Europe’s Economy Emerges From Recession on Exports

By Simone Meier

Nov. 13 (Bloomberg) -- The euro-area economy emerged from its worst recession since World War II in the third quarter as exports from Germany and France helped compensate for households’ reluctance to increase spending.

Gross domestic product in the economy of the 16 nations using the euro rose 0.4 percent from the second quarter, when it fell 0.2 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast the economy to grow 0.5 percent, according to the median of 34 estimates in a Bloomberg survey.

Europe’s economy is gathering strength after governments stepped up stimulus measures and the European Central Bank injected billions of euros into markets to encourage lending. While confidence in the economic outlook is at a 13-month high, rising unemployment, the expiration of stimulus plans and a surging euro are threatening to undermine a recovery.

“The euro-zone economy has officially turned the corner and that is cause for relief, but not celebration,” said Martin van Vliet, a senior economist at ING Bank in Amsterdam. “The economy remains in a fragile state and is recovering mainly because of government stimulus and temporary inventory effects.”

The euro was little changed against the dollar after the release, trading at $1.4874 at 10:30 a.m. in London after rising as high as $1.4902 earlier today. The yield on the German 10- year benchmark bond dropped 0.2 basis points to 3.34 percent.

Global Economy

In the year, euro-area GDP declined a seasonally adjusted 4.1 percent in the July-September period after dropping 4.8 percent in the second quarter. In the 27-nation EU, GDP rose 0.2 percent from the previous three-month period, when it dropped 0.3 percent. The statistics office is scheduled to publish a breakdown of third-quarter GDP on Dec. 3.

The global economy is also gathering steam, led by China, where the manufacturing industry expanded at the fastest pace in 18 months in October. In the U.S., the world’s biggest economy, leading economic indicators rose for a sixth month in September.

Lafarge SA, the world’s largest cement maker based in Paris, witnessed the “first signs of stabilization in the global economic slowdown” in the third quarter, according to Chief Executive Officer Bruno Lafont. Stefan Jacoby, head of Volkswagen AG’s North America division, said on Nov. 11 that “things are looking up” for Europe’s biggest carmaker.

Largest Economy

In Germany, Europe’s largest economy, GDP rose a seasonally adjusted 0.7 percent from the second quarter, when it increased 0.4 percent. The French economy expanded 0.3 percent in the third quarter, while Italy showed 0.6 percent growth. All three GDP figures were below economist forecasts.

Europe’s recovery is being threatened by the dollar’s 18 percent slide against the euro and the region’s policy makers are calling on China to shoulder some of that burden by allowing the yuan to appreciate. China has kept its currency steady against the dollar since July 2008 and ECB President Jean-Claude Trichet said on Nov. 5 that a stronger yuan would be “welcome.”

While China’s central bank this week scrapped a pledge in its quarterly report to keep the yuan “basically stable,” President Hu Jintao didn’t address the currency peg in a speech to executives in Singapore today.

Some economies are trailing the European recovery. In the U.K., where Prime Minister Gordon Brown is struggling to shore up his popularity before elections due in June, the economy remains mired in its longest recession on record. GDP dropped 0.4 percent in the third quarter, extending the contraction over sixth quarters. The Spanish economy also contracted for a sixth quarter in the three months through September.

Cosmetics Maker

For now, companies are relying on faster growing markets to bolster sales. Paris-based Pernod Ricard SA, the world’s second- biggest liquor maker, said on Nov. 3 that demand is “very lively” in China and India. L’Oreal SA, the world’s largest cosmetics maker, on Nov. 5 reported stronger demand for shampoos and makeup in Asia and Latin America.

“Sales are accelerating in emerging markets,” L’Oreal CEO Jean-Paul Agon said on that day in Paris. “Overall, the situation is getting better.”

With a global recovery taking hold, central banks have signaled they are ready to wind down some unconventional measures. The ECB left its key rate at 1 percent on Nov. 5 and signaled that it won’t offer banks unlimited cash over 12 months next year. The U.S. Federal Reserve earlier this month outlined the conditions needed for it to raise borrowing costs.

‘At a Trot’

“The euro zone exited recession at a trot rather than at a canter in the third quarter,” said Howard Archer, chief European economist at IHS Global Insight in London. “The likely fragility of the recovery means that both governments and the ECB need to be wary about withdrawing stimulus measures too soon or too aggressively.”

With the euro’s ascent against the dollar since mid- February making exports more expensive and rising unemployment undermining consumer demand, the economy may be slow to gain momentum. Europe’s jobless rate rose to 9.7 percent in September, the highest since January 1999.

Dublin-based Smurfit Kappa Group Plc, Europe’s largest maker of cardboard boxes, said on Nov. 10 that “a consumer-led economic recovery” hasn’t yet materialized. Peter Voser, CEO of Royal Dutch Shell Plc, Europe’s largest oil company, said on Oct. 29 that the outlook remains “very uncertain.”

“The recovery is fragile and sluggish,” International Monetary Fund Director Dominique Strauss-Kahn said on Nov. 13. “The recovery will take place earlier in Asia than in the U.S. and in the U.S. earlier than in Europe.”

To contact the reporter on this story: Simone Meier in Dublin at smeier@bloombert.net

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Dollar Drop Too Powerful for Brazil as Reserves Rise

By Oliver Biggadike and Matthew Brown

Nov. 13 (Bloomberg) -- Brazil, South Korea, Russia and other developing nations are fighting a losing battle to mute gains in their currencies as a falling dollar and economic recovery create more demand for their assets than central banks can handle.

South Korea Deputy Finance Minister Shin Je Yoon said yesterday the country will leave the level of its currency to market forces after adding about $63 billion to its foreign exchange reserves this year to slow the appreciation of the won. Chile Finance Minister Andres Velasco said the same day that lawmakers approved an increase in local debt sales to finance spending, a move that will allow the government to keep more of its dollar-based savings overseas and slow the peso’s rally.

Governments are amassing record foreign-exchange reserves as they direct central banks to buy dollars in an attempt to stem the greenback’s slide and keep their currencies from appreciating too fast and making their exports too expensive. Half of the 10-best performers in the currency market this year came from developing markets, gaining at least 14 percent on average, according to data compiled by Bloomberg.

“It looked for a while like the Bank of Korea was trying to defend 1,200, but it looks like they’ve given up and are just trying to slow the advance,” said Collin Crownover, head of currency management in London at State Street Global Advisors, which has $1.7 trillion under management.

The won, after falling 44 percent against the dollar in March 2009 from its 10-year high of 899.69 to the dollar in October 2007, is now headed for its biggest annual rally since a 15 percent gain in 2004. It traded today at 1,160.32, up 8.6 percent since the end of December.

‘Suffered Tremendously’

Brazil’s real is up 1.6 percent this month, even after imposing a tax in October on foreign stock and bond investments and increasing foreign reserves by $9.5 billion in October in an effort to curb the currency’s appreciation. The real has risen 33 percent this year.

