Detroit Turns Bankruptcy Into Challenge of Banks

Detroit’s bankruptcy is rapidly shaping up as a battle of Wall Street vs. Main Street, at least as far as the city’s creditors are concerned.

Amy Laskey,a managing director at Fitch Ratings, said in a recent report that she sensed an “us versus them” orientation toward debt repayment. And in the view of bondholders, bond insurers and other financial institutions, it only grew worse last week after the city circulated its plan to emerge from bankruptcy and filed a lawsuit on Friday.

The suit, brought by the city’s emergency manager, Kevyn D. Orr, seeks to invalidate complex transactions that helped finance Detroit’s pension system in 2005. In a not-so-veiled criticism, the city said the deal was done “at the prompting of investment banks that would profit handsomely from the transaction.”

The banks that led the deal were Bank of America and UBS. They helped Detroit borrow $1.4 billion for its shaky pension system and also signed long-term financial contracts with the city, known as interest-rate swaps, to hedge the debt. Detroit has already stopped paying back the $1.4 billion, but for the first six months of its bankruptcy it kept honoring the swaps contracts and at one point offered to pay the two banks hundreds of millions of dollars â€" money it would have had to borrow â€" to end them. But the lawsuit now seeks to cancel the swaps, arguing they were illegal from the outset along with the related debt transactions.

Perhaps of even greater concern to creditors is the city’s 99-page “plan of adjustment,” the all-important document that details how Detroit proposes to resolve its bankruptcy and finance its operations in the future. Banks, bond insurers and other corporate creditors think they are being asked to share a disproportionate amount of pain under the plan, still in draft form and not yet filed with the bankruptcy court.

“The essential issue is the near-total wipeout of the bondholders,” said Matt Fabian, a managing director of Municipal Market Advisors. He said Detroit’s case appeared to be heading toward a “cramdown,” or court-ordered infliction of losses on unwilling creditors.

Municipal bonds have been renegotiated and restructured in the past, both in and out of bankruptcy, with a reduction in interest rates and extension of payments. But bankruptcy specialists say that, until now, municipal bondholders have not had losses of principal forced on them by a court. Participants in the municipal bond markets say the dreaded cramdown may be looming in Detroit, where they are finding themselves increasingly portrayed as greedy, and where plans are taking shape to elevate pensions above municipal bonds, though both are unsecured in bankruptcy.

Bankruptcy law is based on the idea that losses can be kept to a minimum if all parties work together to share the pain instead of cutting preferential deals for themselves at the expense of other creditors. From the beginning of Detroit’s bankruptcy last summer, Gov. Rick Snyder of Michigan has said the intent was to “determine the best path forward that respects, and is fair to, pensioners and all parties.”

But now Detroit’s capital-markets creditors â€" its bondholders, bond insurers and other financial institutions â€" say the plan of adjustment is unfair. It calls for the city to give pensioners up to 50 cents on the dollar for their claims, while other unsecured creditors, like those that bought Detroit’s general-obligation bonds, would end up with about 20 cents on the dollar. The pensioners’ claims would be paid with cash, while general-obligation bondholders would receive notes that Detroit proposes to issue.

“The capital-markets guys can still sue against this as unfair, and they will,” Mr. Fabian said.

The debt that raised $1.4 billion for the city pension system in 2005 would suffer bigger losses still. The plan of adjustment does not accept the entire $1.4 billion as a valid claim, only about half of it. So the investors who bought that debt, called “certificates of participation,” often called COPs, would end up with about 10 cents on the dollar. It would come in the form of a different series of notes, which has lags built into the payment schedules.

“We understand discriminatory treatment of the COP deal might be politically popular, but we believe it to be flawed both legally and as a matter of public policy,” said Derek Donnelly, a managing director for the Financial Guaranty Insurance Company, a bond insurer that promised to backstop the certificates in 2005. The insurance made it easier for Detroit’s underwriters, Bank of America and UBS, to market the certificates. And Detroit paid a lower rate of interest on the debt until it defaulted last summer just before the bankruptcy.

The financial institutions that helped raise money for Detroit’s pension system are dismayed now to see themselves portrayed as shady characters in the new lawsuit, according to people briefed on the matter. The suit contends their transaction “has put very fatal strains upon the city’s finances,” but as they see it, the city already had a crushing debt to its own workers, much of which was hidden, before they arrived on the scene. Some of them are now talking privately about lawsuits that would unwind the 2005 borrowing and force Detroit’s pension funds to return the money.

Spokesmen for Bank of America and UBS declined to comment on the lawsuit.

Ms. Lasky and Mr. Donnelly both expressed concern that by giving the pensions priority over capital-markets debts, Detroit’s lawyers could be making it harder for other Michigan cities, counties and school districts to raise money in the future. Ms. Lasky said that because municipal bankruptcies are so rare, and Detroit’s debts so big, the city stood to set an outsized precedent that might even affect cities outside of Michigan.

“Actions and rhetoric that suggest bondholder rights are not an important consideration will continue to damage market perception of the state and its local governments,” Ms. Lasky said.

Bankruptcy experts who are not involved in Detroit’s case said it would, in fact, be possible for the city’s pensioners to come out at the top of the pecking order, even though they were on par with the general-obligation bondholders when the bankruptcy began.

“You can treat general creditors differently, as long as you have a good reason to treat them differently,” said David A. Skeel, a law professor at the University of Pennsylvania who specializes in bankruptcy issues. “You don’t have to give them exactly the same percentage, but you can’t treat them wildly disproportionately.”

He said it was not at all rare for a bankruptcy judge to approve a higher rate of recovery for a creditor with some essential business relationship with the bankrupt party. While it would be hard to say that Detroit’s retirees fill a conventional business purpose, the city could still make valid arguments that its finances would be hurt if it cut the retirees’ benefits too drastically because it would then have to find money to support them in other ways.

“There’s also a humanitarian interest in not wanting to cut the pensions severely as well,” Mr. Skeel said.

Tax Expert Sees Abuse in a Stream of Private Equity Fees

The tax practices of private equity firms have come under scrutiny from authorities on several fronts. But there is an additional tax strategy that should merit a skeptical look, an academic argues in a new article.

The argument centers on so-called monitoring fees, payments that companies make to their private equity owners in exchange for what regulatory filings call consulting and advisory services over time.

