Markets live chat transcript for the chat ending at 12:18 on 6 Feb 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Good morning and welcome to Markets Live – FT Alphaville’s daily markets commentary.
PM: Neil Hume is with me.
PM: We were having a chat before coming on line – discussing tin hats.
NH: Yeah, they’re just like umbrella – so easy to lose.
PM: This is after I left mine on the train.
NH: It’s like with an umbrella, if it is actually raining, you remember the thing when leaving a train or bar. But if its not raining…
PM: Well, luckily – thanks to cheap Chinese manufacturing — tins hats are now so cheap and commonplace that if you lose one one day, you can just pick another up for 2.99.
NH: Yeah, but don’t you think it’s a waste of resources?
NH: I mean, tin hats just aren’t build to last anymore. Bit of bad financial weather and they immediately spring a hole.
PM: 
PM: Anyway, in the pre-dawn, stumbling thru the front door this morning – I was convinced I would need head protection.
PM: But in the event?
NH: Well the Footsie is now up.
NH: actually its now down
NH: but only 1 points lower at 5,867
PM: Extraordinary.
NH: Yep. The dow was off 370 points last night. The S&P 500 and the nasdaq were even weaker.
NH: Hang Seng was down more than 5%, Nikkei 4.7%
PM: So why are up??
– 3 points now i see
NH: Not immediately clear.
PM: 
PM: Get that sensitivity page up — see which stocks are pushign the index higher
NH: hang on
NH: got it
NH: so its tobacco, food producers, food and drug retailers and household goods
NH: seem to be offsetting the weakness in the banks and the miners
PM: And the ex-divis as VP points out
NH: and some are quite chunky one – eg RDS
NH: and AZN:LSE
AstraZeneca (AZN:LSE): Last: 2,031, down 34 (-1.65%), High: 2,038, Low: 2,000, Volume: 2.68m
PM: 
PM: Let’s go immediately to the points about SocGen below
PM: Initial thoughts are that HSBC would be a little mad to pay 126 in my view
PM: But Neil – can you get this Merrill note?
PM: Please — mentioined below saying HSBC could pay 126 euros for SocGen
NH: right just trying to find it
PM: Think Merrill have been appointed as adviser to SocGen
PM: Alongside JPM and Morgan Stanley, who are udnerwriting the rights
PM: Rescue cash call, for which we are still awaiting details
PM: Neil!
PM: Give up
PM: Too many thousands of notes in his inbox
PM: Neil! 
NH: sorry can’t find it
PM: Thanks for looking
PM:
PM: Let’s dig for some stories in the mining sector
NH: will email someone to see if it can get it
PM: But we are not going to start with the obvious candidates =– Rio and BHP
NH: no we are going to look at Xstrata
PM: Hmmmm
NH: bucking the weak trend in the mining sector
PM: I notice the price is up 99p at 38.89 this morning
PM: When all the other big miniers are off
NH: couple of rumours around
NH: one is that Vale is ready to go with a £45 cash and stock offer
NH: and the second is that Citigroup are now restricted in Xstrata
PM: 
PM: That’s analysts at Citi cannot offer advice on Xstrata — suggesting their corporate financiers are somehow busy on the case
PM: Do we know in what context?
NH: no. I have called Citi and they have yet to get back to me
NH: seems to be something on the research side
NH: as far as I can tell
NH: now the rumour mill says this is because they are advising Glencore on options for its 35 per cent stake in Xstrata
NH: but I am not sure how good that RAW market info is
NH: as Citi is one of the banks providing funding to the Vale bid
NH: so as Rahodeb notes below they could be restricted just for that reason
NH: and that would be very boring
NH: anyway, the market seems genuinely excited
NH: check this email I was sent from a broker earlier today
NH: Xstrata (Buy, £36 tp) – on potential Vale(CVRD) bid for XTA- more rumors
on a £45/sh bid and possible Citi research restriction on XTA from last night.
