Commercial Awareness Breakdown: 6–10 April 2020

Gold, NMC Health and Quibi

Posted at youthlaw.co.uk…

Commercial Awareness Breakdown deconstructs three of the week’s commercial stories in an understandable and jargon-free manner. Terms bolded and underlined may be more difficult to understand and are explained at the bottom.

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1) Gold

Despite the huge financial devastation caused by the Covid-19 outbreak, one commodity has shown its strength in times of crisis. With stocks having dropped an average of 20%, gold has risen to a 7.5 year high, sitting at about $1,750.90 a troy ounce.

Gold is traditionally regarded as a stable investment in times of financial stress, its returns being based solely on price shifts, not on coupons (as is the case with bonds) or dividends (as is the case with stocks). Furthermore, the value of gold is normally independent from industrial activity. However, the closing of gold refineries and a reduction of flights due to coronavirus has caused a soar in value.

The US gold futures market trades 100-ounce bars, whereas the London gold market trades in 400-ounce bars. Simply put, the US market ran out of 100-ounce bars to settle contracts. Normally, when this issue arises, the 400-ounce bars are refined before delivery. However, refineries are now working at reduced rates due to coronavirus, causing severe delays in the supply chain.

Similarly, options for transporting the gold are also reduced. Traditionally, gold travels on passenger aircraft. However, the unprecedented cancellations of commercial flights has resulted in airlines charging up to eight times as much to transport bars. Sourcing the raw material has also proven difficult given mines across America and Africa have closed.

Along with a price boost, this discrepancy between the US and British trading standard has resulted in a larger than average price gap between the two markets, sitting currently at $50 per ounce (despite normally being $1/$2). Hopefully, however, this difference should be reduced, given the exchange’s introduction of flexible contracts to trade 400-ounce bars.

Despite the value having increased, it is taking buyers weeks to obtain gold that could normally be obtained in a matter of days, meaning companies selling gold-based products have had to increase their prices to counteract the delays.

Gold is certainly proving itself as a useful investment in times of crisis. However, it seems it is potentially not as immune against industrial stresses as first thought.

2) NMC Health

United Arab Emirates healthcare chain NMC Health has recently been placed into administration by the UK High Court after being pressured by main creditor Abu Dhabi Commercial Bank. The Middle Eastern hospital operator had previously been cut from the FTSE 100, and has also been accused of fraud after serious financial irregularities were discovered.

The judge issuing the administration order stated it was clear ‘that something has gone very wrong with the management and oversight of the company’. An investigation into the firm’s activities had been carried out by Muddy Waters Investment, and revealed unauthorised off-balance sheet financing.

Abu Dhabi Commercial Bank has just under $1 billion in debt exposure to NMC, whilst other banks, including Barclays, Dubai Islamic Bank, Abu Dhabi Islamic Bank and Standard Chartered are also owed hundreds of millions. NMC is the largest independent healthcare provider in the United Arab Emirates, and has reassured that all of its hospitals and medical centres will continue to operate, providing essential services during the coronavirus pandemic. Currently, however, this hope to stay open is only short-term. NMC Chairman Faisal Belhoul has urged its administrators to ‘extend credit lines and ensure that the company has the necessary liquidity to maintain healthcare operations’.

The London Stock Exchange listed firm faces an investigation by the UK’s Financial Conduct Authority regarding its alleged fraud and debt of $6.6 billion. However, along with not being present at the hearing, the group continues to deny any wrongdoing. Sebastian Prentis, the UK High Court judge who made the order, also reiterated that the allegations of fraud were currently ‘just that’.

Confirmed cases of Covid-19 in the United Arab Emirates as of midday 11th April 2020, data provided by Google: https://news.google.com/covid19/map

NMC employs 20,000 workers, including 2,000 doctors, but is currently suffering from serious cash flow difficulties, making staff salaries uncertain. This is a poor time for a medical operator to run out of funds, and whether or not the struggling firm will be sufficiently supported through this current health crisis is unclear. However, medical centres and hospitals certainly need all the help they can get.

