Markets live chat transcript for the chat ending at 12:03 on 4 Jun 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Welcome to Markets Live, FT Alphaville’s daily markets discussion.
PM:
All go again.
PM:
Footsie off almost a ton
PM:
Neil is here and keen to discuss the British quoted housebuilding sector.
NH:
we need to tackle this subject before the sector disappears
NH:
it could got the way of the dinsosaurs
PM:
And then we will look at the banks – just to ring the changes.
PM:
Divergent stories from the banking sector this morning.
PM:
NH:
It looks like the boys and girls in Mayfair have found a new target
NH:
bored with banks
NH:
they have turned their attention to the housebuilders
NH:
which have taken a real pounding this morning
NH:
in fact is this carries on the sector will be extinct by the autumn
NH:
just check some of these declines
Barratt Developments (BDEV:LSE): Last: 147.00, down 9.5 (-6.07%), High: 155.50, Low: 135.00, Volume: 13.96m
Redrow (RDW:LSE): Last: 208.50, down 14.75 (-6.61%), High: 216.50, Low: 201.50, Volume: 999.14k
Bovis Homes Group (BVS:LSE): Last: 391.75, down 19.25 (-4.68%), High: 413.00, Low: 385.25, Volume: 789.62k
NH:
Taylor Wimpey off 5.25p at 77.25p
PM:
Wot — 77P!?!
NH:
and look at t Persimmon
Persimmon (PSN:LSE): Last: 445.75, down 10.25 (-2.25%), High: 449.00, Low: 436.50, Volume: 3.58m
PM:
complete wipe out
NH:
yep
NH:
actually this morning’s damage had not really been caused by the W1 set
PM:
Really?
NH:
nope
NH:
it is all down to an incredibly bearish note from UBS analyst Mark Stockdale
NH:
he has made large cuts to his dividend forecasts for Barratt, Redrow and Taylor Wimpey (down 50-68%).
NH:
he also reckons house prices could fall by 15-20%
NH:
combined with a volume decline of 30%, he says this could wipe out profits across the sector
NH:
as such he reckons cash calls are very likely
NH:
and what he has done with his price targets is very interesting
NH:
He has taken historical tangible book value and adjusted for a 25%
cut to land and WIP values with an additional discount at Barratt and Taylor Wimpey due to balance sheet structure.
cut to land and WIP values with an additional discount at Barratt and Taylor Wimpey due to balance sheet structure.
PM:
That is bearish
PM:
NH:
indeed
NH:
here’s selected highlights from the note
NH:
In light of the rapidly worsening conditions in UK house building (in terms of
mortgage lending, house price deflation, collapsing reservations – down over
50% in April /May in our opinion – and forward order books down c 30% yoy),
we think it is now becoming inevitable that sector profits are going to come
under extreme pressure over the next year. It is hard to see where the quick fix
comes to the problems in the mortgage market and, consequently, it is clear to us
that this is now a severe problem for profits in both 2008 AND 2009.
mortgage lending, house price deflation, collapsing reservations – down over
50% in April /May in our opinion – and forward order books down c 30% yoy),
we think it is now becoming inevitable that sector profits are going to come
under extreme pressure over the next year. It is hard to see where the quick fix
comes to the problems in the mortgage market and, consequently, it is clear to us
that this is now a severe problem for profits in both 2008 AND 2009.
NH:
Companies are already focussing on cash flow and cutting costs. However, we
now think that this focus on cash generation is likely to be taken to new levels as
builders start to try to find the clearing price for excess working capital in 2008
and for building houses in 2009 (at likely very low profitability), as a way of
moving land through the P&L in order to cash generate by not replacing land
consumed.
now think that this focus on cash generation is likely to be taken to new levels as
builders start to try to find the clearing price for excess working capital in 2008
and for building houses in 2009 (at likely very low profitability), as a way of
moving land through the P&L in order to cash generate by not replacing land
consumed.
NH:
Companies are already focussing on cash flow and cutting costs. However, we
now think that this focus on cash generation is likely to be taken to new levels as
builders start to try to find the clearing price for excess working capital in 2008
and for building houses in 2009 (at likely very low profitability), as a way of
moving land through the P&L in order to cash generate by not replacing land
consumed.
now think that this focus on cash generation is likely to be taken to new levels as
builders start to try to find the clearing price for excess working capital in 2008
and for building houses in 2009 (at likely very low profitability), as a way of
moving land through the P&L in order to cash generate by not replacing land
consumed.
NH:
reviewed, gearing would rise and balance sheets would be scrutinised for
possible equity issues
possible equity issues
NH:
We now take the view that dividend cuts are a logical course of action in this
environment. We now cut dividend forecasts aggressively at Barratt,
Redrow and Taylor Wimpey and modestly at Bellway. Our aggressive cuts
reflect higher gearing (50%, 42% and 30% at Barratt, Redrow and Taylor
Wimpey respectively – before likely land impairment charges) and saves £80m,
£12m and £100m respectively (and more for Barratt and Redrow on an
annualised basis as we now assume no final FY08 or interim FY09 dividend).
environment. We now cut dividend forecasts aggressively at Barratt,
Redrow and Taylor Wimpey and modestly at Bellway. Our aggressive cuts
reflect higher gearing (50%, 42% and 30% at Barratt, Redrow and Taylor
Wimpey respectively – before likely land impairment charges) and saves £80m,
£12m and £100m respectively (and more for Barratt and Redrow on an
annualised basis as we now assume no final FY08 or interim FY09 dividend).
