Money Stuff: Venture Global’s Gas Plant Is Done

Venture Global Inc. is a liquefied natural gas (LNG) producer in Louisiana with an innovative approach to building LNG plants, one that involves “mid-scale factory-fabricated liquefaction trains” that are “assembled off-site at manufacturing and fabrication facilities in Italy and then shipped to our project sites fully-assembled and packaged for installation,” rather than the traditional approach of building everything onsite. [1]  This is efficient as a matter of engineering and construction, but it is also efficient as a matter of financial engineering and contract construction.

The way you finance an LNG plant is that you enter into contracts with customers — big energy companies — to sell them LNG at fixed prices once your plant is completed. You agree on the prices, you raise money, you build the plant, and then, a few years later, the plant is completed and you have to start delivering LNG. If, in the interim, Russia has invaded Ukraine and global natural gas prices have gone up, you will be sad about having to deliver gas at the fixed prices you agreed on years ago. 

Venture Global’s modular approach apparently solved this problem because, with multiple mid-scale liquefaction trains, who’s to say when an LNG plant is completed? You’re kind of always building the plant. It’s the LNG plant of Theseus. As Venture Global puts it:

By design, conventional, stick-built projects generally only engage in several months of commissioning production, thereby limiting the number of cargos produced before full commercial operations occur. Due to our unique modular development approach and configuration consisting of many mid-scale liquefaction trains, which are delivered and installed sequentially, it is necessary to commission and test our LNG facilities sequentially over a longer period of time than traditional LNG facilities with substantially fewer, larger-scale liquefaction trains. The commissioning of the liquefaction trains at our facilities begins while portions of our facilities remain under construction.

This important reliability and technical requirement results in earlier production of LNG than with traditional LNG facilities. We believe this earlier production of LNG positions us to produce a substantial number of commissioning cargos for each of our LNG projects, generating proceeds that may be used to support any remaining construction work or fund subsequent projects and future growth. 

That is: They start building the plant, they install some modules, they start producing gas, but “portions of our facilities remain under construction” and the plant isn’t complete yet. Because their long-term contracts only require them to start delivering LNG once the plant is completed, they don’t have to deliver LNG under those contracts. But they’re still producing lots of gas — “commissioning cargos” — that they can sell on the spot market at much higher prices. This is an advantage of their approach: They can start producing LNG earlier than conventional plants, but they can delay fulfilling their contracts longer than conventional plants. Modular LNG plants have a long period of contractual limbo, and a long period of contractual limbo is apparently what you want if you are an LNG producer.

We have talked about this a few times before because of course we have. “My favorite company in the world these days,” I once called it. Venture Global’s two co-founders were “both industry novices” when they started the company, but one of them was an investment banker and the other was a lawyer, and this is how an investment banker and a lawyer would build a natural gas plant. “Make sure to build in a long period of contractual limbo,” I hope they said to their architect, who was presumably confused.

Anyway they made maximal use of their contractual limbo, delivering lots of gas at high prices on the spot market while telling their long-term customers to just wait longer because the plant isn’t done yet. (I have joked that the plant was complete except for painting one last rivet.) The long-term customers took them to arbitration, saying, come on, your plant is done, give us the gas, and Venture Global responded with maximum smugness, saying things like “Venture Global is honouring its contractual obligations to its long-term customers in strict conformity with its long-term contracts.” Strict conformity is not what the customers wanted.

But last week it lost an arbitration:

Venture Global shares plunged nearly 25 per cent on Friday following its loss in an arbitration case against BP, which accused the US liquefied natural gas producer of breaching contracts to profit from higher prices at the start of Russia’s full-scale invasion of Ukraine.

The case was one of several pursued by Venture Global’s customers alleging it failed to deliver shipments under long-term supply contracts and instead sold them for higher prices on the spot market when gas prices soared in early 2022.

BP’s victory is a major blow to one of the largest US LNG exporters, which now faces a separate hearing to determine damages in the case. The UK oil group is seeking damages in excess of $1bn, as well as interest, costs and attorneys’ fees. ...

The arbitration panel’s ruling against Venture Global was unexpected following the company’s victory in an earlier case involving Shell. In August, Venture Global defeated Shell in the first of these cases, which are being heard by the International Chamber of Commerce. ...

Venture Global said it was disappointed by the arbitration decision, which found the company had “breached its obligations to declare commencement of commercial operations at its Calcasieu Project in a timely manner”.

