Monday, 28 April 2014


Imagine you wake up and your business is without a Chairman, CEO and COO for the first time in 32 years. In fact the Chairman/CEO had started with the company in 1947. What do you, as the inheritor do? This is exactly what happened to the widow of Bordeaux wine doyen Thierry Manoncourt who passed away in 2010.

The family's primary source of wealth and for that matter their raison d'être Chateau Figeac on the right bank of Dordogne in the appellation of St Emilion was without it's Proprietor and just as importantly without its long serving consultant oenologist, Gilles Pauquet who retired around the same time as the formidable Manoncourt died. The details of what happened were in the weekend edition of the Financial Times as recorded by the extremely erudite Jancis Robinson and are available on her own website.

So why am I bothering on a blog that normally deals with publicly listed companies or cycling with a privately held wine producer in France? Transitions whether they be at Chateau Figeac, Apple, Microsoft, BHP or even in the future at J. P. Morgan are not only important in terms of profit and loss, but also culturally for the organisation in question. M. Manoncourt didn't die without a succession plan, he had in fact installed his son-in-law on the management committee of the Chateau in 1988 with the intention no doubt of having him be in a position to manage the estate for the four surviving daughters and his wife when he departed the scene. The best laid plans can often go array and in the case of Figeac one has to consider a number of unique features of the property and its business culture:

Unique terroir: The Figeac we see today is a result of significant changes from the original property. The property was originally double the size that it is today as a result of subdivisions during the 19th century. The most famous of these according to the historians saw a particularly important strip of land sold to Chateau Cheval Blanc, which left Figeac in a position of being mostly a gravel soiled property with its strongest root stock planted to Cabernet Sauvignon. Most of the other wines of St Emilion and Pomerol are dominated by Merlot or in the case of Cheval Blanc Merlot / Cabernet Franc which thrive more or less in clay soil. What this means is Figeac always seems the odd one out because cabernet doesn't have the youthful ripeness approachability of Merlot.

Mangement: The Manncourts came to own Figeac in 1942 through marriage and inheritance. Because of the war and manpower shortages including the then 25 year old Thierry Manoncourt's year in a German PoW camp, Figeac like other Chateau had to make do. Theirry returned in 1943 and by 1947 was in a position to see  the first of the great post war vintages in barrel and ready to sell. 1945, 47 and 49 represent the first of what I like to call the pre-modern classics, that is wines made before the widespread introduction of stainless steel tanks and various techniques in the 80's that produced a new heavier style. The fact that the young Manncourt saw such great vintages probably instilled in him a reverence for the vineyard that probably meant he had a certain skepticism for the modernist movement of the later 20th century. Add to this that his wine was always popular in the anglo-saxon trade and prices were growing as America and the new world took to wine consumption and the business plan of sticking close to what nature had given you seems somewhat obvious.

Style: If Figeac seems somewhat old fashioned by today's modern standards of highly concentrated fruit bombs from places as diverse as the Marema (Italy), Barossa Valley (Australia) or the Napa Valley (USA) then Manoncourt never seemed particularly concerned with the "fashion". In the 80's it was the final vintage of the decade that changed everything with the profound 89's having fantastic weight and texture (followed of course by the fleshy 90's - almost "new-worldly" themselves). Figeac stuck to its own road and was rewarded with very good, if not spectaculor reviews, enough to keep the Chateau humming along.

So what we have is a business being consistently good at producing a limited product range (they have also produce a second cru as well as the main offering), staying true to what got them there. They have a theme to work from thanks to Manoncourt and they kept their primary market well stocked. The flaw, if there is one was not that Figeac didn't invest in his property, it remains well equipped for modern wine making, but probably not challenging the new generation to search for other projects and markets with which to enhance the core business. Madame Manoncourt must be a particularly wily character to at her age have taken it upon herself to shake things up via the appointment of Jean-Valmy Nicolas from the family that owns the nearby Pomerol estate Château La Conseillante to the board and the hiring of one of the high priests of modern wine making as consultant oenologist Michel Rolland. Of course Rolland is seen as everything old Manncourt wasn't (probably unfairly) as he's been characterized as an industrialist rather than a grower. But don't think for moment that continuity passed Mdm Manncourt completly as she also appointed as managing director Frédéric Faye, the then 32 year old 10 year veteran of the Figeac estate, who just so happened to have worked with Rolland in 2008 on a project in Argentina. So in a way the Manncourts have thrown open a stale board by adding an outsider, embraced the new through Rolland and kept true to the spirit of Thierry via someone who spent 10 years working with him in the form of Faye.