NH:
We have made only a modest cut at Bellway – and have left Bovis and
Persimmon forecasts unchanged to reflect better balance sheet structures
and Bovis’ strategic land exposure and its continuing commitment to
honour its dividend growth target for 2008 (Source ims 06/05/08). We
suspect our downside risk could be at Persimmon if anywhere given our
forecast of 31% FY08 gearing.
Persimmon forecasts unchanged to reflect better balance sheet structures
and Bovis’ strategic land exposure and its continuing commitment to
honour its dividend growth target for 2008 (Source ims 06/05/08). We
suspect our downside risk could be at Persimmon if anywhere given our
forecast of 31% FY08 gearing.
NH:
We think dividend cuts are inevitable in the current environment and are
extremely logical in a cash conservation/generation strategy where the focus will
be on protecting balance sheets, preventing debt refinancing at large spreads
over LIBOR and in the context of potential capital raising.
We have not changed our EBIT/EPS forecasts since we wait to see how far
prices decline before builders find a clearing price to entice nervous buyers back
into the market – and a market that is likely to remain severely mortgage
constrained until well in to 2009.
extremely logical in a cash conservation/generation strategy where the focus will
be on protecting balance sheets, preventing debt refinancing at large spreads
over LIBOR and in the context of potential capital raising.
We have not changed our EBIT/EPS forecasts since we wait to see how far
prices decline before builders find a clearing price to entice nervous buyers back
into the market – and a market that is likely to remain severely mortgage
constrained until well in to 2009.
NH:
We think that the odds are growing on price
to decline 2008-2009E by 15-20%, mimicking previous housing downturns.
In this context, while valuations have collapsed and – in the case of Barratt
and Taylor Wimpey look pretty extreme at 70% discount to tangible
historic book value – we see market trends deteriorating further and see no
catalysts to buy the sector until visibility on price declines, asset write
downs and the extent of equity raisings becomes clear. With a poor outlook
in place for 2009, the catalyst for real performance will be the outlook for 2010
possible recovery offset by the nagging worry that the recovery in the 1990s
took 5 years to get under way after the 1990/91 collapse.
to decline 2008-2009E by 15-20%, mimicking previous housing downturns.
In this context, while valuations have collapsed and – in the case of Barratt
and Taylor Wimpey look pretty extreme at 70% discount to tangible
historic book value – we see market trends deteriorating further and see no
catalysts to buy the sector until visibility on price declines, asset write
downs and the extent of equity raisings becomes clear. With a poor outlook
in place for 2009, the catalyst for real performance will be the outlook for 2010
possible recovery offset by the nagging worry that the recovery in the 1990s
took 5 years to get under way after the 1990/91 collapse.
NH:
Accordingly, we have reset price targets to levels which reflect net tangible
assets after a 25% cut to land and WIP with an additional discount at
Barratt and Taylor Wimpey to reflect balance sheet structures and the need
to complete initial cost reductions (and likely more) in a very tough market.
This has then led to rating changes at Bellway (Neutral to Sell), Persimmon
(Neutral–Short-term Sell to Sell) and Redrow (Neutral to Sell). We make no
change to our rating or PT on Berkeley due to its unique cash generation
model with a very low risk of land impairments, in our opinion.
assets after a 25% cut to land and WIP with an additional discount at
Barratt and Taylor Wimpey to reflect balance sheet structures and the need
to complete initial cost reductions (and likely more) in a very tough market.
This has then led to rating changes at Bellway (Neutral to Sell), Persimmon
(Neutral–Short-term Sell to Sell) and Redrow (Neutral to Sell). We make no
change to our rating or PT on Berkeley due to its unique cash generation
model with a very low risk of land impairments, in our opinion.
PM:
goodness. thanks for that
NH:
no probs
NH:
of course, UBS is not the only one bearish on the housebuilders today
NH:
kaupthing has also been telling investors in the sector to strap on the tin hat
NH:
here’s their note
NH:
HOUSEBUILDERS ~ the bear case re-visited, tin hat time. The UK housebuilders are off over 25% this past quarter and over 60% in the past year. the market is currently alive with talk of re-financings, equity calls and worse.
NH:
Let’s recap and update events and likely scenario unfolding.
the problems in the industry stem primarily from one reason and one reason alone – the collapse in trading over the past 9 months and specifically the last quarter when industry reservations have slumped by 50%-60% and on a weekly basis net reservations may be worse than that.
the problems in the industry stem primarily from one reason and one reason alone – the collapse in trading over the past 9 months and specifically the last quarter when industry reservations have slumped by 50%-60% and on a weekly basis net reservations may be worse than that.
