Business and Finance

CHICAGO–Boeing Co. has delayed its 787 jetliner program again, pushing back its expected commercial service debut to the third quarter of 2009.

The delay announced yesterday pushes the 787’s schedule back approximately another six months and means the aircraft touted for its fuel-efficiency potential is now more than a year behind the original schedule.

The first test flight is now expected to take place in the fourth quarter. The company had initially planned to begin test flights last August or September and deliver the first plane to Japan’s All Nippon Airways this May.

The fourth delay with the 787, coming less than three months after the last one, further undermines Boeing’s credibility on the much-hyped program and also is a setback to the more than 50 airlines that have placed nearly 900 orders for the top-selling plane. Buyers are likely to seek compensation for the delays.

The 787, Boeing’s first newly designed jet since airlines started flying the 777 in 1995, will be the world’s first large commercial airplane made mostly of carbon-fibre composites, which are lighter, more durable and less prone to corrosion than more traditional aluminum pay day loans. Boeing has said the plane will be cheaper to maintain and offer greater fuel efficiency and more passenger comforts than comparable planes flying today.

But the unprecedented plan to assemble the jet from components manufactured largely by other companies has run into multiple snags involving outsourcing problems involving contractors in numerous countries.

Boeing said it now expects to deliver 25 of the new airplanes in 2009, down sharply from the originally planned 109.

The company said it expects no change to 2008 earnings guidance. Associated Press

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Canadian building permits fell for a fourth straight month in February, as concerns over the floundering United States economy cut into business spending and expansion plans in Ontario.

A weak performance in the City of Toronto dragged Ontario-wide permits down 16 per cent to $2 billion, the lowest since April 2007.

"Uncertainty related to the impact of a weakening U.S. economy and the high dollar could have a negative impact on non-residential construction intentions," Statistics Canada said yesterday.

Ontario, which does the bulk of its trade with the U.S., has been the hardest hit by the slowdown, which has resulted in layoffs at car plants and other manufacturers.

Market expectations had been for a 1.3 per cent increase for permits nationally in February over January. Instead, building permits dropped 1 per cent to $5.76 billion.

 

Permits, however, would have risen 9.8 per cent Canada-wide if hard-hit Ontario’s figures had been excluded, Statistics Canada said.

Permits are considered a leading indicator of future economic conditions, giving a look at the construction intentions of developers and the expansion plans of businesses.

"The drop in February permits is discouraging," Royal Bank of Canada assistant chief economist Paul Ferley said in an economic note yesterday.

"The disappointing performance (of non-residential permits) so far this year raises the risk that the recent credit tightening, along with increased discussion of a possible U.S. recession, is weighing on business spending."

The bank said in a report last week that Ontario is "teetering" on the brink of a recession payday advance lender.

Yesterday, Conservative Opposition Leader Bob Runciman pushed for tax relief to boost the province’s economy.

Last week alone, Runciman said, 124 workers lost their jobs or were laid off at Gencor Foods in Kitchener, 42 at a Kraft Foods Canada plant in Northumberland and 27 at Weetabix Ltd. in Cobourg.

Although some businesses are suffering, however, residential builders remain upbeat.

Residential permits were up 21 per cent in Ontario, offsetting decreases in non-residential building, which includes commercial, industrial and institutional construction.

In Toronto, building permits were down 31 per cent overall, due to a plunge in non-residential building. But residential permits, which include single-detached and highrise projects, were up 28 per cent, suggesting home builders are confident in the market.

"Several factors could have a positive impact on the demand for housing, including steadiness in employment, growth in disposable income, strong immigration, as well as low interest rates," Statistics Canada said.

The Royal Bank now expects the Bank of Canada to continue to cut interest rates, sending the key overnight rate down to 2.75 per cent from 3.5 per cent by mid-year. That should give the housing market a boost in the form of lower mortgage rates.

If the U.S. economy does slide into recession, however, job losses in Ontario are likely, which would mean fewer home buyers, no matter what the price.

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Forty-three per cent of Canadian investment managers are bullish toward domestic equities and 43 per cent are bearish, according to a survey by Russell Investment Group.