These fees, however, are being improperly characterized for tax purposes, Gregg D. Polsky, a law professor at the University of North Carolina, argues in the article, which appears in the Feb. 3 edition of the journal Tax Notes. The issue could be costing the federal government hundreds of millions of dollars a year in missed tax revenue, Mr. Polsky writes.

At the heart of the issue is whether the payments should be considered a business expense or a dividend. Business expenses are tax deductible, whereas dividends are not.

In many cases, companies owned by private equity firms consider monitoring fees to be business expenses, allowing them to lower their tax bills. But Mr. Polsky seeks to show that they more closely resemble dividends, paid to owners regardless of whether services are performed and directly in proportion to the size of the ownership stake.

Mr. Polsky has a business interest in this matter. In his capacity as a lawyer, he represents an individual who has filed whistle-blower claims with the Internal Revenue Service using arguments similar to the ones in the article. The contents of his article were first reported online by The Wall Street Journal.

The lobbying group for the private equity industry contests Mr. Polsky’s reasoning.

“Monitoring fees incurred are legitimate business expenses for private equity-owned portfolio companies,” Steve Judge, the president and chief executive of the Private Equity Growth Capital Council, said in a statement. “Federal and state revenue authorities have examined and affirmed the deductibility of monitoring fees earned by private equity managers.”

Mr. Polsky relies on publicly available filings to build his case, without having observed whether private equity firms actually performed consulting services for their companies. Still, the filings reflect the logic underpinning these agreements, shedding some light on the nature of the fees.

One argument Mr. Polsky marshals is that monitoring fees are often paid according to the size of a private equity firm’s stake â€" a feature that becomes apparent when multiple private equity firms buy a company. This would suggest that the payments resemble dividends, he says.

“Pro rata allocations belie compensatory intent because compensatory payments would be allocated among service providers based on the respective value of their services, not based on mere share ownership,” he writes. “It would be an incredible coincidence if a private equity firm that controlled, say, 7.2347 percent of shares was also expected to provide 7.2347 percent of the monitoring services.”

In many of these fee agreements, Mr. Polsky argues, the private equity firms do not actually need to provide any significant services in order to get paid.

He points to language that allows private equity firms to terminate fee arrangements at any time and still get paid the net present value of all the fees they would have received. In many cases, he says, the services expected of the private equity firms are described in vague terms.

One agreement involved HCA Holdings, a hospital company that was bought by Bain Capital, Kohlberg Kravis Roberts and Merrill Lynch’s private equity arm. It provided that “no minimum number of hours is required to be devoted” by the private equity owners “on a weekly, monthly, annual or other basis.”

Despite that provision, HCA promised to pay the owners monitoring fees worth more than $100 million, Mr. Polsky wrote.

In a statement, a spokesman for HCA said: “The parties providing services to the company under the management agreement had relevant business, financial or healthcare industry expertise.”

Monitoring fee agreements are “completely unlike any other arrangement you will ever see,” Mr. Polsky said in an interview. “This is a situation where you get to quit tomorrow and still get paid in full.”

Smith & Nephew Pounces on a Wounded Rival

Smith & Nephew, the British medical technology giant, has agreed to buy ArthroCare, an American specialist in sports medicine, for an enterprise value of $1.5 billion.

Treating injured athletes is a faster-growing business than selling artificial hips and knees, Smith & Nephew’s traditional focus. And because of the target’s own self-inflicted injuries, the buyer is paying the slimmest of premiums.

The price equates to about 15.5 times the roughly $97 million in earnings before interest, taxes,depreciation and amortization, or Ebitda, that analysts reckon ArthroCare will make in 2014. That looks impressive, given that American “medtech” giants trade at roughly 10 times. But the valuation multiple has to be seen in context. Smith & Nephew expects annual synergies of $85 million, largely through cost cuts. That would drastically reduce the effective multiple.

The $48.25 offer is only 6 percent above the last close, suggesting more strongly that Smith & Nephew received a bargain. Even over three months, the premium is a scant 20 percent. Against that, analysts’ average price target is $51.17, Datastream shows. In the sell side’s collective wisdom, investors would do better to stay put.

That is a little odd, as is the fact that ArthroCare just struck a “deferred prosecution agreement” with the United States Justice Department, concluding a six-year investigation into earnings manipulation. That the board can sell up so readily a month later seems strangely pessimistic. Then again, revenue barely grew in 2013. Maybe a bigger parent could do better.

The presence of One Equity Partners may also be a factor. Following a rescue financing in 2009, the buyout firm controls 17 percent of the voting rights. One Equity Partners paid $75 million then. Its stake now is worth more like $290 million. So it doesn’t need to haggle over the final dollar to get a handsome exit.

A counterbidder is possible but unlikely, because Smith & Nephew is a better fit, and so has more potential synergies, than other bidders. Given this is a friendly deal, shareholders might struggle to force a sweetener out of Smith & Nephew.

Smith & Nephew’s chief executive, Olivier Bohuon, had a good run since taking over in 2011. The onus is on him to prove sports medicine is as promising as it looks. This is no time to trip up.

Quentin Webb is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

H.P. Revises Autonomy Financial Reports, Citing Accounting Errors

Hewlett-Packard disclosed on Monday that it had found what it said were serious accounting errors at Autonomy, the British software maker it acquired in 2011, leading to a number of major revisions in the acquired company’s previous financial reports.

Among the changes in the restatements were a 54 percent cut in the 2010 revenue of one major Autonomy subsidiary and an 81 percent cut in its operating profit for that year.

The disclosures, made in mandatory filings with the British government on Friday, are the latest development in a bitter dispute between H.P. and Autonomy’s founder and former chief executive, Mike Lynch. Late in 2012, H.P. took an $8.8 billion accounting charge tied to its takeover of the British company, adding that “serious accounting improprieties” represented about $5 billion of that write-down.

The American technology company has contended that Autonomy improperly booked hardware sales as higher-margin software sales in some instances and booked licensing revenue up front before receiving money, inflating gross profit margins.

H.P. has said that it has provided its findings to the Justice Department, the Securities and Exchange Commission and Britain’s Serious Fraud Office.

“The substantial work necessary to prepare these accounts has revealed extensive accounting errors and misrepresentations in the previously issued 2010 audited financial statements, including the problems previously identified by H.P.,” Michael Thacker, an H.P. spokesman, wrote in an emailed statement.

In its filings, H.P. warned that other accounting errors may yet emerge.

Mr. Lynch has denied H.P.’s charges and demanded that the American technology giant provide evidence to back up its claims.

