I was looking through a trade rag for biomass power generation (I have no life). This caught my attention:
The idea of turning waste to energy is a good thing. The facility in Italy is part of an overall effort to get the country to produce 17% of its energy needs from renewable sources.
The GE Jenbacher gas engines (mini blast furnaces) are built in Austria, Hungary and China. So this is one of those global stories.
I don’t have much info on the Villanova Mondovi project but I do have some history financing co-gen facilities in different places around the globe. They all have the following features:
- They are long life projects with long-term paybacks.
- They (almost) always have a municipal involvement.
- There is (almost) no equity in these projects. They are funded 99% with debt.
- The capital structure has debt maturities out to 15+ years.
- In (almost) all cases vendor financing of major components is a requirement for an equipment sale.
- The cost of debt is THE critical component for a project. Without the availability of cheap long-term money these co-gen facilities never get off of the drawing board.
While I can’t confirm that GE’s Austrian subsidiary (or GECS) actually took back Italian government paper in exchange for the sale of turbines it would be very typical for projects like this.
From GE’s 9/30/11 10Q:
Forbes took a look at US corporate exposure to Europe. GE is on top of their list.
They conclude that those companies with high exposure AND a leveraged balance sheet are the most at risk. Well, 27% of GE’s top line comes from Europe. Their debt to capital is 75%.
With Italian interest rates where they are today (and the fact the country can’t sell new debt) projects like the one outside Turin will not be repeated. There may have to be haircuts on old debt. Where does that take GE?
Thinking about the Italian bond market got me to look at a leveraged bet. There are many ways to achieve the following results (derivatives). The following is the simplest form of a carry trade. (Note: you have to be a “player” with a big balance sheet to get into this sandbox.)
$1b of 6% Italian one-year Treasury bills. Finance 90% of the purchase with dollars. Fully hedge the purchase with a one-year swap of dollars for Euros.
One year return on equity: 65%
What? A 65% return on Italian short-date paper?
I can hear people jumping on the fact that this huge return is a consequence of 90% leverage. Let me point out that the margin on Italian Tbills was 5% less than one month ago. But I understand that 90% may seem too high today. What leverage ratio would make you happy? How about 50%?
One-year return on equity: 13%
That’s crazy! I’ve never seen anything like this before. Is the probability of default within one year that high? I have difficulty believing that. But that’s what the market is telling us.
The only conclusion is that the European bond market is functionally nonexistent.
Getting back to GE, a friend sends me this link. This is a letter sent to Congress 11/9 that was signed by 1,500 US corporations. Everyone you can think of signed this. Most notably, GE.
November 9, 2011
Dear Member of Congress:
The undersigned organisations urge Congress to extend as soon as possible the tax provisions set to expire in 2011.
This letter is a plea for tax relief. The companies want to retain their favourite loopholes. For the heck of it I include the wish list below this piece. It’s endless.
It’s a joke. It proves that American industry’s interests are not at all aligned with the American citizens. This list will insure that the likes of GE never pay their share of US taxes.
I don’t have a problem when US industry lobbies congress for what they want. That’s the system we signed up for. But I do have a problem when the company that has the most to gain from the tax code is also advising the Administration on economic policy.
Obama has made a bunch of dumb mistakes. His getting into bed with Jeff Immelt is high on the list.
The “Vomit” list
TITLE I–INFRASTRUCTURE INCENTIVES
Sec. 101. Extension of Build America Bonds.
Sec. 102. Exempt-facility bonds for sewage and water supply facilities.
Sec. 103. Extension of exemption from alternative minimum tax treatment for certain tax-exempt bonds.
Sec. 104. Extension and additional allocations of recovery zone bond authority.
Sec. 105. Allowance of new markets tax credit against alternative minimum tax.
Sec. 106. Extension of tax-exempt eligibility for loans guaranteed by Federal home loan banks.
Sec. 107. Extension of temporary small issuer rules for allocation of tax-exempt interest expense by financial institutions.
TITLE II–EXTENSION OF EXPIRING PROVISIONS
Sec. 201. Alternative motor vehicle credit for new qualified hybrid motor vehicles other than passenger automobiles and light trucks.
Sec. 202. Incentives for biodiesel and renewable diesel.
Sec. 203. Credit for electricity produced at certain open-loop biomass facilities.
Sec. 204. Extension and modification of credit for steel industry fuel.
Sec. 205. Credit for producing fuel from coke or coke gas.
Sec. 206. New energy efficient home credit.
Sec. 207. Excise tax credits and outlay payments for alternative fuel and alternative fuel mixtures.
Sec. 208. Special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities.
Sec. 209. Suspension of limitation on percentage depletion for oil and gas from marginal wells.
Sec. 210. Direct payment of energy efficient appliances tax credit.
Sec. 211. Modification of standards for windows, doors, and skylights with respect to the credit for nonbusiness energy property.
Subtitle B–Individual Tax Relief
PART I–Miscellaneous Provisions
Sec. 221. Deduction for certain expenses of elementary and secondary school teachers.
Sec. 222. Additional standard deduction for State and local real property taxes.
