Chrysler Buyout to Generate Cash Tsunami for UAW Medical Trust

(January 3, 2014) – America’s largest voluntary employee beneficiary association (VEBA) has struck a $4.35 billion deal to sell one of its founding assets: a 41% stake in Chrysler Group.

The UAW Retiree Medical Benefits Trust—launched in 2010 to fund health coverage for Ford, General Motors, and Chrysler retirees—will be paid $1.75 billion in cash by Fiat for the shares.

According to the Italian car manufacturer, it expects to have sufficient cash on hand to fund this payment. “Given the funding arrangements for this transaction, it is not envisioned that Fiat will require equity capital to be raised via a rights issue,” the firm said in a statement.

In addition to Fiat’s outlay, Chrysler has agreed to contribute $1.9 billion at the time of closing to cover member liabilities. Once fully acquired by Fiat, the auto company will provide four more $700 million annual payouts to the trust.

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In aggregate, a successful buyout of Chrysler will generate $4.35 billion in healthcare funding for the more than 779,000 members, according to the VEBA.

“This agreement is in the best interests of the trust’s UAW Chrysler retiree members and their families who rely on the trust to provide vital health care benefits,” said Robert Naftaly, chair of the 11-person committee that governs the fund.

Staff at the Detroit-based fund declined to comment further on the deal.

However, in a September interview with aiCIO, investment chief Ken Frier indicated that the trust’s liabilities demand more liquidity than might be typical for major institutional funds. In 2012, for example, its payout hit $4.1 billion.

“We can’t just follow the endowment model,” Frier said. “Because we have a larger outflow than most endowments or foundations, we need to have a larger amount of our portfolio in liquid assets… We’re going to be the organization that every day looks at our risk budget and market prices to figure out how we can do the best for our members.”

The UAW Retiree Medical Benefits Trust is the largest non-governmental purchaser of retiree healthcare in the United States, and its membership rolls continue to grow.

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(January 3, 2014) — Economist Nouriel Roubini has forecast a marginally positive outlook for 2014, predicting a slight uptick in global growth and a decrease in tail risks.

Nicknamed “Dr. Doom” for forecasting the financial crisis pre-2008, Roubini wrote on the Project Syndicate website that after a year of below-trend growth, the next 12 months looked to be more positive for both advanced and emerging economies.

“The advanced economies, benefiting from a half-decade of painful private-sector deleveraging (households, banks, and non-financial firms), a smaller fiscal drag (with the exception of Japan), and maintenance of accommodative monetary policies, will grow at an annual pace closer to 1.9%,” he said.

“Emerging economies will grow faster in 2014—closer to 5% year on year—for several reasons: brisker recovery in advanced economies will boost imports from emerging markets, the Fed’s exit from QE will be slow—keeping interest rates low, policy reforms in China will attenuate the risk of a hard landing, and, with many emerging markets still urbanising and industrialising, their rising middle classes will consume more goods and services.”

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Roubini also hailed a decrease in tail risks by the end of 2013—risks considered to have a low probability of happening but with high impact shocks if they do.

“The threat, for example, of a eurozone implosion, another government shutdown or debt-ceiling fight in the United States, a hard landing in China, or a war between Israel and Iran over nuclear proliferation, will be far more subdued,” he said.

Despite this, advanced economies such as the US, the Eurozone, Japan, the UK, and Canada, were likely to only achieve marginal growth, if any at all, Roubini continued. This was because both households and companies remained saddled with high debt ratios, leading to an expected continuation of deleveraging.

High budget deficits and public debt burdens will also force governments to continue their painful fiscal adjustments, and the subsequent abundance of policy and regulatory uncertainties will keep private investment spending “in check”.

Living up to his moniker, Roubini went on to list the long-term constraints affecting global growth, namely secular stagnation caused by years of underinvestment in human and physical capital.

And any structural reforms that these economies introduced to boost potential growth will be implemented too slowly, he predicted.

The economist touched on a number of individual countries’ fates: In Japan, “Abe’s government has made significant headway” but there remain big uncertainties, while in the US “economic performance in 2014 will benefit from the shale-energy revolution, improvement in the labor and housing markets, and the ‘reshoring’ of manufacturing”.

Some emerging markets—India, Indonesia, Brazil, Turkey, South Africa, Hungary, Ukraine, Argentina, and Venezuela—would remain fragile in 2014, owing to large external and fiscal deficits, slowing growth, below-target inflation, and election-related political tensions.

The better-performing emerging markets are those with fewer macroeconomic, policy, and financial weaknesses, such as South Korea, the Philippines, Malaysia, and other Asian industrial exporters; Poland and the Czech Republic in Europe; Chile, Colombia, Peru, and Mexico in Latin America; Kenya, and Rwanda, along with the Gulf oil-exporting countries.

Roubini concluded: “The global economy will grow faster in 2014, while tail risks will be lower. But, with the possible exception of the US, growth will remain anaemic in most advanced economies, and emerging-market fragility—including China’s uncertain efforts at economic rebalancing—could become a drag on global growth in subsequent years.”