Markets live chat transcript for the chat ending at 12:16 on 14 Sep 2007. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Welcome to Markets Live – FT Alphaville’s market commentary
PM: Neil Hume is with me.
PM: We are just about as busy as you can imagine.
PM: Busy preparing The Crock Rreport
PM: Cue stirring music.
NH: get with its not Northern Crock. It’s much worse this is NORTHERN WRECK
PM: 
PM: First the news – for those living in a tin box, with the lid shut.
NH: Bank of England has moved to bail out Northern Rock
PM: We knew Rock was stressed, but Robert Peston of the BBC got news that Rock had finally and formally gone to the Bank yesterday and said “We’re screwed. The market won’t finance us. Will you? Please?
NH: Yep – it seems the Bank and the FSA have been planning this rescue for a full week – according to usually knowledgeable sources
PM: Once they realised it was becoming public they had to call in the Bank’s Council of Directors – that happened last night at 9.30.
PM: Grandees streaming into Threadneedle St.
NH: I believe our Bruno Vincent – snapper – was the only man on the spot last night.
PM: Yes, it was an All Chauffeur Alert.
PM: 
PM: So this morning the price of Northern Wreck crashed as low as 475. currently trading at 500 in the middle – down 22%
PM: Basically the City has torn up its earnings estimates. Just try to work out net value – to a potential bidder, that is.
NH: We’ve got waves of rumours washing across the market – over the past half hour or so these have centred on a rescue takeover.
NH: but there is also a strong and growing opinion that Rock should have been allowed to fail.
PM: Yes, Willem Buiter – serious pundit, ex MPC – has declared
PM: Following the bail out of Northern Rock, I can only conclude that the Bank of England is a paper tiger. It talks the ‘no bail out’ talk, but it does not walk the talk. It does not matter whether the decision to bail out Northern Rock was initiated and/or actively supported by the Bank, or whether the Bank was bullied into it by the Treasury and the FSA…
PM: We will all pay the price in the years to come, when the next wave of reckless lending washes over us. Let’s hope that the collateral requirements and penalty rate charged on the credit line will be tough enough to limit the damage.
PM: Here’s his blog address
PM: Now ….. this bail out …. i cant keep up with the comments below
NH: but we too are hearing reports of queues of 200 people outside NRK branches across the country
PM: (Try and keep up C)
NH: what i have found amazing in this morning’s statement is that Northern Rock claim they are solvent
PM: Yes, just a liquidity issues, et cetc etc etc etc etce etc
NH: No it’s not. If the Bank of England were not prepared to lend them money they could refinance and presumably would not be able to write profitable new business
PM: Precisely
PM: VP talks of a reckless business model below
PM: And i notice below that VP also refers to the statement of Aug 20 from Northern Wreck — then knows as Crock of course
PM: Have you got that Neil?
NH: I have and to be fair it focused just on the Wreck’s exposure to sub price and ABCP
PM: Hmmm
PM: Alright leave it
NH: just looked at the statement. not that interesting
NH: what I am more annoyed about is the NRK spokesman yesterday who responding to rumours about funding problems said the bank would make a statement when it had something to say
PM: Right!
PM: So who could buy it
NH: well, we had a big discussion about this in the newsroom this morning
PM: Favourites?
NH: well, its more a question of who can bid
PM: what do you mean?
NH: well look, Barclays, RBS and Santander, which owns Abbey, are all tied up in the ABN bid battle at the moment, so they won’t be bidding
NH: HBSC could yield big funding synergies by bidding for Northern Rock
NH: but is that likely when they have Knight Vinke breathing down their necks, telling them to invest in the Far East
PM: which is what they are doing anyway. Vietnam, South Korea etc
PM: HBOS?
NH: probably would be interested but the combined mortgage market shares of HBOS and Northern Rock would send the regulators into a stake of apoplexy
PM: So who is left?
PM: Alliance & Leicester?
NH: too small
NH: and it could have funding issues of its own. although in answer to Philip W’s question it does have a larger retail deposit base
PM: And really has not been as agressive in terms of building a synthetic source of funding
NH: yeah its more of a traditional lender not that that will help its share price in the current environment
PM: So who are we left with ???
PM: LLOYDS???
PM: now that’s got to be a possibility
NH: it is and they might just be able to get round the regulator
NH: just want to say one thing. we are talking about potential bidders because we think the BoE has extended loans to NRK on the understanding its finds a buyer
PM: 
NH: in fact we think BoE is probably involved in the process
PM: What about a foreign bidder??
PM: Somebody like BBVA
NH: well, the problem with that is, Northern Rock does not have an extensive branch network
NH: and if u want to crack the UK then you need a branch network
NH: The Wreck only has 76 branches
PM: Right, so from what you are saying there aren’t too many bidder out there
NH: NO
NH: someone has just suggested ING could be interested
NH: and that’s logical but unfortunately they have ruled it out
NH: this was on the wires earlier
NH: ING reiterates earlier stance that it is not interested in buying Northern Rock.
“It is not on our radar screen, as we’ve said before,” an ING spokesperson said.
PM: OK
PM: So it looks like Lloyds
PM: By a process of elimination
PM: and I suppose the other key question here is what would someone would be prepared to pay for Northern Wreck
NH: well there are a few schools of thought
NH: some people reckon a bidder would pay a sum equal to the Wreck’s tier one capital
PM: Which is?
PM: Just to test you
NH: eh, just checking
NH: Patrick Foulis on Lex has just been in touch with a figure
NH: And it is £1.875bn
PM: So what is current market cap?
NH: based on a share price of 494p just over £2bn
NH: Cazenove reckon someone might be prepared to pay around 460p
PM: that sounds about right based on the Tier One figure
NH: here’s their note from this morning
NH: Northern Rock – Bank of England provides funding [NRK LN NRK.L] 639p, Outperform, sector – Neutral
NH: Northern Rock has issued a profit warning and given details of current trading.
In its role as lender of last resort, the Bank of England (BoE) is to provide short term funding to Northern Rock at a penalty rate with the bank’s mortgage loans acting as collateral.
NH: Northern Rock has continued to raise new funds but these have not been sufficient to fund maturing liabilities and new asset growth. Management does not expect wholesale funding markets to return to historic levels in the short to medium term.
Additionally, the group’s asset disposal programme (for commercial and unsecured loans) has been suspended.
NH: As a consequence we assume Northern Rock will cease writing new business. The lack of new business flow and a penalty cost of funding will have a detrimental impact upon Northern Rock’s earnings. We estimate H2 pre-tax profit, excluding gains, will be c.£165m compared with £254m in H1. This implies a 15% cut to FY2007E underlying pre-tax profit and there is limited visibility over 2008E earnings but annualising H207 earnings implies an EPS of c.40p compared with our current estimate of 89p (adjusted, diluted).
NH: In our view, Northern Rock is unlikely to remain independent but the value of the company to an acquirer may be significantly below the current share price.
NH: Assuming a 50bp spread on the mortgage book, 50bp on the deposit book and an ongoing cost/income ratio of 35%, we estimate that an acquirer would gain an earnings stream of £224m post tax. This is consistent with revised H207E earnings annualised. On 10x, and with a 20% discount (eg. integration costs, asset impairment) this values Northern Rock at 424p.
NH: Northern Rock’s book value as at 30th June was 462p but this could be vulnerable to a run on the £24.35bn retail deposit book.
PM: So it could be lower than 460p
NH: if there’s a run on the bank which has to look quite possible
PM: Just on the poison pill — raised below by JB
PM: Gold share holder can effectively issue an extra 15% in the event of a bid
PM: BUT –
PM: 1. The price has fallen so low/fast that the importance of 15% has shrunk
NH: massively
PM: 2. We suspect that the golden share structure has a get out clause in situations such as this
PM: 
PM: We need to look at the housebuilders
NH: yeah total carnage in the sector this morning
NH: selling started on the back of the Crock and fears that mortgage rates will have to be jakced up to offset higher funding costs
NH: but we have just had the Rightmove survery and its looks grim
PM: This Rightmove survey seems to have been published early — by accident on their website
PM: Carries a Monday embargo
NH: RIGHTMOVE HOUSING SURVEY WAS CARRIED OUT AUG. 12 TO SEPT. 8
*U.K. HOUSE PRICES FELL 2.6% IN SEPT., RIGHTMOVE REPORT SHOWS
*LONDON HOME PRICES HAD BIGGEST FALL IN 3 YEARS: RIGHTMOVE
*LONDON HOME PRICES FELL 2.5% IN SEPT., RIGHTMOVE REPORT SHOWS
PM: London — biggest fall in three years!
NH: let’s look at some share prices
NH: Barratt Devs down 8.7% at 794p
PM: Ouch!
PM: Persimmon down 70p at 10.18
NH: nasty!
NH: Bovis Homes off 66.5p at 668p
PM: jeepers
PM: Taylor Wimpey — off 25p at 306
NH: man alive!
PM:
NH: and have you seen Paragon, the buy to let mortgage lender???
PM: Go on go on
NH: down 83p at 272p
NH: that’s a fall of 23.2%
PM: as mentioned below earlier — that’s a bigger fall than Wreck
PM: oh dear
NH: hang on paragon CEO commenting on Reuters
NH: says does not need BoE support. has not been to BoE
NH: which is all very well but Paragon has £1bn of loans warehoused that need to be securitised at some point
PM:
NH: just looking at the Dow futures
NH: indicated down 51 points at the moment as news of the problems at the Newcastle based lender spread across the globe
PM: We havent said what the FTSE 100 is doing yet!
PM: Footsie is off 99.5 points at 6264 currently
NH: started very calmly this morning
PM: Hmm
NH: down about 30 points at the open and everyone seemed very relaxed
PM: Doesnt feel that way now
NH: no because the penny has dropped that Britain’s fifth biggest bank has had to be bailed out by the Bank of England
NH: and I’ll repeat that in case anyone does not get the significance – the BoE had had to bail out Britain’s fifth biggest bank
PM:
PM: But look, let’s stop here for a moment.
NH: why>?
PM: I think we should have a moment of levity – something to lift the mood. Something to give people a little chuckle in this dark hour for the British banking system.
NH: Oh, right – what do you suggest?
PM: Just print this name:
PM: John-Paul Crutchley
NH:
PM:
PM: We should share the joke.
PM: This is the Merrill analyst who published a target price for Crock of 913p – this morning!
NH:
PM:
PM: We published this earlier – but here it is again.
PM: The stock is trading at 1.1x 2008e tangible book value for an expected RoE of 18%. Moreover, unlike US mortgage players where there remain doubts as to the book value from mark to market hits from revaluation of the sub-prime portfolios, Northern Rock is a prime lender with negligible intangible assets. If we were to consider Northern Rock as a closed book in run-off with a half-life of three years on its mortgage book/asset portfolio, this would suggest a fair present value of 872p on the stock, a 27% premium to the current share price. Our Price Objective is 913p, based on a target multiple of 9x 2008E.
PM: The risks to our Price Objective are a more prolonged credit market closure than expected, and a macro downturn in the UK which would lead to higher provisions.
PM: So sadly John-Paul, FT Alphaville is now going to issue a SELL note on you.
PM: Harsh, I know, but at stressful moments like this we have to be seen to take FIRM action.
PM: 
PM:
PM: v funny comments below ! — thanks for all those
PM: Noticed Fitzsimons asking earlier about Ceres — and your eagerly awaited demo
PM: Excited are you?
NH: unfortunately I cannot go
PM:
NH: got to appear on Sky News later and then I have a column to write for tomorrow as well as this Northern Wreck stuff to look at
PM: This is the concept Boiler stock == Ceres Power
PM: Price is down 8p at 259 — possibly on news that Neil can’t make the demo
PM: Someone else will be there tho
NH: hopefully
PM: Freebie lost
NH: anyway we should ask Paul about his movements this lunchtime
PM: 
NH: paul?
PM:
NH: come on tell the readers
PM: Er, might hav to get a train
PM: to Paris
PM:
NH: surely not because u r going to see the England vs SA rugby match and then stay a night in Paris???
PM:
NH: i presume you won’t be travelliing in steerage
PM:
NH: the silence says it all
PM: SA v England , youd be good game
NH: and C Mango u are right Helen is disappointed
NH: she is a v BIG rugby fan
PM: Anyway — that’s later — we’ve got a metdown to deal with first
PM:
PM: How about other situs?
PM: How about Barclays
PM: aren’t shareholders supposed to be voting on the ABN Amro bid this morning?
NH: that’s right there was an EGM
PM: What it C!
NH: and we have just had a statement from Barclays and there is an amazing admission in the statement
PM: What, basically that Barclays are saying to the RBS camp — “ABN is yours”
NH: yep here are the comments from CEO Varley
NH: I made reference a moment ago to the terms on which we would be prepared to
proceed. We’ve always been very clear that the merger terms must satisfy our
economic tests, which are tough. That’s why we have been consistent in promising
our shareholders that we will not lose sight of economic reality in our pursuit
of the merger objective. And putting that bluntly, that means being prepared to
walk away if we can’t conclude the transaction on the right terms.
NH: The shareholders of ABN AMRO will make their decision in early October. At that
time they will have to assess the value of our offer by reference, among other
things, to where our stock price is trading at the time, and to its potential to
increase in the future when markets return to normal. And they will also have to
assess the deliverability of the offer from the Consortium.
NH: As things stand today, our bid is some five and a half Euros per share below
that of the Consortium. We have met many of ABN AMRO’s shareholders over the
course of the last months. We’ve been clear in saying to them that they will
have an opportunity to tender their shares in response to our offer. We take
that commitment seriously. They have until 4 October, which is when our offer
closes, to make their decision. Meanwhile, as the stock market valuation of ABN
AMRO indicates, there are uncertainties in the period ahead for the Consortium.
The current value of ABN AMRO shares stands at a 8% discount to the Consortium
offer. So the stock market, which is seldom wrong about these things, is
indicating at the moment that the outcome is far from certain.
NH: what then is the stock market saying about the value of the barc offer
NH: if u ask me it is saying no chance Mr Varley go and buy Northern Wreck
NH: anyway things are starting to hot in the ABN Amro bid battle
PM: Go on
NH: yep reports this morning that ABN are set to recommend the RBS consortium offer (we should find out for sure later today) and get approval from the Dutch Finance Ministry.
NH: so that’s two big hurdles cleared
PM: that’s just leaves the funding
NH: yep and in light of this morning’s developments at a certain Newcastle-based lender that could make things quite tricky
NH: although I would say Merrill Lynch has agreed to underwrite the rights issues of the consortium up to e17bn
PM: that’s quite a commitment
NH: it is
NH: and you have to think that they are going to get lumbered with a load of stock
PM: Do the underwriters have a material adverse change clause they can invoke
NH: i think so, although I don’t imagine the Northern Rock bail out would trigger it
NH: nonetheless trying to broke a huge rights issue in the banking sector at the moment is going to be really tough
PM: Where are ABN trading at the moment?
NH: off 0.8% at 34.92
PM: Hmm
NH: But remember that’s still along way below the value implied by the RBS bid
PM: which is?
NH: e37.86
PM: Big big spread
NH: It is
PM:
PM: Phew
NH: FTSE 100 now down 124 points at 6,239.8
PM: Thanks C — think we should give you a direct login
NH: Dow futures now off 57 points
NH: got a new libor fix
NH: surprisngly it is down
PM: Quite dharp drop in 3m libor — thanks cmsd2
PM: 6.82375 down from 6.88
PM: Just one riser in the Footsie — that is Reed Elsevier — up a ha’penny
PM: Just looking at some of the other indices
PM: Mid 250 off 2.2%!
PM: AIM pretty unscathed — off half per cent
NH: loads of housebuilders in the FTSE 250
PM: All share down 2% — like FTSE100
NH: FTSE 100 moving even lower, now off 140 points. this is starting to look quite grim
PM:
PM: Let’s go to Ashley
PM: Sports Direct
PM: Actually — first another FTSE up date
PM: Index off 150 at 6213 — this is accelerating
PM: 
NH: The Wreck is now close to the lows of the day – 480p. lost a quarter of its market cap today
PM: How has an upstart mortgage bank from Newcastle been allowed to do this?
PM: Hold the Line James !
NH: Don’t panic. stiff upper lip, James
NH: keeping with the Northern Wreck them
NH: let’s move on to Sports Direct and Mike Ashley
PM: 
PM: What’s the connection?
NH: guess who sponsors NUFC???
PM: Ah yes,
PM: He’ll be looking for a new sponsor, then — or he’ll have to get a new Wreck logo
NH: i reckon Sports World would look good
PM: Classy
NH: real class
PM: Thanks toonie!
NH: anyway Sports Direct has been adding to his stake in Umbro. Now has just over 9 per cent of the company
PM: But still not prepared to tell us the purpose of this stakebuilding, presumably?
NH: Afraid not. At least after Wednesday’s win over Russia it looks a bit more likely that Umbro will be able to flog a few more England replica shirts
PM: Let’s hope so – for Ashley’s sake.
NH: SPD has an agreement to buy 65% of the England replica shirts made by Umbro
PM: Northern Rock and Mike Ashley. What a combination!
PM: 
NH: i wonder whose share price has performer worse
NH: can we rebase to the time of SPD’s float and compare
PM: I’m too busy to get Datastream up — suffice to say it must be a close run thing
NH: both in the 50% club
NH:
NH: another bit of stakebuilding news I picked up on this morning
PM: Go on
NH: Songbird Estates
PM: Ah yes
NH: that’s the company that owns 60% of Canary Wharf through some very complex shareholding structure
NH: looks like Paul Reichmann has been buying some more shares
PM: Reichmann — one of the two canadian brothers that founded canary wharf
PM: for their sins
PM: Before it went bust
PM: Still playing the asset then?
NH: according to regulatory announcement this morning, his family trust has increased its stake in S’Bird B shares to 6.5%
PM: Thanks for that rahodeb — below
PM: SPD beats the Wreck
NH: no one seems to know what the angle is but you can bet Reichmann has spotted some hidden value
PM: Hmm — feels v uncertain time for financial property
PM: Was a rumour of Bloomberg moving down there, tho
PM: Lucky hacks
PM:
PM: Right — down the pecking order — and away from Newcastle
PM: I see Regal Petroleum has come out with some news.
NH: It has – and it’s not exactly what the market was expecting.
PM: really?
NH: No
NH: Statement today that Regal has signed a memorandum of understading for the “partial divestment” of its Mekhediviska-Golotvschinska and Svyrydivske gas and condensate fields in the Ukraine
PM: Fantastic spelling!
PM: I am impressed
NH: Thanks.
NH: ctrl v and then ctrl c. never fails!
NH: The deal is with privately-owned MND Exploration and Production, which will invest $330m in return for a 50-50 share of the Ukranian projects.
PM: MND. Should I know them?
NH: Probably not. But, as we’re been reporting in our market report, Shell were definitely interested in these assets, and I think some people will be a bit disappointed that the deal is not with them.
PM: That will explain the share price fall.
NH: It will. Shares are down 14.2p to 215p right now. The figure of 300p for the assets was being thrown about even a few days ago
PM: Is that Frank Timis guy still involved in Regal?
NH: He is. Owns just under 20 per cent of the company, which makes him the largest single shareholder
PM: For those who don’t know him, Timis could be described as a “colourful” character.
NH: Colourful is one word you could use. I can think of others . . . .
PM: Am sure you could, but moving swiftly on. Is this a good deal for Regal then? What do we know about MND?
NH: Might not actually be as bad as some think. MND is more interesting than they first appear.
NH: Have a website at http://www.mnd-uk.com/page.php.
PM: Oooh. website eh
NH: Operations in Romania, Germany, Pakistan and Yemem.
NH: Owned by KKCG, the conglomerate of Czech billionaire Karel Komarek.
PM: Confess I have not heard of him either.
PM: 
NH: Am not surprised – I have been trying to find out more about him and there are very few stories on him in the English-speaking press.
NH: Did find this via Google. http://www.prague-tribune.cz/2005/6/6.htm
PM: Very interesting. So what happens now?
NH: Well, this is only a MoU, so deal is not signed and sealed yet. But looks likely to be signed off in the near future. These assets have the potential to be quite significant too, so it will be interesting to see how they develop.
PM: Especially if the oil price stays above $80 a barrel.
NH: Indeed.
PM: How’s the crude price this morning?
NH: Down a touch from Thursday’s record high. Off 64 cents to $79.45.
PM: Thanks for that
PM:
PM: And thanks to R below for the update on SPD v Wreck
NH: give us a chance C’Mango. we are doing this live.
NH: not easy to research and type at the same time
PM: And we do get out of the office — which we are about to do v soon
PM: to meet people
NH: what at Stade de France??
PM:
PM: Right — we are exhausted — but did enjoy that
PM: But then we are not shareholders in The Wreck
PM: Which is on the wane again — off 154 at 484
NH: one last thing to point out is that some hedge funds and shrewd investors will have made a killing out of the Wreck’s problems
PM:
PM: 
in particular
NH: got a real interesting chart that shows how the short interest has built in recent months
NH: mid June % of issued share cap on loan was around 8
NH: first week of Sept up to 18%
NH: currently above 20%
PM:
NH: that’s 20% of a FTSE 100 company on loan
NH: and its still falling
PM: That’s a serious short to unwind — settlement wise in a market like this
PM: Ok — FTSE 100 has bounced off its lows — currently down 132 at 6231
PM: But James — keep that strap tight — as C points out Dow futures are currently off 68 at 13,368
NH: my chin strap is on so tight I am having trouble breathing!
PM: We are off. Thanks for the dozens of comments and questions
PM: Feel free to keep the conversation going when the formal chat has finished — tho you will have to go to the bottom of the transcript on the main FT Alphaville page
PM: Next edition 11am — on Monday
NH: where Paul will be telling us all about the wonder of the French transport system and the new rail link to the channel tunnel
PM:
PM: Seeya
NH: bye and keep those tin hats firmly on