NH: Our stance is still:
1) Glencore’s interests are not currently aligned with other XTA
shareholders,
2) some XTA shareholders are currently looking for a £45-50/share bid
while we think Glencore would be happy settling out at the £40-45/share level in
order to get the deal done.
News today that Vale may have to pay 2pct points higher than benchmark on
Some of its borrowing would tend to lend further support to the view that Vale
Is likely to bid at the lower range.
Glencore is exiting a 8-yr trade on XTA, completion and transition are
More important than getting the last 10%. If Vale bid for XTA, we think Vale
Could bid as low as £40, but the likely range is £42-45/share
PM: Hmm — thanks for that
PM: Situation to watch v closely
NH: indeed
NH: by Glencore does not have to sell its stake to Vale
NH: there are apparently lots of other interested buyers out there
NH: were stories over the weekend that buyers from Asia, Europe and South America, including one of China’s biggest state-controlled banks, have made secret approaches to buy Glencore’s stake, which is worth around £14bn
PM:
PM: Chinese could come for tht?
PM: Promises fun
NH: possible
NH:
NH: from imagined deals in the mining sector to a real one
PM: yep, Rio/BHP/Chinalco
NH: BHP shares taken a bit of a thump this morning
NH: down 74p at £15.23
NH: which values Rio, under the terms of the new offer, at…
PM: 3.4 BLT shares for every Rio shares
NH: at £51.78
PM: and Rio shares are trading in the market at?
NH: currently trading at £54.17
PM: So a premium of 239p
NH: or 4.6%
PM: so what is the market telling us??
NH: That BHP will eventually have to increase if offer
NH: probably by adding cash
NH: the key thing to remember here
NH: is that yesterday, Rio shares were trading 13% through the terms of the offer
NH: That spread has obviously narrowed this morning
NH: which suggests the deal will happen
NH: but that BHP will probably have to add some cash or bump
PM: Of course what we don’t know is how the Chinese are going to respond.
PM: they could buy another lump of stock
PM: they own around 9% of the combined company (the London and Australian lines at the moment
NH: And there are rumours doing the rounds in London this morning that they are about to do exactly that
NH: But one thing I would also note
NH: the BHP numbers that were released last night, were slightly light of expectations
NH: So that could be weighing slightly on the stock
NH: good points from Rahodeb below
NH: the Oz line of BHP does trade at premium to london
NH: something to do with the tax treatment of divis down under
NH: so the premium is probably a bit lower than we quoted above
PM: Ok
PM: But where does this bid go now
NH: well, once the offer doc is published the bid timetable will kick
NH: and it will follow the normal rules
PM: Right
PM: But what’s the view in the market?
NH: well, I alot of people expected BHP too push ahead with its offer on the old terms
NH: the fact that they bumped suggests they are worried Rio will slip away
PM: so traders are taking the view that if BHP bumped once they will probably do so again
NH: and that is weighing on its share price
PM: And what about Rio
PM: will they come to the table?
NH: dunno
NH: BHP has clearly shown a willingness to negotiate
NH: so they are a little flexible on price
PM: on that basis what would be the harm in engaging discussions??
NH: not all a lot
NH: and there is a lot at stake now
NH: the Chinese may have bought into Rio at £60 but they won’t trade anywhere near there if BHP walks
PM: Any analyst comment on this?
NH: this comes from MF Global
NH: BHP Billiton (Neutral, TP 1,650p) Offer For Rio Tinto (BUY, TP 6,250p) – Now We Are Talking
NH: The BHP Billiton offer for Rio Tinto was ahead of expectations indicating the Group’s willingness to cede ground. We continue to see the possibility of an eventual exchange ratio of 4 to 1, but believe that the ball is now in Rio Tinto’s court to show its willingness to engage.
