Markets live chat transcript for the chat ending at 12:16 on 24 Sep 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Okay – welcome to the All You Can Eat Warren Buffett
PM:
Incorporating Markets Live, FT Alphaville’s daily markets chat.
PM:
This is a SAGE SPECIAL
NH:
we have tech problems. bear with us
PM:
Well partly, anyway.
PM:
Go Neil
NH:
Right – well you can guess the tone of most stuff coming out this morning
PM:
Neil is just rebooting
PM:
Bear with us a mo
NH:
back in
NH:
right i think we are working no
NH:
and just trying to get a price pre-market for Goldman
NH:
up 20% to EUR94.89
PM:
Hey!
PM:
so the Buffett news had gone down well
NH:
it has
NH:
and I suppose it is a big vote of confidence
NH:
but one can’t help thinking that Mr B has got the better of this deal
PM:
I will say
NH:
this is no SWF transaction
PM:
NH:
oh no, Mr B will not get wiped out
NH:
in fact the whole thing looks to have been structured to protect him from losses
PM:
surprise surprise
NH:
Exactly
NH:
for those who missed the terms of the deal, a quick re-cap
NH:
So Mr B pays $5bn and gets
NH:
“perpetual” preferred shares of Goldman.
NH:
These are not convertible into equity but they pay a fat 10% dividend.
NH:
Although they can be bought back by Goldman at any time
NH:
and the second part of the deal gives Mr B an option to spend $5bn on warrants
NH:
obviously if the price goes lower he will not take up the warrants, for which he has paid nothing
PM:
so what’s the strike price on the warrants
NH:
they can be exercised over a five-year period – have a strike price of $115, well below Goldman’s closing price of $125.05 yesterday
NH:
Including Goldman’s after-hours stock jump, Berkshire has a nearly $700 million paper profit on the deal already.
NH:
I think, although my figs could be a bit out now
PM:
Nice work
NH:
the billionaire next door eh!
NH:
the ruthless the investors next door – is more like it
NH:
mind you they won’t have a bad word said against the man on CNBC
NH:
anyway, as you can imagine plenty of comment about the deal
NH:
and the impact for Goldman, which appears to be good even though they have paid through the nose for it
NH:
this from UBS
NH:
GS to Raise Equity from Berkshire Hathaway and in Public Offering
Berkshire Hathaway will buy a $5 bn perpetual preferred yielding 10% (callable at
any time with a 10% premium) & also receive 5-yr warrants to purchase $5 bn of
common stock with a strike price of $115. In addition, GS will raise at least $2.5
bn of common equity in a public offering. This will give GS $7.5+ bn in equity
capital with the potential for an additional $5 bn if the warrants are exercised.
Berkshire Hathaway will buy a $5 bn perpetual preferred yielding 10% (callable at
any time with a 10% premium) & also receive 5-yr warrants to purchase $5 bn of
common stock with a strike price of $115. In addition, GS will raise at least $2.5
bn of common equity in a public offering. This will give GS $7.5+ bn in equity
capital with the potential for an additional $5 bn if the warrants are exercised.
NH:
Equity Raise Reduces Leverage & Boosts Capital Ratios
We calculate a $7.5+ bn equity raise reduces GS’s gross leverage by ~350 bps to
~20x (net by ~200 bps to ~12.5x) & boosts the Tier 1 ratio by ~200 bps to ~13.5%.
Pro forma book/share is ~$100 & EPS dilution is ~5% (would be ~12% if warrants
were exercised).
We calculate a $7.5+ bn equity raise reduces GS’s gross leverage by ~350 bps to
~20x (net by ~200 bps to ~12.5x) & boosts the Tier 1 ratio by ~200 bps to ~13.5%.
Pro forma book/share is ~$100 & EPS dilution is ~5% (would be ~12% if warrants
were exercised).
NH:
Warren Buffett is the Ultimate Stamp of Approval
Given Buffett’s track record, we think his 10-20% stake in GS lends credibility to
the firm’s business model, client franchise, risk mgmt capabilities, & its balance
sheet. This should also help GS get back on the offensive (for distressed assets or
failed banks?) but the big question is whether this move will be enough to settle
credit market concerns & enable GS to roll unsecured long-term debt at reasonable
levels (we think it should – we’ll take ‘the Oracle’ over retail bank deposits).