“We have to be careful that our exchange rate doesn’t appreciate too much as to deindustrialize the country,” Marcos Verissimo, chief of staff at Brazil’s state development bank known as BNDES, said yesterday at a conference in Sao Paulo. “The capital goods industry has suffered tremendously.”

Russia’s Bank Rossii increased its foreign reserves by 15 percent since March 13 as it sold rubles in an attempt to cap the currency’s gain. Even so, the surge in commodities prices this year means Russia’s steps to fight a stronger ruble may “not be productive,” the International Monetary Fund said yesterday. Energy, including oil and natural gas, accounted for 69.5 percent of exports to countries outside the former Soviet Union and the Baltic states in the first nine months, according the Federal Customs Service.

Dollar Index

“There are changes in the underlying factors that call for a more appreciated exchange rate,” Odd Per Brekk, the Washington-based IMF’s senior representative in Russia, told reporters.

Intercontinental Exchange Inc.’s U.S. Dollar Index, which tracks the currency’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, touched 74.774 on Nov. 11, the lowest level since August 2008, and has fallen 16 percent from the high this year of 89.624 on March 4 to 75.550 today.

Much of the greenback’s decline stems from investors borrowing funds in the U.S., where the target benchmark interest rate is between zero and 0.25 percent. They then invest the proceeds in countries with higher rates and faster growing economies.

World Bank, France

World Bank President Robert Zoellick said the recent fall of the dollar is a response to the currency’s earlier rise and to market dynamics, giving the U.S. few near-term options for changing its course.

The value of the dollar depends on confidence in dollar- denominated assets and also to the movements of other currencies, Zoellick told Asia-Pacific business leaders in Singapore today. The dollar grew in value during the height of the financial crisis because investors viewed it as a safe haven, he said.

France’s Finance Minister Christine Lagarde said in an interview in Singapore today that her government favors a “strong” dollar as an appreciating euro threatens to hurt European exports.

International Investment

An unprecedented net $47 billion flowed into equities in India, Indonesia, the Philippines, South Korea, Taiwan and Thailand in the last three quarters, according to data compiled by Bloomberg. That eclipsed the previous full-year high of $33 billion in 2005, nine year of data show.

“The dollar is weakening because the U.S. has the lowest short-term interest rates in the world will be the sell side of the carry trade as long as that remains true,” Chris Low, chief economist at FTN Financial in New York, wrote in a note to clients yesterday.

Chile’s peso has strengthened 26 percent this year versus the dollar, the second-biggest gain among Latin American currencies after the 33 percent rise in the Brazilian real.

South Korea’s economy expanded 6 percent in the nine months ended in September, the fastest rate since it grew 6.9 percent during the same period in 2002. The rebound came as companies such as Hyundai Motor Co. in Seoul and Samsung Electronics Co. in Suwon reported surging profits driven by exports.

‘Hard to Fight’

Brazil’s economy emerged from a recession in the second quarter, swinging to a 1.9 percent expansion after six months of contraction, a Sept. 11 report from the statistics agency showed. Six straight months of job growth, coupled with tax breaks and record low borrowing costs, pushed up consumer spending and helped Latin America’s largest economy rebound from the global financial crisis.

“I hear a lot of noise reflecting the government’s discomfort with the exchange rate, but it is hard to fight this,” said Rodrigo Azevedo, the monetary policy director of Brazil’s central bank from 2004 to 2007. “There is very little Brazil can do,” said Azevedo, who runs $1.8 billion at JGP SA in Rio de Janeiro, in an Oct. 16 interview.

To contact the reporter on this story: Oliver Biggadike in New York at obiggadike@bloomberg.netMatthew Brown in London at brown42@bloomberg.net

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Pound May Fall to One-Month Low Versus Yen: Technical Analysis

By Yasuhiko Seki and Kazumi Miura

Nov. 13 (Bloomberg) -- The British currency may fall to the lowest level in more than one month against the yen, Gaitame.com Research Institute Ltd. said, citing trading patterns.

The pound is about to enter a downtrend as it forms a so- called dead cross in which its short-term conversion line falls below a longer-term baseline on an ichimoku chart, said Kumiko Gervaise, a Tokyo-based currency analyst at the research unit of Gaitame, Japan’s biggest currency margin trader.

“The 60-day moving average has come to a critical level in comparison to the 200-day moving average, which may open the way for the U.K. currency to decline toward the lowest level this month and eventually 140 yen,” she said.

The pound’s 60-day moving average stood at 148.654 and the 200-day moving average was at 148.653, an ichimoku chart shows. The pound fell to as low as 145.81 on Nov. 2, and the currency last traded below the 140 yen mark on Oct. 7.

The pound was at 149.77 yen as of 8:47 a.m. in Tokyo from 149.81 yesterday in New York.

An ichimoku chart analyzes the midpoints of historic highs and lows. The conversion line is the same calculation over the past nine trading days. The baseline on the ichimoku chart is the sum of the highest high and the lowest low over the past 26 trading days.

In technical analysis, investors and analysts study chart of trading patterns and prices to forecast price changes in a security, commodity, currency or index.

To contact the reporters on this story: Yasuhiko Seki in Tokyo at Yseki5@bloomberg.net; Kazumi Miura in Tokyo at kmiura@bloomberg.net

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Former HSBC Executive Chen Pleads Guilty to Bribery Charges

By Debra Mao

Nov. 13 (Bloomberg) -- Former HSBC Holdings Plc executive Chen Ching-hsiao pleaded guilty to charges that he accepted a $60,000 bribe from a client seeking credit facilities.

The former senior vice president at HSBC’S commercial- banking department said “yes” when asked if he was pleading guilty at the Hong Kong District Court today.

“The prosecution’s case was not strong, but my client wanted to avoid the embarrassment of a lengthy trial,” Chen’s lawyer Barry Chin said. Chen faces as much as 2 to 3 years in prison, Chin said. Judge P. Li scheduled sentencing for Nov. 30.

Chen accepted a bribe from an unidentified Taiwanese client in June 2007 in return for “recommending or approving” two credit facilities, Hong Kong’s Independent Commission Against Corruption said Oct. 22.

HSBC referred the case to the anti-graft agency and provided “full assistance” during the investigation, according to the ICAC statement. Gareth Hewett, a spokesman for HSBC in Hong Kong, declined to comment before today’s hearing.

The case is Department of Justice v. Chen Ching Hsiao, DCCC 1184/2009, Hong Kong District Court No. 27.

To contact the reporter on this story: Debra Mao in Hong Kong at dmao5@bloomberg.net

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British Pound Strengthens Against Euro, Climbs Against Dollar

By Daniel Tilles

Nov. 13 (Bloomberg) -- The pound rose against the euro, strengthening 0.2 percent to 89.41 pence as of 7:41 a.m. in London. Sterling advanced 0.3 percent to $1.6631.

