PCC - Primary Capital Certificates

PCCs are very similar to shares. The main differences between PCCs and shares are that PCCs give ownership rights to specific parts of a bank´s capital, and that the governing bodies of a savings bank will have a broader representation than a commercial bank. As a result of the fact that the PCC owner´s only own parts of the bank, the dividends are limited.

There are 121 savings banks in Norway. 25 of these have issued PCC. In 2002 The Savings Bank´s Act was amended. The savings banks got the possibility to convert to shareholding companies, and the largest saving bank, Union Bank of Norway, converted. The bank has later on merged with the largest commercial bank in Norway, DnB, into DnB NOR Bank ASA. The bank might still be named a savings bank.

PCCs are of great importance for the Norwegians savings banks. 8 of the 10 largest savings banks have issued PCC, and the he owners´ share of the bank´s capital varies from about 10 to 55 percent.

The interesting thing about PCCs in a few of the mid-sized norwegian banks is

  • High dividend yield (comparable to dividend shares)
  • Low volatility

At the same time the disadvantage from an investor's perspective is

  • Low volatility
  • Low liquidity

As should be easily noticable, low volatility is listed as both a pro and con . While the Oslo Stock Exchange Benchmark Index (OSEBX) is up 30% the past month (and rougly 45% since the bottoming) a few of the more interesting PCCs (such as MORG - Sparebanken Møre) has moved 1.9% the past month. As such, a high weight on PCCs vs the overall market means giving up gains. At the same time, in downturns they stay stable while giving a good dividend.

As such having a weight on PCCs serves as a defensive position, and at the current levels seems interesting to position for a pullback.

The most interesting PCCs in my opinion at the moment?

  • MORG - Sparebanken Møre

morg

(click image for full size)

Dividend history:

morg1

  • SVEG - Sparebanken Vest

sveg

(click image for full size)

Dividend history:

sveg1

  • MING - Sparebanken MidtNorge

ming

(click image for full size)

Dividend history:

ming1

Protectionism

Ever heard the term "buy American"? I know I have, most recently it cought my attention when the house of representatives of the u.s. congress wanted to impose a provision in astimulus package. Thankfully the final version passed by the senate not only removed such statement, but acknowledged an obligation to avoid protectionist trade policies. Lets take a step back and see how the dictionary defines protectionism:

protectionism
n 1: the policy of imposing duties or quotas on imports in order
to protect home industries from overseas competition

At a quick glance, it is certainly tempting to boost own industry on the expense of othe countries. With unemployment rates spiking globally, political pressure towards job creation is enormous. Hopefully, however, the politicians doesn't go for what seems to be the quick fix. The world stretches past the domestic market, and global competition increases efficiency. Granted there can be a claim for macroeconomic correction of externalities and other market imperfections, but the point still remains. I have no doubt that e.g. the US automaker industry would've been in a better position today had it not been for politics such as "buy american". Instead, it seems General Motors will file for bankrupcy, maybe it will be restructured, maybe it won't . What is interesting to see is how, seemingly , Ford is doing so much better. With an anticipation of changed to consumer preferences towards smaller and more fuel-efficient cars can be one possible reason. In Europe, incentives towards cars with less emissions has been , mostly, driven by taxes and governmental regulations.

Moving away from the automaker industry, however, lets have a look at agriculture. This is a sector where most countries , especially Norway and a few other countries in Europe, should be particulary ashemed of. The level of taxes on foreign products and the amount of subsidies on domestic products is devastatingly high (looking at it from a taxpayer perspective). It can also be argued on moral grounds, in terms of the less fortunate countries in the world. Norway prides itself on the amount of foreign aid it provides, yet what is demanded the most by participants is market access. Free trade stimulates growth, and they know it.

Thankfully so does the Asia-Pacific Council of American Chambers of Commerce , an organization representing more than 10,000 U.S. Businesses. The organization urged the government to avoid protectionism and move toward expanding trade agreements with Asia *.  In order to avoid another 1930 situation in the real economy, we have to avoid protectionism. Indeed, argued by Joseph S. Nye, hard economic times are correlated with it ** ***. 17 out of the G-20 countries have already entered into some form of protectionistic measure since the beginning of this year ****. But guys, lets try to avoid another Smoot-Hawley Tariff Act as we saw in 1930. Ultimately it is a matter of game theory, if you face a rational expectation of what others will do to counteract a move by yourself, you might find that you're better off not making the move at all, and sadly, protectionism is increasing while global trade shrinks.

Aker's raid on Aker Solutions

I hope everyone has had a nice Easter, I know I've had; recharging my batteries, so to speak, and gotten some sun. But one case in particular has preoccupied me for the past couple of weeks, so I can might as well share some of my thoughts on the matter.

The summary of the situation is that Aker Solutions acquired ownership in a series of companies from the holding company Aker. Internal transactions are always vulnerable to speculations about proper pricing, and stresses the importance of proper Corporate Governance. For one thing the competencies and the independence of the different corporate boards of directors can result in the difference between a favorable and an unfavorable situation.  My hypothesis is that the board of directors in Aker Solutions is too closely related to the Aker system. Simultanuously you have a complicating factor in that the Norwegian government is involved. The Norwegian Prime Minister was present at the Aker Day 2nd of April when the transactions were announced, and naturally got questioned about his thoughts on the matter. More about that later.

Aker

Aker ASA is an industrial ownership company consisting of the companies (ownership in percentages after adjusting for the transactions in question)

  • Aker Floating Production (72.3%)
  • Aker Drilling (100%)
  • Aker Solutions (41.0%)
  • Aker BioMarine (82.9%)
  • Aker Seafoods (64.95%)
  • Aker Exploration (76.1%)
  • Aker Philadelphia Shipyard (50.3%)
  • Aker Clean Carbon (50%)

The aker companies has a total of 26,500 employees spread across five continents and total operating revenues totaling NOK 65 billion for 2008.

Aker Solutions

Aker Solutions delivers engineering, construction, manufacturing, technology products, maintenance and other specialised services, often as total solutions for complete projects. Aker Kværner is the result of a merger between the Kværner Group and the Aker Maritime Group in 2002, and it got listed on the Oslo Stock Exchange in 2004. In April 2008, Aker Kværner changed the name to Aker Solutions.

Governmental involvement / Aker Holding

Aker Solutions’ largest shareholder is Aker Holding AS, with a 40.27 percent stake in the company. Aker Holding AS is owned by Aker ASA
(60 percent), the Norwegian Government (30 percent), SAAB AB (7.5 percent) and Investor AB (2.5 percent). The government got involved on June 22nd 2007, when Aker transferred its entire ownership of Aker Solution (40.27 %) to Aker Holding, and sold 40% of the latter for NOK 6.4 bn. This happened after international investors showed interest in the company, by reasons of wanting the company to remain in Norway. As this is not a post about protectionism I'll leave it at that for now. There are also questions about a put option that was given to the swedish investors, but again, I'll leave that for now.

The transactions

Aker Solutions is acquiring five companies at a total consideration of NOKbn 2 including shareholder loans (ownership in brackets):

  • Aker Oilfield Services (100%)
  • ODIM (33%)
  • Aker DOF Supply (50%)
  • Misund Bruk (100%)
  • Aker Clean Carbon (50%)

It is worth noticing that a few of these companies undoubtedly prompts sound long-term gains for Aker Solution. The issue is the pricing involved. At the same time it seems weird to increase the capital expenditure requirements for the next couple of years by roughly NOK 2.5 bn and the debt ratio (NOK 2 bn in debt accounts for roughly 25% increase) in the mids of the financial environment we're in.

One company that seems additive for Aker Solution is the acquisition of Aker Oilfield Services, but while the valuation of comparables are down 50-90% over the past 18 months, the transaction involved a premium to prices at that point, which seems unreasonable at best. Similarly the ODIM stake seems just, except for being sold for a 16% premium over closing prices on the Oslo Stock Exchange previous day. The transfer of Aker DOF Supply (pretty much 6 AHTS (Anker Handling Tug Supply) ships) is more questionable.

The acquisition of Aker Clean Carbon is also interesting, as Aker Solution sold this to Aker in the first place and now pays a premium in order for it to be re-acquired. But the most questionable in the whole situation is the process.

The Aker value statement says "Aker ASA’s overriding concern is to create value via its ownership of well-run businesses that provide products and services in an environmentally sound, ethical, and socially responsible manner.", an interesting notion considering the situation in the first place.

Aker Solutions had a general assembly 1st of April 2009. Nothing about these transactions, however, were mentioned untill the Aker Day the 2nd of April. For transactions resulting in 25% increase in debt and capex increases it would've been nice for this to be mentioned in the documents for the general assembly, not to mention for it to be disclosed at this, not the following day.

As for Aker Holding, the equity agreement between the partners states that such a transaction in Aker Solution ASA is clearly a matter for the board of Aker Holding and the general assembly. However, the transactions were performed through a fully-owned subsidary of Aker Solution ASA named Aker Solution AS (note the difference in organization form, so it is actually two different companies).

Inquery into the transactions

The government has started an inquery into the transactions. The financial valuation will be performed by Pareto Securities, while the legalities will be considered by the lawfirms Simonsen and Selmer. The question is, what can happen even if they should conclude things to be non-favorable for Aker Solutions? Ultimately the responsibility is with the board of directors in the company.  The government's representative in the Aker Holding board is now responsible for the investigation, after apparently reacting due to the stock market reaction to the news.

akso

As one can see in the drop the past couple of days, it is down (rougly 13% the days directly after the announcement), on a montly basis it is down about 11% vs OBX (25 most traded shares on OSE, of which AKSO consists) which the past month is up 4.36%. The increased debt ratio and capex has also resulted in rating agencies taking matters into their own hands and prompting a negative watch on the rating (BBB- initially)

No matter what happens, it shows the importance of corporate governance when dealing with internal transactions, it will be interesting to see what the inquery concludes.