Will the changes at Figeac see the estate elevated once more? To know that you'd have to know the influence of the four Manoncourt sisters due to the nature of the Napoleonic inheritance laws of France that will call in time for ownership to be once again redistributed on the passing of Madam Manoncourt. If the goal is to increase the value of Figeac in order to facilitate the sale of the property at an appropriate price, as was the case 1998 when Cheval Blanc was sold to Bernard Arnault, (LVMH), and Belgian businessman Albert Frère for €155m, then you can see the plan coming together. Investors would do well to watch this space both as a lesson in transition management, but perhaps also for the chance to buy into a fine Bordeaux vineyard which might well be on a new growth trajectory.

The wet weather in Sydney continues and I'm trying to complete one of the Strava challenges that are periodically offered. This one sees me attempting to ride 1,266 kilometers in 40 days. I have 6 days left and still need to complete 242kms. It's not as easy as you think because the easter vacation is over now in Sydney, meaning that cars are back in charge of our roads. Add to this the autumn rain and it will be touch and go.

The other distraction I have is in connection to a position I'm interviewing for. It's taking a while to get through the steps and as I haven't worked for a large corporation for a while it's easy to become frustrated with the process. It's quite different than being able to call up the owners and say what you're doing or what you'd like to do and get an answer in short time. In a large corporate there are so many stakeholders that you're forced to slowdown and bring people on board in whatever you're trying to accomplish. In my case the position is a fantastic opportunity to work with a really highly rated team. People know me understand my philosophy when working in a team environment is simple, especially as a manager; you're only as good as your weakest link. If you're the weak person you're letting people down, if you're the manager and one or more of the staff is under performing then so are you and you need to fix it. If you're servicing a client or another internal business unit you have to treat them with respect. Finance requires a level head and some hand holding. Take people along with you and if that requires you to slowdown and explain things then you do it in expectation of a better outcome in the long run. I don't expect people to roll-over and just hand me a plum job. Experience tells me that you check your ego at the door and work hard . . . nothing was better than being having my team still humming at the terminals a 9pm on a cold winter's night on the big trading floor at UBS in London when the crew didn't even whinge once about the hour and they got on with it, because you got on with it and they knew you were all in it together. That made the trip home on the tube shorter and happier for all.


Thursday, 10 April 2014

One more time with feeling . . . 200km in the rain

No one, just no one on the planet Earth is so important that they alone control their entire destiny. Granted, at certain moments you can make a decision that can be path defining, but essentially there's always someone or something else that can throw a spanner in your "works".  At the moment I'm in somewhat of a twilight zone and I can't do a lot about it and that's why it's been a few weeks since the blog had a new posting. Apologies to long time readers and casual web surfers.

One of the big themes of this blog since inception has been the recapitalisation of the banking sector. I've been preparing a presentation on this and in it I was arguing that the current cycle of equity issuance was in fact not over. Confirmation of this leaked into the FT on Tuesday when Fed Governor and regulation supremo Dan Tarullo "signalled that the Fed might impose an additional risk-based capital charge on the biggest US banks, bringing it “to a higher level than the minimum agreed to internationally” to discourage short-term wholesale funding." Right now the banks have to hold a minimum of 3% equity to assets, but the Fed is indicating that it would like an additional 2% for the eight systemically important ant banks (SIBs) in the USA (Bank of America, Bank of New York Mellon, Citigroup, Goldman, JPMorgan, Morgan Stanley, State Street and Wells Fargo). That means that they will have to hold an additional $68bn in equity or shrink to match what they have. Without doing that numbers yet some of these banks are probably well on the way to either having or raising this equity.

The significance of the Fed adding additional capital requirements is that other central banks will be forced to look in a similar fashion to their own SIBs. Central bankers no matter how independent they are from their political masters are nothing if not risk averse. Think about it this way, say you're a central banker and you decide that the 3% requirement is enough and one of your big banks gets into trouble; surely the first thing that happens is that politicians are going to knock on your door and ask how come you didn't follow the Fed? No central banker will want that and if the payment for this is a lower return on equity amongst the banks administered by that central banker then so be it.