A spokesman for the former senior management of Autonomy said on Monday, “We continue to reject these allegations by H.P. Given the size of H.P.’s write-down, we are very surprised by the small size of the adjustments in Autonomy Systems Limited that are attributed to the ongoing accounting dispute.”

Revised Autonomy Systems Ltd. 2010 Financial Report

Revised Autonomy Corporation Ltd. 2010 Financial Report

A Lonely Bet Against Portugal’s Debt

David Salanic cuts a lonely figure among the Manhattan machers eating power breakfasts at the Loews Regency Hotel restaurant on Park Avenue. Sure, he is a hedge fund guy, but with $50 million, his fund may represent a year of commissions for some of the heavy hitters in the room.

None of the big shots stopped by his table either, and the hostess, having messed up his table reservation, was not at all rattled by the snafu.

Still, while he may not bring with him the buzz of billionaire hedge fund raiders like Daniel S. Loeb and William A. Ackman, Mr. Salanic, the chief executive of Tortus Capital, has his own target â€" Portugal â€" and it is bigger in size than any of the major corporations that have come under attack by his larger peers.

Putting it bluntly, he said he believed that the country, despite accolades for its economic reform efforts, would soon default on its private sector bonds â€" in the same way Greece did in 2012.

“Portugal’s debt is just not sustainable,” Mr. Salanic said, as he tucked into a heaping plate of eggs and potatoes. “In fact, it is even more unsustainable than Greece.”

Unlike the vast majority of hedge fund investors, Mr. Salanic is straightforward and nonsecretive. He has no public relations team and there is no elaborate ritual before the interview over which parts of the conversation are to be on, or off, the record. He states openly that he is shorting Portugal’s bonds and that he has set up a website that sets forth his investment thesis in the form of a rigorous, 64-page PowerPoint presentation.

His thesis is that Portugal, with one of the slowest growth rates of any country in Europe, is in no position to make good on its debt, which, at 128 percent of gross domestic product, is on the verge of passing Italy to become the second-largest in the euro zone after Greece.

Moreover, Mr. Salanic said he believed that the country’s debt was understated and that if you added in debts guaranteed by the state, as well as other off balance-sheet transactions that state-owned corporations have put in place with foreign banks, the true figure approaches 150 percent of economic output.

All of which may be true, and in conversation or on paper, Mr. Salanic advances his arguments with precision and authority.

The problem is, no one seems to be listening.

Portugal’s 10-year bonds, once seen as virtually toxic, have been on a tear, with yields plunging from above 16 percent in 2012 to current levels of 4.9 percent. In fact, the most recent rally came soon after Mr. Salanic made public his bear case for the country about a month ago.

So, how does that make him feel?

Mr. Salanic smiled indulgently.

“I feel great about our position,” he said. “In fact, we have been increasing it.”

Brave words, no doubt. Especially as Mr. Salanic, in predicting a Portuguese default, is, in effect, taking on Chancellor Angela Merkel of Germany and Mario Draghi at the European Central Bank, both of whom have said in no uncertain terms that the restructuring of Greek debt was a unique case that was not to be repeated.

In fact, Europe has already rejected suggestions by the International Monetary Fund that it be more open to the idea of debt restructuring in the euro zone. Any chance that it might be either cowed or influenced by Mr. Salanic seems slim indeed.

Moreover, the Portuguese government recently announced that it had met its 2013 budget deficit target of 5.5 percent set by its creditors and in the past six months has successfully sold its bonds to international investors.

That is point that Isabel Castelo Branco, the secretary of state for the Treasury in Portugal, made sure to emphasize in a recent interview.

“The Portuguese economy has surprised on the upside, and foreign investors see this,” she said. “Now, you can see that the yield of our 10-year bond is below 5 percent.”

Ms. Blanco would not say in an interview whether she had read Mr. Salanic’s report, although she did say, a bit dismissively, that she had read about it in the Portuguese media.

“Investors are free to have their own views,” she said. “On both the long and the short end of the market.”

Barclays Chief Declines Annual Bonus

Updated, 1:54 p.m. | LONDON â€" Barclays’ chief executive, Antony Jenkins, said Monday that he would forgo a bonus for 2013 in light of the bank’s continued restructuring costs and litigation expenses.

Mr. Jenkins said the bank had made progress in regaining the trust of the British public and shaping its business, but still paid “very significant costs” last year to address previous litigation and conduct issues and to exit business lines as part of its continued restructuring.

“When combined with the substantial rights issue we completed in the autumn, I have concluded that it would not be right, in the circumstances, for me to accept a bonus for 2013, and I have therefore respectfully declined the one offered to me by the board,” Mr. Jenkins said in a statement.

Mr. Jenkins will still receive a base salary of £1.1 million. He could have received a bonus as high as £2.75 million. He also declined to accept a bonus in 2012.

Mr. Jenkins took the top job in 2012 as the bank was reeling from participation by its employees in a scheme to manipulate the London interbank offered rate, or Libor.

Barclays and four other financial institutions combined to pay more than $3 billion to regulators in the United States and Britain over the rate-rigging scandal.

The bank also is in the middle of a revamping in which it hopes to cut annual costs by 1.7 billion pounds, or about $2.8 billion, by 2015.

Barclays announced last year that it planned to eliminate at least 3,700 jobs, including 1,800 in its corporate and investment banking businesses.

It is preparing to cut another 400 jobs in the investment bank, according to a person familiar with the matter. Barclays employs about 140,000 people worldwide.

Last week, the lender said that its fourth-quarter results would include additional charges of £110 million against income in its investment bank related to litigation and regulatory penalties. Barclays will report its results on Feb. 11.

British Regulator Warns Two of Potential Libor Charges

The Wells notice appears to be going global.

The Financial Conduct Authority, one of Britain’s financial regulators, made public on Monday warnings to two individuals that it plans to charge them for misconduct related to the rigging of the London Interbank Offered Rate, or Libor.

It is the first time the agency has used its newly minted authority to issue such warnings and the first time the regulator has taken action against individuals in the wide-ranging Libor investigation. The warning is similar to the Securities and Exchange Commission’s Wells notice, which notifies individuals or institutions in the United States that the S.E.C. plans to file civil charges against them.

Unlike the S.E.C., however, the F.C.A. cannot identify the individuals or the banks involved.

