Alitalia
Rapid descent
Mar 19th 2008 ROMEFrom The Economist print edition
Air France-KLM makes an offer that Italy's troubled airline cannot refuse
BEGGARS cannot be choosers: the threat of insolvency can push even the most politically motivated managers to make tough decisions. When the board of Alitalia, Italy's state-controlled national airline, met on March 15th, it had no choice but to accept a takeover offer worth €139m ($217m) made the day before by Air France-KLM, a large Franco-Dutch airline group which began exclusive negotiations with Alitalia in December. The conditions that Air France-KLM has set are harsher than expected, but Alitalia's tattered finances mean any bid is better than none.
If the deal goes ahead, it will be the final stage of a privatisation that began at the end of 2006 when Italy's economics and finance ministry, which has a 49.9% stake in the airline, invited expressions of interest for its shares. Alitalia's plight has worsened significantly since then. Having lost about €2.6 billion between 1999 and 2005, it lost €605m in 2006 and a further €364m last year. It is losing around €1m a day and had €282m in cash and short-term credits at the end of January, and net debt of €1.3 billion. Air France-KLM says it will also buy Alitalia's convertible bonds for €608m and has promised to underwrite a capital increase of €1 billion immediately after the closing of its offer.


Unsurprisingly, the offer comes with strings attached. One is the price that Air France-KLM is willing to pay for Alitalia's shares: it has offered one of its own shares for every 160 Alitalia shares (less than half of what had been rumoured), valuing each one at around €0.10, against a market price of €0.54 per share on March 14th. A second is that Air France-KLM will pay only the market value of convertible bonds that Alitalia issued, rather than their nominal value.
A further condition of the deal concerns the controversial airport at Malpensa near Milan, a white elephant backed by local politicians where operations cost Alitalia €200m a year. When it announced its summer schedule last month, Alitalia slashed its intercontinental flights to and from Malpensa and said that Rome's Fiumicino airport would be its main hub. Air France-KLM's offer gives only Fiumicino a significant role as an intercontinental airport.
Under the salvage plan, Alitalia's fleet will be cut and jobs will go. Given the fractiousness of Alitalia's staff, Air France-KLM has wisely made its offer conditional on trade unions formally signing up, and was talking to them as The Economist went to press. It also wants to be indemnified against any legal action taken as a result of its plan to reduce operations at Malpensa. The Italian government accepted the offer from Air France-KLM on March 17th, although it is open to a higher offer and the question of Malpensa remains. Italy's trade unions now face a simple choice: accept the offer and keep Alitalia flying, or reject it and ground the airline.

Pelosi urges Beijing to allow probe
By Amy Yee in Dharamsala and Geoff Dyer in Shanghai
Published: March 20 2008 14:20 Last updated: March 21 2008 17:58
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The speaker of the US House of Representatives on Friday demanded that China allow an international investigation into the violent unrest in Tibet and said the situation there was a “challenge to the world’s conscience”.
Nancy Pelosi delivered a strong show of US support for the Dalai Lama, the exiled Tibetan Buddhist leader, who has been accused by the Chinese government of organising the protests and rioting which began last week.
EDITOR’S CHOICE
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West’s perception of Tibet angers Beijing - Mar-19
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In pictures: Conflict in Tibet - Mar-21
Victor Mallet: Malaysian lessons for Asia’s authoritarians - Mar-19
“We insist the world know what the truth is in Tibet,” said Ms Pelosi, during a visit to Dharamsala, the Indian hill-town that is the seat of Tibet’s government-in-exile. “We need to know what is happening there.”
Although Ms Pelosi was leading a Congressional delegation to India which had been scheduled weeks before, she used the occasion to issue a censure of the Chinese government’s tough military response to the protests, the most serious in the region for 20 years.
“If freedom-loving people throughout the world do not speak out about Chinese repression in China and Tibet, we have lost all moral authority to speak on behalf of human rights anywhere in the world,” she said.
Speaking before an audience of hundreds of Tibetan refugees holding US and Tibetan flags in front of the Dalai Lama’s residence, she added: “Nothing surprises me about the use of violence on the part of the Chinese government. I would hope that world opinion can come down heavily on them.”
Ms Pelosi, who has been a critic of Chinese human rights policies in the past, did not call for a boycott of the upcoming Beijing Olympics but stressed that China had promised to improve its record on human rights when it bid for the games. “The world is watching,” she warned. China should allow monitors, journalists and medical assistance into Tibet, she said.
In pictures: Conflict in Tibet

Slideshow: Protests by Buddhist monks in Lhasa, capital of Tibet, against Chinese rule worsened into the most serious social unrest to hit the Himalayan territory in nearly two decades
The influential US politician also rejected Chinese claims that the Dalai Lama incited the violence, saying that the accusation “doesn’t even make sense”.
Congress would consider a resolution to call for an inquiry “to make sure there is no association between His Holiness and the violence in Tibet.”
The Chinese government has been adamant that the Dalai Lama and his supporters were behind the wave of protests, which included a riot last Friday in the Tibetan capital Lhasa when several Han Chinese residents were killed.
China argues that the Dalai Lama is still committed to pushing for independence for Tibet, prompting Zhang Qingli, China’s party chief in Tibet, to this week call the ageing cleric “a monster with human face and animal’s heart”.
The Chinese authorities also claim the protests have been partly designed to undermine the Olympic Games in Beijing in August. Chinese mountaineers said on Friday that the unrest in Tibet would not deter them from an attempt to take the Olympic torch to the peak of Mount Everest in May.
“We shall go all out to ensure the smooth movement of the torch relay. We must strengthen ethnic unity while hostile forces try to drive a wedge between ethnic groups,” Yin Xunping, an official with the Tibet mountaineering effort, was quoted as saying by the Xinhua news agency.
Copyright The Financial Times Limited 2008

Hong Kong IPO market is ‘almost dead’
By Justine Lau in Hong Kong
Published: March 20 2008 07:43 Last updated: March 21 2008 10:40
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Hong Kong’s initial public offering market, which has been rattled by plummeting share prices, is “almost dead” as companies continue to pull their offerings.
Evergrande, the Chinese property developer, and China’s Wing Fat Printing this week became the latest casualties of the recent stock market stumble after they pulled listings in Hong Kong that together could have raised as much as $3bn.
EDITOR’S CHOICE
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HK’s IPO market shows signs of recovery - Mar-03
The postponements came as a record number of companies have withdrawn or delayed their IPOs in Hong Kong, and are likely to cast a further shadow on the market.
“[The IPO market] is not dead yet but it is definitely almost there,” said Ben Kwong, chief operating officer of KGI Asia, a local brokerage. “I don’t see any catalyst for sentiment to improve in the short term.”
The Hong Kong market has plunged in the last few weeks following a string of bad news from the US, including the collapse of Bear Stearns. The benchmark Hang Seng Index has dropped 24.1 per cent since the start of the year.
In view of dim investor sentiment, many companies have delayed their planned listings as they search for better opportunities to sell stocks.
According to Dealogic, eight companies in Hong Kong have withdrawn or postponed their offerings so far this year, bringing the number of scrapped IPOs to the highest level ever. Only 14 companies have pulled their listings in the previous five years combined.
While some have eventually listed, they have been forced to cut sizes of their offerings or sell their shares at lower prices.
Guangzhou-based Evergrande had planned to sell 2.86bn shares in a price range of HK$3.50to HK$5.60 apiece on the Hong Kong Stock Exchange to raise US$2.1bn.
The company, which began bookbuilding on March 6, is understood to have decided to shelve the IPO after failing to receive enough orders from retail and institutional investors by the time subscriptions closed on Wednesday night. This is in spite of the developer having extended the subscription period for its retail offering by one day.
At the top of the pricing range the listing would have made Xu Jiayin, the company’s owner, China’s richest person. The IPO is expected to go ahead when the market recovers.
Some analyst had questioned the timing of Evergrande’s IPO given that Beijing is keen to cool the property market to tame soaring inflation, which hit 8.7 per cent in February, the highest in 12 years.
Chinese authorities are controlling bank loans and credit to developers as well as restricting foreign investment in the sector. They have also made it harder for consumers to obtain mortgages.
Credit Suisse, Goldman Sachs and Merrill Lynch are joint book-runners on Evergrande’s IPO. They declined to comment.
Wing Fat, a Chinese packaging paper manufacturer, was hoping to raise up to $89m in a sale arranged by UBS and BNP Paribas. The banks declined to comment.
Copyright The Financial Times Limited 2008