"Is the worst of the sub-prime crisis over? Is recession coming to Canada? How will central banks balance demands for more stimulus while containing inflation? These are the questions currently dividing market watchers," Timothy Hicks, chief investment officer at Russell Investments Canada, said in releasing the survey Monday.

"The split decision could also mean that more managers are willing to get off the fence with their opinions in regards to where this market is headed."

The optimistic camp has grown by 15 percentage points since the firm's previous poll in the fourth quarter.

The attractiveness of commodity stocks was behind this increase, with 56 per cent of the 101 firms and individual managers who responded to the poll being bullish on the energy sector, up by 13 points from the previous quarter payday advance. And bullishness toward the gold-heavy materials sector soared to 62 per cent from 38 per cent.

Sentiment on the financial sector intensified in both directions, with bulls rising to 42 per cent from 30 per cent and bears increasing to 40 per cent from 35 per cent.

The information technology sector, dominated by Research In Motion, saw bullishness fall to 40 per cent from 50 per cent and bearishness climb to 39 per cent from 23 per cent.

The manager's outlook for the U.S. market continued to weaken, with 33 per cent bullish and 44 per cent bearish.

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Draxis Health Inc. has struck a US$255-million friendly deal to be taken over by Jubilant Organosys Ltd., a publicly traded company from India that is offering US$6 per share for the Canadian drug producer.

The deal, announced Friday, is the second takeover of a well-known Canadian company by an Indian firm as corporations in the fast-growing Indian economy flex their expansion muscles and look beyond Asia to grow their international business.

Last year, Algoma Steel was bought by India's Essar Steel for $1.85 billion, continuing a wave of consolidation that has left the Canadian steel sector in foreign hands. Indian companies have also been said to be examining whether to invest in oilsands properties in northern Alberta.

The proposed acquisition of Draxis (TSX: DAX) represents a 22.4 per cent premium over Thursday's closing price for the company, which has a generic version of Cardiolite, a commonly used drug for nuclear medicine imaging. It had acknowledged last month that it was in talks with a potential buyer.

"Draxis represents a unique opportunity in the North American market, offering Jubilant entry into the attractive, regulated, high growth and high margin radiopharmaceutical business," Shyam Bhartia, chairman and managing director of the Indian company, said in a release.

"It also enables Jubilant to consolidate its position in the sterile and non-sterile contract manufacturing business. With this acquisition Jubilant will become one of the leading providers of contract manufacturing of small volume parenterals to large pharmaceuticals and biotech companies in North America. Draxis has an excellent regulatory track record, with its management and employees having a wealth of experience and expertise in radiopharmaceuticals and contract manufacturing.

"Jubilant is committed to grow Draxis by supporting management and employees through new product launches, entry into new markets and expansion of customer base."

Jubilant Organosys is an integrated pharmaceutical company, involved in research, development and manufacturing. In addition to several locations in India, it has two in the United States – in Maryland and Washington state.

The Draxis board of directors is recommending that shareholders accept the offer.

Analysts were quick to say the offering price was somewhat below their target prices for a takeover of Draxis, but that they saw a good fit between the two companies.

Desjardins Securities analyst Maher Yaghi wrote Friday that that, by his calculations, Draxis could be valued at about US$6.60 per share if the various parts of its business were considered separately.

"While Jubilant's offer is nine per cent below our assessed takeout valuation, we believe this opportunity provides fair value to current investors regardless, given the risks involved with the approval and launch of generic sestamibi (Cardiolite) in the U.S faxless payday loans. and the potential volatility in Draxis Pharma's base business considering a possible phase-out in 2009 of Hectorol, currently the company's greatest revenue contributor."

Hectorol is used to treat patients with kidney disease.

In its most recent financial report, Draxis said Hectorol production volumes in last year were $9 million lower than they were in 2006 and significantly lower than what was originally forecasted for 2007.

Yaghi wrote that Draxis could opt out of its agreement with Jubilant after paying a break fee of US$10.5 million but "we believe it is unlikely that another potential buyer would emerge immediately to provide a superior counter bid."

Doug Loe, an analyst with Versant Partners Inc., said that while the bid for Draxis is attractive, it is below the broker's one year target of $7.50 per share for the Toronto company.