Regulators and prosecutors from around the globe, including those in Japan, the Netherlands, the United States and Britain, are investigating more than a dozen banks on the suspicion that they rigged benchmark interest rates including Libor in a number of different currencies in an attempt to inflate trades in more than $400 trillion worth of financial products, including derivatives and mortgages.

Banks have paid more than $6 billion, according to Bloomberg, in fines related to the investigations into the manipulation of benchmark interest rates. At least 10 people have been charged criminally by the Justice Department in the United States and the Serious Fraud Office in Britain, with more charges expected.

The F.C.A., which is in charge of regulating the markets, has fined five institutions £426 million, with UBS topping the list with a penalty of £160 million. In December, European Union antitrust regulators fined six banks, including Deutsche Bank and Citigroup, a record $2.3 billion for manipulating interest rates linked to Libor and Euribor.

At the time, Joaquín Almunia, the European commissioner responsible for competition, said, “What is shocking about the Libor and Euribor scandals is not only the manipulation of benchmarks, which is being tackled by financial regulators worldwide, but also the collusion between banks who are supposed to be competing with each other.” He said the European Commission would fight cartels in the financial sector.

In 2012, as part of regulatory reforms in Britain, the F.C.A., which is led by Martin Wheatley, was given the authority to “warn” individuals that they would be charged in an effort to expedite the regulatory inquiry process and to increase transparency around the proceedings. That power went into effect last year. The warning system was designed to illuminate what the F.C.A. is examining, perhaps prodding it to examine more.

The F.C.A.’s cases were detailed in two brief summaries. The first says a “submitter” â€" the person who submits the benchmark every day â€" failed to adhere to proper market conduct when he rigged rates and colluded with an interdealer broker on other rigged trades over two years, the notice said.

In a second notice, the F.C.A. said a bank manager went beyond turning a blind eye to market manipulation. The manager was aware of and condoned the fact that traders were asking submitters to manipulate the interest rate benchmark, the warning said. Rather than put controls in place, “He instead facilitated others’ attempts to manipulate interest rate benchmark submissions.”

The minimum fine for market abuse is £100,000. The most the F.C.A. has ever penalized an individual is £6.5 million. It can also ban individuals from the profession.

The agency has 50 people working on the rate-rigging investigation out of a total of 400 enforcement staff members. The individuals who were notified are not likely the same people who are being charged criminally. While the F.C.A. can investigate the same people, it would most likely not bring a case against someone who is already facing criminal action.

In Britain, the identity of the individuals is meant to stay private. Some laud the difference in the British approach from the United States system, which some call “pre-prosecution.”

“It balances the public interest in knowing their watchdog is on the case with the privacy interest of the individual bankers who may or may not end up being charged,” said Robert Henoch, a London-based partner at Kobre & Kim.

Both notices were issued on Nov. 28 and published on Monday. The F.C.A.’s investigation into other institutions and individuals is continuing.

Elliott to Hint at Proxy Fight With Juniper

As the networking equipment maker Juniper Networks prepares to announce its turnaround plan, one of the activist investors in its shares is pressing its own case for what the company must do.

Elliott Management plans to say on Monday that it has received overwhelming support from fellow shareholders for its three-point plan on what Juniper should do, as well as to reiterate that it has had constructive conversations with the company’s new chief executive, Shaygan Kheradpir.

But reading between the lines of the hedge fund’s forthcoming statement shows that Elliott has a slate of director nominees that it plans to put forward if the company does not do enough to appease investors.

From the statement:

We also recruited a team of leading executives who are excited about Juniper and who have the operational skills and deep industry experience to help ensure that the shareholder value plan becomes a reality. Elliott is entirely committed to seeing the plan through, and our commitment is such that we remain open to all paths to ensure its implementation.

Elliott has made no secret that it has been preparing a slate of directors. It first went public with its demands last month, and the portfolio manager overseeing the activist campaign, Jesse Cohn, has been canvassing Silicon Valley for potential nominees.

The statement from Elliott comes just after Mr. Kheradpir has met with Juniper investors in New York City and Boston, assuring them that he will announce his operating plan within the next few weeks.

The hedge fund has already proposed cutting costs, returning capital to shareholders and trimming the company’s product line.

Elliott faces a deadline of Feb. 23 to nominate directors for Juniper’s board. But the firm is hoping that Juniper is already feeling enough pressure from shareholders and analysts that it will acquiesce to Elliott’s proposals.

The other major activist investor in Juniper, Jana Partners, is also believed to be preparing a slate of alternative board nominees.

More Bitcoin Regulation Is Inevitable

The next phase in the development of virtual currencies like Bitcoin was highlighted at a hearing last week conducted by Benjamin M. Lawsky, New York State’s top banking regulator. The question is not whether there will be greater regulation of firms developing new methods of transmitting payments with nongovernment currencies, but how much regulation they will face.

The idea that Bitcoin could be an alternative to traditional money that would allow users to conduct transactions anonymously beyond the pale of intrusive government regulators has proved to be little more than a pipe dream. In testimony at last week’s hearing, Barry E. Silbert, the founder of Bitcoin Investment Trust, acknowledged that “it may be appropriate to regulate any transaction that involves an unregulated intermediary converting Bitcoin to dollars on behalf of a third party.”

As if to make the message especially clear that the government is keeping a close eye, the Justice Department unsealed a criminal complaint the day before the hearings charging two men with using a Bitcoin exchange to help pay for illegal narcotics transactions. One defendant, Charlie Schrem, was on the board of the Bitcoin Foundation, which is promoting the virtual currency as a new means for conducting business around the world.

Federal regulators have already been going after companies that allow payments in virtual currencies. In March 2013, the Financial Crimes Enforcement Network, a part of the Treasury Department known as FinCen, issued guidance stating that anyone operating an exchange for virtual currencies would be considered to be running a money transmitting business.

That designation means exchanges must collect information about customers, as required under Bank Secrecy Act regulations, which are intended to prevent transactions through anonymous accounts. FinCen went a step further in its guidance by including any person who puts into circulation a virtual currency, which means that the so-called Bitcoin miners are also subject to the regulations.

The only ones not subject to the Bank Secrecy Act are users of virtual currencies who only buy and sell goods and services. FinCen exempted their transactions, which means individuals and merchants who use Bitcoin like cash do not need to comply with the regulations imposed on those operating exchanges.

If that were the extent of government regulation, there would be little concern about the negative effect of new rules on the development of virtual currencies. No one supports creating an anonymous bazaar for dealing in drugs and other illegal goods and services - except, perhaps, the criminals themselves.