Given Buffett’s track record, we think his 10-20% stake in GS lends credibility to
the firm’s business model, client franchise, risk mgmt capabilities, & its balance
sheet. This should also help GS get back on the offensive (for distressed assets or
failed banks?) but the big question is whether this move will be enough to settle
credit market concerns & enable GS to roll unsecured long-term debt at reasonable
levels (we think it should – we’ll take ‘the Oracle’ over retail bank deposits).
NH:
Valuation: Looks Better, But Environment & Deal Cost Keep Us Neutral
We think the raise could help calm the client franchise & allay some concerns in
the credit markets. That said, while we have a lot of confidence in Goldman,
concerns around profitability, the economy, several parts of the debt markets & the
model in general remain for now. Our 12-month PT is based on ~1.4x our fwd
book estimate.
We think the raise could help calm the client franchise & allay some concerns in
the credit markets. That said, while we have a lot of confidence in Goldman,
concerns around profitability, the economy, several parts of the debt markets & the
model in general remain for now. Our 12-month PT is based on ~1.4x our fwd
book estimate.
NH:
JP Morgan
NH:
GS announced that it is issuing perpetual preferred stock for $5 billion to
Berkshire Hathaway and raising at least $2.5B in a public equity offering.
We think the capital raise is positive in that it brings a respected investor
with experience in the sector (Salomon) to Goldman. Its cost is dilution of
about 10% from preferred dividends, common issuance, and Buffett warrants.
Berkshire Hathaway and raising at least $2.5B in a public equity offering.
We think the capital raise is positive in that it brings a respected investor
with experience in the sector (Salomon) to Goldman. Its cost is dilution of
about 10% from preferred dividends, common issuance, and Buffett warrants.
NH:
Goldman gets Buffett investment and endorsement. In another
attempt to turn negative sentiment, Goldman is raising $7.5 billion of
capital. This supplements permanent access to the Fed discount window
as part of GS’s Bank Holding Company status. Whether it needed
regulatory or ratings-based capital or not, GS higher capital ratios should
give investors confidence in its capital position and lead to a greater
ability to tap the public debt markets when needed next year.
attempt to turn negative sentiment, Goldman is raising $7.5 billion of
capital. This supplements permanent access to the Fed discount window
as part of GS’s Bank Holding Company status. Whether it needed
regulatory or ratings-based capital or not, GS higher capital ratios should
give investors confidence in its capital position and lead to a greater
ability to tap the public debt markets when needed next year.
NH:
Capital ratios to improve – how does GS use the cash? We think near
term that GS will choose to operate at a lower leverage ratio and increase its
already solid T1 ratio of 11.6% to approx. 13% level. We expect GS to
opportunistically use newly raised capital to buy distressed assets.
term that GS will choose to operate at a lower leverage ratio and increase its
already solid T1 ratio of 11.6% to approx. 13% level. We expect GS to
opportunistically use newly raised capital to buy distressed assets.
PM:
(Monkey — have alerted Assanka. Neil had to close his browser and reload…)
Cracking little software shop who built FT Alphaville
NH:
Lowering estimates. We lower our ‘08 and ‘09 est to $11.79 and $14.31,
respectively, accounting for an additional 18.5m shares, the $0.5B annual
div. on the preferred, and 37m new shares from Buffett’s warrants. We
partially offset this dilution with reinvested proceeds at a money fund rate
until GS deploys the new capital generating ~$200 MM/year. We model a
slight accretion to the BV/share, and low- to mid-teens ROEs for ‘08/’09.
respectively, accounting for an additional 18.5m shares, the $0.5B annual
div. on the preferred, and 37m new shares from Buffett’s warrants. We
partially offset this dilution with reinvested proceeds at a money fund rate
until GS deploys the new capital generating ~$200 MM/year. We model a
slight accretion to the BV/share, and low- to mid-teens ROEs for ‘08/’09.
Maintain our OW. We maintain our OW rating based on a superior business
mix and firm culture. Mgmt. and regulators are addressing investor/client
concerns about capital adequacy. Based on the CDS spreads, which closed at
383bps, GS is still under stress, but less now with the additional capital.