Sec. 223. Deduction of State and local sales taxes.
Sec. 224. Contributions of capital gain real property made for conservation purposes.
Sec. 225. Above-the-line deduction for qualified tuition and related expenses.
Sec. 226. Tax-free distributions from individual retirement plans for charitable purposes.
Sec. 227. Look-thru of certain regulated investment company stock in determining gross estate of nonresidents.
PART II–Low-income Housing Credits
Sec. 231. Election for direct payment of low-income housing credit for 2010.
Sec. 232. Low-income housing grant election.
Subtitle C–Business Tax Relief
Sec. 241. Research credit.
Sec. 242. Indian employment tax credit.
Sec. 243. New markets tax credit.
Sec. 244. Railroad track maintenance credit.
Sec. 245. Mine rescue team training credit.
Sec. 246. Employer wage credit for employees who are active duty members of the uniformed services.
Sec. 247. 5-year depreciation for farming business machinery and equipment.
Sec. 248. 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
Sec. 249. 7-year recovery period for motorsports entertainment complexes.
Sec. 250. Accelerated depreciation for business property on an Indian reservation.
Sec. 251. Enhanced charitable deduction for contributions of food inventory.
Sec. 252. Enhanced charitable deduction for contributions of book inventories to public schools.
Sec. 253. Enhanced charitable deduction for corporate contributions of computer inventory for educational purposes.
Sec. 254. Election to expense mine safety equipment.
Sec. 255. Special expensing rules for certain film and television productions.
Sec. 256. Expensing of environmental remediation costs.
Sec. 257. Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico.
Sec. 258. Modification of tax treatment of certain payments to controlling exempt organisations.
Sec. 259. Exclusion of gain or loss on sale or exchange of certain brownfield sites from unrelated business income.
Sec. 260. Timber REIT modernization.
Sec. 261. Treatment of certain dividends of regulated investment companies.
Sec. 262. RIC qualified investment entity treatment under FIRPTA.
Sec. 263. Exceptions for active financing income.
Sec. 264. Look-thru treatment of payments between related controlled foreign corporations under foreign personal holding company rules.
Sec. 265. Basis adjustment to stock of S corps making charitable contributions of property.
Sec. 266. Empowerment zone tax incentives.
Sec. 267. Tax incentives for investment in the District of Columbia.
Sec. 268. Renewal community tax incentives.
Sec. 269. Temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands.
Sec. 270. Payment to American Samoa in lieu of extension of economic development credit.
Sec. 271. Election to temporarily utilise unused AMT credits determined by domestic investment.
Sec. 272. Reduction in corporate rate for qualified timber gain.
Sec. 273. Study of extended tax expenditures.
Subtitle D–Temporary Disaster Relief Provisions
PART I–National Disaster Relief
Sec. 281. Waiver of certain mortgage revenue bond requirements.
Sec. 282. Losses attributable to federally declared disasters.
Sec. 283. Special depreciation allowance for qualified disaster property.
Sec. 284. Net operating losses attributable to federally declared disasters.
Sec. 285. Expensing of qualified disaster expenses.
PART II–Regional Provisions
subpart a–new york liberty zone
Sec. 291. Special depreciation allowance for nonresidential and residential real property.
Sec. 292. Tax-exempt bond financing.
subpart b–go zone
Sec. 295. Increase in rehabilitation credit.
Sec. 296. Work opportunity tax credit with respect to certain individuals affected by Hurricane Katrina for employers inside disaster areas.
Sec. 297. Extension of low-income housing credit rules for buildings in GO zones.
TITLE III–TECHNICAL CORRECTIONS TO PENSION FUNDING LEGISLATION
Sec. 301. Definition of eligible plan year.
Sec. 302. Eligible charity plans.
Sec. 303. Suspension of certain funding level limitations.
Sec. 304. Optional use of 30-year amortization periods.
Sec. 305. Transition rule for certifications of plan status.
TITLE IV–REVENUE OFFSETS
Subtitle A–Personal Service Income Earned in Pass-thru Entities
Sec. 401. Partnership interests transferred in connection with performance of services.
Sec. 402. Income of partners for performing investment management services treated as ordinary income received for performance of services.
Subtitle B–Corporate Provisions
Sec. 411. Treatment of securities of a controlled corporation exchanged for assets in certain reorganizations.
Sec. 412. Taxation of boot received in reorganizations.
Subtitle C–Other Provisions
Sec. 421. Modifications with respect to Oil Spill Liability Trust Fund.
Sec. 422. Denial of deduction for punitive damages.
TITLE V–HEALTH AND OTHER ASSISTANCE
Sec. 501. Extension of section 508 reclassifications.
Sec. 502. Repeal of delay of RUG-IV.
Sec. 503. Limitation on reasonable costs payments for certain clinical diagnostic laboratory tests furnished to hospital patients in certain rural areas.
Sec. 504. Funding for claims reprocessing.
Sec. 505. Medicaid and CHIP technical corrections.
Sec. 506. Addition of inpatient drug discount program to 340B drug discount program.
Sec. 507. Continued inclusion of orphan drugs in definition of covered outpatient drugs with respect to children’s hospitals under the 340B drug discount program.
Sec. 508. Conforming amendment related to waiver of coinsurance for preventive services.
Sec. 509. Clarification of effective date of part B special enrollment period for disabled TRICARE beneficiaries.
Sec. 510. Adjustment to Medicare payment localities.
Sec. 511. Clarification for affiliated hospitals for distribution of additional residency positions.
TITLE VI–OTHER PROVISIONS
Subtitle A–General Provisions
Sec. 601. Allocation of geothermal receipts.
Sec. 602. Employment for youth.
Sec. 603. Housing Trust Fund.
Sec. 604. The Individual Indian Money Account Litigation Settlement Act of 2010.
Sec. 605. Appropriation of funds for final settlement of claims from In re Black Farmers Discrimination Litigation.
Sec. 606. Expansion of eligibility for concurrent receipt of military retired pay and veterans’ disability compensation to include all chapter 61 disability retirees regardless of disability rating percentage or years of service.
Sec. 607. Refunds disregarded in the administration of Federal programs and federally assisted programs.
Sec. 608. Qualifying timber contract options.
Sec. 609. Extension and flexibility for certain allocated surface transportation programs.
Sec. 610. Community College and Career Training Grant Program.
Sec. 611. Extensions of duty suspensions on cotton shirting fabrics and related provisions.
Sec. 612. Modification of Wool Apparel Manufacturers Trust Fund.
Sec. 613. Department of Commerce Study.
Sec. 614. ARRA planning and reporting.
Sec. 615. Surety bonds.
Sec. 616. Funding for Deployment of Renewable Energy, Energy Efficiency, and Electric Power Transmission Projects.
Subtitle B–Extension of Trade Adjustment Assistance
Sec. 621. Short title.
Sec. 622. Extension of Trade Adjustment Assistance.
Subtitle C–Extension of Health Coverage Improvement
Sec. 631. Improvement of the affordability of the credit.
Sec. 632. Payment for the monthly premiums paid prior to commencement of the advance payments of credit.
Sec. 633. TAA recipients not enrolled in training programs eligible for credit.
Sec. 634. TAA pre-certification period rule for purposes of determining whether there is a 63-day lapse in creditable coverage.
Sec. 635. Continued qualification of family members after certain events.
Sec. 636. Extension of COBRA benefits for certain TAA-eligible individuals and PBGC recipients.
Sec. 637. Addition of coverage through voluntary employees’ beneficiary associations.
Sec. 638. Notice requirements.
Subtitle D–TANF Provisions
Sec. 641. Extension of Temporary Assistance for Needy Families and related programs.
Sec. 642. Reinstatement of Federal matching of State spending of child support incentive payments.
Sec. 643. Extension and modification of the TANF Emergency Fund.
Sec. 644. Modifications to TANF data reporting.
Sec. 645. State court improvement program.
Subtitle E–Unemployment Compensation Program Integrity
Sec. 651. Permissible uses of unemployment fund moneys for program integrity purposes.
Sec. 652. Mandatory penalty assessment on fraud claims.
Sec. 653. Prohibition on noncharging due to employer fault.
Sec. 654. Collection of past-due, legally enforceable State debts.
Sec. 655. Treatment of short-time compensation programs.
Sec. 656. State use of compensating balances and interest earned on clearing account to pay associated banking costs.
Sec. 657. Reporting of first day of earnings to directory of new hires.
Sec. 658. Deduction of obligations for custodial parents.
Sec. 659. Advisory Council on unemployment compensation.
Sec. 660. Amendment to the Federal-State extended benefits program.
Sec. 661. Operating instructions and regulations.
Subtitle F–Custom User Fees
Sec. 665. Customs user fees.
TITLE VII–TRANSPARENCY REQUIREMENTS FOR FOREIGN-HELD DEBT
Sec. 701. Short title.
Sec. 702. Definitions.
Sec. 703. Sense of Congress.
Sec. 704. Quarterly report on risks posed by foreign holdings of debt instruments of the United States.
Sec. 705. Annual report on risks posed by the Federal debt of the United States.
Sec. 706. Corrective action to address unacceptable and unsustainable risks to United States national security and economic stability.
TITLE VIII–TRANSPARENCY REQUIREMENTS FOR FOREIGN-HELD DEBT
Sec. 801. Short title.
Sec. 802. Definitions.
Sec. 803. Sense of Congress.
Sec. 804. Annual report on risks posed by foreign holdings of debt instruments of the United States.
Sec. 805. Annual report on risks posed by the Federal debt of the United States.
Sec. 806. Corrective action to address unacceptable risks to United States national security and economic stability.
TITLE IX–OFFICE OF THE HOMEOWNER ADVOCATE
Sec. 901. Office of the Homeowner Advocate.
Sec. 902. Functions of the Office.
Sec. 903. Relationship with existing entities.
Sec. 904. Rule of construction.
Sec. 905. Reports to Congress.
Sec. 906. Funding.
Sec. 907. Prohibition on participation in Making Home Affordable for borrowers who strategically default.
Sec. 908. Public availability of information.
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