The more difficult issue is whether the government will reach further and try to impose more onerous rules on the exchanges and users of virtual currencies.

It might be helpful to consider what underpins any form of currency. Putting it simply, there are two aspects to currency: the medium by which it is exchanged, and the promise it incorporates.

The medium can be almost anything, from paper notes and coins to gold and silver to electronic credits stored in a financial institution or central bank account. When a government issues currency, it comes with the promise that it is a legitimate means of transacting business in that country. A dollar bill, for instance, states that it is “legal tender for all debts, public and private.”

But virtual currencies raise concerns about how they can be transmitted and used for illegal purposes. Testimony before Mr. Lawsky by Richard B. Zabel, the deputy United States attorney in Manhattan, highlighted the challenge facing law enforcement with the “ease of movement” that a medium like Bitcoin can provide.

Transferring $1 million in cash to buy drugs in another country would be difficult because of the sheer bulk of that much money and would probably get the attention of banking officials. Using the equivalent in Bitcoin, however, only involves a few keystrokes. So a virtual currency would be much more attractive than cash to those engaging in global illegal transactions.

The regulations in place for virtual currency exchanges may not be enough to satisfy law enforcement’s desire to keep criminals from creating a new avenue for transferring value across borders. If someone was able to gather up enough Bitcoin while avoiding scrutiny from virtual currency exchanges, then the transactions could fly beneath the regulatory reporting rules.

Regulators are also concerned that exchanges based in foreign countries might not impose the same customer disclosure requirements as the United States. If someone can use a foreign exchange to conduct business outside the American government’s watchful gaze, then criminals could find ways to slip between the cracks and avoid scrutiny.

Cyrus R. Vance Jr., the Manhattan district attorney, testified that “we need stronger tools to combat new emerging threats derived from these payment systems.”

It would not be a surprise if one tool would require those who control or trade over a certain threshold amount of a virtual currency to report their holdings to the government. This approach is much like the rules requiring the owner of 5 percent of the shares of a publicly traded company to disclose any transactions to the Securities and Exchange Commission.

One promise supporting government currencies is that they have a certain value. A central bank work tirelessly to maintain a target level for its currency in relation to other currencies, which explains why the fear of inflation is so great.

Virtual currencies do not carry the same promise. So they depend on the market to determine their value, which is often stated in relation to a traditional currency, like the dollar or euro. The government has no stake in how Bitcoin is valued, but it is concerned that consumers be protected from abuses when they use a virtual currency to pay for goods and services.

Bitcoin has fluctuated wildly in value, highlighted by a chart from Coinbase showing that it increased over 400 percent in November and then lost nearly half its value in December. That type of volatility is an invitation to unscrupulous dealers and merchants to overcharge or underpay.

To protect consumers who want to use Bitcoin for legitimate transactions, the government may adopt reporting requirements on virtual currency exchanges so that there is a public repository of information about prices. Although the government cannot control the value of a virtual currency, it can make the currency more transparent to users so that they are not defrauded.

Much as the S.E.C. and Commodity Futures Trading Commission regulate stock and futures exchanges, government regulators may require centralizing the trading in virtual currencies so that the market is less susceptible to manipulation. That is a short step from treating firms that trade in virtual currencies like stock and commodities brokers, which are subject to extensive disclosure and capital requirements.

The days of anonymous transactions in Bitcoin and operating an exchange with no outside interference are over. As virtual currencies develop, firms devoted to aiding trading, and perhaps even their users, will encounter greater government regulation, along with the costs that come with compliance.

Warburg Pincus to Invest in Cloud-Based Facilities Manager

Despite the torrent of money flowing into the technology sector, software to manage building maintenance services seems like an unlikely target for investors.

But Warburg Pincus thinks the field could yield healthy returns.

The investment firm plans to announce on Monday that it will invest up to $100 million in Dude Solutions, a provider of cloud-based software aimed at helping schools, hospitals and government agencies manage building maintenance.

According to Alex Berzofsky, a managing director at Warburg Pincus, the private equity firm has long been interested in investing in the field. The thesis: the sector is a fast-growing one, as institutions look to cut costs by more efficiently managing their janitorial and custodial services.

Cloud-based service providers of all stripes have become popular targets for private equity firms and venture capital funds, as investors zero in on both the fast growth of the industry and the steady payments such companies collect.

Mr. Berzofsky said his firm had known Dude Solutions’s chief executive, Kent Hudson, for years. But Mr. Hudson turned down Warburg Pincus’s approaches for years, believing the time was not right.

He changed his mind within the last few months, as Dude Solutions came around to the idea that additional capital could help it continue to grow. What became the $100 million investment closed last week.

“They thought we could add a lot of value,” Mr. Berzofsky said by phone. “We have a lot of other investments in companies in and around this space.”

Dude Solutions, based in Cary, N.C., is nearly 15 years old and has more than 8,000 clients, the company said in a statement. Mr. Berzofsky says he believes additional growth will come as Dude Solutions continues to push into hospital and government work, which it first began in 2008 with the creation of FacilityDude.

Gov. Pat McCrory of North Carolina, who is expected to participate in the official announcement of the Warburg Pincus investment, said in a statement: “The company’s success not only means new jobs, but the services they offer help taxpayers get the maximum benefit out of their investment in schools and other public facilities.”

Herbalife Increases Share Buyback Plan

Herbalife, the nutritional supplements company under attack by the activist hedge fund manager William A. Ackman, said on Monday that it would increase its share buyback plan by $500 million.

The company said it planned to buy back $1.5 billion worth of shares, an increase from the previous plan to repurchase $1 billion of shares. To finance the buyback, Herbalife announced plans to offer $1 billion of convertible senior notes to institutional investors.

Herbalife also gave an estimate of its profitability in the fourth quarter of 2013. The company said its earnings on an adjusted basis would probably come in at $1.26 to $1.30 a share, higher than the estimate of $1.17 a share by analysts surveyed by Thomson Reuters. The official results will be announced on Feb. 18.

Still, Herbalife estimated that its results in the current quarter would fall short of analysts’ predictions. The adjusted earnings are likely to be $1.24 to $1.28 per share, Herbalife said. Analysts surveyed by Thomson Reuters expected earnings of $1.40 a share.

Investors reacted positively to the announcements, pushing Herbalife stock up about 4 percent at the start of trading on Monday.