Right, on the one hand, presumably an LNG company founded by an investment banker and a lawyer had a pretty good handle on the technicalities of what it means to be in “commercial operations,” and thought they had a pretty good trade here. On the other hand, if you’re shipping billions of dollars’ worth of LNG, there is some risk that an arbitrator will conclude that you have commenced commercial operations.

A week ago, María Corina Machado had about a 0.8% chance of winning the Nobel Peace Prize, according to Polymarket odds. The front-runner was Yulia Navalnaya, at about 10%, with Donald Trump in second place and quite a long tail of other possible winners. Total volume on this market was about $21 million, so if you knew in advance that Machado would win the prize you could have made tens of thousands of dollars. Someone apparently did:

Hours before a Venezuelan opposition leader won the Nobel Peace Prize, a mystery trader on Polymarket began piling into long-shot bets on her victory. 

The buying spree—from a newly created account called “6741”—earned the unknown trader more than $50,000 in profit and spotlighted concerns that the popular crypto-based prediction market is vulnerable to insider trading.

“We have noticed that some have made significant financial gains by placing bets on this year’s prize. We will investigate whether this means that someone has unlawfully obtained information from us,” Erik Aasheim, a spokesman for the Norwegian Nobel Institute, said Friday.

Sure. We have discussed insider trading on Polymarket several times before. A few quick points:

1. The most important thing to notice here is that, if you had advance knowledge of the Nobel Peace Prize winner, you could make $50,000. That is a nice payday if you are, like, a peace activist or a junior staffer at the Norwegian Nobel Institute, but it is not going to move the needle for a hedge fund. The economic opportunity for insider trading on almost every classic prediction market is quite small, because the economic opportunity for trading on almost every classic prediction market is quite small. 
2. The main exceptions are (1) US presidential elections (hard to insider trade?) and (2) spooooooooooooooooorts. I write about this all the time, but when you read “prediction markets are a big deal” or “a big financial firm is partnering with a prediction market” or “people are worried about insider trading on prediction markets,” you should pretty much always substitute the words “sports gambling site” for “prediction market.” 
3. If this was insider trading, in what sense would it be legal or illegal? Polymarket currently exists in sort of a regulatory gray area, but it is barreling toward becoming a registered US commodity futures exchange, at which point it will presumably (but who knows?) be subject to US commodities insider trading rules. Which are a little looser than stock insider trading rules, but still it would probably be illegal (in the US) to trade on information misappropriated from the Nobel committee. Like if a junior staffer at the Nobel Institute knew the outcome in advance and traded on it, that seems like illegal insider trading.
4. Also separately the Nobel Institute could fire that junior staffer.
5. Is insider trading on prediction markets good? The classic economic case for it is that it incentivizes experts and insiders to incorporate their inside information into prices, thus making the world better informed. But … how important is it for the world to know in advance who will win the Nobel Peace Prize? How important is it for the world to know 12 hours in advance? 
6. An important part of the case against insider trading on prediction markets involves not “insider trading” — you know the outcome, so you trade on it — but rather “conflicts of interest”: You trade on the outcome, and then you influence it. For a certain dollar value, you could imagine … maybe not the Norwegian Nobel Institute, but some prize-giving body being influenced by prediction markets. Like the Nobel committee could walk into the room and say “hey María Corina Machado is at 0.8% in a deep and liquid market; if we each buy $10,000 of her contracts and then vote for her, we’ll each get a million-dollar payday.” And so the actual outcome of the Nobel Peace Prize is determined not by objective peace considerations but by how the committee members can make a quick buck. (Consider Bill Ackman’s suggestion that the New York mayoral race should be determined by how Eric Adams could make a quick buck.) But, again, the liquidity just isn’t there yet for this to matter. 

One possible future is that prediction markets will work, they will scale up dramatically, they will “expand how individuals and institutions use probabilities to understand and price the future,” people will start gambling hundreds of millions of dollars on all sorts of salient public events including the winner of the Nobel Peace Prize, and so you will be able to make tens of millions of dollars, rather than tens of thousands, trading on your inside knowledge of the winner.

This seems quite unlikely to me: Are millions of recreational gamblers really going to want to take a flutter on which democracy activist will win the Nobel Peace Prize? [2] Is some quantitative hedge fund going to build a statistical model, using only public information, to predict the Nobel Peace Prize winner, and wager tens of millions of dollars on that model? Really the only person who had a good reason to bet on this market was this supposed insider trader. What you want, as an insider trader, is a lot of uninformed traders who nonetheless have a good reason to bet against you. Football prediction markets have that. Nobel Prize prediction markets, so far, don’t.

But, sure, one day. If we ever get there, it will be a little disappointing if the Nobel committee doesn’t do some trading of its own. Pay for the prize money by taking it out of prediction markets, why not.

Elsewhere:

President Trump’s surprise announcement of 100% tariffs against China on Friday triggered a cryptocurrency selloff that wiped out more than $19 billion in leveraged positions. Two accounts that placed bets against the market minutes before the news broke scored a $160 million windfall.

Bitcoin dropped 12%, forcing liquidations that triggered even more selling, pushing prices lower. Less popular tokens saw declines as steep as 80%. …

Ahead of the selloff, two accounts on Hyperliquid, a decentralized exchange that allows investors to make leveraged bets on future crypto prices, placed massive bets that bitcoin and ether would fall. By day’s end Friday, the positions were closed for $160 million in profit.

Right, see, you can make real money insider trading on crypto. I will say that if you knew in advance that Donald Trump was going to announce 100% tariffs on China, “sell Ethereum” was not the most obvious trade? The tariffs are not on Ethereum. Except that crypto is a form of generic levered betting on risk-on sentiment, so “stuff that is bad for the economy will be extra-bad for crypto” is a reasonable bet to make. “If I insider trade the S&P 500 I might get in trouble, but if I insider trade Bitcoin on Hyperliquid I definitely won’t” also might be a reasonable bet.

Here’s how I think about Credit Suisse Group AG’s additional tier 1 capital securities:

1. Credit Suisse issued some securities (the AT1s) that mostly looked like bonds: They paid interest and would eventually be paid back at par.
2. Except that, if Credit Suisse ran low on capital, the AT1s would be written off, giving investors a total loss and giving Credit Suisse a bit more capital.
3. Specifically, if Credit Suisse’s common equity tier 1 capital ratio fell below 7%, the AT1s would be triggered and they’d be written down to zero.
4. So, for instance, let’s say Credit Suisse had 500 billion Swiss francs of regulatory risk-weighted assets, CHF 50 billion of common equity, CHF 10 billion of AT1s and CHF 440 billion of other liabilities. That’s a CET1 ratio of 10%, so it’s fine. But if the assets lost 5% of their value, it would have CHF 475 billion of assets and only CHF 25 billion of equity (5.2%). The AT1s would be triggered, and they’d go to zero, leaving Credit Suisse with CHF 440 billion of liabilities and thus CHF 35 billion of equity (7.4%). Wiping out the AT1s would leave Credit Suisse better capitalized, which is the point of the AT1.
5. Notice that the AT1 is, in this scenario, junior to common stock. The common shareholders are not wiped out in that scenario: Their stock is still valuable, and in fact should get more valuable with the AT1 writedown. But the AT1 holders get back nothing. The trade for them is that they get a high interest rate as long as Credit Suisse is well capitalized, but if Credit Suisse starts to get shaky, they get zeroed even if the shareholders are still fine.
6. In March 2023, Credit Suisse got shaky. Swiss regulators arranged a quick weekend fire sale in which UBS Group AG bought Credit Suisse for peanuts.
7. Specifically UBS agreed to pay about CHF 3 billion (around $3.3 billion at the time) in stock for Credit Suisse’s equity.
8. At the time of the deal, Credit Suisse had about CHF 531 billion of assets at book value.
9. So its equity value in the deal (CHF 3 billion) was about 0.6% of its assets (CHF 531 billion). That is a crude approximation of Credit Suisse’s capital position, but 0.6% is really quite a lot less than 7%. At market prices, Credit Suisse was very very very thinly capitalized.
10. So of course the AT1s, which are supposed to be triggered when Credit Suisse’s equity fell below 7%, were triggered. The AT1s became worthless, not because the stock became worthless (it didn’t), but because the stock was almost worthless, and the AT1s were junior to the common.

This model is, I still think, intuitively and economically correct. But legally it is pretty sketchy. In fact, Credit Suisse’s regulatory capital never fell below 7%: As far as its regulators were concerned, Credit Suisse was very well capitalized at all times before, during and after they forced it to sell UBS. That’s weird! If it was so well capitalized, why did it have to shut down and sell itself for peanuts? The basic answer is some combination of:

1. Regulatory capital calculations are slower-moving and more backward-looking than market confidence, and a correct accounting of Credit Suisse’s capital ratios really would have found plenty of capital even as the market was saying that Credit Suisse was almost worthless.
2. Regulators have incentives to be publicly upbeat about troubled banks’ capital situations, so even as they are in closed-door negotiations saying “your bank has failed, sell it,” in public they go around saying “Credit Suisse is very well capitalized and there’s nothing to see here.”

And so, when Credit Suisse went under and the AT1s were zeroed, they were not zeroed because they hit the 7% capital trigger: They didn’t; Credit Suisse’s capital ratios were fine. The AT1s had another trigger, saying that they could be zeroed on a “viability event” requiring capital support from the Swiss government; that was the trigger that was referenced in writing them down. But the Swiss government did not provide any capital support to Credit Suisse: UBS took over all of its assets and liabilities, with some liquidity support from the government but no need for capital. 

To my mind, when Credit Suisse sold itself for CHF 3 billion to UBS in a government-coordinated rescue, that (1) was obviously a “viability event” for Credit Suisse and (2) obviously implied that Credit Suisse’s equity value was less than 7% of assets, so of course the AT1s should have been zeroed. But that is not a legal argument, it’s a “look at what is going on here” argument. 

Anyway the AT1 holders did a lot of suing over this, and today they won, kind of. The Financial Times reports:

A Swiss court has ruled that regulators’ decision to wipe out SFr16.5bn (£15.5bn) of Credit Suisse bonds as part of a government-orchestrated rescue was unlawful but stopped short of ruling whether investors should be repaid.

The case was brought by about 3,000 investors across 360 cases after Swiss financial regulator Finma ordered the bank’s Additional Tier 1 (AT1) bonds be written off in March 2023, as part of Credit Suisse’s emergency rescue by UBS. ...

In a ruling published on Tuesday, judges found that Finma had overstepped because the legal and contractual conditions for the write-off had not been met. Credit Suisse, now part of UBS, was still adequately capitalised at the time, and the government’s liquidity support did not amount to a “viability event” that would trigger a total loss of AT1 value, the court ruled.

Here is the court’s announcement. “The conditions for a write-off were not fulfilled because the contractual viability event had not been triggered: at the time of the write-off, CS was sufficiently capitalised and met regulatory capital requirements.” 

“Finma’s decision was controversial because while AT1 bondholders were wiped out, it allowed Credit Suisse shareholders to retain some value, reversing the usual order in which investors bear losses,” adds the FT, which I insist is not the correct way to look at these things: The AT1s really do, by their terms — by their title — contemplate being wiped out even as shareholders retain some value; their whole purpose is to reverse the usual order in which investors bear losses. (A 7% capital trigger is not a 0% capital trigger.) But nonetheless, here, they didn’t hit the trigger, so wiping them out was wrong.

I do think that the upshot here might be “there is no possible scenario in which the AT1s will be triggered and the common stock won’t be wiped out”: Any non-bankruptcy rescue of a failed bank will involve some sort of payout to the equity, and a lot of regulatory announcements that actually the bank is perfectly well capitalized thanks for asking, so there’s never a reason to trigger the AT1s. “AT1s are senior to common and can’t be wiped out if the shareholders get anything” is wrong as a matter of security design, but might in practice be right.

If you own 100 shares of Grindr Inc. stock, you can go to your broker and borrow some money against it. The stock trades at about $12.50 per share, so your stock is worth about $1,250; your broker might lend you $625. If the stock drops a lot from here, you will get a margin call: If the stock goes to, like, $9, your broker will call you and ask you to pay back the loan or post more collateral. If you don’t do that promptly, your broker will seize your stock and sell it to raise $625 to pay itself back.

Raymond Zage owns about 85.9 million shares of Grindr, about 46% of the company, and is on the board of directors, so he’s in a different position. He has borrowed a lot of money against his stock: He has pledged all 85.9 million shares “ to certain lenders in connection with a financing arrangement.” The chairman of Grindr’s board, James Lu, owns about 26.6 million shares and also also pledged almost all of them. Between them, they own more than 60% of the company. If the stock drops, their lender can seize their shares, but then what? Sell them all in the market? If you take out a margin loan against 60% of a public company, and you get a margin call, the form that it takes is essentially “we are going to sell your company for you.” Or I suppose “you’d better get long-term financing to buy it from us.”

I do not know the terms of those loans, but Grindr was at $24.73 in June and dipped below $12 this morning, so it is certainly plausible that they would be getting margin calls. It was below $12 a year ago so it is also plausible that they wouldn’t be. But they are, as Semafor’s Liz Hoffman reports:

Insiders at Grindr are discussing taking the company private after a stock slide forced its owners into a precarious personal financial position, people familiar with the matter said.

Raymond Zage and James Lu, who control a majority of the dating app, are in talks to secure debt financing from Fortress Investment Group to acquire Grindr, which has a market value of $2.4 billion, the people said. The fast-moving talks come after a unit of Temasek, which had made personal loans to at least one of the men secured by their holdings, seized some of the underlying shares last week and sold them, the people said.

Zage and Lu have discussed a buyout price of around $15 a share, some of the people said, cautioning that number could change. A deal at that price would value the company at around $3 billion.

Here is Zage’s filing announcing that they are considering taking the company private, and here’s the somewhat shamefaced letter that Zage and Lu sent to the board saying that they “would welcome the opportunity to engage with the Board of Directors to further explain our intentions and work with the Board of Directors and any Special Committee to be established.” Hey guys, sorry, we got some margin calls so the company is in play.

One financial problem I have occasionally thought about is:

1. It is rare, difficult and valuable to be able to consistently make correct predictions about which stocks will beat the market. People who can do this tend to charge a lot of money for that skill.
2. It is, in theory, equally rare, difficult and valuable to be able to consistently make incorrect predictions about which stocks will beat the market. If you could produce a daily signal like “Buy Stock X,” and Stock X regularly went down, then I could make very good use of that signal. (I could sell the stocks you tell me to buy.) 
3. It seems like there should be some way to identify, cultivate and reward people who have that skill. But it is challenging. I once wrote that “if you waltz in the door at Citadel and are like ‘hi my superpower is that I am exceptionally terrible at picking stocks’ they will have doubts.” Also, like, if you are good at picking stocks, you will spend time learning more about stocks and hopefully get better over time. If you are improbably bad at picking stocks, there is no obvious way for you to maintain and improve your edge. I guess you could build a program of study that involves reading all of the worst financial advice, but really, the whole setup seems to call for a level of self-awareness that is hard to square with “you always buy stocks that go down.”
4. Still. If you could find a pure source of negative alpha — some feed of people who are always wrong about stock prices — then you could make a lot of money with it.

We talked once about a futures broker who had some clients who were pretty bad at trading futures, and who used their signals (inverted) to trade futures itself. Very cool trade, though in fact the broker got in trouble. Or there is Marshall Wace’s “TOPS” alpha capture system, which takes recommendations from brokers, extracts signals from them, trades on them and then rewards the brokers for good trade ideas; in theory a broker whose recommendations were reliably terrible would be very valuable to Marshall Wace. 

Anyway here’s a paper titled “StockTwits: Comprehensive records of a financial social media platform from 2008 to 2022,” by Xingji Li, Nasser Al Ansari and Aaron Kaufman, finding that (1) StockTwits sentiment about stocks is basically random, but (2) some posters on StockTwits have alpha and (3) some posters have negative alpha:

This paper describes and characterizes the relationship between social media and financial markets, focusing on two key questions: (1) Do users of financial social media perform better than guessing at predicting stock movements? (2) When do users in the aggregate perform better than guessing at the same task? To study these questions, we introduce the first publicly available, comprehensive dataset of posts on a social media platform: StockTwits. StockTwits is a financial social media platform where more than 7 million active users have discussed financial markets and investing strategies across over 550 million posts since 2008. We provide a complete record of all StockTwits posts up to 2022, including the poster's anonymous ID, the text and timestamp of the message, and whether the user tagged their post as optimistic ("bullish") or pessimistic ("bearish"). … We find that while most users perform approximately at a guessing rate, a significant percentage consistently perform statistically better or worse than guessing, especially at longer timescales. 

There should be a hedge-fund strategy, or I guess an exchange-traded fund, that is like “short the stocks that the worst StockTwits posters like.”

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