Markets live chat transcript for the chat ending at 12:02 on 18 Jul 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
This is FT Alphaville’s daily markets commentary – Markets Live.
NH:
Some stupid playground bug, which my son had earlier this week
PM:
He’s complaining loudly. And so we might not make thru this morning – not all the way to noon.
PM:
Both at our desks and in the market
NH:
The news flow seems to get weirder and weirder with each passing day.
NH:
Today’s “Uh?” news is that Freddie Mac – currently capitalised at about $5bn in the US, is going to raise $10bn in new equity.
NH:
And from existing shareholders – not from the US treasury.
PM:
We just cant get our heads round this.
PM:
This may just all be about Congressional politics, which we don’t know anything about.
PM:
Or it may be trying to force shareholders hands – saying , look, give us lots more money or Paulson will take control and your shares will be worthless.
PM:
Or it might just be that Richard Syron, the chairman of Freddie Mac has gone a bit mad.
NH:
Basically the American bloggers are tearing this whole plan to bits.
NH:
Have a look at Calculated Risk, for example.
NH:
http://calculatedrisk.blogspot.com/2008/07/wsj-report-freddie-considering-stock.html
PM:
Do read the accompanying comments – one guy talking about it being structured as a convertible that swaps into small silver coins in 2013.
NH:
And we had the Merrill Lynch news
PM:
Yes, that rather brought an end to the idea that all American financials were on some sort of tear,
PM:
Another umpteen billion of writedowns and losses from ML. Sort of numbers that leave you numb.
PM:
This negative thinking has to stop.
PM:
You have not been listening to Josef Ackermann of Deutsche Bank.
PM:
Josef Ackermann, Deutsche Bank’s chief executive, on Thursday said the credit crunch was at “the beginning of the end” as banks and regulators have taken action to deal with the crisis and many businesses were slowly returning to normal.
PM:
that was in an interview with the FT
NH:
Right, lots of questions about Informa
NH:
stock off 0.5p at 394.5p
PM:
Well, our people say…..
PM:
Due diligence still underway
PM:
And work in the debt markets still underway
PM:
This deal is still being pursued — actively
PM:
But of course we dont know whether it will eventually be completed
PM:
What we can be sure is that the squall the hit the stock yesterday afternoon was misguided
NH:
certainly appears to be
PM:
To ML — lots of chatter generally around the debt market about this one
PM:
has been since the news first emerged
PM:
Lots of people dont believe it can be done — certianly not at the debt/ebitda multiples suggested
PM:
Which were an heroic six times initially
PM:
Also should point out that the FT story was published AFTtER yesteray’s price moves
PM:
Prices of the UK banks all over the place this morning
PM:
Barclays under heavy pressure at the outset – after its placing without clawback.
NH:
well, 19% of clawback
PM:
But that has recovered since.
NH:
RBS has had a run higher on the back of this Morgan Stanley note – suggestion that the stock bottomed out on July 16.
NH:
shares currently up 7.4p at 186.9p
NH:
for those of you who missed the note
NH:
here are some highlights
NH:
It’s Black at the Bottom
Summary and Investment Conclusions
RBS hit an intra day low of 145p on 16th July 2008 as concerns
surrounding its US loan book, monoline exposures, UK risk
and general systemic concerns hit fever pitch. At that price
RBS’s market cap stood at ~£24bn, down 77% from the peak in
February 2007. Despite the deteriorating macro environment,
we believe 145p could turn out to be the bottom of the chart in
this cycle, given that the price action of the recent sell-off
matches other final legs down in bear market cycles. At 145p
the market appears to be pricing in more than 3x what we
would calculate as the theoretical risk to valuation by moving
from a ‘normalised’ level of bad debts to a 90’s stressed level.
NH:
Concerns surrounding the US, UK, credit exposures and
potentially capital are unlikely to go away soon. But we believe
that valuation has now become even more compelling and that
the upcoming interim results should highlight that fears
surrounding its US exposures are overblown and that monoline
exposures are manageable. Margin trends in the UK are also
likely to be an increasing part of the story in 2H08.
NH:
US Exposure
In the US RBS has a higher quality loan book than many of its
peers, which is reflected in the low level of NPLs. One potential
problem area is a $8bn broker-originated Home Equity portfolio,
which RBS flagged at the time of the rights issue and
commented that it was setting aside $1bn to cover future
deterioration. This would take NPL cover to ~140% at the end
of 1Q08 and suggests to us that recent concerns surrounding
the quality of the RBS US business are overblown.