Herbalife is closely watched on Wall Street because it is the target of a $1 billion short-selling bet by Mr. Ackman, chief executive of the hedge fund Pershing Square Capital Management, who contends that the company is a pyramid scheme. Herbalife has denied his assertions, and its stock rose last year as it reported several quarters of better-than-expected results.

But Herbalife stock came under pressure last month when Senator Edward J. Markey, Democrat of Massachusetts, sent letters to federal regulators urging them to investigate the company. “I have seen reports from Massachusetts residents that suggest Herbalife is a pyramid scheme,” Mr. Markey wrote.

The increased share buyback reflects Herbalife’s continuing effort to buttress its stock price. When the stock rises, it puts pressure on Mr. Ackman.

The investors in Herbalife’s convertible notes will be Bank of America Merrill Lynch, Credit Suisse, HSBC and Morgan Stanley, the company said on Monday, adding that it would give the investors the option to buy an additional $150 million of notes. The notes will mature on Aug. 15, 2019.

Herbalife’s previous share repurchase plan had an available balance of $653 million, the company said. In addition to financing the share buyback, proceeds from the offering of convertible notes will go toward “working capital and general corporate purposes, including, without limitation, the repurchase of outstanding common shares,” Herbalife said.

SAC Fashioning a New Identity

SAC Capital Advisors, the hedge fund started by Steven A. Cohen, will soon cease to exist as Wall Street has known it. The firm, whose reputation is now intricately linked to an insider trading scandal, is in the midst of rebranding itself, including changing its name and corporate structure. And recently, a major bank distanced itself from the firm. Together, these developments provide the most vivid illustration yet of SAC’s steep fall from powerful hedge fund to marginalized player, Ben Protess and Alexandra Stevenson write in DealBook.

And, at least for now, it is unclear how banks, which once profited handsomely from the hedge fund’s trading activity, will handle the firm’s new look. For one, Wall Street has already become less dependent on SAC’s fees and some of the firm’s banking relationships have slowed. Deutsche Bank severed ties with SAC in recent weeks, citing “reputational risk.”

Mr. Protess and Ms. Stevenson write: “As other companies tainted by scandal have done, SAC may use its new name and structure as vehicles for a new beginning. SAC’s rebranding, playing out under the watchful eye of the government, might send a message to the authorities that the firm is resigned to a smaller and simpler existence.”

THE TAMING OF THE ACTIVIST INVESTOR  |  Activist investors and large companies have a tendency to butt heads, but now, an unlikely alliance is doing its best to get the two sides to communicate. A group of investors, board members and advisers, calling itself the Shareholder-Director Exchange, is announcing an initiative on Monday to provide companies, boards and investors with the self-help tools they need to avoid sudden blowups, David Gelles writes in DealBook.

The protocol, a voluntary set of standards that companies and investors can adopt, will encourage boards to meet with longtime shareholders. While the purpose is not for board members and shareholders to discuss management topics like operations and financial returns, the two sides are encouraged to discuss corporate governance issues, management changes and long-term plans.

JOS. A BANK WEIGHS EDDIE BAUER PURCHASE  |  By now, news on the monthslong takeover battle between Men’s Wearhouse and Jos. A. Bank is old hat. In any case, Jos. A Bank publicly released a letter to Men’s Wearhouse on Sunday accusing its rival of failing to properly disclose the antitrust risks in its takeover bid and said that it was in talks to buy Eddie Bauer, the outdoor clothing retailer.

The move to buy Eddie Bauer may seem unusual. After all, Jos. A. Bank is known for making suits, while Eddie Bauer caters more to the rugged outdoor crowd. But it turns out that Eddie Bauer is owned by the private equity firm Golden Gate Capital, which originally agreed to back Jos. A. Bank’s bid for Men’s Wearhouse with a $250 million equity investment.

THE SUPER BOWL WAS NOT EXCITING  |  The Seattle Seahawks dominated Super Bowl XLVIII, thrashing the Denver Broncos 43-8. Perhaps it was an omen when the game started with a safety on the Bronco’s first offensive play, the fastest score in Super Bowl history.

But the event, if not the game itself, did manage to provide some suspense for those watching at home in California. According to the Los Angeles Times, some Time Warner Cable customers in the Los Angeles area were unable to watch a chunk of the game, as well as the halftime show, because of technical issues.

On the plus side, Henry R. Kravis, co-chairman and co-chief executive of the private equity firm Kohlberg Kravis Roberts, was sighted at the Super Bowl sitting next to the actor Michael Douglas. Talking about Wall Street movies, no doubt.

ON THE AGENDA  |  The purchasing manager’s index for January is released at 8:58 a.m. The I.S.M. manufacturing index for January comes out at 10 a.m. Construction spending figures for December are out at 10 a.m. The Senate Subcommittee on National Security and International Trade and Finance holds a hearing at 3 p.m. on safeguarding consumers’ financial data. Treasury Secretary Jacob J. Lew speaks at the Bipartisan Policy Center at 9 a.m. Shawn Matthews, the chief executive of Cantor Fitzgerald, is on CNBC at 12:30 p.m.

PRIVATE EQUITY’S ROLE IN THE DEFENSE INDUSTRY  |  The Washington Post has a report on the major role private equity firms are playing in the defense industry.

“For a typically slow-moving industry such as contracting, private equity investors can provide the money and motivation to help companies adapt and change,” The Post reports. “Today, there are signs that private equity may have some second thoughts about buying into the market, as government spending declines following the conclusion of two wars and the arrival of spending cuts.”

“Though the fervor among private equity groups to buy into defense contracting has dimmed, there remain investors interested in the market. Some contracting executives are forecasting that 2014 could be the bottom for sales, meaning investors may take a chance on buying at lower prices now, hoping for an upswing in the coming years.”