To contact the reporter on this story: Daniel Tilles in London at dtilles@bloomberg.net

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U.S. Treasury Confident Congress Will Increase Debt Ceiling

By Rebecca Christie

Nov. 13 (Bloomberg) -- The Obama administration is confident Congress will raise the country’s debt limit by year end to avert a showdown similar to the one that shuttered parts of the government in 1995, administration officials said.

The White House wants an increase of at least $1 trillion to $1.5 trillion, according to a person familiar with the deliberations between lawmakers and the administration. Record budget deficits are pushing the national debt closer to the $12.1 trillion statutory limit.

The administration’s request, higher than a proposed increase already passed in the House of Representatives, would get the government through the November 2010 midterm congressional elections without needing another increase. Earlier this month, Treasury officials acknowledged they’ll need more borrowing room by year-end to avoid market disruptions.

“Market participants still remain on edge, especially since many have concerns over the rising debt loads that were kicked off this year,” said George Goncalves, chief fixed- income rates strategist in New York at primary dealer Cantor Fitzgerald LP.

The administration officials said the White House is open to any legislative vehicle that will raise the debt limit, by any amount. Although the Obama administration has pledged to bring deficits down to “sustainable” levels in the longer term, Treasury Secretary Timothy Geithner has focused recently on the need to keep up spending on economic assistance programs until the unemployment rate, which reached a 26-year high of 10.2 percent in October, comes down.

TARP Savings

To rein in the 2010 deficit, the administration will save as much as it can from unused portions of the $700 billion Troubled Asset Relief Program, another administration official said. Treasury data show that the administration has more than $200 billion in uncommitted TARP funds.

One Treasury official said the memory of the 1995 budget standoff should be motivation to avoid another showdown. In that confrontation, then-House Speaker Newt Gingrich battled with the White House over federal budget bills, forcing President Bill Clinton to shut the government down temporarily.

With the economy still in the early recovery stage, Congress understands the stakes and doesn’t want to fuel investor concern, the official said.

Republicans in Congress are seeking to link the debt limit to the debate over health-care spending, while Democrats prefer to keep the two issues separate. The Senate Budget Committee has proposed a commission to look into the nation’s fiscal health, which backers say should be a condition of any debt limit increase.

‘Not Right’

“We’re seeing deficits projected for the next 10 years of over a trillion dollars a year,” said Senator Judd Gregg of New Hampshire, the ranking Republican on the Budget Committee, in congressional comments last week. “It’s not sustainable. It’s not fair, and it’s not right.”

Treasury debt-management director Karthik Ramanathan told bond market participants in Washington last week to expect another year of government debt sales of $1.5 trillion to $2 trillion in fiscal year 2010, which began Oct. 1, according to minutes of the meeting.

For fiscal year 2009, which ended Sept. 30, the U.S. racked up a $1.4 trillion deficit, and the Congressional Budget Office in August predicted a deficit this year of about the same size.

Treasury officials also have said they have less maneuvering room than in the past. Tactics such as tapping federal retirement funds would free up roughly $150 billion - about the same amount as the interest payments that come due on Dec. 31.

Temporary Measures

“Depending on the date that we hit the debt limit, they could last days or at most weeks,” compared with five or six months in previous debt-limit impasses, said Matthew Rutherford, deputy assistant Treasury secretary for federal finance, in a press conference last week.

Forecasting a precise date for a debt-ceiling collision is difficult because the government’s cash flows are “volatile,” the Treasury said last week, adding that it would keep markets and lawmakers notified of developments. The department said it could need extra immediate cash because there’s so much uncertainty surrounding incoming taxes and outgoing spending on fiscal stimulus and financial market stabilization programs.

“Debt ceiling showdowns used to be long, drawn-out affairs,” said Louis Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey. “Things come to a head much faster when your cash burn rate averages more than $100 billion a month.”

To contact the reporter on this story: Rebecca Christie in Washington at rchristie4@bloomberg.net

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Asian Commodity Stocks Fall, Bonds Rise; China Shares Rally

By Patrick Rial and Akiko Ikeda

Nov. 13 (Bloomberg) -- Asian commodity stocks declined, led by BHP Billiton Ltd. and PetroChina Co., and bonds climbed on concern the pace of the global economic recovery will slow. China stocks rose on speculation the yuan will appreciate.

The MSCI Asia Pacific Index lost 0.1 percent to 117.69 as of 3:50 p.m. in Tokyo, paring a weekly advance to 1.1 percent. The yield on Japan’s 10-year government bond fell three basis points to 1.34 percent. Chinese yuan forwards climbed and shares rallied in Hong Kong and Shanghai as President Barack Obama arrived in Asia to push for more flexible exchange rates.

Crude oil traded near $77 after tumbling 3 percent in New York yesterday as U.S. stockpiles rose more than economists had forecast. China’s surging asset prices, a dollar collapse and a double-dip global recession are the biggest risks investors face in 2010, Michael Hartnett, Bank of America Corp.’s chief global equity strategist, wrote in a report issued yesterday.

“Lower commodity prices illustrate anxiety about the economy,” said Kiyoshi Ishigane, a strategist in Tokyo at Mitsubishi UFJ Asset Management Co., which oversees about $56 billion.

Ten-year U.S. Treasury notes rose, pushing the yield down two basis points to 3.43 percent, after Obama said the U.S. “desperately” needs jobs. The dollar fell 0.2 percent to $1.4877 per euro after gaining 0.9 percent yesterday as investors sold higher-yielding assets. South Korean three-year yields declined eight basis points to 4.26 percent.

Stimulus Withdrawal

Singapore’s Prime Minister Lee Hsien Loong warned at a gathering of the Asia-Pacific Economic Cooperation group that late withdrawal of monetary stimulus may stoke asset bubbles. Malaysia’s Prime Minister Najib Razak said policy makers must avoid prematurely ending fiscal programs until a “real” recovery is secured.

BHP, Australia’s largest oil producer, lost 1.4 percent to A$39.01 in Sydney. PetroChina, the nation’s biggest oil producer, fell 1.5 percent to HK$9.93.

Japan’s Nikkei 225 Stock Average dipped 0.4 percent to 9,770.31. Mitsui & Co., whose profit is the most sensitive among Japan’s five largest trading houses to changes in the price of oil, lost 1.1 percent to 1,184 yen.

“There are still skeptical investors out there who don’t think the global recovery will be sustained and this is tempering the advance in equities,” said Allan Yu, who helps manage $4.24 billion at Manila-based Metropolitan Bank & Trust Co. “The market is trying not to run ahead of itself.”

Oil, Gold Fall

Oil declined after an Energy Department report showed crude inventories rose a more-than-expected 1.76 million barrels last week and U.S. refinery operating rates fell to the lowest in more than a year. Analysts surveyed by Bloomberg News forecast a 1 million-barrel gain.