NH:
No housebuilder is immune from this decline.
the root of the decline is mortgage availability, or rather the lack of it. Lending banks have reined in (Bradford & Bingley the latest headline casualty) and it is possible there will be zero net new money (i.e. net of new deposit savings taken in) made available for mortgages over the rest of this year. In short the situation for borrowers (irrespective of rates rising) could actually get worse before it gets better. And may take well into 2009 before improvement is seen.
the root of the decline is mortgage availability, or rather the lack of it. Lending banks have reined in (Bradford & Bingley the latest headline casualty) and it is possible there will be zero net new money (i.e. net of new deposit savings taken in) made available for mortgages over the rest of this year. In short the situation for borrowers (irrespective of rates rising) could actually get worse before it gets better. And may take well into 2009 before improvement is seen.
NH:
Under this scenario selling prices weaken simply reflecting the competitive pressures to secure the 50% of buyers still able to transact – and they in turn recognise their inherent bargaining power. Prices could easily sink 10% over the remainder of the year into 2009.
NH:
Forecasts for the housebuilders crumble further. Assuming any cocktail of volume and price will slash estimates in a range up to 100%.
Simplistically lower EBIT means straining interest cover ratios means covenant breaches means new equity to reduce debt and re-instate ratios.
Simplistically lower EBIT means straining interest cover ratios means covenant breaches means new equity to reduce debt and re-instate ratios.
NH:
Add to this the possibility that lower selling prices will potentially hit land values causing write-downs to balance sheet carrying values and you have a further financial trigger point with reference to shattered net asset covenant ratios.
In this scenario the only ‘safe’ housebuilder is one with no debt and with no net interest charge. Step forward err…..none.
In this scenario the only ‘safe’ housebuilder is one with no debt and with no net interest charge. Step forward err…..none.
PM:
NH:
In crude terms the following rankings identify those with (a) the highest nominal levels of debt and (b) the lowest interest rate cover ratios on our (vulnerable) current year forecasts. Low numbers mean most exposed to financial risk.
Barratts 2-1
Bellway 6-5
Berkeley 7-7
Bovis 4-6
Persimmon 5-3
Redrow 3-4
Barratts 2-1
Bellway 6-5
Berkeley 7-7
Bovis 4-6
Persimmon 5-3
Redrow 3-4
NH:
Taylor Wimpey 1-2
NH:
The problems for BDEV and TW are most acutely pressing, with Redrow perhaps not so far behind. In some sense the massive drop in their share prices may have even now precluded a pre-emptive equity issue leaving any move an act of rescue. Clearly one of the ideal solutions would be for the Banks to undertake a debt to equity exercise but with many of the lenders themselves heavily exposed indirectly and some directly to housing, that route may not appeal in a period of self-imposed fiscal restraint.
PM:
NH:
The ‘safest’ stocks would appear to be Berkeley, Bellway and Bovis but you cannot discount new equity in any instance, but that from this group one assumes it would be pre-emptive. Persimmon sits somewhere in the middle.
The real crux of the housing problem is that ultimately it is a victim of a crisis in the financial system and as such its responses are largely ineffectual.
It could be a long hard summer for the sector. Certainly it would take a braver investor than us to be buying in just yet.
The real crux of the housing problem is that ultimately it is a victim of a crisis in the financial system and as such its responses are largely ineffectual.
It could be a long hard summer for the sector. Certainly it would take a braver investor than us to be buying in just yet.
NH:
and it is worth repeating the line on debt for equity swaps here
NH:
In some sense the massive drop in their share prices may have even now precluded a pre-emptive equity issue leaving any move an act of rescue. Clearly one of the ideal solutions would be for the Banks to undertake a debt to equity exercise but with many of the lenders themselves heavily exposed indirectly and some directly to housing, that route may not appeal in a period of self-imposed fiscal restraint.
PM:
Repeating also — In this scenario the only ‘safe’ housebuilder is one with no debt and with no net interest charge. Step forward err…..none.
PM:
Extraordinary
PM:
Kinda explains some of today’s price moves
NH:
it does
NH:
and you have to wonder if Barratt did not make a massive mistake innot launching a rights issue a month or so ago
NH:
if they had
NH:
the cash would be in place
NH:
nerves would have been calmed
NH:
and the bears would have wandered off to find another target
NH:
as it is, large chunks are being taken out of its share price everyday
NH:
and it is perhaps worth speculating on what Barratt’s new chairman will think of it when he takes the helm
PM:
who is the new chairman??