NH:
Bank of America
NH:
Bottom Line: Goldman Sachs announced last night that the firm aims to raise $7.5B or more in a mix of both common and preferred shares. GS has reached an agreement to sell $5.0B of perpetual preferred shares to Berkshire Hathaway, Inc. in a private offering.
Company will drive lower leverage and likely lower ROEs over time, perhaps sooner than later, see our
9/22/08 piece, MS & GS Brokers No More? Good News & Bad News of Transition to Bank Holding
Companies), though well worth it in our view in today’s environment.
NH:
Management Comments Regarding Transaction: “We are pleased that given our longstanding relationship, Warren Buffett, arguably the world’s most admired and successful investor, has decided to make such a significant investment in Goldman Sachs. We view it as a strong validation of our client
franchise and future prospects,” said Lloyd C. Blankfein, Chairman and CEO of The Goldman Sachs Group, Inc.
franchise and future prospects,” said Lloyd C. Blankfein, Chairman and CEO of The Goldman Sachs Group, Inc.
Buffet Comments on Transaction: “This investment will further bolster our strong capitalization and liquidity position.” “Goldman Sachs is an exceptional institution,” said Warren Buffett, Chairman and CEO of Berkshire Hathaway, Inc. “It has an unrivaled global franchise, a proven and deep management
team and the intellectual and financial capital to continue its track record of out performance.”
NH:
Maintain Estimates Pending Deal Pricing: We maintain our below the street FY’08 and FY’09 estimates of $11.90 (cons=$13.10) and $14.69 (cons=$16.00) respectively until we receive confirmation around deal pricing. At this time we expect the transaction to be ~2% accretive to book value per share of $99.30 on 428 million of shares out at q3’08 end (even more so to tangible book of $87.11) at the cost of
~20% dilution to EPS and (less so to) ROE. Changes to our model remain pending post the offering.
~20% dilution to EPS and (less so to) ROE. Changes to our model remain pending post the offering.
NH:
and finally this from Bernstein
NH:
In typical Goldman Sachs fashion, senior management has reacted decisively to the global credit crisis. On Sunday, the company announced that it had elected to become a bank holding company.
NH:
against a wide pool of collateral and obtained a lender of last resort for its UK broker-dealer subsidiary.
Yesterday evening, Goldman announced a $7.5 billion capital raise to boost its capital strength and to quickly bring its balance sheet leverage into line with that of a commercial bank. The company stated that it was going to raise at least $2.5 billion in common equity in a public offering and that Berkshire Hathaway was investing $5.0 billion in GS perpetual preferred stock. The preferred has a dividend of 10
percent and is immediately callable at any time at 10% premium. Linked to the offering, Berkshire Hathaway will receive five-year warrants to purchase $5 billion of GS common stock at $115/share.
NH:
• The capital increase will substantially strengthen the company’s net cash capital position to +$41 billion
and will bring the firm’s gross and net leverage to 20.3x and 18.3x, respectively from 23.7x and 21.2x.
and will bring the firm’s gross and net leverage to 20.3x and 18.3x, respectively from 23.7x and 21.2x.
Bernstein believes that the combination of Monday’s regulatory change to a bank holding company structure, the addition of $7.5 billion in capital and the endorsement of Warren Buffett should quickly end credit market debate about the capitalization and liquidity position of Goldman.
• As a result of the dilutive impact of the $2.5 billion of common equity raise, coupled with the expected $500 million increase in annual preferred dividends tied to the $5.0 billion preferred equity issuance, we are reducing GS’ 2008 and 2009 EPS to $11.70 and $13.34, respectively, from $11.93 and $14.68.
NH:
• Concurrently, we are reducing our price target per share on Goldman Sachs to $165 from $170. We rate
GS Market-Perform.
Investment Conclusion
Long term, Goldman Sachs is the most direct play on the recovery of the international securities markets, and, notably, on the rebound of the investment banking business. Goldman has the highest percentage of revenue coming from the profitable (and high ROE) M&A and equity underwriting businesses and should generate the highest ROE of the large capitalization banks and brokers at the top of the cycle.
GS Market-Perform.
Investment Conclusion
Long term, Goldman Sachs is the most direct play on the recovery of the international securities markets, and, notably, on the rebound of the investment banking business. Goldman has the highest percentage of revenue coming from the profitable (and high ROE) M&A and equity underwriting businesses and should generate the highest ROE of the large capitalization banks and brokers at the top of the cycle.
NH:
Unfortunately, the much hoped for investment banking and capital markets upcycle may be some time away. We note that the high margin businesses of investment banking are entering a cyclical slowdown,
mutual fund flows are negative, private equity is being constrained by an inability to finance new deal
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
PM:
Thank you for all that
PM:
And a HT to Bryce for pulling stuff together
PM:
Plenty to eat
NH:
yup a big buffet there for you all
NH:
NH:
comments below on BGY
NH:
not sure why but Merrill did raid the market for stock this mornig
NH:
picked up 270m shares for EDF at 274p
NH:
that’s 27% of the company
NH:
not sure they are worried about a counter bid
NH:
but what they don’t want is investors electing to take the contingent value rights
NH:
sorry that shoudl have been 774p
NH:
I will come back to these later, but analyst reckon these could be really valuable
NH:
the CVR’s are notes with the payout tied to future production at BGY
NH:
could be very lucrative
NH:
PM:
Anyway, the Buffett investment has provided support for the market??
NH:
small
NH:
FTSE 100 currently up 6.9 points at 5,142.6
PM:
And what about our glorious banks?
NH:
that particular protected species are up this morninig
Royal Bank of Scotland Group (RBS:LSE): Last: 212.25, up 9 (+4.43%), High: 213.50, Low: 200.00, Volume: 26.23m
HBOS (HBOS:LSE): Last: 188.60, up 8.4 (+4.66%), High: 190.00, Low: 180.20, Volume: 20.27m
Barclays (BARC:LSE): Last: 364.00, up 6.75 (+1.89%), High: 373.75, Low: 351.50, Volume: 11.61m
PM:
The exception is Lloyds
Lloyds TSB Group (LLOY:LSE): Last: 257.00, down 4.75 (-1.81%), High: 264.00, Low: 250.50, Volume: 22.10m
PM:
Seeing the HBOS /Lloyds bid spread shrink this morning
NH:
yeah, got a bit wide yesterday I think
NH:
actually on Lloyds a slighty cautious note has come out of Caz this morning
NH:
On the acquisition of HBOS, we expect a core tier 1 ratio of 5.4% by 31 December 2008E; this assumes £3bn of fair value adjustments.
NH:
Clearly there is scope for disposals but market conditions mean timing is uncertain.
We believe that to assuage the fear surrounding HBOS, the new entity needs a higher capital ratio after fair value adjustments.
We believe that to assuage the fear surrounding HBOS, the new entity needs a higher capital ratio after fair value adjustments.
NH:
Lloyds traditionally runs with a core tier 1 above 6% and we think it should 6.5%-7% in the near term.
NH:
Potential cost savings make this an attractive deal for Lloyds. Looking to the long term and even post capital raising, we estimate “normalised” EPS of c.60p.
There are fewer risks from new regulations and political interference in commercial banking than capital markets, in our view.
There are fewer risks from new regulations and political interference in commercial banking than capital markets, in our view.
NH:
We retain an IN-LINE recommendation as expectations of equity issuance prevail across the domestic banks, yet once resolved we see relative attractions in the lower-risk business mix of Lloyds and the benefit of cost savings (and a re-based dividend) to help combat the higher loan impairment that most observers anticipate.
NH:
all told precious little positive comment on the banks this morning
NH:
they all remain pretty bearish
NH:
: none more so than Jonathan Piece at Credit Suisse
NH:
he did a really interesting note yesterday
NH:
which ended with this rather good pay off line
NH:
Overall therefore, any light at the end of the tunnel for the sector could prove to be the regulatory steam train charging towards it at high speed. In this context, and given the prospect for significant deterioration in the meantime (still our immediate focus) we would continue to avoid the UK domestic banks, trading as they are on 1.4 times tangible book value.
PM:
yeah read that
PM:
good note
PM:
the general thrust of it was that banks are going to have to raise more capital
PM:
because the process of de-leveraging would pace further pressure on balance sheets
PM:
and the note quoted a recent speech from John Gieve at the BoE
PM:
here’s the main line
PM:
In short, the process of deleveraging that was designed to alleviate pressure on banks’ capital position can lead to an additional wave of credit losses, coupled with higher write-off rates, given the lower level of property prices. And, welcome though the reforms of Basel II and accounting rules are in many respects, they can accentuate the squeeze on capital because the requirements are based on risk weights which rise when arrears are increasing and collateral values are falling
NH:
anyway, Mr Pierce has penned another note this morning
NH:
reflecting the worries emerging from the Treasury MOAB
NH:
cash market conditions have deteriorated again with relatively little liquidity more than one day out (of course things are better than mid last week with very near term cash abundant, indeed the Bank of England actually took money out of the system this morning as rates fell markedly below base – furthermore, the standing DEPOSIT facility at the Bank of England, not to be confused with the standing lending facility, took £9.4bn of balances at 100bps below base rate yesterday).
NH:
The main problem again is in US$ cash. 3m LIBOR spreads are therefore expected to widen notably, with £ indicated around 6.07% today.
NH:
Given falling base rate expectations over the next few months (60% chance of a cut now priced in for October) this would represent a spread to 3m SONIA of around 127bps – considerably wider than any point over the last year. Futures contracts
are also widening out with December 2008 contracts pointing to a spread of 142bps (Friday night it was 122bps) and even
March 2009 is now at 100bps.
are also widening out with December 2008 contracts pointing to a spread of 142bps (Friday night it was 122bps) and even
March 2009 is now at 100bps.
NH:
• In credit markets, CDS is widening a little as well. The senior financials index across Europe is trading around 107bps today versus around 95bps yesterday, with most UK banks around 5-10% wider, albeit still much tighter than middle of last week.
• UK RMBS is also indicated a little wider today, but nothing too significant, with Permanent AAA around 240bps from around 230bps yesterday.
NH:
• So overall, pricing a little worse in CDS space, but the most notable news is in cash markets. It’s also worth noting BBA numbers out this morning, with big bank net mortgage lending of just £2.1 billion in August, less than half the average over the
previous six months (£4.7bn) which was itself depressed. Just 21,086 loans for house purchase were approved, down from 22,239 the prior month indicating continued tight credit availability (as suggested by our weekly index). It is also worth noting
that personal deposits increased by just £0.2bn against a six month average of £2.2bn, although this can be quite volatile.
previous six months (£4.7bn) which was itself depressed. Just 21,086 loans for house purchase were approved, down from 22,239 the prior month indicating continued tight credit availability (as suggested by our weekly index). It is also worth noting
that personal deposits increased by just £0.2bn against a six month average of £2.2bn, although this can be quite volatile.
• As before, we remain cautious UK bank equities.
NH:
and while we are talking about the banks, this has come out of Panmure this morning
NH:
by Sandy Chen
NH:
Sector note: This insubstantial pageant faded
NH:
Stepping back from the fray, it still looks bad for banks. Short-term, we see
further losses and write-downs, particularly from counterparty defaults.
Medium-term, we see rising capital pressures. And we expect economies to
remain starved of credit for years. We remain underweight the sector, and
reiterate Barclays and RBS as our key Sells.
further losses and write-downs, particularly from counterparty defaults.
Medium-term, we see rising capital pressures. And we expect economies to
remain starved of credit for years. We remain underweight the sector, and
reiterate Barclays and RBS as our key Sells.
NH:
The whirligig of time is wreaking its revenge on global financials. The US Treasury
bailout programme, the bankruptcy of Lehman Brothers, the bailout of AIG, and (it
seems a long time ago) the bailouts of Fannie Mae and Freddie Mac, have stirred up a
tempest of write-downs, settlement payouts and counterparty defaults that could
overwhelm the global financial system. We are not exaggerating.
bailout programme, the bankruptcy of Lehman Brothers, the bailout of AIG, and (it
seems a long time ago) the bailouts of Fannie Mae and Freddie Mac, have stirred up a
tempest of write-downs, settlement payouts and counterparty defaults that could
overwhelm the global financial system. We are not exaggerating.
In the medium term, we expect that continued deterioration in the credit and capital
market environments will lead to a significant rise in risk weightings, leading to further capital pressures. And if we normalise the risk weightings across banks (an admittedly imperfect thing to do), we see Tier 1 capital shortfalls of roughly £12bn for BARC and £14bn for RBS.
NH:
: Finally, we side with F. A. Hayek and the Austrian School of economists in expecting that this credit crunch will last for several years, largely because economies will remain starved of credit. In our view, government bailouts will only prolong the process of structural readjustment, which includes further 20% falls in US and UK house prices, and all the consequences that implies.
We have again cut forecasts for all of our banks. And we note that one of the main
effects of the recent equity and debt capital issuance by all the banks has been a longterm dilution of ROICs – thus a long-term diminution of many target valuations.
Although we have a smattering of recommendations that are not Sells, we maintain our Negative stance on the sector. We reiterate BARC and RBS as our key Sells, on both earnings and capital risks
NH:
PM:
Might also mention on the HBOS lloyds front — we’ve had all this stuff coming out of Scotland recently
PM:
The Scottish Solution
PM:
Try and get Sir Peter Burt to come back and rescue Bank of Scotland
PM:
it aint going to happen — according to alex potter
PM:
Here’s his note
PM:
Press reporting a Bank of Scotland carve-out being planned
The Scotsman is reporting that Sir Peter Burt (ex-Governor or CEO of BoS)
is looking at attempting to buy various portfolios back from Lloyds/HBoS to
reconstitute the a new BoS . Jim Spowart (founder of HBoS s Intelligent
Finance unit, Standard Life Bank and a founder of RBS s Direct Line unit)
seems to also be part of the team.
Management credibility is good
Clearly, both of these managers have wide experience in the sector, intimate
knowledge of the company and a good track record.
The Scotsman is reporting that Sir Peter Burt (ex-Governor or CEO of BoS)
is looking at attempting to buy various portfolios back from Lloyds/HBoS to
reconstitute the a new BoS . Jim Spowart (founder of HBoS s Intelligent
Finance unit, Standard Life Bank and a founder of RBS s Direct Line unit)
seems to also be part of the team.
Management credibility is good
Clearly, both of these managers have wide experience in the sector, intimate
knowledge of the company and a good track record.
PM:
Strategically, Lloyds could sacrifice BoS
Firstly, there are clearly political sensibilities surrounding this deal, especially
in areas such as Scottish job losses. Our current UK administration has
made its preference for Scotland over England clear already in this deal and
such a carve-out would make the deal a smoother process. Further, the
quantum of cost savings & pricing power that Lloyds-HBoS would command
would be far larger outside Scotland, so the deal strategy remains relevant.
Firstly, there are clearly political sensibilities surrounding this deal, especially
in areas such as Scottish job losses. Our current UK administration has
made its preference for Scotland over England clear already in this deal and
such a carve-out would make the deal a smoother process. Further, the
quantum of cost savings & pricing power that Lloyds-HBoS would command
would be far larger outside Scotland, so the deal strategy remains relevant.
PM:
The problem remains funding; this is where a carve-out falls
In 2001, old BoS had a 219% loan-deposit ratio (LDR). In 1H08, the HBoS
corporate bank had a 261% LDR. A carve-out would likely be most of the
HBoS corporate bank plus a limited part of HBoS s (better funded) retail
business North of the border, we feel. This would still have a >200% LDR,
we estimate. This would deflate Lloyds acquired LDR (177% currently)
which would be attractive to Lloyds, in our view but we struggle to see how a
carve-out would fund itself in current markets. Perhaps a Chinese backer
could be found (as MS US has managed) but this seems relatively unlikely.
Lloyds remains beholden to funding markets and not that cheap
Lloyds now trades on 0.95x pro-forma 2008E book value and yields c.7.5%
(2009E). This is not explicitly cheap and the combined group s 163% LDR
(from Lloyds own 142%) remains a major funding issue. If funding markets
normalise, this business could look marginally cheap. If they remain frozen
well into 2009, new Lloyds could react a lot like old HBoS .
In 2001, old BoS had a 219% loan-deposit ratio (LDR). In 1H08, the HBoS
corporate bank had a 261% LDR. A carve-out would likely be most of the
HBoS corporate bank plus a limited part of HBoS s (better funded) retail
business North of the border, we feel. This would still have a >200% LDR,
we estimate. This would deflate Lloyds acquired LDR (177% currently)
which would be attractive to Lloyds, in our view but we struggle to see how a
carve-out would fund itself in current markets. Perhaps a Chinese backer
could be found (as MS US has managed) but this seems relatively unlikely.
Lloyds remains beholden to funding markets and not that cheap
Lloyds now trades on 0.95x pro-forma 2008E book value and yields c.7.5%
(2009E). This is not explicitly cheap and the combined group s 163% LDR
(from Lloyds own 142%) remains a major funding issue. If funding markets
normalise, this business could look marginally cheap. If they remain frozen
well into 2009, new Lloyds could react a lot like old HBoS .
PM:
Not very supportive, eh?
NH:
NH:
actually just going back to the note from Pierce at Credit Suisse
NH:
Sam has just sent round a really interest email
NH:
it seems that lending in the US non-financial CP market has collapsed
NH:
just nothing there
NH:
now last week the spreads over risky CP and non-financial AA paper was already a record levels last week
NH:
but the latest release from the Fed shows things are getting worse
PM:
This is from the Fed
PM:
“Trade data insufficient to support calculation of the 30-day AA nonfinancial, 60-day AA nonfinancial, 90-day AA nonfinancial, 90-day A2/P2 nonfinancial, and 90-day AA financial rates for September 22, 2008.
PM:
Calculated Risk had an interesting post on this few days ago
PM:
The spread between good and bad CP exploded to 2.8% ahead of the MOAB
PM:
Seem as one of the key triggers for Fed/treasury action
NH:
this seems to suggest that the crisis is spreading beyond Wall Street to Main Street USA
NH:
look at these rates
NH:
so a AA rated non-financial has to pay
NH:
2.09% overnight to borrow
NH:
and 2% for 7 days
NH:
and these are not risky companies
NH:
as for 30-day, 60-day and 90-day forget it
NH:
the Fed can’t get any quotes
NH:
no one will lend
NH:
Trade data insufficient to support calculation of the 30-day AA nonfinancial, 60-day AA nonfinancial, 90-day AA nonfinancial, 90-day A2/P2 nonfinancial, and 90-day AA financial rates for September 22, 2008.
PM:
Paul Davies has just sent round some interesting research on this
PM:
From Morgan Stanley’s interest rate desk
PM:
Interest Rate Strategist
String the Bow: Money Market Update
String the Bow: Money Market Update
Cash hoarding and a reluctance to lend for any term longer than overnight characterised the action in today’s money markets.
PM:
Although overnight cash remains abundant: both USD and GBP O/N rates again traded down as far as they could – to 0%; and to the Standing Deposit Facility’s 100bp below Base Rate, respectively – term LIBOR-OIS spreads widened again today, as cash hoarding intensified and the term markets were barely open. Indeed, in the US CP market, the Fed declined to calculate rates for 1-3 month AA Non Financial CP, stating that no data were available.
Although overnight cash remains abundant: both USD and GBP O/N rates again traded down as far as they could – to 0%; and to the Standing Deposit Facility’s 100bp below Base Rate, respectively – term LIBOR-OIS spreads widened again today, as cash hoarding intensified and the term markets were barely open. Indeed, in the US CP market, the Fed declined to calculate rates for 1-3 month AA Non Financial CP, stating that no data were available.
Whatever the long-term merits of the TARP plans proposed by the Administration, the money markets, unlike long-duration markets, are (as we noted on Friday) too exposed to immediate systemic risk to discount an improvement that has not happened yet.
PM:
The recent sharp decline in market confidence needs to be turned around quickly: and the immediate measures announced thus far by the Fed far have evidently not done the trick.
The authorities still have a couple of strings to their bow before resorting to non-market measures (see our notes from today and Friday on the Swedish banking crisis). These are: moral suasion to encourage term interbank lending; and official rate cuts. The scope for the former in current markets looks insufficient: the time for the latter, it seems, may be rapidly approaching.
PM:
Got that? “moral suasion”
NH:
why, oh why are the banks up this morning
NH:
clearly everyone is still hoarding cash
PM:
yep
NH:
some worrying stats
NH:
there has been a large jump in the cost of insuring US govt debt against default
NH:
29.2 bps up from 26.5bps
NH:
The cost of insuring 10-year
U.S. government debt against default rose to a record high on
Wednesday as investors fretted over the feasibility of the
government’s $700 billion plan to contain the financial crisis.
Credit default swaps on 10-year Treasury debt expanded to
29.2 basis points — its widest ever — from 26.5 basis points
on Tuesday, according to CMA, a specialised data provider.
CMA said CDS on five-year widened to 22.0 basis points from
20.5 basis points.
U.S. government debt against default rose to a record high on
Wednesday as investors fretted over the feasibility of the
government’s $700 billion plan to contain the financial crisis.
Credit default swaps on 10-year Treasury debt expanded to
29.2 basis points — its widest ever — from 26.5 basis points
on Tuesday, according to CMA, a specialised data provider.
CMA said CDS on five-year widened to 22.0 basis points from
20.5 basis points.
NH:
that was from our Capital Markets team
NH:
hat tip to David Oakley
PM:
Er, so why is this market up???????????
PM:
Everyone should have their tin hats on
PM:
No CP, no working capital for some very very big companies
NH:
and that could mean in extremis that people don’t get paid
NH:
a lot of big corporates borrow in the CP market to make things like payroll payments
NH:
everyday stuff
NH:
very scary
NH:
NH:
right, we are going to try something a little ambitious for us
NH:
we are going to try and put a value on Buffett’s Goldman warrants
NH:
Paul has got the Black Shcoles calculator out
NH:
why are not sure what vol fig to give Goldman at the moment
PM:
Not sure which interest rate either
PM:
Anyway — at strike of 115 and share price of 125
PM:
185 days to expiry
PM:
sorry 1825 days
PM:
30% vol
PM:
Rates 3.8%
PM:
Calls wort $46 apiece
NH:
right here goes
NH:
the final figs going in
PM:
$2bn worth of warrants??
PM:
Fair value
PM:
I mean the warrant grant has an intrinsic value of $2bn itelf
NH:
so he gets $500m a year in div
NH:
and he has got warrants worth $2bn
NH:
and he has paid out just $5bn
NH:
hat tip to Mr B
PM:
NH:
v humbling for GS
NH:
taken to the cleaners for a the Buffett seal of investment approval
PM:
If we use a vol of 50% as suggesed by Soviet Planner below , the warrants are worth closer to $3bn
NH:
anyway, we are rank amatuers with the BS calculator
PM:
I will second that
PM:
NH:
so if anyone else has a fig pls get in touch
PM:
lets mvoe on
PM:
PM:
let’s have a look at a few individual stocks
NH:
OK
NH:
was going to talk about British Energy
NH:
but not for the first time Montesquieu has stolen my thunder
NH:
and summed things up beautifully
NH:
anyway, shares still to performer in the FTSE 100 this morning
NH:
EDF offered 774p a share
NH:
a 9p raise on their previous offer, which was knocked back by a couple of shareholders
NH:
but as MT said, there is an alternative
NH:
700p plus a contingent value right
NH:
in fact, i think you can have more than one CVR – up to 3
NH:
anyway Merrill Lynch acting on behalf of EDF has raided the market and picked up 280m shares – that’s around 27% of the company
NH:
now there is plenty of debate in the market as to what these CVR’s are worth
NH:
one analyst says upwards of 500p
NH:
for the record the CVR’s
NH:
are notes linked to BE’s future performance
NH:
it is all very complex
NH:
but there were a couple of rebel shareholders – Invesco was one – who blocked an earlier offer from EDF because they wanted a greater interest in BE going forward
NH:
and they look to have got that
PM:
(v funny cmsd2 )
NH:
just digging around in the statement for the terms of the CVR’s
NH:
here’s what I have found so far
NH:
The British Energy Board believes that, in reaching a decision whether to elect for the Partial
CVR Alternative, British Energy Ordinary Shareholders should take into account among
others, the following factors:
CVR Alternative, British Energy Ordinary Shareholders should take into account among
others, the following factors:
NH:
that any payments under the Nuclear Power Notes will be spread over the next 10
years;
that trading in them could be illiquid or otherwise affected by factors not directly
related to the electricity market or British Energy’s output. This may affect the price
which could be obtained on any sale during the lifetime of the Nuclear Power Notes;
that the price and value of the Nuclear Power Notes and any payments under the
Nuclear Power Notes may fluctuate significantly over their life;
years;
that trading in them could be illiquid or otherwise affected by factors not directly
related to the electricity market or British Energy’s output. This may affect the price
which could be obtained on any sale during the lifetime of the Nuclear Power Notes;
that the price and value of the Nuclear Power Notes and any payments under the
Nuclear Power Notes may fluctuate significantly over their life;
NH:
that: