Market Commentary: Marketing Madness in the Central Lowlands -- abrdn

Spot the Link to Scotland

 

A relatively large amount of ink – both real and electronic-- has been spilled of late over Standard Life Aberdeen’s adoption of a “new” trendy identity.

Just the step you’d probably expect “futurists” would take.

I have my own opinion on this sad affair.

When I think of the Scots, I picture thrifty, hard working, sensible people, who can have a bit of fun. “Laugh with the devil” and be as “gentle and prickly as our own downy thistle”.

“arbdn” doesn’t “fit” that impression.

Contrary minds might cite “Irn-Bru” to counter my ill-tempered judgement..

But that (the name not my judgement) arose for copyright and brand identity concerns. Sensible marketing..

Rather than piling on abrdn, I want to focus on the apparent pernicious effect of marketing in this matter. Because the name doesn’t seem to be accompanied by typical consultancy advice on strategy or structure.

But rather merely placing the old wine in new skins.

To set the stage a quote from a recent FT article on the topic.

But Manfred Abraham, joint chief executive of Yonder Consulting, said Abrdn was the first branding change in wealth management “befitting of the fintech revolution”.

He added: “Asset management brands are all very homogenous and traditional.

“Abrdn has the feel of a Monzo or Starling — and that opens the door to the inner workings of the company modernising too.”

And my reaction.

I’m not sure what abrdn or its new logo have to do with fintech.

It could just as well be a competitor to Airbnb. Or a new fast food restaurant. Perhaps the result of a corporate “coupling”.  

Or perhaps signage in an airport or tube station.  This way to the "abrdn".

There is a reason why why asset management firms have traditional names. To convey the impression that they are sensible careful people who you can trust with your money.

That being said, there is clearly a market for investments for those who like to take a punt on delusion. Hopefully, abrdn is not targeting this group.

As to other names …

When I hear the name “Monzo”, I think of “gonzo”. Or perhaps the nickname of a loan shark. Not a proper bank.

In the former North American colonies, starlings are about as well respected as their “cousins” pigeons -- “rats with wings”.

Whatever one’s view of this species, it’s hard to connect either bird with “fintech” or finance. Perhaps with bicycles?

That leads to the name of the company commenting on the change: “Yonder”.

A firm with this archaic name would not appear to be on the “bleeding edge” of the marketing “space”. One not inhabited by “tiger teams”.

It’s not a legacy name.

There is no eponymous founder, Anthony Charles Brakewell Yonder, OBE, the English David Ogilvy.

Yonder is of more recent vintage.

Formed in October 2020 out of four companies to “create a new consultancy proposition”. Whose truth value perhaps remains undetermined to this day. At least it’s not a conjecture.

After the apparent application of their unique skills and insights, they actually chose this name. It may come then as no surprise that “abrdn” also is melodious to their ears.

It is not a unique name. Not an Exxon or Exelon.

Rather you will find a variety of other “Yonder” companies across the globe. Or as we might say surveying the field “yonder lea, yonder lea”.

So much for brand identity.

Physician, heal thyself.

“YNDR”? Redyon? Ekeipera?

I don’t know how to react to the last comment about these names “opening the door to the inner workings of the company modernising too”.

Many of the great advances in business babble have come to us from the “science” of marketing and consultancy. As well I will admit valid insights, but perhaps less often.

GFG's "Tiny" Auditor = Rather "Large" Credit Red Flags

Even He Probably Couldn't Perform
Audits on 60 Companies

An introductory note to what follows.

Credit “red flags” in themselves do not conclusively prove there is a problem with an entity. Rather they identify areas for enhanced due diligence to determine if there is a problem.

According to research by the FT, one apparently very small English Chartered Accountancy firm, King & King, audited over 60 companies in Mr. Gupta’s Group. Companies with a combined Sterling 2.5 billion in revenues!

It is one of the long standing—but often ignored—rules of due diligence to scrutinize not only audited financial reports but also the auditor.

1. Is it a known firm? What is its reputation and track record?

2. Does it have the skills and resources to conduct an audit of the particular company? Horses for courses.

3. Is there an imbalance in the relationship between the company and the auditor that might make the auditor subject to undue influence on its work?

For example, if the auditor is dependent on the company for the bulk of its revenues, it might well find it hard to say “no” to the company.

I’d hasten to add that this is not a conclusive test.

There are more than a few cases where the “biggest” auditing firms appear to have failed in conducting sufficiently probing audits.

After reading the FT’s excellent article, I decided to do a bit of digging myself.

What better place to start than an electronic visit to the UK’s Companies House?

There I searched for the name King & King and the address 273-287 Regent St, London W1B 2HA, United Kingdom. This search returned three entities that appear directly related:

1. KING & KING LTD Company number 04871854. Listed as dormant. Last Financial Statements 20 August 2019. Net assets GBP 1.

2. KING & KING (ACCOUNTING & ADVISORY) LTD Company number 07597296. Listed as dormant. Last Financial Statements 30 April 2019. Net assets GBP 1.

3. KING & KING WILLS LTD Company number 07533423 Last Financial Statements 28 February 2020. Net assets GBP 685.

There is no doubt a reasonable explanation for what would appear at face value to be a discrepancy here. How could a dormant firm with so modest financials audit 60 companies.

However, what that explanation is eludes me.

I suppose it may be that the firm that does the audits is registered under another name. 

I did take the obvious step of using Companies House to search on the names of officers and directors at the above companies on the assumption that one or more of these might be at the firm with "with another name".  

However, I came up with a blank.

To make sure I covered as many bases as possible,  I then searched Companies House for the address alone.

To my surprise there were 20 pages of entities.

Companies House told me to refine my search as there were many many more.

So it may be that I missed that new name.

No results for K&K’s Middlesex Office at Companies House using both its name and the address.

But using Google, I quickly turned up at least 51 companies at the Middlesex address.

I did however find a related company at that address which shares a director with King & King.

RELANS LIMITED Company number 07317670. Latest Financial Statements 30 April 2020. GBP 127,284 in total equity.

While the income statement was not included, comparative figures would suggest it was a good year indeed for Relans as its retained earnings increased approximately GBP 120,000 year on year. Quite a remarkable change from previous years!

As to the numerous parties at both of K&K’s listed addresses, at first glance it would appear that both buildings are “rather large”.

Or perhaps more likely the address is that of virtual office or a corporate registration service.

Perhaps, K&K are “working from home” as part of a Covid inspired remote work initiative.

Turning back to the FT article, the FT asked chartered accountants at other firms what K&K’s reputation was. The answer they received seems to be “who?”.

According to the FT, K&K is registered at the ICAEW as having one CA and one professional staff.

On its face, that might make some question the “depth of its bench” in terms of ability to perform audits of large firms.

It would also suggest that GFG was the “father of the feast” at K&K. Loss of this relationship would be likely to dramatically reduce revenues.

Typically, scrutiny is focused on the auditor of the obligor or the counterparty to a transaction.

And that absent guarantees or other support from related parties, focus on those parties’ auditors would be minimal at best.

However, even with a limited one company focus, there are enough red flags to suggest weakness. That would include the questions posed by my Companies House search.

And those threads when pulled might well have revealed other issues. Or resulted in a clean bill of health for K&K.

For those with exposure to GFGroup, a wider focus would be appropriate.

Discovering that one very small CA firm was auditing a large number of GFG companies should have been a gigantic red flag, prompting further investigation..

It’s not just the three questions above, but the fact that K&K was auditing 60 companies but it had a staff of one CA and one other professional. Companies with Sterling 2.5 billion in revenues.

If we assume that one-quarter of these firms had their fiscal year at each quarter’s end as opposed to all at 31 December, it boggles the mind to think that K&K would be able to do the intensive work required for an audit even on “just” 15 firms.

The ability to repeat this intensive process quarter on quarter would have required probably more than a singe Stakhanovite.

More importantly one might reasonably struggle to understand how a firm this size could perform a proper audit on even one company each quarter.

If, as is more likely, 31 December was the FYE for all or the majority of the 60 companies,, then the improbable becomes the impossible.

One caveat K&K notes on their website they are affiliated with IRGlobal a network of accountancy, advisory, and tax firms and so would appear to have access to additional knowledge resources.

Somehow the extent of K&K’s audit work (and prowess) was missed.

The FT was able to discover this interesting issue apparently without undue or time-consuming exertion.

Admittedly, they benefited from hindsight: GFG’s woes were public knowledge

Also admittedly, the FT has a cadre of very savvy financial reporters who have been responsible for uncovering financial frauds. By their own skill, not just via whistleblower tips.

Bondhack and Cynthia O’Murchu made a significant pre-crash discovery regarding the weak state of NMC’s finances by the clever use of credit bureau information.

One-at least this one-would expect that financial institutions with money at stake would have at least as competent staff.

And perhaps because they were doing this for a living, or were supposed to be doing this, would have additional resources and experience.

Sadly, hope is not necessarily accompanied by change. 

Or so I have been told.

McDonald's New "BTS Meal" Where's the Garlic?"

Not Coleslaw
Not Available at McDonalds

I read somewhere that McDonald’s was introducing the new "BTS Meal" with a worldwide roll out planned. Touted was the fact that one couldn’t get these flavors elsewhere in the world!

What is the BTS meal I wondered?

And eagerly read on hoping to steal a march on my august and revered elder and wiser brother, expert in many things Asian. 

It is the favorite meal of the Korean group BTS.

10 Chicken McNuggets, fries, and a Coke.

The apparent “unavailable” flavors were in some specially devised sauces: “cajun” and “sweet chili”.

Didn’t sound very “Korean” to me.

Then I remembered Bon Chon chicken. Ah, the flavors of Korean deep fried chicken. No doubt, Colonel Kim's secret recipe.

So check one ethnic box.

I was once taken to a BC restaurant on a visit to the USA for the apparently “Korean” fried chicken. But as requested by my elder and wiser brother, I note he had nothing to do with this

Sensing an opportunity for some real Korean food, I ask for Kimchi.

The waitress brought me a small paper cup about the size of cups one can get a shot of ketchup in a USA fast food restaurant. 

It was filled with what looked like “coleslaw”. Sadly, that’s how it tasted.

As to the BTS sauces, I suppose there is an “ethnic” connection.

Cajun sauce: South Korea, South USA.

“Sweet chili” could be chojang, according to my august and revered elder and wiser brother demonstrating his in-depth knowledge of yet another Asian topic. Though he doubts it is.

“Hold the fermented soybeans, hold the garlic.” 

“외국인”orders don’t upset us.”

Progress inexorably marches forward.

H/T to my elder and wiser brother fount of unstinting wisdom on matters Asian, but not on pizza.

Custódio Castelo Sobre Lisboa

 

The Maestro

BCDR Issued USD 4.1 Million Judgment in Favor of Bahrain Middle East Bank ("BMB") Against Former Shareholders

A First Step
But Still a Long Way to Go

8 April BMB announced (somewhat belatedly) that on 1 February the BCDR had issued a judgment in its favor in its case against former shareholder AlFawares Group apparently over a loan made to Al Sawari Holding Company guaranteed by companies associated with AlFawares.

BMB has instructed its lawyers to initiate steps to enforce the judgment.

Since it appears that the AlF has fallen on very hard times, it's probable that collection will be very difficult.

Even if successful, BMB still has a "long" way to go to remedy its more than USD 116.6 million negative equity. 

“Foreign Investors Face Critical Test Over Chinese Bonds” Part 2

I bought US$10 Million in PUFG Bonds
And all I actually got back was this cheap T-shirt

Part 2:  More on the "Critical Test" facing PUFG bondholders. 

I’ll take a close look at the transaction structure quoting chapter and verse from the Offering Circular (prospectus).

I’ll break with what is sadly usual investment process by actually referring to the most important but usually least read section of the prospectus: Risk Factors. 

And in so doing “force” you to read along as well.

In this “exercise” I’m going to focus on structural/legal factors to the exclusion of other risk factors.

Why?

Because if the transaction structure is weak or the market has fundamental legal problems, you need to walk away.

Page 44 

It may be difficult to enforce any judgments obtained from non-PRC courts against the Group or its directors and senior management who reside in the PRC.

Page 48 

Additional procedures may be required to be taken to bring English law governed matters or disputes to the Hong Kong courts and the Bondholders would need to be subject to the exclusive jurisdiction of the Hong Kong courts. There is also no assurance that the PRC courts will recognise and enforce judgments of the Hong Kong courts in respect of English law governed matters or disputes.

These two items do not sound “promising”.

Page 45 

However, any claim by the Issuer, the Guarantor and/or the Trustee against the Company in relation to the Keepwell Deed or the Deed of Equity Interest Purchase Undertaking will be effectively subordinated to all existing and future obligations of the Company’s subsidiaries (which do not provide a guarantee in respect of the Bonds), particularly the Company’s subsidiaries in the PRC, and all claims by creditors of such subsidiaries in the PRC will have priority to the assets of such entities over the claims of the Issuer, the Guarantor and the Trustee under the Keepwell Deed and the Deed of Equity Interest Purchase Undertaking.

If you’ve read my earlier post about consolidated financials and what they mean, you realize that the holding company’s primary assets are equity in subsidiaries. Absent a guarantee from those operating entities, you’re already effectively in a “junior” position.

And, if by chance, you’re wondering about the PUFG guaranteed bonds, well the guarantee there is by the holding company only. There are no cross guarantees by subsidiaries. So it is limited to the assets of the holding company, which largely consist of stock in the subsidiaries.

Thus, while the PUFG “guarantee” is better than a keepwell deed of equity interest purchase undertaking, it still falls short of the sort of guarantee you would want. Another lesson from the tale of consolidated financials.

Here is the offering circular for the PUFG guaranteed US$250 million 7.875% 24 June 2021 bond if you’d like to check my analysis.

Page 46 

Performance by the Company of its undertaking under the Deed of Equity Interest Purchase Undertaking is subject to approvals of the PRC governmental authorities. (Five are listed)

No approval = legal bar to PUFG’s compliance.

Request for approval will come when the payment crisis has occurred. Not before. That seems a less than ideal situation. You don’t know if the Company is legally bound until default.

Page 47

Performance by the Company of its undertaking under the Deed of Equity Interest Purchase Undertaking may be subject to consent from third-party creditors and shareholders, and may also be restricted if any of the equity interests are secured in favour of third-party creditors.

That’s what we “professional” investors call “cold comfort”.

Page 47 

The Relevant Transferors have limited assets which can be sold to the Company pursuant to the Deed of Equity Interest Purchase Undertaking.

This sounds even less promising. If there’s nothing to purchase, the Company has nothing to buy.

Given all this, there seems little justification for bondholders’ complaints.

Or claiming there was a guarantee when there was not. 

Or even an “impression” of a guarantee as demonstrated by the quotes above.

They were warned in the prospectus.

As well, this isn’t foreign investors’ first “bad” rodeo in the PRC. 

If you’re planning to invest in a country, it’s probably a “smart” move to do a bit of due diligence on how other investors have fared with respect to laws, the legal system, legal structures, etc. 

However, on a positive note, this case does prove my version of the Efficient Markets Hypothesis.

The market is very efficient in separating the financially illiterate, the gullible, or the heedless from their money. And does not discriminate between the retail investor, the professional investor, and institutional investors.

H/T to AA's older wiser august and revered brother, expert in many things Asian, for the quote above as well as the T-Shirt picture.  "If you don't do stupid things, you won't end up in tragedy".