NH:
Bob Lawson
NH:
currently in the chair at Hays
NH:
he starts on July 1
NH:
and I reckon he will be asking the CEO – Mark Clare – why a rights issue had not been launched
NH:
he may also want to know why Mr Clare made a top of the market acquisition – Wilson Bowden
PM:
Mr Clare
PM:
wasn’t he at Centrica before
NH:
yep, jumped straight from gas into housebuilding
PM:
hmm
PM:
that’s enough collapsing houses for now
PM:
PM:
OK, let’s turn to the wider market
NH:
well that collapsing as well
NH:
FTSE 100 down 97.1 points at 5,960.6
NH:
looks like the 6,000 level has been surrendered
NH:
Wall Street’s overnight performance and in particular the beating handed out to Lehman Brothers has also hit sentiment pretty hard here
NH:
on top of that there has been some pretty poor consumer confidence data
NH:
June 4 (Bloomberg) — U.K. consumer confidence fell to the
lowest level since at least 2004 in May as increases in living
costs added to gloom about the economy, Nationwide Building
Society said.
lowest level since at least 2004 in May as increases in living
costs added to gloom about the economy, Nationwide Building
Society said.
NH:
Nationwide’s index of sentiment taken from the responses of
1,000 people declined 1 point to 69, the lowest since the survey
began in May 2004, Britain’s fourth-biggest mortgage lender said
today in an e-mailed statement.
1,000 people declined 1 point to 69, the lowest since the survey
began in May 2004, Britain’s fourth-biggest mortgage lender said
today in an e-mailed statement.
NH:
“Consumers are starting to feel the pinch,” Fionnuala
Earley, Nationwide’s chief economist, said in an interview on
Bloomberg Television. “The housing market isn’t getting any
better at the moment, and we also know there’s been a squeeze on
their income. Their willingness to spend and their ability to
spend at the moment isn’t very high.”
Earley, Nationwide’s chief economist, said in an interview on
Bloomberg Television. “The housing market isn’t getting any
better at the moment, and we also know there’s been a squeeze on
their income. Their willingness to spend and their ability to
spend at the moment isn’t very high.”
PM:
PM:
Think they Lehman situation has to be watched v v closely
PM:
Sam has just put a round up on the home page
PM:
You’ve got to wonder how many blows they can take to their reputation
PM:
BS II, potentially
PM:
PM:
To some questions below…
NH:
someone asked about Findel
NH:
shares off 25.75p to 193p
NH:
a fall of 11.8%
NH:
trading ex-dividend today
NH:
as for the Goldman note that was picked in some of the papers today
NH:
that was actually out on Monday
NH:
does not say too much
NH:
bsacially trading could be bad and bad debts could be rising
NH:
here it is anyway
NH:
Source of opportunity
In our view, Findel’s capital structure places a significant constraint on the
growth of its Core Credit Business. Although we forecast modest growth in
each business for FY09E, we believe more significant expansion will be
difficult to achieve unless working capital improves beyond our current
expectations. The macro outlook is also a challenge, with the UK
consumer weak and inflationary pressures likely to weigh on the lowincome
element of Findel’s customer base. With our 6-month price target
implying -20%, we downgrade Findel to Sell and add it to our Conviction
List. We also add it to our UK Relative Value List, replacing Headlam
In our view, Findel’s capital structure places a significant constraint on the
growth of its Core Credit Business. Although we forecast modest growth in
each business for FY09E, we believe more significant expansion will be
difficult to achieve unless working capital improves beyond our current
expectations. The macro outlook is also a challenge, with the UK
consumer weak and inflationary pressures likely to weigh on the lowincome
element of Findel’s customer base. With our 6-month price target
implying -20%, we downgrade Findel to Sell and add it to our Conviction
List. We also add it to our UK Relative Value List, replacing Headlam
NH:
In our view, the key areas of risk are (1) the potential for further
unanticipated increases in bad debt provisioning if the UK economic
climate continues to worsen, and (2) the challenge in improving the
working capital profile near term. We assume a £10 mn working capital
inflow in 2009, and that the group has sufficient headroom in its existing
debt facilities.
Valuation
Our estimate changes take us c.10% below consensus for 2009E reflecting
the worsening retail outlook in the UK. We believe Findel is now ex-growth
and base our new 6-month price target of 180p (was 330p) on a 25th
EV/EBITDA (6.1x) for 1999-03 (i.e. prior to the subsequent, acquisitiondriven,
growth). Currently, the Retail Speciality Hardlines sub-sector trades
on 6.6x EV/EBITDA for 08E and 6.1x for 09E.
unanticipated increases in bad debt provisioning if the UK economic
climate continues to worsen, and (2) the challenge in improving the
working capital profile near term. We assume a £10 mn working capital
inflow in 2009, and that the group has sufficient headroom in its existing
debt facilities.
Valuation
Our estimate changes take us c.10% below consensus for 2009E reflecting
the worsening retail outlook in the UK. We believe Findel is now ex-growth
and base our new 6-month price target of 180p (was 330p) on a 25th
EV/EBITDA (6.1x) for 1999-03 (i.e. prior to the subsequent, acquisitiondriven,
growth). Currently, the Retail Speciality Hardlines sub-sector trades
on 6.6x EV/EBITDA for 08E and 6.1x for 09E.