“There is a lot of uncertainty as to what we can expect with the rate of recovery in Western oil demand,” said Toby Hassall, a research analyst at CWA Global Markets Pty in Sydney. “There are sectors of the economy that remain weak.”

Crude oil for December delivery fell as much as 1.2 percent to $76 a barrel and was recently at $77.07. Futures, up 73 percent in 2009, have dropped 0.5 percent this week.

Gold futures for December delivery added 0.2 percent to $1,108 per ounce, after touching an all-time high of $1,123.40 yesterday. Newcrest Mining Ltd., Australia’s largest gold producer, slumped 2.8 percent to A$34.57.

The Dollar Index, which measures the greenback against a basket of six currencies, slipped 0.1 percent, ending a two-day, 0.9 percent advance. The U.S. currency dropped to the lowest since Aug. 8, 2008, during trading on Nov. 11, helping spur demand for gold as a store of value.

Yuan Appreciation?

Twelve-month non-deliverable forwards for the yuan rose 0.3 percent to 6.5895 per dollar in Shanghai, signaling traders are betting China will shift its currency peg of about 6.83 per dollar that’s been in place since July 2008. The Shanghai B- Share Stock Price Index, a gauge of dollar-denominated Chinese shares, jumped 9 percent on speculation corporate earnings in yuan will be bolstered by a stronger currency.

The Hang Seng Index climbed 0.6 percent to 22,520.05, led by China stocks. Industrial & Commercial Bank of China Ltd., the world’s most profitable bank, rose 1.4 percent to HK$6.76 after predicting loan profitability will improve.

APEC ministers yesterday called for “market-orientated exchange rates,” without naming the yuan. The People’s Bank of China this week said foreign-exchange policy will take into account global capital flows and changes in major currencies and scrapped language in a previous report to keep the yuan “basically stable.” The economy expanded by 8.9 percent in the third quarter from a year earlier.

“There has been a subtle message sent that as China’s economy starts to recover, it’s probably appropriate for the PBOC to move back to a managed float,” Stephen Roach, chairman of Morgan Stanley Asia in Hong Kong, said in an interview. A shift may not be imminent and wouldn’t reach the 15 percent to 20 percent that some U.S. lawmakers have demanded, he said.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net; Akiko Ikeda in Tokyo at iakiko@bloomberg.net.

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China Rejects Requests for $29 Billion of New Plants

By Bloomberg News

Nov. 13 (Bloomberg) -- China, the world’s third-largest economy, rejected requests to build industrial projects worth almost 200 billion yuan ($29 billion), and said it plans new measures to close factories to curb overcapacity and pollution.

The government will target the steel, aluminum, coke, cement, paper and utility industries, Zhu Xingxiang, director of environment evaluation department at the Ministry of Environmental Protection, said today in Beijing.

“This shows China’s confident enough about the momentum of growth to begin addressing structural excess capacity problems,” said David Cohen, an economist with Action Economics in Singapore. “One of the motives will be to improve the profitability of existing companies.”

The measures underscore China’s determination to prevent record bank lending from fueling an investment bubble without imposing restrictions that may endanger an economic rebound. Overcapacity is stalling a profit recovery at steelmakers including Baoshan Iron & Steel Co. with prices falling 18 percent since touching a 10-month high on August 4.

“The steel industry is the focus of our supervision,” Zhu said. “There is too much capacity being built without government approval.”

Baoshan Iron & Steel, the largest Chinese mill, dropped 2.6 percent to 7.45 yuan at 1:34 p.m. local time in Shanghai trading. Aluminum Corp. of China Ltd., the biggest maker of the metal in the nation, fell 1.4 percent to HK$8.64 in Hong Kong trading.

Stable Growth

“Industry restructuring is a long, tough and important task,” Li Pumin, a spokesman at the National Development and Reform Commission, the country’s top economic planner, said at the same conference today. “The purpose of that is to ensure the stablilty and continuity of economic growth.”

Urban fixed-asset investment surged 33.1 percent in the first 10 months of the year, the Chinese government said this week. Officials have indicated they plan to tighten lending terms after an 8.92 trillion yuan ($1.31 trillion) boom in new loans in January to October.

The government’s 4 trillion yuan stimulus spending has spurred overproduction of steel and rising inventories has led to lower prices, the China Iron & Steel Association said this month. The U.S. this year imposed antidumping charges on some Chinese steel products, which U.S. Commerce Secretary Gary Locke said today weren’t protectionist measures.

The proposed policies may include closing or relocating “seriously-polluting” plants, helping factories upgrade their technology, and offering compensation to companies and workers for closures, Zhu said today. Trials will be conducted before the measures are implemented nationwide, he said.

Tighten Approval

“In the future, we are also tightening approval for hydropower projects as they will damage local biology and fishing,” Zhu said.

The ministry is also conducting an environmental review of planned steel projects in Shandong province after local governments approved construction without proper evaluation, Zhu said. The environmental protection bureau in June suspended works at Shandong Rizhao Steel Holding Co.’s steel plate project and Weifang Iron & Steel Group’s 5-million-ton project.

The Chinese government banned the expansion of coke projects for three years in September, and has said it will eliminate 800,000 metric tons of aluminum smelting capacity. Coke is used to make steel and aluminum is used in car parts and packaging.

China’s plans to close more coke plants may inflame an existing trade dispute with the U.S. and the European Union, which last week filed a World Trade Organization complaint over the Asian nation’s export restrictions on the product.

The Ministry of Land and Resources has rejected almost half of the 431 applications made this year for land usage, including requests from the steel, cement and glass industries, Dong Zuoji, director of land planning, said at the same conference.

--Xiao Yu and Kevin Hamlin. Editors: Tan Hwee Ann, Jacob Lloyd- Smith.

To contact the Bloomberg News Staff of this story: Xiao Yu in Beijing at yxiao@bloomberg.net; Kevin Hamlin in Beijing at khamlin@bloomberg.net

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Corn Declines on Speculation Drier Weather to Aid U.S. Harvest

By Luzi Ann Javier

Nov. 13 (Bloomberg) -- Corn fell for a third day, trimming a weekly gain, on speculation drier weather in growing regions in the U.S. will accelerate harvesting in the world’s biggest exporter of the grain.

Iowa, Nebraska and Minnesota, three of the four biggest U.S. corn-producing states, were forecast to have normal to below- normal precipitation between Nov. 18 and Nov. 22, according to the U.S. Climate Prediction Center Web site.

“The market is interested in the rain forecast at the moment,” Luke Mathews, a commodity strategist at Commonwealth Bank of Australia in Sydney, said by phone today. Prices are reacting on prospects that farmers will be “able to complete the harvests, particularly in the U.S.”

Corn for December delivery slumped as much as 0.9 percent to $3.87 a bushel in after-hours electronic trading on the Chicago Board of Trade. The most-active contract traded at $3.88 a bushel, down 0.5 percent at 3:08 p.m. Singapore time, curbing the weekly gain to 5.9 percent.