Wealth funds strike deal with Washington
By Daniel Dombey in Washington and Simeon Kerr in Dubai
Published: March 22 2008 02:00 Last updated: March 22 2008 02:00
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The US has reached an agreement with Abu Dhabi and Singapore on a set of principles for investment by sovereign wealth funds.
Washington hopes the move will help assuage concerns about such funds' transparency, while encouraging them to continue investing. It wants the agreement to serve as a stepping stone for wider-ranging efforts by the International Monetary Fund and Organisation for Economic Co-operation and Development.
The code of conduct could soon gain other adherents in the Middle East. The Qatar Investment Authority has signalled a willingness to sign up. Dubai International Capital also says it would consider adopting the code.
The agreement says sovereign wealth fund investment decisions "should be based solely on commercial grounds, rather than to advance directly or indirectly the geopolitical goals of the controlling government". It also stresses the need for "strong governance structures" for the funds, and respect for host country regulatory disclosure rules.
The US agreed that recipient countries "should not erect protectionist barriers", and "should ensure predictable investment frameworks" and "not discriminate among investors".
Clay Lowery, the US Treasury's assistant secretary for international affairs, told the Financial Times: "It's the first time to my knowledge that there's been a set of principles on this type of issue that include both sovereign wealth funds and a recipient country.
"In terms of transparency and disclosure what you saw today was two funds that are basically willing to step up and say, 'We believe there should be greater information and disclosure.'" He emphasised commitments in institutional arrangements and decision-making structures and financial information, notably asset allocation and benchmarks.
Abu Dhabi officials say the guidelines will simply formalise the oil-rich emirate's investment practices. The capital of the United Arab Emirates - a key US ally - has been embarrassed by rising hostility to such funds, fearing entanglement in wider concerns about more politically motivated Russian and Chinese funds.
One Abu Dhabi official says the US Treasury has pushed for the code of conduct as a means to assuage domestic concerns about sovereign wealth funds and to prevent the introduction of punitive legislation against these funds, which have traditionally held hundreds of billions of dollars in US T-bills and other US assets. Middle East funds are already diversifying away from the US to lower exposure to the weakening dollar and to seek higher returns from Asian markets.
The White House is keen to ensure continued investment at a time when US officials are seeking to prevent the credit squeeze from further damaging the economy. "We can protect our people against investments that jeopardise our national security, but it makes no sense to deny capital, including sovereign wealth funds, from access to the US markets," President George W. Bush said last week.
But some US Congress members worry about the economic power that could be accumulated by sovereign wealth funds from Arab states, Russia and China.
The 32-year-old Abu Dhabi Investment Authority is the world's largest, with between $500bn and $875bn (€324bn-€566bn, £252bn-£441bn) in assets, according to US Congressional Research Service estimates this year.
Singapore's sovereign wealth fund ranks second globally, with the Government of Singapore Investment Corp having estimated assets of between $100bn and $330bn and Singapore-based Temasek Holdings assets of more than $100bn.
Additional reporting by John Burton in Singapore
Copyright The Financial Times Limited 2008

Central banks float rescue ideas
By Chris Giles and Krishna Guha in London
Published: March 21 2008 22:02 Last updated: March 21 2008 22:02
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Central banks on both sides of the Atlantic are actively engaged in discussions about the feasibility of mass purchases of mortgage-backed securities as a possible solution to the credit crisis.
Such a move would involve the use of public funds to shore up the market in a key financial instrument and restore confidence by ending the current vicious circle of forced sales, falling prices and weakening balance sheets.
EDITOR’S CHOICE
The four ‘new sheriffs’ of Wall Street - Mar-21
Lex: Propping up mortgages - Mar-21
Gapper: Why Bear’s bankers should make penance - Mar-21
Man in the News: Timothy Geithner - Mar-21
Editorial comment: Renew the financial toolbox - Mar-17
Fear of further casualties whips up new storm - Mar-14
The conversations, part of a broader exchange as to possible future steps in battling financial turmoil, are at an early stage. However, the fact that such a move is being discussed at all indicates the depth of concern that exists over the health of the banking system.
It shows how far the policy debate has shifted in recent weeks as the crisis has spread to prime mortgage assets in the US and engulfed Bear Stearns, the investment bank.
The Bank of England appears most enthusiastic to explore the idea. The Federal Reserve is open in principle to the possibility that intervention in the MBS market might be justified in certain scenarios, but only as a last resort. The European Central Bank appears least enthusiastic.
Any move to buy mortgage-backed securities would require government involvement because taxpayers would be assuming credit risk. There is no indication as yet that the US administration would favour such moves. In the eurozone it would require agreement from 15 separate governments.
One argument among policymakers and bankers has been that new international rules have exacerbated the credit squeeze by requiring assets to be valued at their current record lows rather than at face value.
But a strongly held view at one European central bank is that it is not “mark-to-market” accounting that is to blame for severe weaknesses in banks’ balance sheets but that prices of MBS securities have fallen to levels that imply unrealistically high rates of default.
If public authorities were to buy and hold sufficient mortgage-backed securities – rather than simply lend against them as they have until now – at prices well below face value but above current prices, they would set a floor in the MBS market.
The Fed does not believe that the point has yet been reached when such drastic action is necessary and considers the discussions it has had with its counterparts to represent “blue-sky thinking” rather than the formulation of a definitive policy proposal.
Fed officials are monitoring the impact of the latest barrage of Fed liquidity moves and interest rate cuts. They also believe the US has not exhausted all the options short of wholesale public intervention and further intermediate steps are available to them.
These could include still more aggressive use of the Fed’s own balance sheet to boost liquidity in the markets.
Analysts say the US government also has plenty of scope to boost support for the markets indirectly through the Federal Housing Administration or Fannie Mae and Freddie Mac.
The UK lacks these institutions, which could be one reason why the Bank of England is keenest to explore outright intervention. The UK government has already become heavily involved in buying mortgages since September with the recent nationalisation of Northern Rock, the mortgage lender.
Michael Coogan, the director-general of the UK’s Council of Mortgage Lenders, said this week: “Demand for mortgages remains strong but cannot be fully met from existing funding sources.” He predicted higher prices and reduced lending.
It is not just central banks that think the MBS market prices are too low and imply a unrealistic level of mortgage default. Some US states’ pension funds are investing small sums in the mortgage market.
Robert Gentzel, a spokesman for the Pennsylvania State Employees’ Retirement System, told the AP news agency: “Some of the securities that have dropped in value were really very solid securities.”
Copyright The Financial Times Limited 2008