 

Mergers & Acquisitions »

Montagu to Buy Bulk of Rexam’s Health Care Business  |  Montagu Private Equity has made an $805 million offer to buy the health care devices and prescription retail divisions of the British consumer packaging company Rexam. DealBook »

British Company to Buy U.S. Medical Device Maker  |  The British medical technology company Smith & Nephew said it would pay $1.7 billion in cash for the ArthroCare Corporation and introduce its products to additional markets. DealBook »

Etihad Airways Sets Deadline on Talks With Alitalia  |  Etihad Airways of Abu Dhabi says its discussions with Alitalia over a possible investment in the troubled Italian airline have entered “the final phase.” Nicola Clark reports in The New York Times. NEW YORK TIMES

Goldman Bets on Russian Fitness Chain  |  Goldman Sachs is increasing its investment in an upscale chain of Russian fitness clubs, Reuters reports. The bank’s special situations group has been supporting entrepreneurs who are hoping to capitalize on the country’s rising middle class. REUTERS

Charter Said to Consider Raising Time Warner Bid  |  Charter Communications is said to be discussing increasing its bid for Time Warner Cable in the next few weeks, Reuters reports, citing unidentified people familiar with the situation. REUTERS

INVESTMENT BANKING »

Lloyds Bank to Take £1.9 Billion in Added Charges  |  The Lloyds Banking Group, which is partly owned by the British government, also said it expected to seek permission to begin paying a “modest” dividend again in the second half of 2014. DealBook »

French Bank to Expand Bond Trading  |  The French bank Société Générale is expanding its bond trading units in the United States and Asia, with plans to add up to 150 employees this year, The Financial Times writes. FINANCIAL TIMES

R.B.S. Plans Management Shake-Up  |  Ross M. McEwan, chief executive of the Royal Bank of Scotland, is planning to shake up the bank’s management team, The Financial Times reports. The move is intended to help strengthen the bank’s focus on retail and small business customers. FINANCIAL TIMES

The Difficulties of Managing a ‘Bad Bank’  |  Managers of “bad banks,” which are created to take troubled assets off a bank’s balance sheet, are charged with selling these assets as quickly as they can. But once these managers sell these assets, they no longer have a job, which may be one of the reasons investors are saying it is difficult to purchase these castoffs, Quartz reports. QUARTZ

Morgan Stanley’s Stock Bet Yields Windfall on Paper  |  Purchases of Morgan Stanley stock made years ago by James P. Gorman, the firm’s chief executive, when the Wall Street bank’s shares were trading far lower, have paid off extremely well for his portfolio. DealBook »

PRIVATE EQUITY »

K.K.R. to Open Office in Spain  |  The private equity firm Kohlberg Kravis Roberts is opening its first office in Spain on Monday, The Wall Street Journal reports. WALL STREET JOURNAL

Private Equity Could Spur Mining M.&A.  |  An $8 billion pool of private equity funds could be used to support mergers and acquisitions in the mining assets space, Bloomberg News reports. BLOOMBERG NEWS

K.K.R. Buys Stake in German Soccer Club  |  Kohlberg Kravis Roberts has agreed to buy a 9.7 percent stake in Hertha BSC, a soccer club in Berlin. It is virtually unheard-of for an American private equity firm to buy a stake in German soccer. DealBook »

Exfinity to Invest in Indian Start-Ups  |  A private equity fund called Exfinity will invest in about 15 start-ups in India, The Wall Street Journal reports. The firm’s chairman discusses his target investments. WALL STREET JOURNAL

HEDGE FUNDS »

Hedge Funds File Suit Against Porsche  |  Seven hedge funds have filed a 1.8 billion euro lawsuit against Porsche’s chairman and another board member, accusing the carmaker and its management of misleading the market leading up to its disclosure in 2008 that it was aiming to take control of Volkswagen, The Financial Times reports. FINANCIAL TIMES

Investigation Broadens Into Deals Between Finance Firms and Libya  |  The Justice Department is increasing the scope of its investigation of banks, private equity firms and hedge funds, which, they contend, may have violated antibribery laws in dealing with Libya’s government-run investment fund, The Wall Street Journal reports, citing unidentified people familiar with the situation. WALL STREET JOURNAL

I.P.O./OFFERINGS »

Castlight Health Files for I.P.O.  |  Castlight Health, an online application that allows companies’ employees to shop for health care benefits, has filed a confidential initial public offering with the Securities and Exchange Commission, Fortune reports. FORTUNE

Coupons.com Prepares to Go Public  |  Coupons.com, known for providing coupons that can be used in physical stores, has filed for a $100 million initial public offering, 15 years after its inception, ReCode writes. RECODE

VENTURE CAPITAL »

Ezra Klein’s Plans for the Future  |  Ezra Klein explains in a New York Magazine article why he left The Washington Post to start a digital news site. NEW YORK MAGAZINE

Bitcoin’s Price Stability  |  Bitcoin’s stable pricing in January could indicate a trend for the virtual currency, TechCrunch writes. TECHCRUNCH

Start-Up Aims to Circumvent Rules on Private Stock Sales  |  Employees who hold shares in start-ups are often wealthy on paper, but have few ways to access that wealth. A new company, Equidate, is trying to get around rules that restrict employees’ ability to sell their shares with a novel way to provide liquidity. DealBook »

Boss Insists That Staff Members Skip Super Bowl  |  Brooke Allen, who has worked for 30 years in the securities industry as a proprietary trader and hedge fund manager, insisted that his staff members attend a start-up event rather than watch the Super Bowl to encourage them to innovate, Quartz writes. QUARTZ

LEGAL/REGULATORY »

Law Does Not End Revolving Door on Capitol Hill  |  Former officials have little trouble passing through loopholes in laws intended to keep them from immediately lobbying their onetime colleagues. DEALBOOK

Detroit Sues to Cancel Some Costly Contracts  |  The city contends that some of the complex transactions set up to finance pensions were illegal. DealBook »

A Long Battle for a Retirement Plan  |  After a five-year battle, retirement account holders of a collapsed company can finally touch their money, Gretchen Morgenson writes in The New York Times. NEW YORK TIMES

Judge Approves Bank of America Settlement on Bonds  |  A New York State judge blessed the 2011 agreement to cover some of the investors’ mortgage losses, but she also excluded some of the legal claims by the investors from the settlement. DealBook »

How the Fed Learned to Communicate  |  “Partly but not only because of the global financial crisis â€" which caused the Fed to take unprecedented steps to stabilize the financial system, prevent big banks from going bust and keep interest rates low to stimulate the economy â€" the Fed communicates more than ever before,” Douglas R. Holmes writes in an Op-Ed in The Times. NEW YORK TIMES

Smith & Nephew to Buy U.S. Medical Device Maker

LONDON - Smith & Nephew said Monday that it has agreed to acquire medical device maker ArthroCare Corporation for about $1.7 billion in cash.

The British medical technology company said it would pay $48.25 a share for ArthroCare, representing a 20 percent premium over the 90-day volume weighted average price of ArthroCare’s shares prior to the announcement.

The deal will allow Smith & Nephew to cross sell products from the two companies across its global footprint and to introduce ArthroCare’s products to additional markets and customers.