Corn futures jumped 7.5 percent in the first two trading days of the week as the U.S. Department of Agriculture cut its forecast for the nation’s output and on speculation delays in harvest may curb yields further.

About 37 percent of the corn crop in the 18 largest U.S. growing states, had been harvested as of Nov. 8, compared with the past five-year average of 82 percent, the USDA said Nov. 9.

Production Forecast

The USDA on Nov. 10 reduced its corn production forecast for the world’s biggest exporter to 12.921 billion bushels, down 0.7 percent from its October estimate after heavier-than-normal rainfall and freezing temperatures helped reduce yield potential.

Soybeans for January delivery in Chicago were little changed at $9.91 a bushel, taking the weekly gain to 3.8 percent.

About 75 percent of the soybean crop in 18 largest U.S. producing states have been collected as of Nov. 8, compared with the past five year average of 92 percent, the USDA said Nov. 9.

Wheat for March delivery declined as much as 0.7 percent to $5.485 a bushel before trading at $5.495. The March contract has gained 6.2 percent rally this week.

Rough rice for January delivery jumped as much as 2.3 percent to $15.07 per 100 pounds in Chicago on speculation Thailand, the world’s biggest exporter, may delay sales, limiting supplies as the Philippines prepares for a record tender.

The Philippines is seeking to buy 600,000 metric tons of rice on Dec. 1 after cyclones damaged crops in the world’s biggest importer.

To contact the reporter on this story: Luzi Ann Javier in Singapore at ljavier@bloomberg.net

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Frontline Chief Says Fujairah Ban Will Spur Tanker Scrapping

By Alaric Nightingale

Nov. 13 (Bloomberg) -- Owners of single-hulled tankers are more likely to scrap their ships, buoying freight rates, after the Port of Fujairah said it would ban them next year, according to Frontline Ltd., the biggest supertanker company.

Fujairah, in the United Arab Emirates, is the most common regional refueling point for ships carrying crude from the Persian Gulf. About 90 supertankers, or 17 percent of the global fleet, have single hulls, according to Lloyd’s Register-Fairplay data on Bloomberg.

“It’s another nail in the coffin for single-hull ships,” Jens Martin Jensen, Singapore-based chief executive officer of Frontline’s management unit, said by phone today. Fujairah’s ban is “a push in the right direction” that may contribute to the fleet shrinking next year, he said.

The International Maritime Organization, a United Nations agency with 169 members, will implement a global ban on single- hull tankers from next year. Nations can opt out until 2015. The European Union called the ship design “more accident-prone” in 2003 and London-based BP Plc says it won’t hire them because of the risk of leaking, favoring double-hulled ships instead.

Frontline operated a fleet of 84 tankers including seven single-hull carriers according to its quarterly earnings report on Aug. 28. The majority of its single-hulled ships are leased out on fixed fees until the end of next year.

Daily returns from the Saudi Arabia-to-Japan voyage rose 16 percent to $21,584 yesterday, according to the Baltic Exchange.

To contact the reporter on this story: Alaric Nightingale in London at Anightingal1@bloomberg.net

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Most Asian Stocks Decline on Earnings Concern; ICBC Advances

By Jonathan Burgos and Ian Sayson

Nov. 13 (Bloomberg) -- Most Asian stocks dropped, paring the MSCI Asia Pacific Index’s first weekly advance in four, as commodity prices fell and Japanese glassmakers posted losses.

BHP Billiton Ltd., the world’s biggest mining company and Australia’s largest oil producer, sank 1.4 percent in Sydney. Central Glass Co. and Nippon Sheet Glass Co. dropped more than 6 percent in Tokyo after reporting losses. Industrial & Commercial Bank of China Ltd. climbed 2 percent after its chairman predicted loan profitability among Chinese lenders will improve.

Five stocks fell for every four that rose on the MSCI Asia Pacific Index. The gauge was little changed at 117.87 as of 5:12 p.m. in Tokyo, on course for a 1.3 percent gain for the week. The measure has dropped 2.8 percent from a 13-month high on Oct. 20 amid concern governments will withdraw stimulus efforts.

“There are still skeptical investors out there who don’t think the global recovery will be sustained and this is tempering the advance in equities,” said Allan Yu, who helps manage $4 billion at Manila-based Metropolitan Bank & Trust Co.

Japan’s Nikkei 225 Stock Average dipped 0.4 percent to 9,770.31. Leopalace21 Corp., a real-estate company, slumped 7.5 percent after Mitsubishi UFJ Securities downgraded the stock.

Australia’s S&P/ASX 200 Index sank 0.9 percent as Paladin Energy Ltd. dropped 2.6 percent after its loss in the September quarter widened. The Shanghai B-Share Stock Price Index, a gauge of dollar-denominated Chinese shares, rallied 9.4 percent to its highest since May 2008 after regulators increased the amount of foreign currency individuals can exchange.

Oil, Metal Prices

Futures on the Standard & Poor’s 500 Index were little changed. The gauge slid 1 percent yesterday from a 13-month high, dragged down by energy producers.

Crude-oil futures fell 3 percent to $76.94 a barrel in New York yesterday, the lowest settlement since Oct. 14. The Energy Department reported that supplies of crude oil rose 1.76 million barrels to 337.7 million last week. Analysts surveyed by Bloomberg News forecast a 1 million-barrel gain.

The London Metals Index, a measure of six metals including copper and zinc, dropped 0.8 percent yesterday, its steepest slump this week.

BHP Billiton dropped 1.4 percent to A$39.01. Rio Tinto Ltd., the world’s third-biggest mining company, slipped 0.5 percent to A$69.52. PetroChina Co., the nation’s largest oil producer, lost 1.3 percent to HK$9.95 in Hong Kong. Jiangxi Copper Co. Ltd., China’s biggest producer of the metal, declined 1.4 percent to HK$18.30.

In Manila, Philex Mining Corp. slumped 14 percent to 16.75 pesos. Philex said yesterday third-quarter profit fell 42 percent to 617.5 million pesos ($13 million) while First Pacific Co. said it’s in no hurry to boost its 21 percent stake in the miner.

Justifying Valuations

The MSCI Asia Pacific Index has climbed 67 percent from a more than five-year low on March 9. Stocks in the benchmark are valued at 22 times estimated earnings, compared with 17 times for the S&P and 15 times for the Dow Jones Stoxx 600 Index.

“We’ll have to see whether corporate earnings will continue to surprise positively,” said Michiya Tomita, who helps manage $67 billion at Mitsubishi UFS Asset Management Co. in Hong Kong. “That will help justify valuations.”

The MSCI gauge fell 1.3 percent in October, the first monthly decline since February, as Australia’s central bank raised interest rates, while India shifted policy focus toward stemming inflation.

China, World

China will take further steps to boost domestic demand, President Hu Jintao said. The International Monetary Fund doesn’t expect the world to experience a double-dip recession, though the economic recovery is fragile and sluggish, IMF Managing Director Dominique Strauss-Kahn said. Hu and Strauss- Kahn spoke in Singapore.

Paladin Energy declined 2.6 percent to A$4.12. The uranium producer said its loss widened to $20 million in the three months ended in September from a loss of $5.1 million a year earlier.

In Tokyo, Central Glass tumbled 6.8 percent to 370 yen after posting first-half net loss of 451 million yen ($5 million). Nippon Sheet Glass, which posted a first-half net loss of 26.2 billion yen, declined 8.2 percent to 261 yen, the steepest decline in the MSCI Asia Pacific Index.

Leopalace21 slumped 7.5 percent to 410 yen after it was cut to “underperform” from “market perform” by Kouki Ozawa, an analyst at Mitsubishi UFJ Securities.

Nintendo Co. declined 1.4 percent to 22,980 yen. Sales of the company’s Wii console fell for the eighth straight month in the U.S., as a 20 percent price reduction failed to lift purchases of the world’s leading video-game platform.

In Hong Kong, Industrial & Commercial Bank advanced 2 percent to HK$6.80. China Construction Bank Corp., China’s No. bank by market value, added 1.4 percent to HK$7.13.

ICBC Chairman Jiang Jianqing said this year’s record lending won’t lead to an increase in bad debts in 2010, and predicted loan profitability among Chinese banks will improve. Jiang also said he expects China to maintain its current monetary policy.

To contact the reporters for this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net; Ian C. Sayson in Manila at isayson@bloomberg.net.

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European Stock-Index Futures Are Little Changed; BA May Move

By Adria Cimino

Nov. 13 (Bloomberg) -- European stock-index futures were little changed as a report that showed Germany’s economic recovery accelerated in the third quarter helped offset lower commodity prices. Most Asian shares declined.

BHP Billiton Ltd., the world’s biggest mining company and Australia’s largest oil producer, slipped 1.4 percent in Sydney. Porsche SE, the maker of the 911 sports car, may be active after posting a full-year pretax loss. British Airways Plc will probably move after agreeing to a plan for a $7 billion merger with Spanish carrier Iberia Lineas Aereas de Espana SA.

Futures on the Dow Jones Euro Stoxx 50 Index, a benchmark gauge for the euro region, slipped 0.1 percent to 2,868 as of 7:23 a.m. in London. The U.K.’s FTSE 100 Index may decrease 11, according to Cantor Index, a betting firm.

Market moves today may come from news on mergers and acquisitions or commodity prices, according to James Hughes, a market analyst at CMC Markets in London. “Otherwise we could well see the week end with a whimper,” he wrote in a note.

Europe’s Stoxx 600, poised for its second straight weekly advance, has rallied 56 percent since March amid speculation government stimulus programs and record-low interest rates are helping to drag the economy out of recession. Gains have pushed its valuation to about 54 times reported earnings, near the highest level since 2003.

Gross domestic product in Germany, Europe’s largest economy, increased a seasonally adjusted 0.7 percent from the second quarter, when it rose 0.4 percent, the Federal Statistics Office said in Wiesbaden today. The median estimate in a Bloomberg News survey of 35 economists was for growth of 0.8 percent. The second-quarter figure was revised from 0.3 percent.

U.S. Futures

U.S. equity benchmark indexes yesterday fell from 13-month highs as energy shares slumped following bigger-than-estimated growth in oil stockpiles, erasing an earlier advance spurred by Hewlett-Packard Co.’s takeover of 3Com Corp.

Standard & Poor’s 500 Index futures added 0.2 percent today, while the MSCI Asia Pacific Index dropped 0.1 percent.

BHP Billiton declined 1.4 percent to A$39.01 in Australia.

Crude oil was little changed after falling to the lowest level in a month in New York on concern that fuel demand has not recovered in the world’s biggest energy consumer. The contract for December delivery declined as much as 94 cents, or 1.2 percent, to $76 a barrel on the New York Mercantile Exchange.

The London Metals Index, a measure of six metals including copper and zinc, retreated 0.8 percent yesterday, the steepest drop this week.

Porsche, BA

Porsche posted a full-year pretax loss after writing down the value of options on shares of Volkswagen AG, the company it’s merging with after a failed takeover bid.

The 4.4 billion-euro ($6.5 billion) loss in the year ended July 31 compared with an 8.6 billion-euro profit a year earlier, the company said. Porsche plans a dividend of 5 cents per preferred share, a reduction of 93 percent from the 70-cent payout for fiscal 2008.

BA agreed to a plan for a $7 billion merger with Iberia, ending more than a year of talks on a tie-up aimed at fighting a slump in travel and closing the gap with competitors.

Under the all-share deal, BA shareholders will get one share in the combined company for every existing share they hold in BA and Iberia investors will get 1.0205 shares in the enlarged company for every Iberia share they hold, the companies said yesterday after the market closed.

Compagnie Financiere Richemont SA, the world’s largest jewelry maker, said its operating profit fell to 390 million euros in the first half from 635 million euros the year earlier. Currency effects will have a negative impact on results in the second half, Richemont said.

Dexia, Technip

Dexia SA, France’s biggest lender to local governments, reported a third-quarter profit after selling its U.S. bond insurance unit. Net income was 274 million euros, following a 1.54 billion-euro loss in the year-earlier period, the Paris- and Brussels-based bank said. That compares with a 272 million- euro median estimate of nine analysts surveyed by Bloomberg.

Technip SA, Europe’s second-largest oilfield services provider, confirmed its full-year sales outlook and reported third-quarter net income of 108 million euros.

Siemens AG, Europe’s biggest engineering company, may gain after UBS AG rated the shares a “short-term buy.”

To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net.

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U.S. Stock Fund Inflows Reach 11-Month High, EPFR Global Says

By Shiyin Chen

Nov. 13 (Bloomberg) -- Investors poured the most money into U.S. stock funds in 11 months, leading global equity inflows amid a recovery in earnings and on expectations the Federal Reserve will keep borrowing costs low, EPFR Global said.

Investors funneled $6.97 billion into U.S. equity funds, the most since the second week of December 2008, contributing to total inflows of $10 billion to stock funds during the week ended Nov. 11, EPFR said in a statement dated yesterday. It added that funds investing in China shares took in $256 million, the most in nine weeks, pacing a $2.46 billion gain in overall emerging-market stock investments.

The Standard & Poor’s 500 Index and the MSCI Emerging Markets Index both gained 5 percent during the week, helped by pledges by the Group of 20 nations to maintain their stimulus measures. Cisco Systems Inc. and HSBC Holdings Plc were among companies that rose after reporting earnings.

“There’s going to be a slow but steady recovery,” Richard Lacaille, global chief investment officer at State Street Global Advisors, which oversees $1.74 billion in assets, said in a Bloomberg Television interview in Hong Kong. “We’ve gone through the bottom, earnings have troughed, we now face growth.”

Policy makers from the U.S. to Japan said at the G-20 meeting last week it’s too early to withdraw fiscal steps designed to support global recovery. The Fed also said on Nov. 4 it will keep interest rates near zero for “an extended period.”

Cisco, China

Cisco, the world’s largest maker of networking equipment, reported profit excluding stock compensation and some other costs of 36 cents last week, beating the 31-cent average estimate in a survey of analysts. HSBC, Europe’s biggest bank, said third-quarter profit was “significantly” higher than a year ago on lower loan provisions.

China equities gained as economic data showed the nation’s recovery strengthening. Industrial production rose 16.1 percent in October, the most since March 2008, the statistics bureau said on Nov. 11. Retail sales gained an annual 16.2 percent during the month, while urban fixed-asset investment climbed 33.1 percent in the first 10 months of the year.

“In addition to being seen as a haven from dollar weakness, emerging markets benefited during the first full week of November from some robust Chinese macroeconomic data showing GDP growth on track to exceed 10 percent during the fourth quarter of 2009,” said EPFR, which tracks funds with $10 trillion in assets.

Developing Markets

Global emerging-market stock funds drew $1.48 billion, while Asia took in $630 million, Cambridge, Massachusetts-based EPFR said. Latin America and developing Europe, the Middle East and African stock funds also attracted a combined $350 million, it said.

Funds investing in the BRIC nations of Brazil, Russia, India and China also had a ninth straight week of inflows, taking in $224 million, according to the statement. Total inflows for the year have reached a record $66.4 billion, according to estimates by Morgan Stanley.

“In emerging markets, you’ve got a secular growth story and a lot more robustness in terms of growth,” Lacaille said.

To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net

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Japanese Stocks Fall; Nikkei 225, Topix Decline for Third Week

By Akiko Ikeda and Kotaro Tsunetomi

Nov. 13 (Bloomberg) -- Japanese stocks fell, dragging benchmark indexes to a third consecutive weekly decline, after crude-oil and metal prices slumped and companies reported losses.

Nippon Mining Holdings Inc., an oil refiner and Japan’s biggest copper producer, sank 1.4 percent after oil retreated yesterday in New York to a four-week low and metals slid in London. Japan Petroleum Exploration Co. lost 2.9 percent. Nippon Sheet Glass Co. plunged 8.2 percent, the steepest drop in the Nikkei 225 Stock Average, after the glassmaker reported a loss. Central Glass Co. tumbled 6.8 percent after reporting a half- year loss and cutting its full-year profit forecast in half.

“Lower commodity prices illustrate anxiety about the economy,” said Kiyoshi Ishigane, a strategist in Tokyo at Mitsubishi UFJ Asset Management Co., which oversees about $56 billion.

The Nikkei 225 fell 0.4 percent to 9,770.31 at the 3 p.m. market close in Tokyo. The broader Topix index retreated 0.1 percent to 866.80, the lowest close since July 15, with about three stocks declining for every two that advanced.

Losses widened to 0.2 percent this week for the Nikkei and 0.8 percent for the broad gauge. The Topix has drifted between gains and losses in seven of the past eight sessions. Closing levels have moved less than 1 percent on 22 of the 30 trading days since Oct. 1, reducing its 30-day volatility to the lowest level since August 2007, according to data compiled by Bloomberg.

The index has fallen 11 percent since Yukio Hatoyama was elected as Japan’s prime minister on Aug. 30. That’s the second- biggest drop among 89 benchmarks tracked by Bloomberg worldwide. Equities in the Japanese measure trade at 36 times estimated earnings, more than double the 17 times for the MSCI World Index.

Shrinking Economy

Investors have shunned stocks on concern the new government will struggle to revive growth after the global recession sapped demand for companies’ products and the stronger yen hurt earnings at exporters.

Japan’s economy will shrink 5.4 percent this year, faster than contractions of 2.7 percent expected in the U.S. and 4.2 percent in the euro area, according to forecasts released on Oct. 1 by the International Monetary Fund.

In New York yesterday, the Standard & Poor’s 500 Index slid 1 percent from a 13-month high the previous day, dragged down by energy producers on a bigger-than-estimated increase in oil stockpiles.

Crude oil for December delivery fell 3 percent to $76.94 a barrel on the New York Mercantile Exchange yesterday, the lowest settlement since Oct. 14. The Energy Department report showed supplies of crude oil rose 1.76 million barrels to 337.7 million last week. Analysts surveyed by Bloomberg News forecast a 1 million-barrel gain.

Oil, Metals

Nippon Mining dropped 1.4 percent to 366 yen. AOC Holdings Inc., an oil and gas explorer declined 2.3 percent to 606 yen. Japan Petroleum Exploration sank 2.9 percent to 4,360 yen, its lowest in more than five weeks.

The London Metals Index, a measure of six metals including copper and zinc, dropped 0.8 percent yesterday, its steepest slump this week.

Nippon Sheet Glass tumbled 8.2 percent to 256 yen. The glassmaker posted a first-half net loss of 26.2 billion yen, compared with a year-earlier profit, as sales fell 32 percent.

Central Glass plunged 6.8 percent to 370 yen, losing the most in 10 months. The company cut its full-year forecast for net income in half, citing a slump in sales and losses related to inventory. It booked a first-half loss of 451 million yen, missing the profit of 200 million yen it expected.

Nippon Suisan Kaisha Ltd. jumped 7.6 percent to 268 yen, the steepest advance in the Nikkei 225. The seafood company was boosted to “buy” from “underperform” by Ritsuko Tsunoda, a Tokyo-based analyst at Bank of America Corp.’s Merrill Lynch & Co. unit on the outlook for a recovery in earnings.

Sharp Corp. advanced 3.8 percent to 1,001 yen, rising the most since July 30. Japan’s biggest maker of liquid-crystal displays was lifted to “buy” from “hold” by Yasuo Nakane, an analyst at Deutsche Bank AG.

To contact the reporters for this story: Akiko Ikeda in Tokyo at iakiko@bloomberg.net; Kotaro Tsunetomi at ktsunetomi@bloomberg.net.

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KKR’s Dollar General Raises $716 Million in IPO Sale

By Michael Tsang

Nov. 13 (Bloomberg) -- Dollar General Corp., the discount retailer controlled by private-equity firm KKR & Co., raised $716 million in an initial public offering selling shares at the low end of the range it sought.

The company, KKR and other owners sold 34.1 million shares at $21 each, the Goodlettsville, Tennessee-based retailer said in a statement yesterday, after they asked for as much as $23. The IPO gives the merchant a capitalization of $7.2 billion and values it at 26.9 times reported earnings, a 77 percent premium to Wal-Mart Stores Inc., the world’s biggest retailer, Bloomberg data show. Dollar General will receive 67 percent of the proceeds, while selling stakeholders will get the rest.

Dollar General is the fifth U.S. company IPO in November and comes after an eight-month, 61 percent rally in the Standard & Poor’s 500 Index spurred the most American offerings in almost two years. While sellers reaped $9.6 billion unloading stock, Dollar General’s IPO price suggests institutional buyers are starting to extract bigger concessions from underwriters after three deals were pulled in the past two weeks and more than half of the IPOs since September fell below their offer price.

“It’s definitely going to be more of a buyers’ market as opposed to a sellers’ market now,” said Peter Sorrentino, who helps manage $13.8 billion at Huntington Asset in Cincinnati. “Deals are going to get a lot more scrutiny.”

Taken Private

Citigroup Inc., Goldman Sachs Group Inc. and KKR of New York, among Dollar General’s biggest shareholders, also served as lead underwriters for the IPO, along with Charlotte, North Carolina-based Bank of America Corp.’s investment banking unit Merrill Lynch & Co. and New York-based JPMorgan Chase & Co.

The retailer, which will use the proceeds to pay down debt, begins trading today on the New York Stock Exchange under the ticker DG. Dollar General’s IPO comes less than 2 1/2 years after it was acquired by KKR in July 2007 in a $7.3 billion purchase. The deal was KKR’s last leveraged buyout before the credit markets froze in August that year.

The IPO price values the company at 26.9 times reported net income of 78 cents a share in the 12 months ended in July, according to a regulatory filing on Nov. 9.

Walmart, which has a capitalization of $205 billion, trades at 15.2 times reported profits, Bloomberg data show. The Bentonville, Arkansas-based company said yesterday that third- quarter profit rose 3.2 percent and forecast sales this quarter would be little changed.

Relative Value

Dollar General’s price-earnings ratio falls to 18.5 times if its first-half profits of $177 million are averaged over a year and adjusted for the decline in interest expenses following the IPO, according to Francis Gaskins, president of IPODesktop.com in Marina del Rey, California.

That’s 25 percent higher than Walmart’s ratio of 14.8 times estimated 2009 profit, Bloomberg data show.

“The deal they’re bringing out is one that happens to be doing well in this environment,” said Eric Cinnamond, the Jacksonville Beach, Florida-based manager of the $249 million Intrepid Small Cap Fund that has gained 51 percent in the past year, beating 91 percent of competitors. “They’re winning the relative game in retail right now.”

Same-store sales at Dollar General rose 8.6 percent in its fiscal quarter ended July, according to data compiled by Bloomberg, amid the deepest U.S. recession since the 1930s. Sales at Walmart stores declined 1.5 percent in the same period.

Debt Burden

Dollar General, which had $4.1 billion in long-term borrowings at the end of July, used about 39 percent of its operating income for interest payments, Bloomberg data show. That’s more than 10 times the median amount that interest expenses trim from operating income at 10 competing retailers.

“The debt burden is definitely going to be an issue,” said Nick Einhorn, a Greenwich, Connecticut-based analyst at Renaissance Capital LLC, which has specialized in IPO research since 1991. “They have done a good job in the past couple years definitely, but there is a question of how much of that is real improvement. How much of that is a one-time boost because of the economy that may go away?”

The U.S. economy returned to growth last quarter after a yearlong contraction, expanding at a 3.5 percent pace, the Commerce Department said last month.

KKR, founded by Henry Kravis with his first cousin George Roberts and their Bear Stearns Cos. colleague Jerome Kohlberg in 1976, is listing Dollar General as investors suffer the worst returns on U.S. IPOs since at least 1995.

AEI, Aviv

AEI, the George Town, Cayman Islands-based former unit of Enron Corp., and Chicago-based Aviv REIT Inc., the real-estate investment trust that operates nursing homes in 21 U.S. states, postponed offerings in the past two weeks. Both companies were backed by private-equity firms.

Rue21 Inc., a teen apparel retailer, sold 6.77 million shares in an IPO yesterday at $19 each, raising about $129 million. The price exceeded the $16 to $18 a share that the Warrendale, Pennsylvania-based company originally sought.

The IPOs of 18 U.S. companies that went public in September and October have outperformed the S&P 500 by 0.1 percentage point on average in the first month of trading, the worst performance in Bloomberg data going back 14 years. Offerings by American companies have beaten the S&P 500 by an average 21.3 percentage points since 1995, the data show.

‘It’s Probably Overpriced’

“IPO means, ‘It’s probably overpriced,’” said billionaire investor Kenneth Fisher, who oversees $35 billion as chairman of Woodside, California-based Fisher Investments Inc. “IPOs have never been done for the benefit of the purchaser. IPOs are done for the benefit of the company by definition. So the history of IPOs is very clear that they’re money losing activities.”

Fisher said he’s not interested in Dollar General’s IPO.

KKR and its co-investors, Goldman Sachs and Citigroup, Boston-based Wellington Management Co. and the Canada Pension Plan Investment Board, spent $2.8 billion to take over Dollar General, and borrowed the rest. Including $384 million in net debt that Dollar General had at the time, the deal was valued at $7.32 billion.

The stakeholders reaped $239 million from selling 11.4 million shares. That would increase to $347 million if the underwriters exercise an option to purchase an additional 5.12 million shares for their clients.

In September, Dollar General paid a dividend of $239 million to its owners, which matches the amount they received in the IPO and exceeds the company’s operating income in its fiscal second quarter. The retailer doesn’t plan to pay any dividends as a public company, according to the Nov. 9 filing. Citigroup, Goldman Sachs and KKR will also collect fees as underwriters.

‘In the Bank’

The dividend may have been paid to offset any loss of income had the underwriters failed to drum up enough buyers for the IPO, according to Renaissance Capital’s Einhorn.

“If you don’t get the IPO done at the price you want, at least that money is sitting in the bank already,” he said.

Using KKR’s own valuation models, the “fair value” of Dollar General’s common stock was $12.95 each at the end of May, according to the regulatory filing. Dollar General used two methods to determine the value of its stock: one that estimates the present value of future cash flows and another based on comparable publicly traded companies, the filing showed.

That valuation was used to set the exercise price for 731,821 stock options that Dollar General granted on May 28.

Fair Value

The IPO price range of $21 to $23 that KKR sought from institutional buyers “was not derived using a formal determination of fair value.” Dollar General said higher sales growth versus its rivals in the first six months of 2009, a 17 percent increase in the S&P 500 from May 28 through Oct. 27, and the “dramatic improvement” in the market for IPOs since September helped to account for the valuation gap.

The IPO implies a so-called enterprise value, or the sum of Dollar General’s stock and debt minus its cash, of about $11 billion, Bloomberg data show. That’s about 50 percent more than the total deal value of KKR’s takeover in 2007.

To contact the reporter on this story: Michael Tsang in New York at mtsang1@bloomberg.net.

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