This brings me back to Australia, which has formed the basis of the presentation that I've been doing. The Reserve Bank of Australia (RBA) helpfully puts out a statistics pack to give you an idea as to the capitalisation of its' own banks and financial institutions. The theory here in Australia is that most of the capital raising is over after a deluge of hybrid issuance (CoCo type structures) was approved by local regulators to be a suitable substitution for common equity, with any additional top-ups being possible via the retention of profits or use in underwriting their own dividend re-invest plans. Here's what the major Australian banks looks like in respect of Tier 1 capital (i.e. equity and "equity like"):

The RBA is probably quite happy with this, but given what the Fed is saying and taking for example what the Swiss are doing in respect of their own SIBs that might not be enough going forward. I would consider that Australia runs a banking system closer in nature to (say) Switzerland in terms of concentration, than the USA. In Switzerland the law goes beyond the Basel III rules and requires Credit Suisse and UBS to have capital ratios of at least 19%, of which 10% would be common equity because of their systemic importance to the country. Australia at least has the argument that the four major banks here tend to concentrate their business locally and thus external shocks might not have the same effect here as they will to the Swiss. Even allowing for this the argument for adding to the current capitalisation buffers is persuasive. The question for bankers is can this be done through the current earnings or not?

Given Australian banks are amongst the best in terms of RoE and profits have been rising it's hard not to take the view that there's nothing to see here. Having said that the RBA is already signalling that the easing of the interest rate cycle is over and that with the institutions down here focused on housing financing it seems to me that they might be inclined to require a bit more issuance. Consider this; charges for non-performing loans are at multi-year lows. In the G7 countries this is because the system shock of the crisis has passed, meaning probability must be that if a loan was going to go "sour" it probably already did. This is not the case in Australia where charges during the crisis topped out at only 0.5%.

Maybe I'm being a bit too "glass half full", but rates have only gone down. If rates kick-up you're reliant on the RBA's modelling to say what might happen to the banks. I tend to think they'll ere on the side of caution. Investors should expect more equity to be issued.

While on the subject of issuance I think it's wise for investors to review their holdings in Hybrids. CoCos have become a kind of deposit substitute here in Australia and in several other major economies. Investors in my mind have somewhat ignored the short optionality imbedded in these instruments and a recent event in the UK should see some novices in the area to start re-examine prospectuses. On January 20 one of the worlds biggest steel companies Arcelormittal announced that it was calling a $650m hybrid bond paying a 8.25% coupon it had issued less than 18 months beforehand. The trigger for the call was a "Ratings Agency Event" that occurred when Moodys said it would give zero equity credit to sub-investment grade hybrids, effectively handing the company's balance sheet a $325m increase in debt. The result was that a bond that had been trading above 108 in the secondary was immediately repriced in the market at 101 (the call price), effectively handing a mark to market loss to holders. The same thing happened in respect of a Telecom Italia hybrid bond only a week later, though the loss was not as large. Leaving aside the specifics of these two companies the lesson for investors is that you need to read the documents, as holding lower graded hybrids trading at a premium to their call is asking for trouble. In the case of Mittal that was 7 bond points. It could have been worse as in the case of a bank that looks to be in trouble and has the ability to convert debt to equity in a falling market. Either way you're short an option and need to understand the risks. 

During a break in the charity bike ride I was participating in last Friday I got a call from someone who heard about hybrids being called and as I was an old hand in the convertibles market wanted to get some advice from me. I was actually a bit too wet and exhausted to be much, if any use. I had already ridden 120kms in dark overcast skies, including a rain shower right at the events start at 7am. 

The ride was for the Children's Cancer Institute of Australia and I was on a team of six ridding for a maximum of 12 hours. It was a last minute thing and I had been asked if I could make up the numbers. Luckily for the team CCIA was an old family favourite as my father had specified them for donations instead of people bringing flowers to his own funeral when cancer took his life. I was the weakest of the six riders in the team, but still managed to grind out 201kms before giving up with about 90mins to go. I hate the rain and even though I'd filled my kit bag with 4 pairs of socks, two back-up jerseys and two rain jackets I really wasn't enjoying things.  It was pretty pathetic of me not to be able to get to 250kms, but I did what I could. I rode the race on my Cannondale, shod with Campagnolo Boras. In fact I was surprised how many participants chose to ride carbon wheels with tubular tyres. Perhaps like me they wanted to take advantage of the fact that as we were riding a motor racing circuit (Eastern Creek 3.9kms) a puncture was really not the end of the world as walking back to the pits was not likely to be anything too severe. Of course the rain meant that braking was problematic and for those who haven't been to motor racing tracks they're not as flat as they seem on TV. This one had a couple of nasty little climbs, including a 9%'er that was easy in the early going, but somewhat more annoying later with shoes full of water and 7 hours on the bike. I did 2300m of climbing which is proof of the constant rolling nature of this particular circuit. Anyway it was for a good cause and I did get to meet some really nice people. Would I do it again . . . mmm part of me just wants to write a check, but that's a little weak right?