“This is a compelling opportunity to add ArthroCare’s technology and highly complementary products to further strengthen our sports medicine business,” said Olivier Bohuon, Smith & Nephew’s chief executive.

“Together, we will be able to generate significant additional revenue from the more comprehensive portfolio, combined sales force and Smith & Nephew’s global footprint.”

The deal is expected to result in transaction expenses and integration costs about $100 million to be incurred over a three-year period.

The transaction is subject to regulatory and shareholder approval and is expected to close in mid-2014.

One Equity Partners, ArthroCare’s largest shareholder with convertible preferred shares equivalent to 17 percent of its equity, has agreed to support the transaction. ArthroCare’s board of directors is recommending that shareholders approve the deal.

The transaction will be financed from cash and Smith & Nephew’s debt facilities, including an existing $1 billion revolving credit facility and a new two-year $1.4 billion term loan facility.

Smith & Nephew also said it will suspended its share buyback program in light of the acquisition.

Based in Austin, Texas, ArthroCare had net sales of $368 million in 2012 and employs about 1,800 people. About two-thirds of its revenue came from sport medicine products in 2012.

In January, ArthroCare agreed to pay $30 million and enter a deferred prosecution agreement to end an inquiry by the United States Department of Justice related to alleged securities fraud by former members of its management.

JPMorgan Chase and Centerview Partners served as the financial advisers to Smith & Nephew, while Piper Jaffray and Goldman Sachs advised ArthroCare. The legal advisers were Davis Polk & Wardwell for Smith & Nephew and Latham & Watkins for ArthroCare.

Montagu to Buy Bulk of Rexam’s Health Care Business

LONDON - Montagu Private Equity said Monday that it had agreed to acquire the health care devices and prescription retail divisions of Rexam, the British consumer packaging company, for about $805 million in cash.

The sale of the two businesses to the European private equity firm represents the bulk of Rexam’s health care operations.

Rexam said Monday that it also is in discussions regarding the sale of its closures and containers business, the third prong of its health care operations, and would provide an update in due course.

“The sale of the healthcare business is part of our long-term strategy to maximize shareholder value,” said Graham Chipchase, Rexam’s chief executive. Following the sale, he said, “We will be a focused beverage cans business with a strong financial position. Our strategy is to balance growth and returns and we will continue to pursue selective investment opportunities in beverage cans in higher growth markets.”

The health care devices business, based in La Verpillière, France, designs a broad range of medical devices, including inhalers and insulin pumps. The business has annual sales of about $265 million and employs more than 1,700 people, Montagu said.

The prescription retail business, based in Berlin, Ohio, provides plastic vials and closures to pharmacies in the United States, which are used to deliver an exact count of pills to patients. The business has annual sales of about $165 million and employs more than 170 people, Montagu said.

“Healthcare Devices and Prescription Retail are both market leaders in attractive industries with defensive characteristics,” said Sylvain Berger-Duquene, a director at Montagu. “We have been impressed by the development of the business in recent years and look forward to working with the management team to support their future growth plans.”

The transaction is subject to approval by regulatory and competition authorities. It is expected to be completed by the middle of the year.

Rexam is the world’s largest maker of beverage cans, employing about 11,000 people in 24 countries. The company reported sales of 1.97 billion pounds, or about $3.24 billion, in the first six months of 2013.

The company said it plans to return about £450 million to shareholders following the sale.

Montagu has prior experience in the health care sector, including investments in Sebia and BSN Medical. Cinven, a European private equity firm, purchased Sebia for 800 million euros, or about $1.08 billion, in 2010.
Montagu has €3.3 billion in assets under management.

Morgan Stanley and Weil, Gotshal & Manges advised Montagu on the transaction.

Lloyds to Take £1.9 Billion in Added Charges

LONDON - Lloyds Banking Group said Monday that it would set aside 1.9 billion pounds to cover potential claims related to the improper selling of insurance and other products â€" the latest European bank to increase its reserves in the fourth quarter for past sins.

Deutsche Bank and Royal Bank of Scotland have recently announced their own multibillion pound charges related to mortgage-backed securities and other legal liabilities.

Lloyds, which is partly owned by the British government, also said it expects to ask the Prudential Regulatory Authority, the financial regulator, for permission in the second half of 2014 to resume paying a dividend “at a modest level.” The bank said it aims to move, over the “medium term, to a dividend payout ratio of at least 50 percent of sustainable earnings.”

The bank also has begun the process that will allow the British government, which provided Lloyds with a £17 billion bailout during the financial crisis, to sell more of its stake to the public, a priority for George Osborne, the chancellor of the Exchequer. The British government sold a 6 percent stake in the bank in September, and still holds a 33 percent stake.

“Our significant progress in delivering sustainable improvements in our capital position and our profitability, despite legacy issues, is testament to the strength of our business model and the commitment of our people, and has enabled the UK government to start to return the bank to full private ownership,” said António Horta-Osório, chief executive of the Lloyd’s group.

Lloyds said that it would take a further provision of £1.8 billion, or about $3 billion, to cover additional claims related to payment protection insurance, a contentious insurance product that has cost British banks billions of dollars, and an additional £130 million for interest-rate hedging products sold to small- and medium-size businesses.

Despite the provisions, Lloyds said it expects to report an underlying profit of £6.2 billion for the full year, ahead of analyst expectations of £5.8 billion. The bank is expected to report its full-year results on Feb. 13.

The increased reserve for payment protection insurance, or PPI, reflects in part the bank’s revised expectations for a slower decline in complaint volumes than originally forecast. The bank previously took a charge of £750 million for PPI in the third quarter.

With the additional provision, Lloyds has set aside £9.8 billion to cover potential PPI claims. About £2.8 billion had yet to be utilized as of Dec. 31.

In a research note Monday, Andrew Coombs and Ronit Ghose, Citigroup banking analysts, said the added compensation for insurance clients should put Lloyds in line with R.B.S. in terms of its usage of the money they have set aside for potential claims, following R.B.S.’s recent profit warning.

“The main focus today is likely to be on the dividend announcement, which we view as disappointing,” Mr. Coombs and Mr. Ghose said.

The market was looking for a small dividend in the second half of 2013, they said, “and while the target payout ratio is inline with Citi estimates it is lower than some had anticipated.”

Including the latest provision, the bank has set aside £530 million in total for interest-rate hedging product claims. About £368 million of the total provision had yet to be utilized as of Dec. 31.