rating downgrades since at least 2002, when Fitch began reporting quarterly municipal rating change totals.
The number of downgrades in the last quarter was nearly two-thirds of the total number of downgrades in all of 2008 and greater than the total number of downgrades in all of 2007.
The bulk of the par value in downgrades was attributable to the state of California. Other significant downgrades were in Florida, Tennessee, and Detroit, Michigan.
During 1Q’09, there were 20 upgrades and 29 downgrades in the tax-backed sector, four upgrades and eight downgrades in healthcare, six upgrades and seven downgrades in water & sewer, three upgrades and five downgrades in public power, no upgrades and four downgrades in transportation, and four upgrades and no downgrades in tax-exempt housing.
The ratio of Positive to Negative Rating Watches and Outlooks indicates the declining trend in public finance ratings is likely to continue for some time, Fitch concludes.
Moody’s ratio of municipal scale upgrades to downgrades deteriorated to 0.8 to1, from the fourth quarter’s 1.1 to 1. The most recent quarter marked a low point for this ratio, falling below the 1.1 to 1 set in the first quarter of 2003 following the last recession. The ratio of upgrades to downgrades based on affected par value also weakened further, falling to 0.1 to 1 from the fourth quarter’s 0.7 to 1.
Technorati Tags: energy, health care, housing, municipal-bonds, state-and-local-government, transportation, utilities
Oxford Analytica thinks oil prices are likely to remain low, even if economic growth picks up later this year.
Producers argue that oil prices need to remain high to fund the investment necessary to meet future oil demand, an important part of which is replacing production lost to depletion, OxAn says in Outlook for oil prices looks weak. They say that at current price levels investment will be insufficient. Once oil demand growth resumes, OPEC’s production cuts will be quickly eroded as will the level of surplus capacity. The attraction of this argument is that it justifies high oil prices no matter how bad or deep the current crisis because it is future shortages that are the imperative rather than the present.
“However, with supply relatively abundant and OPEC finding each incremental reduction towards its output goal of 24.845 million b/d harder, how demand evolves is critical to the price outlook. It is far from certain that a return to the pre-credit crisis ‘peak oil’ paradigm of ever-rising commodity prices will be quick, or will happen at all.”
- Consumer wealth. Part of the ability to absorb rising oil prices without impacting demand was that oil had become relatively cheaper in terms of the proportion of consumers’ disposable income that it absorbed.
However, with rising unemployment, economic contraction and falling wage inflation, oil continues to be perceived as expensive, despite having lost two-thirds of its value since its peak.
- Substitution effects. Although oil demand is characteristically inelastic, substitution effects do occur and their impact, rather than being reversed as prices fall, may be compounded by an increase in legislation designed to reduce greenhouse gas emissions and to improve countries’ security of energy supply.
“While many forecasters argue that the majority of substitution effects are reversible rather than structural, the continuing impact of current energy policies might also be seen as gathering momentum. There is a tendency to assume that under ‘normal’ economic conditions, oil demand will always rise everywhere, and for developing economies it will trend towards per capita levels seen in the OECD. However, both Japanese and European oil demand was falling or static before the financial crisis, while neither have nor are likely to see the same level of car ownership as the United States.”
Technorati Tags: energy, oil prices, OPEC