"What we know about Jubilant to this point is that it looks as though it's a pharmaceutical and drugs development services and industrial chemicals conglomerate that could effectively integrate Draxis's capabilities in contract manufacturing and nuclear medicine," Loe said.

"These are areas of their business that seem to be underdeveloped in comparison to other parts of its business."

In trading today on the TSX, Draxis shares rose $1.01 to $5.95, a gain of 20.5 per cent in trading of more than 822,000 shares.

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NEW ORLEANS–Former Enron Corp. chief Jeffrey Skilling, convicted for his role in the once-mighty energy giant’s collapse, took risks, but they were always for the firm’s benefit, his lawyer says.

Skilling was convicted on a legal theory that he deprived Enron of his "honest services" and put his own interests above those of the company, defence lawyer Daniel Petrocelli told a three-judge panel of the 5th United States Circuit Court of Appeals yesterday. But Skilling’s actions were well-intentioned, Petrocelli argued.

Meanwhile, prosecutors argued Skilling’s actions were dishonest and contrary to the needs of the company’s shareholders and its financial stability.

Skilling was convicted in 2006 for his role in Enron’s collapse.

Skilling, who is serving a 24-year sentence in a federal prison in Minnesota, was not present during yesterday’s arguments. His wife and siblings were there, however.

Company founder Kenneth Lay also was convicted, but he died less than two months later and his convictions were vacated.

Petrocelli made the "honest services" theory the centerpiece of his arguments payday loans. Legal experts say that is Skilling’s best chance at overturning some or possibly all of his convictions.

Prosecutors theorized at trial that Enron employees were bound to serve honestly and not put their interests ahead of the company’s. If the employees failed to do so, they deprived the company of “honest services" and committed a crime.

The 5th Circuit has already overturned several Enron-related convictions based on the honest services theory, ruling that executives did only what Enron wanted them to do and did not profit at its expense.

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The Ontario Teachers' Pension Plan's managers, the provincial government and the federation representing 278,000 active and retired teachers are faced with a daunting math problem – how to resolve a $12.7-billion shortfall between assets and liabilities.

The shortfall, which has long been anticipated but not resolved, will have to be dealt with through higher contributions from employers and employees, reduced benefits for retirees, a revision of the plan's underlying assumptions or a combination of these.

The shortfall arose despite the plan's 4.5 per cent return on its investments for 2007, a solid result by one of Canada's largest and most-active capital pools in difficult markets.

Teachers said Tuesday its assets at Dec. 31 were $108.5 billion, up by $4.7 billion on the year but representing a $12.7-billion shortfall between the plan's assets and its liabilities – in essence the payments it's currently obliged to make to retirees in future.

Last year, the fund paid out $4 billion in benefits while receiving $2.1 billion in contributions from active teachers and employers .

Jim Leech, chief executive of the Teachers fund, said a balanced valuation plan must be filed with the provincial regulator by September and work on that is already well progressed.

"The fortunate thing is – we've seen this coming for a number of years and we spent the last year getting more and more intelligence and informing ourselves better," Leech said in an interview.

He said the plan that he oversees has been "doing very well" at making money and the asset shortfall, while important, has to be put into context.

"Certainly, you wouldn't want to frighten people to think their pensions are not secure. I mean, we have $108 billion in assets. . . . We can pay pensions for a long time. But you want to solve the problem and make sure (the plan) is in balance, forever."

He said it's up to the sponsors – the Ontario Teachers Federation and the Ontario education ministry – to decide in the coming months what to do about the contribution and benefits.

It will be up to the plan managers to reassess the plan's assumptions and maximize returns on investments.

But Teachers is being hampered by low after-inflation interest rates, which were 1.9 per cent at the end of 2007 and are now down to 1.7 per cent, and by increased longevity of retirees.

"That raises the costs instant payday loan. People live longer and you're paying the pensions for longer and that's one of the factors that has led to the deficit," Leech said.

"The other factor, of course, is interest rates. The higher the interest rate, the lower the cost of providing somebody with a pension."

For example, to provide a pension paying out $40,000 per year it would cost of that stream of payments is $855,000 if real interest rates are two per cent. It would cost only $585,000 if the real interest rates were five per cent.

"All defined-benefit pension plans worldwide face this challenge."

Teachers said its public and private equity holdings totalled $50 billion at year-end after a negative 0.1 per cent investment return during 2007.

Inflation-sensitive assets such as infrastructure and real-return bonds were valued at $39.3 billion, returning seven per cent.

Fixed-income assets amounted to $18.7 billion after a 5.4 per cent return.

Overall, Leech said, "our fund cannot afford the investment risk that it once did." He noted that equities have declined to 47 per cent of total assets, compared with 65 per cent in 1995.

"Diversification has always been a hallmark of our investment program," he added, "and our real estate, private equity and infrastructure assets led the way with our tactical asset allocation and absolute return strategies in producing a 4.5 per cent total fund return, decisively outperforming the 2.3 per cent composite benchmark."

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In assessing U.S. presidential candidate Hillary Clinton’s real position on NAFTA, and testing her foreign-policy credentials generally, it would seem an obvious place to start by re-reading her own memoirs and those of her husband.

Lord knows, those books were blockbuster publishing events. And in all the copious parsing by pundits of what Hillary and Bill Clinton had to say for themselves, no one pounced on the NAFTA misgivings of Hillary Clinton.

Because there aren’t any.

The archival CBS video that surfaced this week disproving Hillary Clinton’s repeated claims to have come under sniper fire during a Bosnia state visit speaks for itself. Clinton’s boast of playing a catalytic role in Northern Ireland’s Good Friday Accord appears nowhere in either Clinton’s memoir, Living History (2004), or her husband’s 957-page doorstopper, My Life (2004). Nor are they chronicled in Carl Bernstein’s definitive bio, A Woman in Charge (2007). Clinton’s credibility is in ruins.

Which brings us to NAFTA.

The Democrats’ primary contest in rust-belt Ohio earlier this month featured some full-throated NAFTA-bashing by both Clinton and rival Barack Obama. But Hillary Clinton is a life-long free-trader. She told Time last year she believes in "the general principles of NAFTA." And Obama is supporting two new bilateral trade pacts in the U.S. Senate.

In My Life, Hillary Clinton is revealed as opposing NAFTA in just one particular: Promoting its legislative passage in 1993 would expend so much political capital that there would be little left for her own health-care reform initiative.

Clinton, Obama and John McCain, to judge from his speech this week about needed fence-mending with allies, each place a higher priority on restoring America’s goodwill abroad than the nuances of a trade agreement at a time of global terrorism, a slumping U.S. economy, and the grim prospect of as many as two million Americans threatened by foreclosure on their homes payday loan. My 83-year-old mother will develop a taste for Britney Spears CDs before the 44th U.S. president chooses to create a political firestorm in America’s back and front yards by reopening NAFTA.

And there would be a firestorm. The highest-ranking Canadian and Mexican political officials have made that clear with their voluble objections to renegotiating NAFTA.

What’s going on here is pure politics. And a credulous Canadian media have been suckered into it.

Obama suffered the political misfortune of having one of his "off-message" surrogates inform the Canadian consulate in Chicago that Obama has no interest in substantive changes to NAFTA. To rekindle that issue, and to quash the U.S. punditry’s obsession with Clinton’s own sincerity gap as revealed in the Bosnia debacle, the Clintonites counted on family retainer Gene Sperling, an economist, to use a scheduled Thursday appearance in Ottawa to spout the same Hillary Clinton talking points force-fed every day to U.S. reporters covering her campaign.

"She’s a tough leader, a tough negotiator," said Sperling, "And she means what she says, and says what she means" about pulling the U.S. out of NAFTA if it isn’t renegotiated.

Obviously the Clintonites have zero interest in how this plays in Canada. What they’re doing is using the Canadian media to revive Clinton’s political viability by generating alarmist headlines like "Clinton ready to walk away from NAFTA, adviser warns" that can be used in mail drops in Pennsylvania, the next Dem primary.

As it happens, the Clinton candidacy is effectively dead. She trails Obama and can’t catch up. Not that our media should ever play a stenographic role. But doing so when the motive is so obvious and the threat so bogus is doubly embarrassing.

dolive@thestar.ca

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