3) Quibi

Quibi, the long awaited mobile-specific streaming service launched on Monday, having previously raised $1.8 billion before it even launched. The service, free for the first 90 days before costing $7.99 a month, is designed exclusively for smartphones and therefore aims to provide ‘quick bite’ content to its users.

CEO Meg Whitman, along with DreamWorks founder Jeffrey Katzenberg, has invested millions of dollars of the companies’ funds into a range of content, hoping the success of services such as TikTok, YouTube and Netflix will repeat itself. Those backing the project include Hollywood studios as well as banks such as Goldman Sachs and JP Morgan.

There is no option to view Quibi content on TV or PC, a feature the firm claims will differentiate it into a new market — ‘I think we don’t really compete with big streaming services for time’, states Whitman, who notes that only 10% of all of Netflix’s viewing is carried out on phones. The app’s slick design, along with its ‘Turnstyle’ mode, hope to make viewing on-the-go as smooth as possible.

Quibi’s ‘Turnstyle’ feature, image provided by: https://www.engadget.com/2020-01-08-quibi-mobile-video-turnstyle.html

Along with its technological features, the firm hopes its content’s quality will persuade users to subscribe. This content, featuring a variety of industry names, will remain short, with no single instalment lasting longer than 10 minutes — hence the name Quibi, a portmanteau of ‘quick bites’). Furthermore, according to the New York Times, the service’s content must incorporate a cliffhanger at the end of every 10-minute instalment. However, it is uncertain how many users will decide to invest in a mobile-only service, particularly considering the lockdown the world is currently facing.

Some have viewed the firm’s decision to release during the lockdown as a gamble of their $1.8 billion backing. However, Whitman, CEO, claims the that the snappy element of the app is still attractive under social distancing rules — ‘People who are home with their children would really like a 10-minute break’.

Streaming services have tried and failed before Quibi. Fighting against Disney Plus, TikTok and Netflix will be no easy feat, particularly in the current economic downturn. However, perhaps the firm may be able to make the most of its $1.8 billion investment into app design and, most importantly, content. Whether the firm can take advantage of an extremely unusual set of circumstances is for the paying customer to decide.

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Difficult Terms:

Administration — When a company has cash flow problems or is insolvent (the state of being unable to pay creditors), it may apply for administration, a form of rescue, whereby it can continue its operations under certain conditions.

Bond — A financial instrument through which an investor buys the bond, loaning money to the issuer. This loan has a certain duration, and the investor receives a coupon (interest payments), often annually. The face value of the bond is what will be paid back to the borrower once the bond matures.

CEO — Chief Executive Officer — the most senior officer in charge of an organisation.

Commodity — A raw material traded on a commodity market.

Creditor — An individual/organisation to whom money is owed.

Debt Exposure — The amount of debt lent out by an organisation which is at risk of not being repaid.

Exchange — An exchange is a public platform on which financial instruments (such as stocks, shares, commodities and bonds) are sold and bought.

FTSE 100 — Financial Times Stock Exchange Index — A share index of the highest 100 companies listed on the London Stock Exchange with the highest market capitalisation.

Futures — A futures contract is an agreement to buy a commodity or financial instrument at a certain price at a certain point in time. The buyer of the contract is the long position holder, whilst the seller is the short position holder.

High Court — The UK High Court is one of the senior courts of the UK judicial system. The court sits before the Court of Appeal in the hierarchy.

London Stock Exchange — An stock exchange located in the City of London, possessing a market capitalisation of around $4.5 trillion.

Off-Balance Sheet — An asset or transaction not appearing on an organisation’s balance sheet (a document stating capital and interests of a business).

Returns — Returns is the ratio or percentage of gain made on an investment. Good, reasonable, returns sit at around 15%, however in some cases these can be much higher.

Stocks — A financial unit of ownership interest in a company.

Supply Chain — A supply chain for a product/company is the network of production, wherein components make their way from source materials, to a manufacturer and finally to the customer.

Troy Ounce — A unit of measurement for weighing precious metals, one troy ounce is equal to 31.1034768 grams.