PM:
I remember this — they run I want one of those — we were laughing abotu it last week
NH:
yep full of massively overpriced toys
NH:
Blade 3D helicopter
NH:
Vision Eyeware
PM:
NH:
anyway, on to a quick bit of RAW
NH:
Rentokil on the move
NH:
up 6p at 103p
PM:
Very much against the market trend
NH:
seems to be some talk of an MBO
PM:
no way!
NH:
but having thought about it that makes no sense
NH:
the new management team from ICI has just been parachuted in
NH:
they are heavily incentivised – PE style
NH:
why on earth would they launch a buyout
PM:
Can’t agree more.
NH:
newsflash
NH:
takeover talks between Emerson and Cholride terminated
PM:
think we set that hare running here 2/3 weeks back
PM:
Deal now off
NH:
Emerson withdraws interest in Chloride Group plc (“Chloride”)
Emerson announces that, since its previous announcement on 12 May 2008, it has made a further indicative
proposal to the Board of Chloride with a view to making a cash offer for Chloride. Emerson’s last indicative
proposal, which valued each Chloride share at 270 pence, has been rejected by the Board of Chloride and
accordingly, Emerson confirms that it is no longer considering making an offer for Chloride. The proposal of
270 pence per share represented:
* an implied multiple of 18.2 times 2008 EBITDA;
* an implied multiple of 28.4 times 2008 earnings per share;
* a premium of 64% to the Chloride share price of 164.25 pence at the close of business on 17 March 2008, the
day before Emerson made its first proposal; and
* a premium of 45% to the average Chloride share price over the three months up to and including 9 May 2008.
PM:
— in Chloride
— in ChloridePM:
Stock off 27p at 256p
PM:
PM:
Ok – the banks.
NH:
On the one hand we’ve got
Royal Bank of Scotland Group (RBS:LSE): Last: 244.00, down 0.75 (-0.31%), High: 251.00, Low: 240.00, Volume: 155.53m
PM:
Alliance & Leicester up 17p at 417.25p
PM:
And on the other we’ve got ?
Barclays (BARC:LSE): Last: 350.25, down 10 (-2.78%), High: 360.50, Low: 345.50, Volume: 32.41m
HBOS (HBOS:LSE): Last: 340.50, down 11.25 (-3.20%), High: 351.75, Low: 334.75, Volume: 18.09m
PM:
What’s going on?
NH:
Well, with A&L Im not entirely sure. Some people say it has the whiff of expired feline about it.
PM:
NH:
Other’s point to the fact that in the latest slew of ratings from S&P A&L was given a pretty stable report.
NH:
The other view is that it has simply fallen so far over the past month that some sort of bounce had to be in order. Before this morning’s recovery the shares were off 25 % in a month.
NH:
and the other suprious theory is that a PE company might be looking to take a stake
NH:
apparently this could be a growing trend
PM:
OK
PM:
And how about RBS.?
NH:
Well, that is a clearer story.
NH:
After yesterday’s cynical, disgusting, panicking of people into the stock on the back of a TCI stake buying rumour, we’ve suddenly got a very bullish call from Morgan Stanley on RBS.
PM:
For the record we believe this TCI chatter to be wrong
NH:
It was really quite strong at the opening – moving back about 250p, but then it has succumbed to the general market sell off over the past hour or so.
NH:
Currently off 1.25p at 243.5p
PM:
So what are MS saying?
PM:
I put up a snippet earlier, but I think you have full details.
NH:
Much of the bear case answered. Our Underweight rating on RBS was built on concerns surrounding the US, exposure to FICC, capital, dividends and the UK macro
picture. The rights issue, alongside prudent marks in RBS’s structured credit book and extra US bad debt reserves, resolves many of the issues, leaving only a UK recession and a poor ABN Amro integration as major concerns. Current valuations suggest that the risk of remaining Underweight is high and, with the capital raised and potential future disposals, we upgrade to
Overweight relative to the UK banks.
picture. The rights issue, alongside prudent marks in RBS’s structured credit book and extra US bad debt reserves, resolves many of the issues, leaving only a UK recession and a poor ABN Amro integration as major concerns. Current valuations suggest that the risk of remaining Underweight is high and, with the capital raised and potential future disposals, we upgrade to
Overweight relative to the UK banks.
NH:
Why Overweight?
• RBS has been early to raise capital and that should favour it over the coming months as concerns about the economy build.
• RBS has been early to raise capital and that should favour it over the coming months as concerns about the economy build.
• RBS’s reliance on private equity/asset disposal gains, coupled with a peaking of the fixed income cycle, meant that revenue growth was set to come under pressure in 2008. These concerns
are now captured by forecasts.
• RBS is the #1 UK corporate lender, which exposes it to economic threats if the UK enters a recession. However, given the valuation we think the macro risks are arguably greater elsewhere.
• RBS has faced up to its capital deficit, taken prudent marks on its structured credit book, lowered expectations for GBM and flagged sizable reserves in its US business.
PM:
bickie
Reminder to readers – if you arrived late and want to stop the dialogue ‘jumping’ as you catch up, hit the ‘pause auto-scrolling’ tab at the bottom right hand corner
NH:
bear case), we feel that risks are more skewed to the upside, with a UK recession and ABN Amro integration the only areas of real concern.
• In the near term as investors look to potential margin gains, disposals, attractiveness to activist investors, write-backs and a solid trading performance at RBS’s trading statement on June 11, we feel that remaining Underweight is too risky.
• In the near term as investors look to potential margin gains, disposals, attractiveness to activist investors, write-backs and a solid trading performance at RBS’s trading statement on June 11, we feel that remaining Underweight is too risky.
We upgrade to Overweight and would instead sell HSBC, which stands at a 10-year relative high.
PM:
Just looking through that note – which I should add is about 16 pages.
PM:
Looking across the valley. RBS has been plagued by losses in structured credit and, more recently, concerns about US credit losses. The prudent marks taken alongside the rights issue put these issues behind the company, with the potential to think about write-backs in 2009. The US$1 billion of additional bad debt reserves in the US strengthens the NPL cover to ~140% – adequate in our view. If we couple this with margin improvements in the US and the UK, there is more cause for earnings optimism than we previously thought.
NH:
Ha – its tatamount to saying Don’t look down!
PM:
PM:
Okay – moving on….
PM:
How about HBOS?
PM:
What is going on??? Price is off another 11p at 341p – dropped to 334p a little earlier.
NH:
Well, HBOS is sending its rights issue circular out today. I don’t think anyone has seen that yet – and im guessing that if there were any change in outlook the bank would have mentioned as much in this mornings’s statement.
PM:
So what detail did we get this morning – all the rights dates, presumably.
NH:
We did – and therein lies a clue to the price move, I believe.
NH:
Shareholders meet June 26. The actual prospectus gets issued the week after next.
NH:
Trading in the nil paids gets underway on June 27 , with acceptances due by July 18.
NH:
Two for five at 275p.
NH:
Now, when HBOS unveiled this rights – the ordinaries were at 487p I believe.
PM:
Blinking eck – so they’ve fallen 30% since then.
NH:
Yes – and so while everyone used to think of HBOS having a substantial cushion – you can suddenly start scratching off the points as the ordinaries drop towards the rights price.
PM:
TERP?
NH:
Well I make it 321p this morning.
PM:
Oh dear, so we are just 5% or so above that.
NH:
Hmmm. And the fact is, now we’ve got all the dates, certain Mayfair banditos no what they are playing with in terms of time scales.
PM:
Champers in one hand, clicking the sell button with the other. I don’t know.
NH:
the W1 Set strikes again
PM:
PM:
More banks?
NH:
If you can bare it.
PM:
Bungle Bank – how they doing. People having pitting on them this morning?
NH:
Not really – just being ignored. Pirce is off 1p at 67.25p. rights at 55p.
NH:
Interesting tho. Think we should do the decent thing and say we were probably unfair on Monday when we spat tacks about the underwriters seemingly walking away from their commitments.
PM:
Eh? Is it not kick-an-underwriter week after all?
NH:
Well, here’s a couple of facts to consider when deciding how hard to kick.
NH:
And im referring to the primary underwriting banks in this.
PM:
Citi and UBS ???
NH:
I believe they genuinely had a material adverse change situation. B&B has owned up to the fact that its management information systems were behind the curve.
NH:
The issue had been sub-underwritten – and here’s the first interesting fact:
NH:
The sub-underwriters have all picked up a 0.5 per cent terminal fee for the abandoned rights.
PM:
PM:
That was the B&B refinancing, rather than the B&B re-refinancing.
NH:
That’s right.
NH:
Second interesting fact is this – which had passed me by earlier:
NH:
The subunderwriters now get a full 3 per cent commission for standing there at 55p, when so much of the downside risk has now been removed.
PM:
So that’s pretty good money.
NH:
Another point that needs to be made clearly. UK institutions don’t underwrite rights issues with the idea that if the issue goes bad then they will become firm, long-term hands in the stricken stock.
NH:
They sell. And in B&B’s case they would have unloaded everything v quickly. It would have destroyed B&B’s price – perhaps even more than we saw on Monday.
PM:
Hmmm. Food for thought.
PM:
I still think it’s an all round bungle.
NH:
And I think your right. But the bungling was not necessarily evenly spread.
PM:
NH:
Bored wanted to talk about Shaftesbury
Shaftesbury (SHB:LSE): Last: 485.75, up 26 (+5.66%), High: 488.75, Low: 466.75, Volume: 1.47m
NH:
yep, that’s on the back of reports that entrepreneur Paul Kemsley is going to bid
NH:
and excellent timing because Mr Kemsley will be on the Apprentice tonight
NH:
he is one of Surallun’s men – interviewing the candidates
PM:
Ah yes. Sam has wandered away from the desk here
PM:
Sure he will have some thought
PM:
So what do we think of this Shaftsbury story??
PM:
Once i learn how to spell the company’s name
NH:
well, the first thing we should say is that it was in the Mail
NH:
and written by Geoff Foster, who we have a great deal of respect for
PM:
We do 
NH:
now, I have no doubt that Kemsley would like to buy Shaftesbury
NH:
after all he and his great mate Mike Ashley built up a large stake in the company (12%) which they flipped to Laxey
NH:
It remains unclear to this day whether they made any money on that trade
NH:
anyway, as Kemsley never tires of telling people he has backing from HBOS and wants to acquire a listed company
NH:
problem is I can’t see HBOS backing him at the moment
NH:
the bank has bigger issues at the moment
PM:
NH:
and I am not sure shareholders, who are being asked to back a £4bn rights issue , would be too happy about the bank backing a highly leveraged bid for a property focused on central London
PM:
fair point
NH:
however, what is interesting is laxey
NH:
they bought into Shaftesbury in March when the shares were trading at 580p
PM:
so they are under water
NH:
and Laxey does not like that
PM:
presumably they are pushing for change already
NH:
one story I have heard this morning is that Laxey are putting pressure on the company to sell some of its portfolio and return the cash to shareholders
NH:
apparently there is one part of the portfolio that is attractive to another party
NH:
for all I know that could well be Kemsley
NH:
anywhere here is the story our property guy Dan Thomas wrote when Laxey first announced the stake
NH:
Laxey Partners, the corporate activist that once agitated for the break-up of British Land, has emerged as the largest shareholder of West End property specialist Shaftesbury.
Laxey has been building a shareholding in the real estate investment trust over the past two weeks using derivatives but crystallised the position yesterday to emerge with a 14.5 per cent stake.
NH:
Laxey has a fearsome reputation as a corporate agitator, acquiring a stake of close to 10 per cent in British Land to try to force an overhaul of the company in 2002. It failed, but not before it provoked the wrath of Sir John Ritblat, the then chairman.
It does not take over companies itself but has acted in the past as a king-maker in corporate deals with a view to raising the share price and securing an exit at a profit.
It does not take over companies itself but has acted in the past as a king-maker in corporate deals with a view to raising the share price and securing an exit at a profit.
Many property companies are again trading at wide discounts to their net asset values, making them fertile ground for bargain hunting activists such as Laxey.
Shaftesbury, with a market capitalisation of GBP790m, is one of the more expensive stocks in the real estate market. It is not thought that there is any impending corporate action, although analysts expect Laxey to pressure management to further improve the share price.
NH:
Laxey is known to favour the West End property market as it sees the potential for rental growth. The news may alert rivals to Shaftesbury in the West End market, such as Derwent London and Great Portland Estates.
Laxey has acquired the stake for its Terra Catalyst opportunity fund, which floated on Aim in February. The purchase means that Terra Catalyst is almost 70 per cent committed, having raised about GBP230m through the public offer and private funding.
Laxey has acquired the stake for its Terra Catalyst opportunity fund, which floated on Aim in February. The purchase means that Terra Catalyst is almost 70 per cent committed, having raised about GBP230m through the public offer and private funding.
Laxey acquired a stake of more than 12 per cent in Shaftesbury two weeks ago, through contracts for difference, from tycoon Mike Ashley and property entrepreneur Paul Kemsley, according to people with knowledge of the situation.
Shares in Shaftesbury rose strongly as the stake was converted earlier in the week but has since fallen 0.85 per cent to GBP5.80.
PM:
thanks for that
PM:
Tune in to watch Kemsley tonight then
PM:
PM:
Neil is just on the phone for a mo
PM:
I can report that the FTSE 100 is continuing to slide
PM:
Currently off 106 points at 5952
PM:
Bad news
PM:
FSA hiring people who may know about markets
PM:
The Financial Services Authority (FSA) today announced the appointment of three new senior advisors with substantial market experience. Jeremy Bennett, David Smith and Simon Stockwell will join the wholesale and institutional business unit with immediate effect.
Jeremy Bennett, a former co-head of fixed income for Europe and emerging markets at Credit Suisse First Boston, has over twenty years of experience in banking, with a particularly strong background in structured products and derivatives, and bank control infrastructure.
Simon Stockwell, a former head of the European corporate advisory business at Lehman Brothers, also has an extensive background in market compliance and surveillance.
David Smith was Senior Partner in charge of KPMG Forensic Accounting in the UK based in London. He had previously been the partner in charge of several KPMG Middle East offices and dealt with major audit clients in the oil and gas, banking and insurance industries as well as leading major financial investigations.
Jeremy Bennett, a former co-head of fixed income for Europe and emerging markets at Credit Suisse First Boston, has over twenty years of experience in banking, with a particularly strong background in structured products and derivatives, and bank control infrastructure.
Simon Stockwell, a former head of the European corporate advisory business at Lehman Brothers, also has an extensive background in market compliance and surveillance.
David Smith was Senior Partner in charge of KPMG Forensic Accounting in the UK based in London. He had previously been the partner in charge of several KPMG Middle East offices and dealt with major audit clients in the oil and gas, banking and insurance industries as well as leading major financial investigations.
PM:
PM:
Right — lets finish up with some RAW then
NH:
OK
NH:
Informa
NH:
shares up 0.75p at 387.5p
NH:
bid rumours been swirling around for a while
NH:
but I think I have some meat to put on the bone
NH:
Provident Equity
NH:
are apparently running the slide rule of the company
NH:
not clear whether they have approached Informa or any of its senior directors
NH:
but what they are looking at I am told is a 530p a share
NH:
now that is not as high as some of the recent figures mentioned
NH:
but a lot more credible given Informa’s debt levels
PM:
Providence pretty big PE — about $21bn under management
PM:
Providence has managed seven funds with total committed capital of approximately $21 billion. Since 1989, the firm has invested in over 100 companies globally.
PM:
Seem to be focused on media dn entertainment largely
NH:
so its interest in Informa would be obvious
PM:
yes, but very much a small and mid size buyout specialist
NH:
Informa would be a bigger deal
PM:
yes — looks that way at first glance
PM:
This would be over £1.6bn — plus another billion or so of debt
PM:
424 times 5.30 is
NH:
at the rumoured price that would equate to £2.2bn
NH:
as noted below that would be a large mouthful
NH:
but Informa could be broken up
NH:
conferences sold off and Datamonitor
PM:
We should add that this is completely RAW
PM:
We dont know whether any talks have been held etc
PM:
Providence own the YES Network i see
NH:
what’s that???
PM:
The YES Network is a 24/7 sports and entertainment television network featuring the New York Yankees. YES also broadcasts the New Jersey Nets and other professional and collegiate sports teams as well as classic sports footage and sports-related content.
NH:
perfect fit with the Llloyd’s List then?
PM:
NH:
anyway, to recap we think some detailed work has been done on this
NH:
whether it ever comes to anything we are not sure
NH:
and some great comments from Montesquieu below
NH:
who seems to be a real media expert
PM:
PM:
Moving on
PM:
Any more RAW?
NH:
hearing talk of a 580p a share bid for International Power again
PM:
PM:
any names in the frame?
NH:
EDP
NH:
a portugese utility company
NH:
they are sitting $2.4bn of cash following the ipo of their renewables arm
NH:
while that is not enough to fund a bid for IRP (market cap £6.7bn)
NH:
it is a start
NH:
and with a market cap of $19.2bn plus its remaining stake in the renewables business
NH:
it is not impossible that it is weighing a bid
NH:
and it would certainly be a good way for EDP to spread its wings
PM:
just looking at the renewables biz
PM:
that was the biggest IPO of the year
PM:
looks to have a market cap of
PM:
hang on it started trading to today
PM:
: it is the worlds second largest wind turbine company
PM:
market cap EUR7.2bn
NH:
IPR shares down 13p at 433.25p
NH:
Lemmy on Enodis
NH:
hearing ITW poised to return with a higher offer
NH:
don’t have any guidance on levels
PM:
PM:
Any more dare i ask?
NH:
two more bits
NH:
Royal & Sun Alliance
NH:
sorry RSA Insurance Group
NH:
it has a new name
NH:
stock has not done much this morning, but a real buzz around
NH:
off 1.4p at 136.5p at the moment
PM:
Whats the story?
NH:
seems to be that RSA could be a takeover target for Oz insurer QBE
NH:
Now, QBE appears to be on the lookout for acquisitions
NH:
it just made a $8.3bn for a company called Insurance Australia Group
NH:
that was rejected
NH:
in fact it raised its offer twice and was beaten back twice
NH:
anyway, Insurance Australia has appointed a new highly rated CEO
NH:
as such as bid for the company now looks unlikely
NH:
so perhaps QBE will have to cast its net further afield
PM:
er, thanks for that
PM:
Anything else?
NH:
Punch Taverns
NH:
a few weeks ago there was a story doing the rounds about the company preparing for a REIT status
NH:
it was apparently trying to change the terms of the bonds secured against its spirit division
NH:
this was seen a pre-requisite to applying for REIT status
NH:
well it seems that has all come to nothing
PM:
Really?
NH:
here’s what I got hold of from a broker earlier
NH:
You may recall that in the middle of May, Punch Taverns proposed changing the redemption terms on its Spirit securitisation. I thought this was a pre-cursor in them attempting to split the business in two. Today they’ve withdrawn that proposal since after talking to the bondholders it was clear they would not approve the changes. This puts selling Spirit to Mitchells & Butlers firmly on the back-burner, and since the company won’t be paying much tax in the next few years, I didn’t think a REIT was imminent anyway. In other words there’s no Corporate Finance alchemy available to this one for a while yet, and I’m happy to keep it a Reduce. I’ll put out a paragraph on the noon e-mail for clients.
NH:
Punch off 13p at 513.5p
PM:
Brilliant — thanks for all that
PM:
PM:
Right — we are done — Footsie still off 105
PM:
We ahve a lunch to go to
NH:
and it is not with Citi or UBS as some suggested earlier
PM:
Thank you very much for joining us this morning. And thanks for all the comments
NH:
especially the ones on media
PM:
Back tomorrow at 11am