NH: An agreed deal at our suggested exchange ratio should be pursued as quickly as possible to avoid further complications. The next hurdle to consider then is the regulatory side. The BHP Billiton 1H07/08
results were as expected, but the fact that its nickel earnings were below expectation should be read across quite negatively to Xstrata (Neutral, TP 3,400p), especially as the Group is in talks with Vale.
NH: • The offer was ahead of expectations. At an exchange ratio of 3.4x BHP Billiton shares for one Rio share the offer was clearly ahead of expectations. Most people expected a 3 for 1 formalised offer. In a sense, BHP has ceded ground given the urgency of the situation, in our view, and if need be we see more upside in this offer to up to 4 for 1 including a cash component of around 750p.
NH: The shares’ movement in Australia reflects our view as the exchange ratio there moved to close to 3.5 with the BHP Billiton shares coming off 7.5%, while the Rio Tinto shares were only marginally down (-0.16%);
NH: • What is fair? Given the current offer the weight of Rio Tinto in the enlarged Group is around 43.5%. This compares to our earnings weighting of around 37% and 63% for Rio Tinto and BHP Billiton respectively. Add to that the potential of synergies and different long-term earnings perspectives of the two groups, then we think that our assessment of sharing value (48%/52% Rio Tinto/BHP
Billiton) appears fair for both sides;
NH: • Rio Tinto should now engage. The stakes are high for both BHP and Rio Tinto and we think that BHP has now shown its willingness to budge. Rio Tinto should do the same and open up to negotiations with the Group, clearly centred around value but also with regard to the best use of human capital within the two groups. We think both groups should act decisively and swiftly now to
avoid further complications.
Canberra is also making the right noises, so it is now just a question of
getting on with the job and then to convince the regulators;
• The regulators is the final hurdle to be taken. We think that in Australia this won’t be a particular issue, but then one doesn’t know what influence the global and Chinese steel industry have on the regulators in the US, Europe and South Africa. We have done the work on global, seaborne and Australian market shares (which is available on request); and
• Results a bit disappointing also raising question marks about Xstrata. The BHP Billiton results, although in line with consensus, were below our expectations (EBIT came in at US$9.6bn vs our
expectation of US$9.8bn). The product area which disappointed most was stainless steel / nickel, where profits declined by 44% on last year’s first half earnings and came in 11% below consensus.
NH: This will raise significant concerns about Xstrata which has some 32% profit exposure to nickel, especially as it is in talks with Vale. We think that Xstrata could come off quite markedly on the back of this, also because our medium-term outlook for nickel is less positive than for the other metals.
PM: thanks for that
NH: this comes from Numis Securities
NH: BHP Billiton’s formal bid for Rio Tinto at 3.4 BHP shares per Rio Tinto share reflects a high level of discipline on valuation, which creates value for both BHP and Rio shareholders but does not attempt to compete with the 6000p per Rio share recently paid by the Chinese for a 9% stake.
NH: We continue to believe the Chinese are not looking to bid for Rio Tinto and would
meet resistance from the Australian government if they attempted it. With Alcoa’s
involvement, which could become greater, combined with Chinese interest and a confirmed bid from BHP Billiton, an eventual break up of Rio Tinto appears possible (though we believe the Chinese’ main objective is to prevent BHP and Rio acquiring) but the process from here will be drawn out, taking most of 2008 in our view. The relative performances of
BHP and Rio in terms of operational execution and marketing their value to investors will be critical, as will the general performance of equity markets given the Chinese marker in the sand at 6000p. Interim results from BHP Billiton were bang in line with consensus with underlying EBIT of US$9.6bn.