NH:
Monoline risk
RBS detailed a £6.2bn gross exposure (£3.2bn net) to
monolines in its prospectus. Included within the marks
announced at the time of the rights issue RBS detailed it had
taken write-downs equivalent to ~47% of its gross exposures.
We think that this level of credit valuation adjustment is
consistent with recent comments from Citigroup of where it
needs to mark its ‘higher rated’ monoline risk and where Natixis
has just announced it is marking its MBIA/AMBAC exposures.
At RBS’s pre-close statement the Finance Director commented
that they had anticipated a rating agency downgrade when
setting the ~47% mark. While we might expect a further top up,
in our view improvements in other areas of the credit markets,
such as leveraged loans and CMBS, provide an offset. If the
write-downs are more material then in our view RBS has a lot of
organic capital capacity to provide an offset, without requiring
further recourse to shareholders via a share issue.
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:
HFLOP up 1.5p 269.75p
NH:
still below the rights price though
PM:
creepoing back tho — shame its too late
PM:
Be very intresting to see the take up level on that one – just about impossible to guess.
NH:
it will be and if the price gets above 275p say later today, the underwriters wpn’t be left with a stick
NH:
it will be a rump they can place
PM:
Ex-ABN-er — didn’t know about that situation in Macau. V interesting. Will make enquiries
PM:
Just to note — anyone recently departed from various IBs…
PM:
Do feel free to sweep crumbs in our direction — paul.murphy@ft.com
PM:
No dabs, etc. Guaranteed
PM:
Also — note the debate on Informa below. Clearly quite polemical views
PM:
Neil hopes to have a bit more on the situation next week
PM:
Yorkshire lad — im from Lancs
NH:
i thought those in Yorks had a reputation for thrift. throwing good money after bad in HFLOP would not been in keeping.
PM:
Horrible gov borrowing figures earlier
NH:
market drifted lower – off 26 points at 5,260
PM:
well off the bottom tho — did hit 5216
NH:
probably hang around there until we get the numbers from Citi
NH:
that said, it is the miners doing the damage in London today
PM:
All under pressure this morning
Eurasian Natural Resources Corp (ENRC:LSE): Last: 1,027, down 73 (-6.64%), High: 1,085, Low: 999.00, Volume: 1.58m
Ferrexpo (FXPO:LSE): Last: 276.25, down 18 (-6.12%), High: 293.25, Low: 269.75, Volume: 550.79k
Ferrexpo (FXPO:LSE): Last: 276.25, down 18 (-6.12%), High: 293.25, Low: 269.75, Volume: 550.79k
Xstrata (XTA:LSE): Last: 3,371, down 134 (-3.82%), High: 3,464, Low: 3,305, Volume: 3.78m
Vedanta Resources (VED:LSE): Last: 1,799, down 65 (-3.49%), High: 1,857, Low: 1,765, Volume: 1.24m
Kazakhmys (KAZ:LSE): Last: 1,330, down 62 (-4.45%), High: 1,410, Low: 1,322, Volume: 798.05k
PM:
I guess this is more China slowdown worries
NH:
real damage being done to the sector at the moment
PM:
yeah, just looking at the chart
PM:
looks like the FTSE All Share Mining index
PM:
was at 29,500 back in May, now at 22,500
PM:
so the miners are in bear market as well
NH:
yep, although the FTSE AS mining index does not include some of the industrial metals companies
NH:
but the point is still valid
NH:
miners in a bear market
NH:
is there nowhere safe to hide???
NH:
actually just been looking at New World Resources
PM:
That’s the Czech coal miner Cazenove floated
NH:
they are down as well
NH:
stock off 104p to £15.21
NH:
still above float price of £13.25
NH:
problem at one of its mines this morning
NH:
company have suspended production in one part of the miner following a fatality
NH:
and that follows another incident at another mine last week, where two miners lost their lives
PM:
Sticking with the miners
PM:
Just got a note through from Evolution Securities
PM:
looking at the performance of the underlying commodities
PM:
Generally dont look bad
PM:
let me just put this note up
PM:
Aluminium 3-month prices up 0.1% to $3127/t paring back some of the loss over the past week. Production cuts at the top 20 aluminium smelters in China could alleviate this. However LME inventories are at their highest levels since 2004. Chinese exports rose to 300kt in June, up 11% from May buoyed by strong overseas prices.
Copper gained 1% to US$8160/t over supply concerns and as the world economy remains troubled, although copper prices in Shanghai slipped in overnight trading. Rising copper inventories on the LME and in shanghai over the past week have contributed to weakness in the price. However exchange inventories for copper are still only 3.4 days of stocks to global consumption compared to the 20-year average of 11.6 days. So still a very tight market.
NH: Zinc gained 2.4% to $1840/t on zinc mine closures and falling oil prices despite. China’s 13 largest zinc smelters that account for around 16% of global output are discussing production cuts against a background of weak prices. Some operators in the Beijing region have already cut production in an effort to reduce pollution and provide spare power capacity during the Olympic games.
PM:
Correspondingly we expect to see a sharp fall in production, exports and demand for most base metals from China over the next few months before picking up again later in the year. Nonetheless, zinc prices have fallen 51% in the past 12 months and with soaring inflation and operating costs marginal zinc (and lead) production is now operating at a loss. Consequently Xstrata (XTA.L BUY, 4800p) and Teck Cominco are to close Lennard Shelf in Western Australia by early August due to falling zinc and lead prices, in combination with a stronger Australian dollar. Anecdotally small, high-cost Chinese zinc miners are considering shutting capacity owing to the recent weakness in prices. AIM Resources (AIMR.L, NR) has also announced that it is to place its Pekoa Zinc project in Bukino Faso on care and maintenance due to low zinc prices and on debt and equity funding difficulties. Before long we would not be surprised to hear more stories of zinc miners shutting. So, it maybe too early to call for a rally in zinc prices but surely it can only be around the corner.
NH:
just scanning the wires for the Citi results
NH:
and remember the slogan
NH:
just looking for the statement
NH:
UK banks rallying on the news
PM:
Citigroup Inc. (NYSE: C) today reported a net loss for the 2008 second quarter of $2.5 billion, or $0.54 per share, based on 5,287 million shares outstanding.(1) Solid results in the core franchise were offset by write-downs and credit costs. Results include $7.2 billion in pre-tax write-downs in Securities and Banking (See Schedule C on page 10). Additionally, credit costs increased $4.5 billion, mainly driven by Consumer Banking in North America and Global Cards.
Second Quarter Highlights
* Results improved substantially versus first quarter 2008 due to lower write-downs and good performance in the core franchise.
* Total assets declined by $99 billion since first quarter 2008; approximately two-thirds from legacy assets.
* Sale of non-strategic businesses on track; announced CitiCapital, Diners Club International and CitiStreet transactions.
* Capital position improved as Tier 1 Capital ratio increased to 8.7%; total allowance for loans, leases and unfunded lending commitments increased to $22 billion.
* Re-engineering efforts resulted in sequential decline in headcount and expenses.
* Headcount reduced by approximately 6,000 in the second quarter and approximately 11,000 in the first half of 2008.
* Net interest margin expanded 34 basis points versus the first quarter 2008, to 3.18%.
* Talent enhanced by strong new hires.
NH:
seems to be a little ahead of expectations
PM:
Management Comment
“We continue to demonstrate strength in our core franchise. We cut our second quarter losses in half compared to the first quarter. The cost of credit increased by 20% from the first quarter, but write-downs in our Securities and Banking business dropped by 42%. Additionally, headcount and expenses declined sequentially. While there is still much to do, we are encouraged by our progress in delivering on our commitment to the re-engineering efforts,” said Vikram Pandit, Chief Executive Officer of Citi.
“As part of our efforts to improve capital and balance sheet efficiency, we reduced legacy assets substantially during the quarter. We recently closed on the sale of CitiStreet and just last Friday, announced the sale of our German retail banking operation for a substantial gain. We continue to be focused on building the strongest team by attracting world class leaders to Citi and developing our current talent. This, combined with a sharp focus on customer relationships in all regions and an ongoing commitment to our strategic targets, will drive our earnings power going forward,” said Pandit.
PM:
Revenues were $18.7 billion, down 29%, largely driven by continued write-downs in Securities and Banking sub-prime related direct exposures in fixed income markets and a downward credit valuation adjustment related to exposure to monoline insurers. Revenues were stable across other businesses. The net interest margin increased 34 basis points versus first quarter 2008 to 3.18%.
PM:
Credit costs of $7.2 billion primarily consisted of $4.4 billion in net credit losses and a $2.5 billion net charge to increase loan loss reserves. Net credit losses increased $2.4 billion, primarily driven by residential real estate lending in North America and Global Cards. The incremental net charge to increase loan loss reserves of $2.0 billion was mainly due to residential real estate in North America.
PM:
* Write-downs of $3.4 billion on sub-prime related direct exposures. These exposures on March 31, 2008, were comprised of approximately $6.4 billion of gross lending and structuring exposures and approximately $22.7 billion of net ABS CDO super senior exposures (ABS CDO super senior gross exposures of $33.2 billion). On June 30, 2008, these exposures were comprised of approximately $4.3 billion of gross lending and structuring exposures and approximately $18.1 billion of net ABS CDO super senior exposures (ABS CDO super senior gross exposures of $27.9 billion). See detail in Schedule B on page 9.
– Downward credit value adjustments of $2.4 billion related to exposure to monoline insurers.
– Write-downs of $545 million on commercial real estate positions.
– Write-downs of $325 million, net of hedges, on Alt-A mortgages.
– Negative revenues were partially offset by record revenues in interest rate and currency trading, and commodities. Revenues also included a $197 million gain on auction rate securities inventory.
NH:
UK banking sector really seems to like the news
NH:
HFLOP closing in on the right price
NH:
who would have thought that possible a couple of days ago??
PM:
We’ve always known HBOS would bounce back, eh
PM:
Citi arrived too late for HBOS nil paids tho
PM:
They’re trading at 0.01p
PM:
Which means they are not trading, of course
NH:
Bryce has sent me a very interesting note on Enteprise Inns
NH:
it’s by Goldman Sachs
NH:
and it looks at the company’s debts
NH:
and come to some pretty bearish conclusions
NH:
60% of the company’s debt structures do not look secure
PM:
Really!?!?!
NH:
they reckon if pub assets fall 15% from their Sept 2007, it could spell big trouble for Enterprise
NH:
now 15% might sound a lot
NH:
but in 1990’s the average value of a pub fell by 25%
NH:
as such Goldman has been telling clients to slot Enterprise
NH:
ACTION Sell
Enterprise Inns plc (ETI.L) 
Return Potential (25%)
Freehold values can go down as well as up; remains Conviction Sell
Source of opportunity
In an era of declining asset values, 60% of Enterprise’s (ETI) debt structure
does not look secure in our view. We estimate that asset cover covenants in
ETI’s corporate bonds and bank debt would be breached if pub values were to
fall 15% from their September 2007 level; in the early 1990s, the value of
the average UK pub fell approximately 25%. The cash trap on ETI’s securitised
bonds (1.5x DSCR) looks likely to be triggered in 2011 as principal
repayments step up. With already high leverage (by real estate standards) and
the prospect of falling asset values, we struggle to see how ETI can pay 90%
of Schedule A income, maintain its estate and repay debt.
NH:
Catalyst
We expect Enterprise’s trading update (July 22) to disappoint; in particular,
for beer sales to fall further than consensus forecasts and for rent and beer
concessions to continue to rise. As the year progresses, we also expect
confirmation that pub values are falling in response to lower yoy
profitability, the gloomy economic outlook, cost inflation and much tougher
financing conditions.
Valuation
We lower our 6-month price target, which is now based on historical average
price to adjusted book, to 240p (from 300p). Enterprise continues to trade at
a significant premium to the sector and especially to its closest peer,
Punch, which trades on a calendar 2009E consensus EV/EBITDA of 8.3x versus
ETI on 10.3x.
Key risks
The main upside risks to our view and price target are that the outlook for
UK consumer spending improves, Enterprise Inns’ tenants permanently accept
lower earnings, or the company manages to renegotiate the terms of its debt
facilities.
NH:
we have been watching Mr Einhorn’s stakebuilding in Punch Tavs with fascination
NH:
sadly we have not been able to get hold of him to ask what it is all about
NH:
nevertheless a guy worth watching
NH:
Punch shares up 5.25p at 255.5p
NH:
and Enterprise Inns up 7.5p at 328p
NH:
right, lots of questions about F&C Asset Management
NH:
do not know a lot about that situation other than the fact Friends Prov is trying to slot its 50% holding and fnding the going tough
NH:
good trading statement
NH:
shares up up 9.75p at 131.25p
NH:
and one thing sticks out of this morning’s statement
NH:
just comes right out of the blue
NH:
Martin Gilbert, Chief Executive of Aberdeen, commented:
“Despite these challenging market conditions, we continue to win new business across the Group’s core asset classes and increase assets under management. At the same time, we are focusing on increasing our efficiency as a business and have identified £57m of annualised cost savings.
PM:
57m sounds impressive
PM:
How are they going to do that?
NH:
could be another explanation for the rise in Aberdeen this morning
NH:
and its not bid rumours
NH:
although there has been speculation over the past couple of weeks that the company’s biggest shareholder Tosca had been approached for its stake
NH:
we are hearing talk that Aberdeen could be close to announcing a big jv in Japan
NH:
anyway here a couple of notes on the Aberdeen statement
This entry was posted by Paul Murphy on Friday, July 18th, 2008 at 11:02 and is filed under Uncategorised.
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