PM:
PM: To some points below
PM: On citi pulling back from big financings
PM: There were certainly working a cash raising for BHP before Xmas, but everytthing seems to have gone v quiet on that ffront
PM: There is an interesting note out from MS today on European investment banks — showing the pressures — which we can share
NH: Yep I have that. we will come to it later
PM: And can add for Carlogano, this note also has interesting stuff about eastern europe
PM: Wonders aloud whether Romania might below up first
PM: FXtrader — thanks for your fx report
PM:
NH: right, I have managed to track down this ML note on Soc Gen
NH: quite amusing
NH: they reckon HSBC should move their head office to the Champs-Elysees
PM:
NH: ML reckons the French govt would be into the idea of having the world’s biggest bank by market cap located in Paris
PM:
NH: oh, they also think there is some industrial logic to it
PM: Well I suspose Knight Vinkee wants them to be No 1 in each market where they operate
NH: HSBC owns CCF in France
PM: (Wish i could spell)
PM: Any more from the note?
NH: pasting now
NH: A French solution to Soc Gen does not preclude HSBC
In our view much of the debate on the strategic end-game for Soc Gen has
focussed on the need for a French solution to a French problem. However, if we
assume that the ingredients for a “French solution” could include a bank with a
Paris Stock Exchange listing, Head Office on the Champs-Elysees and domestic
French operations, then none of this precludes HSBC’s involvement. The
possibility of HSBC’s Head Office relocating in the wake of M&A is also not out of
bounds (it’s happened before). We suspect that, if offered, such a move might be
welcomed by French politicians. To have the world’s largest bank (based on
combined market value) relocate from London to Paris would, we suspect, be
seen as a substantial coup.
NH: Does HSBC-Soc Gen make sense?
We think an HSBC/SG combination could have industrial logic on four levels: 1)
the bulking up in domestic France would bring scale to HSBC’s French
operations. 2) SocGen’s emerging Europe and North African businesses would
support HSBC’s strategic goal of increasing emerging market exposure. 3) Taking
SocGen’s equity derivatives and structured product skills into Asia with HSBC’s
distribution would, we believe, provide significant scope for revenue
enhancement. 4) HSBC’s problematic US exposure could be diluted.
We estimate that an acquisition of SocGen for up to €126/share (with €15bn of
cash) could be earnings neutral in 2009E and mildly accretive thereafter. Other
things equal we probably would be more positively disposed to HSBC/SG than
HSBC alone because of the lower US, higher emerging markets mix.
NH: The Activist Angle
Knight-Vinke, the activist shareholder, has been targeting HSBC on the basis that
its retail operations lack scale and contrasts the efficiency in markets where it has
scale (Hong Kong) with those it does not (France). Bulking up via Soc Gen would
arguably improve this position as well as adding product capability to the
investment bank.
NH: Would HSBC relocate to Paris?
The ingredients to position HSBC as a French solution to SocGen are already
largely in place. The group is listed on the Paris Bourse, has meaningful domestic
French operations (generating PBT of $870m in 2006) with France currently the
fifth largest contributor, by country, to group profits.
Moreover, in terms of considering relocation, the group has set historical
precedent. The acquisition of Midland Bank in 1992, led to the relocation of the
Head Office from Hong Kong to London. The following comments taken from an
October 2006 article in the London Evening Standard highlight the way that
HSBC thinks about its domicile.
“Chris Spooner, head of HSBC’s financial planning, said: ‘The UK used
to be a good place to be for pure tax purposes. I am not sure if that is
the case anymore.’
Spooner pointed out: ‘We know how to move. We are not frightened of
moving.’ It [ HSBC ] regularly reviews its domicile every three years and
the next decision is likely to be taken by the middle of 2008. A
spokesman said: ‘We are not suggesting that any move is imminent.’
Spooner said that in the late 1990s the UK was clearly the most
favourable place for the bank to be headquartered. But since then it has
lost ground to other countries which have improved their tax regimes,
such as the United States, Hong Kong or Singapore. He cited lower
overall tax rates, the abolition of withholding taxes and wider tax treaties
with other countries as examples of improved regimes.
But HSBC said there are other key factors in deciding where to base its
headquarters, including the regulatory-regime, transport and
infrastructure and the quality of life for its executives and employees.
The bank has long been critical of aspects of Britain’s regulatory regime,
with former chairman Sir John Bond once telling shareholders that new
regulations were not in their interest or that of its customers.”
London Evening Standard October 6th 200
PM: that v funny
PM: 
PM: But Knight wanted HSBC to move to HK — not Paris
NH: should point that despite ML flagging the possibility of a EUR126 bid
NH: they are still sellers of Soc Gen
NH: and has Paul says above KV
NH: wants HSBC back in HK not Paris
PM: France not being the growth market that china is — allegedly
NH:
PM: BREAKING NEWS WITH A TWIST
NH: Martini Family have bought into Mitchells & Butlers
PM: Who they – how much have they bought??
NH: dunno just checking
NH: just came out on a rule 8.3
NH: Martini Family-Rule 8.3- Mitchells & Butlers
NH: looks like they own 1.74% of the company
NH: looking at the recent 8.3 disclosures
NH: seems they have been building this position for a couple of days
PM: Trouble with the Martini family is that just one of them makes you want another, but two’s not enough and three is too many.
PM: They have 1.74 per cent according to the statement — seems to be held thru cfds
PM: Up from 1.7 dead the other day
NH: not sure what the background is on these guys
NH: but there is a contact number
NH: Tassinari Cristina
Telephone number 0039 0545 989597
NH: Martini Family (Martini Luciano & C.
Sapa, Unigra International Sa,
UNI.FII Srl)
NH: right, we are just researchng (sorry googling) this lot
PM: http://www.martiniluciano.com/main.asp
NH: what have u got paul
PM: L’azienda nasce nel 1988, dopo 25 anni di esperienza come ditta individuale del Sig. Martini Luciano, il quale, di comune accordo con gli allora dipendenti, ed attuali soci, decide di creare la “Martini Luciano snc di Luciano Martini & C.” .
Attualmente l’azienda si compone di 4 soci e 7 dipendenti dislocati nelle varie aree e sedi produttive.
A gennaio 2003, allo scopo di dare un servizio completo al cliente, è stata avviata, affianco all’attività di fornitura e posa in opera, con levigatura e verniciatura di pavimenti in legno, l’attività di progettazione, produzione in proprio e montaggio in opera di scale in legno (da rivestimento, autoportanti in legno e legno – acciaio) oltre che produzione di opere complementari ai pavimenti e scale (battiscopa sagomati, battiscopa rampanti ed a fascione per scale, cornici, parapetti in legno e legno-acciaio, corrimano, ecc.).
PM: How is your italian Neil?
NH: er, not good
PM: he company was founded in 1988, after 25 years of experience as a sole proprietor Mr. Martini Luciano, who, by mutual agreement with the then employees, and current members, decided to create the “Martini Luciano Luciano snc of Martini & C.” .
Currently, the company is composed of 4 members and 7 employees located in different areas and locations.
In January 2003, aimed at providing a complete service to the customer, was launched, along with the supply and installation work, sanding and painting wooden floors, the design, production and assembly at its by wooden stairs (pouring, self wood and wood – steel) as well as production of works within the floors and stairs (skirting shaped, skirting and climbing stairs for a band, cornices, parapets wood and wood-steel handrails , etc..).
PM: makes staircases!!
NH: hang on a minute – it makes staircases???
NH: was this a google translation??
NH: er, this is all very odd
PM: Neil is just firing up a proper database
PM: Google does have its limitations
NH: guess what??
NH: the database does not work
NH: oh, Paul has got it opened
NH: by nothing on the Martini Familiy
PM: We’re now on to some Luxembourg holding company
PM: Come on — we cant do live research as well as pasting
NH: no we can’t. will have to find an Italian speaker and call that number below
NH:
NH: and talking of stakebuilding
NH: Northern Rock??
PM: Wot’s my favourite anti-bank doing this morning? Up again, I expect.
NH: sure is. up 3.5p at 93.5p
PM: There is a disclosure from the former shrewd trader, Jon Wood this morning
NH: yep, bought another 2.15m shares at 92p
PM: Thru SRM
NH: holding now is 10.77%
PM: His Monaco-reg hedge fund
NH: bought the stock yesterday
NH: and it the false/illiquid market that is NRK
NH: that helped the shares rise
PM: On note from broker friends — asks whether Wood should be made to lend his stock out
PM: So that other can go short
PM: Then we might see a real price in Crock
Readers may also know this former bank as Northern Rock.
PM: So what’s the daft story this morning pushign the price higher – JC Flowers to come back in? Blackstone to take private? Merger with Iceland?
NH: aside from Mr Wood…
NH: I think it’s our old colleague Nils Pratley who’s got it moving.
PM: sPratley! At the Guardian. Wot’s he doing moving stock prices?
NH: Well, good question – although I think he meant to move it the other way.
NH: Said Rock still looks wildly overvalued.
PM: Wildly overvalued? I’m surprised the price is not up five per cent on that.
NH: What he’s done is take your basic maths from earlier in the week on the prospective ex-rights price and the book value per share.
PM: Respectively 30p and something between 38p and 48p.
NH: And then he has a stab at valuing the nil-paids:
NH: If the shares were to trade at a slight discount to book value – say at 40p – then each nil-paid share in a 25p rights issue would be worth 15p. Virgin plans to offer rights to subscribe for 4.7 new shares for every one owned. So 4.7 multiplied by 15p is 70p. Add the original share (now worth 40p) and you get 110p of current value. Magic, huh?
NH: But before you go round there and punch him in the gob, he then says this:
NH: Hmm, maybe. Frankly, some of the assumptions are heroic. Is the underlying quality of Rock’s assets really as good as everybody claims? The bank was famous for its 125% mortgages. Prudence might demand that another £300m be knocked off the book value immediately. And who can say that Rock, even in recapitalised form, would trade at 0.8 times book value, as assumed in the back-of-the-envelope example?
Half book value might be more appropriate since Rock, even under Virgin’s proposal, would be shrinking at a rate of knots in the early years.
It can’t be competitive on savings rates or on mortgages because it can’t abuse its government guarantee.
PM: Well yes, that is the point. Assessing Rock’s book value is a guessing game.
PM: And there’s the little matter pricing in the chances of the Virgin bid not proceeding – and the government moving to nationalise.
PM: Just mentioning nationalisation should be good for another 5% on the price.
PM: Anyway, I’m board of the Rock let’s move on
NH: Well, before we do, I notice the Guardian has a poll on this.
NH: With Olivant pulling out last night, which of the three remaining options would be best for Northern Rock?
NH: Virgin taking control, An inhouse management takeover, nationalisation.
PM: Guardian readers poll? Bet on nationalisation.
NH: Well it is actually quite close :
NH: 32.2%, 29.5% and 38.3% – respectively
PM: http://www.guardian.co.uk/business/poll/2008/feb/05/northernrock.banking
PM:
NH: just noticed something interesting has popped up in Tate & Lyle
PM:
NH: just had news that harbinger capital has increased its holding to 10%
NH: revealed a 5% stake just after Xmas
NH: now I think alarm bells should be ringing at Tate
PM: Go on
NH: this lot appear to be quite activist
PM: Certainly are
NH: this lot have taken aim at the New York Times
PM: Trying to get its own directors appointed there
NH: four candidates
NH: and let’s face after last year’s string of disasters
NH: Tate would appear vulnerable to some activist treatment
PM: certainly would
PM: Sounds like some fun is on the way
Tate and Lyle (TATE:LSE): Last: 475.00, down 6.75 (-1.40%), High: 482.75, Low: 471.75, Volume: 1.16m
NH: Harbinger also announced a 28% holding in Inmarsat yesterday
NH: were there is some bid rumours doing the rounds and a huge short position
NH: you have been warned
PM: 
Inmarsat (ISAT:LSE): Last: 481.25, down 6.25 (-1.28%), High: 489.75, Low: 478.50, Volume: 535.27k
PM:
PM: Right — sam has been busy researching the martini family
PM: Stakebuilding in M&B
PM: this is the link you need:
PM: http://www.unigra.it/unigra-eng/WEB/home.asp?action=0&what=0&type=0
PM: Unigrà operates in the processing and area of food oils and fats, margarines and semi-finished products for food production, especially in the confectionery market.
The company was set up in 1972 by Luciano Martini. Over the years it has developed its own mission to produce items for a highly specialised, professional market, that ranges from the big food industry to artisanal clients in the Bakery, Catering and Ice Creams markets.
The success of Unigrà is based on clear, winning ideas: finding and managing raw materials, technologically advanced equipment, high skills, and the constant search for quality.
Unigrà is today one of the leader in Italy and has also developed its own presence in over 40 countries worldwide.
PM: Believe it or not — this seems to be the buyer
PM: Go to the FAQs — adn you get recipies for puff pastry
PM: Seriously!
NH: appears to be based near Rimini
NH: so they could have bumped into Mr T on his yatch
NH: via the Rimini branch of SBRY
PM:
PM: V funny
PM:
PM: Bit more on banks — we havent shared this MS stuff yet
NH: very complex
NH: penned by Huw Van Steenis
PM: highly rated guy
NH: been banging the drum about this piece of research big time this morning
NH: basically he thinks funding problems will continue to haunt the banks in the year ahead
NH: and investors should be seeking those banks with big customer deposits
NH: and that are cash rich
PM: that would seem to rule out Barc
NH: and RBS
NH: here is a bit of the note
NH: Many banks and investors were rightly hoping that funding
pressures will ease on the back of constructive US policy
response to tail risks (monolines, Countrywide, GSE reform,
money markets etc), a steeper US curve, greater transparency
on where problems lie and acceptance by banks they need to
move on. The rally in bounce in BKX fits this pattern. But the
risks on funding pressures, credit issues (we expect more
material losses on CMBS, leverage finance, ABS etc) &
potential for multi-year deleveraging in the world are still high.
Eg we think banks could take another $20bn marks on
leverage finance in 2008.
NH: What’s more, watching CDS curves
closely – many banks have seen their CDS gap out during the
recent risk rally – Erste, Kaupthing, Popular, Sabadell, B&B &
others stand out. Given these are the benchmarks for senior
bank funding (add 15-50bps for cash bond cost depending on
degree of concerns on issuer) the implications for banks’ P&L,
balance sheets and outlook could be huge, and we have
sought to calibrate. We wrote in December (Intense Funding
Pressures) that we thought we would be in for long innings as
banks addressed funding pressures — and selling industrial
stakes, assets, units/businesses, fresh equity and whole firms
would be the name of the game for 2008.
NH: Our purpose today is to look sector-wide at the intense funding
pressures that remain in the system, what some of the first and
second order consequences would be if funding costs remain
higher for longer and what it would mean for our stock picks.
Overall we are concerned that European banks as a sector
could be stuck in a value trap until we see a steeper yield
curve from the ECB and BoE, greater transparency and
recognition of balance sheet repair, new marks on credit
by the banks, and a tightening of funding costs. Clearly
funding costs are also central to any market view on the banks
and the economy given the impact on asset growth/leverage.
NH: The punchline? The greater the funding issues, the more it
reinforces our call to be long resilient, free cash flow generative,
deposit-rich banks & div fins – and short high leverage and/or
high credit risk. Our model portfolio/best ideas include longs on
ISP, EMG, SAN, DB1, IAP, Tullet, Baer, DnB, 1st Gulf, GFMN,
GLG, STAN, Greek basket & shorts (many paired with longs) on
POP, SAB, ERSTE, SDR, UBS & KAUP. Our portfolio has
outperformed SX7P by 2195bps since inception July 2007. We
also agree with our colleagues on US and European yield
curve steepeners as good trades. Also that EM banks will
continue to outperform SX7P. We also fear BKX could
continue to rally vs SX7P for time being.
NH: and here is some stuff on RBS and Barclays
NH: Investors have been focusing on wholesale funding gaps by
referring to simple loan to deposit ratios. In Life After Peak
Earnings (December 3 2007) Mike Helsby and Steve Hayne
highlighted the banks’ £564bn on balance sheet funding gap
(loans less deposits) in the UK. In Wholesale Forecast and
Price Target Downgrades (10 January, 2008), they highlighted
the banks’ £969bn off-balance sheet funding gap in the form of
undrawn loan commitments, most of which is undrawn
corporate facilities.
In Exhibit 35, we show the pro forma core capital ratios
assuming that all the undrawn facilities were drawn at the year
end. While this is clearly unrealistic, it highlights the potential
capital pressure that the banks face in addition to the SIVs,
conduits and the threat to core cash generation. Once again,
this suggests that RBS and Barclays are the banks most at
threat, but also shows a big swing at HSBC, Lloyds TSB and
Standard Chartered.
PM: Note — that is 20bn on LBO loans etc — seen no real write downs
PM: Note — sees generalised east euro meltdown
PM: We will try and do a more detailed post on that a bit later
PM: ..cos there are some scary charts to share
PM: And we know everyone loves a scary chart
NH: sure are
PM:
NH: ITV has managed to the buck the weak market trend
PM: As has BskyB after its figures
PM: Sky is up 28 at 567
NH: and ITV is 1.8p better at 76.2p
NH: now higher at 77.3p
NH: and that’s on continued bid rumours
NH: once again we have speculation that some is going to offer Sky 100p for their stake
PM: Who??
NH: private equity seems to be the name in the frame again
NH: and Permira seems to be the name that is being mentioned to me time and again
PM: Really?
PM: Does that make sense?
NH: a bit
NH: the theory seems to be as follows
NH: Perimra owns independent TV production group All3Media, which is headed by Steve Morrison, the former chief executive of Granada.
NH: it also owns European broadcaster SBS with US buyout firm KKR
NH: so the idea would be too fold the whole thing together
NH: not sure how they could fund it in the current environment
NH: but that seems to be the rumour
PM: Ok — thanks for that
PM:
PM: very good point below from bohemia on the fact that Virgin Money is not “cash”
PM: it is wrong to add it into net asset caluculation
PM: Ditto point that Branson is getting 1bn shares for VM — not £250m
PM:
PM: We’d be interested in other people cals on this matter
PM:
NH: have an alternative view on the BHP stuff
NH: apparently some people thought they would walk away
NH: that going beyond 3 for 1 is a real stretch
NH: and that’s why the shares are lower
NH: and the spread has come in coz no one believes they can bid any higher
PM:
PM: Thanks for that
PM: We are just abotu done
PM: We will of course have a rate poll here tomorrow at 11am
PM: Ahead of the Banks decision
NH: and we also have a special guest coming intot see us
PM: V specialst guest
PM: We’re very excited
NH: who may appear live
NH: certainly we have a snap of him to use
PM: yep, loaded into the system, ready
PM: But he might be too shy 
PM: no more hints — jsut a v special guest here on Markets Live
NH: well, special from a City perspective
PM: yeah , not Kylie Minogue or something
PM:
NH: no. deffo not Kylie
PM: Right — we are off
PM: Thanks for joining
NH: not Martin Lukes. good guess but not right
PM: He’s in jail, stupid
PM: And i hope he rots there
NH: no its not Pesto either
PM: but good idea
NH: all will be revealed tomorrow
NH: but if Pesto fancies a go he should get in touch
PM: Or mr Applegarth for that matter
NH: we could do a CROCK special
PM: I’m off! seeya
NH: bye
PM: