Markets live chat transcript for the chat ending at 12:11 on 26 Sep 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Hi
PM:
Welcome to ML form AV
PM:
Bit rushed this am
PM:
TOO MUCH GOING ON
PM:
Neil is here
PM:
But he’s been laughing to much to long on
PM:
NH:
sorry
NH:
just been looking at Fortis
NH:
and the comments of its CEO Verwilst
NH:
now this must be the weakest defence ever
NH:
*FORTIS CEO VERWILST SAYS MOST RECENT ANALYSTS REPORTS GIVE PRICE TARGET
SIGNIFICANTLY HIGHER THAN TODAY’S STOCK PRICE
NH:
so, that settles that
PM:
NH:
analysts reckon it is worth more than the current share price
PM:
Any other gems??
NH:
plenty
NH:
how’s this for a teaser
NH:
*FORTIS BANK PRESIDENT DIERCKX SAYS WILL GOOD GIVE GOOD NEWS BEFORE END
OF
DECEMBER
PM:
PM:
Xmas present
PM:
Be patient
NH:
FORTIS BANK PRESIDENT DIERCKX SAYS TARGETTING 5.5 BILLION OF NON
CORE ASSETS FOR POSSIBLE SALE
CORE ASSETS FOR POSSIBLE SALE
NH:
*FORTIS SAYS FUTURE NEED FOR ADDITIONAL CAPITAL WILL ONLY BE IN 12-18
MONTHS AS
IT STARTS TO FOLD IN LARGEST PART OF ABN AMRO
NH:
*FORTIS BANK PRESIDENT DIERCKX SAYS FORTIS HAS NO LIQUIDITY ISSUE
PM:
They dont need to raise money of course
NH:
*FORTIS BANK PRESIDENT DIERCKX SAYS GOING TO SELL MORE NON CORE ASSETS
PM:
decided to sell assets into the biggest financial panic in 70 years
NH:
of course the backstory here is that the Fortis price has been shredded in recent days on concerns about its balance sheet
PM:
been down every day this week, I think.
PM:
Price was off 12 per cent earlier
PM:
Off 8.4 % onb my screen — but that’s delayed i think
PM:
Ridiculous panic earlier.
PM:
The stocks was off – all these notes coming out on its liquidity position – so the bank breezily announces its going to hold a media conference at 9.30.
PM:
Everyone goes into ORBIT – stock goes down the plug hole
PM:
Then its clear that the Fortis felts rang up all the news wires in a mad panic saying THERE IS NO NEWS
PM:
NO BIG ANNOUNCEMENT!
PM:
Damage already done of course.
PM:
Is there a shorting ban in Amsterdam
NH:
Sure is – across the board.
PM:
So we can pose the Q – what price Fortis in a free market?
NH:
We can – but at the risk of boring the readers with that.
PM:
But what are the analysts saying??
NH:
well, they are all toeing the party line
NH:
Fortis is fabulous. worth much more than the current price
NH:
(Minerva talks off)
PM:
(shars off 8.5p at 72) — in auction tho
NH:
back to Fortis
NH:
this is from ING
NH:
The Fortis share price ended down 6.3% following a very volatile session in the wake of rumours regarding the company’s capital adequacy.
NH:
Refinancing needs and liquidity profile. Fortis has faced deposit outflows following negative media attention and market rumours regarding its capital adequacy. Clearly, the pressure on its share price is not helping to reverse this process, however, outflows need to be significant before they result in funding problems. Fortis Bank’s CEO has denied rumours over liquidity issues; Fortis needs to refinance €3-5bn in 2H08 and €7-8bn in 2009. Refinancing will become more expensive but we do not believe that Fortis will face major difficulties. Fortis is not very dependent on wholesale funding given its loan-to-deposit ratio of an estimated 120-130%. Furthermore, Fortis has banking and insurance assets that it can re-discount with the ECB.
PM:
That feels a bit blasé to me
NH:
Most of the discussion is over this solvency plan they are trying to arrange with the Dutch central bank.
NH:
Regulatory deadlines approaching. Deadline of 3 October for approval of EU remedies (selling some commercial activities to Deutsche Bank) by EU commission and Dutch Central Bank (DNB). This is an important milestone. We expect the approval to be granted. Without approval, the transfer of activities cannot begin. Once the EC remedies are approved the DNB is not in a position to wait for the outcome of its review of the consortium’s integration plan. We see a risk that the DNB will only giveits approval upon condition of Fortis providing more capital to Fortis Bank Nederland (the Dutch holding), hence, causing further delay. What are the consequences? Fortis cannot start the planned transfer and integration of activities in the Netherlands, such as factoring, leasing, etc. The impact of this delay should be modest, however. Fortis can start, as scheduled, with the transfer and integration of acquired assets outside the Netherlands (dependent upon EC remedies approval), such as the private bank operations
NH:
The key question in the case of a delay is for how long? In 4Q09, the transfer and integration of the retail activities of ABN Amro are planned, which are key to the realisation of synergies. If the DNB delays its approval for the integration plans we expect a negative market reaction as this would be perceived as a further delay in the realisation of €1.3bn in pre-tax synergies, although the impact would only be material if the delay was of more than 12 months, in our view.
NH:
Actually Bryce has located some more stuff.
NH:
This is from KBC – very supportive of poor Fortis.
NH:
Cant copy and past for some reason.
NH:
Talking about unfounded spec regarding its solvency and liquidity position.
NH:
A demo of the ridiculous rumours can get is the rumour (according to De Tijd) that the Dutch central bank would have asked another bank to substitute its role as lender of last resort…
NH:
Fortis trading at less than four times earnings. KBC have a target price of €18.
NH:
OD DO Securities
NH:
Fortis plummeted 20% during trading yesterday before closing down 6.5%, even Recommendation Buy (1) though the sector rallied as a whole. The share price was hit by a rumour according to which the Dutch Central Bank had demanded that the Dutch Rabobank make cash available to Fortis. We consider this to be unlikely: (i) the group’s maturities in terms of refinancing are very limited for both the end of this year and the next and (ii), the CDS spread is not compatible with a group experiencing cash flow problems.
NH:
In a press release towards the end of trading, Fortis “categorically denied rumours currently circulating on the market and confirmed its earlier statements”.
As such, there is nothing new: The re-rating of the share still depends on the management’s ability to sell off assets. We believe management has become aware of the need to substantially step up its disposal programme by the end of the year
NH:
NH:
Looks like Minerva is going to unwind at 60p in the auction
NH:
here’s the statement
NH:
a few lines in here that will spook people
NH:
Limitless LLC-Offer Update
NH:
WITHDRAWAL of indicative offer by Limitless WORLD LLC (“Limitless”) for Minerva PLC (“MINERVA”)
On 21 July 2008 Minerva announced that it had received a proposal from Limitless to acquire Minerva at 160 pence in cash per Minerva share. On 17 September 2008, Minerva announced that negotiations between the parties were ongoing and that Limitless required third party consents as a waivable pre-condition to an announcement of an offer for Minerva. As a result of being unable to obtain the necessary consents on terms satisfactory to Limitless, Limitless announces that it no longer intends to make an offer for Minerva.
On 21 July 2008 Minerva announced that it had received a proposal from Limitless to acquire Minerva at 160 pence in cash per Minerva share. On 17 September 2008, Minerva announced that negotiations between the parties were ongoing and that Limitless required third party consents as a waivable pre-condition to an announcement of an offer for Minerva. As a result of being unable to obtain the necessary consents on terms satisfactory to Limitless, Limitless announces that it no longer intends to make an offer for Minerva.
NH:
third party consents as a waivable pre-condition to an announcement of an offer for Minerva
NH:
wonder what they are
PM:
very odd
PM:
PM:
Anyway — on to UK banks
PM:
PM:
Today’s price moves?
NH:
weak
NH:
one week on from the BAN and they are still weak
NH:
spooked by the delay in dropping the MOAB
NH:
sector is down
NH:
led, surprise, surprise, by Lloyds TSB
NH:
down a further 17p to 256.5p
NH:
a fall of 6%
PM:
Was just looking at the discount on the HBOS deal — now sitting at something like 17 per cent
PM:
What discount in a free market and with regulatory risk
NH:
and we note the comments from TFT1 below
NH:
we have heard the same thing – if the big institutional holders do not back the deal then the govt is going to make life very difficult for them
NH:
and here’s how the rest of the sector is performing
Barclays (BARC:LSE): Last: 368.75, down 1.25 (-0.34%), High: 375.75, Low: 353.00, Volume: 11.45m
Royal Bank of Scotland Group (RBS:LSE): Last: 215.00, down 5.5 (-2.49%), High: 217.75, Low: 207.50, Volume: 20.84m
HBOS (HBOS:LSE): Last: 177.60, down 6.4 (-3.48%), High: 181.80, Low: 175.00, Volume: 12.92m
NH:
of course it is not just the delay to the MOAB that is doing the damage
NH:
the continued seizure of the money market is affecting Lloyds in particular
NH:
the fact that WaMu, which is the US version of HBOS pretty much, was effectively seized by the regulators leaving equity and unsecured creditors facing wipe-out but with the depositors/assets taken on by JP Morgan.
NH:
that seems to have shaken people as does the Fortis stuff
NH:
this is the sort of reaction I have been hearing from around the trading floors this morning
NH:
WaMu is another example of the excesses continuing to be wiped out of the system after the bubble years for financials. It’s a very scary landscape but one where the strong are at least getting stronger but with the weak risking being wiped out.
NH:
Overall this is unfortunately what we need to see happen before we can move on from this crisis.
NH:
As our Trillion Dollar Mean Reversion chart helps demonstrate there are too many financial institutions chasing what looks to us like a dramatically smaller future profit pie going forward. So as difficult to take as it is, this is probably a healthy medium-term outcome even if the better short-term outcome would have been a straight take-over. Expect more consolidation and defaults at the smaller banks.
NH:
According to Bloomberg, WaMu has $28.4bn of publicly traded debt which makes it in the same ball-park as WorldCom as the 2nd biggest corporate bond default in history behind Lehman Brothers earlier this month (leaving AIG out of the equation for now). In terms of assets ($310bn) it’s the largest US bank failure (Lehman wasn’t a bank) in history, ahead of Continental Illinois ($40bn of assets in 1984 = $83bn in 2008 money). JP Morgan is acquiring the $310bn of assets. It’s not clear whether they will want to keep all of these so the de-leveraging trend may continue, thus increasing the need for some kind of TARP solution soon.
NH:
One worrying thing we picked up on in JP Morgan’s press conference was that they were making provisions for the deal based on US home prices going down a further 8%. We think the eventual outcome could be more than double this so although this looks to be a good deal for JP Morgan, it still may cause some issues further down the road.
PM:
Trillion Dollar Mean Reversion chart — wouldnt mind a butchers of that
NH:
trying to get hold of it
PM:
PM:
Got any more on WaMu??
PM:
This is the biggest bust in US banking history, after all
NH:
plenty
NH:
here’s what Meredith Whitney at O’Heimer thinks
NH:
JP Morgan Chase & Company
JPM Buys WM Deposits for $1.9B, Announces $8B
Common Equity Raise
JPM Buys WM Deposits for $1.9B, Announces $8B
Common Equity Raise
NH:
Thursday, after the close, the FDIC seized WM and concurrently sold the deposits
of $188B and substantially all of WM banks’ assets to JPM for $1.9B, (a 1.01%
deposit premium). JPM also announced an $8B common equity offering, that is
expected to price before the market opens Friday, at a yet-to-be determined price.
JPM had looked at WM for months, and to its advantage, waited with discipline on
price. WM’s deposits gives JPM a pro forma deposit total of $911B; making JPM
the largest depository in the U.S. JPM expects deposit run-off of $20-25B, giving a
deposit total of ~$890B. Including the equity raise, JPM’s estimated pro forma Tier 1
Ratio for 9/30/08 is 8.3%, down from 9.2% at 6/30/08.
of $188B and substantially all of WM banks’ assets to JPM for $1.9B, (a 1.01%
deposit premium). JPM also announced an $8B common equity offering, that is
expected to price before the market opens Friday, at a yet-to-be determined price.
JPM had looked at WM for months, and to its advantage, waited with discipline on
price. WM’s deposits gives JPM a pro forma deposit total of $911B; making JPM
the largest depository in the U.S. JPM expects deposit run-off of $20-25B, giving a
deposit total of ~$890B. Including the equity raise, JPM’s estimated pro forma Tier 1
Ratio for 9/30/08 is 8.3%, down from 9.2% at 6/30/08.
NH:
JPM provided a more cautious updated 3Q08 earnings outlook. JPM expects
markdowns of ~$3.0-3.5B on mortgage and leveraged loans (vs. $1.1B in
2Q08), significant reductions in risky exposures, and a benefit of credit spread
widening of ~$1B.
markdowns of ~$3.0-3.5B on mortgage and leveraged loans (vs. $1.1B in
2Q08), significant reductions in risky exposures, and a benefit of credit spread
widening of ~$1B.
NH:
JPM expects a ~$2B reserve build to its allowance for loan losses (vs. $1.3B in
2Q08), including ~$600M related subprime/prime mortgages (vs. $430m in
2Q08). JPM anticipates a $1.2B pre-tax writedown for FNM/FRE preferreds and
a $400M pre-tax auction rate securities buyback charge, as well as higher credit
costs related to the prime mortgage portfolio.
2Q08), including ~$600M related subprime/prime mortgages (vs. $430m in
2Q08). JPM anticipates a $1.2B pre-tax writedown for FNM/FRE preferreds and
a $400M pre-tax auction rate securities buyback charge, as well as higher credit
costs related to the prime mortgage portfolio.
NH:
JPM’s marks on the portfolio include national home price declines of 25% as the
base case (unemployment 7.0%), 28% as the deeper recession case
(unemployment 7.5%), and 37% as the severe recession case (unemployment
8.0%). We note that the Case-Shiller futures market currently anticipates a 33%
peak to trough decline in home prices.
base case (unemployment 7.0%), 28% as the deeper recession case
(unemployment 7.5%), and 37% as the severe recession case (unemployment
8.0%). We note that the Case-Shiller futures market currently anticipates a 33%
peak to trough decline in home prices.
NH:
It is important to acknowledge that the largest U.S. thrift just failed and did so
seamlessly with the commendable stewardship of the FDIC. Things could have
played out much worse for all deposit-taking parties involved. At 8/31/08, WM’s
$143B retail deposits were ~unchanged YTD. However, since 9/15/08,
deposit-outflows of $16.7B left WM with insufficient liquidity.
seamlessly with the commendable stewardship of the FDIC. Things could have
played out much worse for all deposit-taking parties involved. At 8/31/08, WM’s
$143B retail deposits were ~unchanged YTD. However, since 9/15/08,
deposit-outflows of $16.7B left WM with insufficient liquidity.
NH:
this is from Credit Suisse and has fewer numbers and more analysis
NH:
This evening, JPMorgan Chase announced the acquisition of Washington
Mutual’s banking operations from the FDIC. The acquisition makes sense
strategically and financially, on all fronts consistent with what we have come to
expect from this management team. More specifically, the transaction is
expected to be immediately accretive to earnings ($0.50 per share in 2009),
with the latter forecast inclusive of the cost of an $8 billion capital raise now in
the market. No acquisition is without risk. Management’s experience with
consumer credit (mortgages, home equity loans and credit cards) and merger
integration are critical in this case. We continue to recommend purchase of JPM
as a core financial services holding.
Mutual’s banking operations from the FDIC. The acquisition makes sense
strategically and financially, on all fronts consistent with what we have come to
expect from this management team. More specifically, the transaction is
expected to be immediately accretive to earnings ($0.50 per share in 2009),
with the latter forecast inclusive of the cost of an $8 billion capital raise now in
the market. No acquisition is without risk. Management’s experience with
consumer credit (mortgages, home equity loans and credit cards) and merger
integration are critical in this case. We continue to recommend purchase of JPM
as a core financial services holding.
NH:
Transaction details… What’s Being Purchased: Wamu’s banking
operations only; excluded are the holding company’s assets and liabilities
and the senior unsecured debt, subordinated debt, and preferred stock of
Washington Mutual’s banks. The acquisition is effective immediately. Price
Paid: $1.9 billion cash to the FDIC. Capital Raise: $8Bn of common stock
via public offering, in the market now.
operations only; excluded are the holding company’s assets and liabilities
and the senior unsecured debt, subordinated debt, and preferred stock of
Washington Mutual’s banks. The acquisition is effective immediately. Price
Paid: $1.9 billion cash to the FDIC. Capital Raise: $8Bn of common stock
via public offering, in the market now.
NH:
Financial implications… management is expecting the transaction to be 15%
accretive in 2009 (roughly $0.50 per share), 14% accretive in 2010, and 15% in 2011.
The forecast is reliant on the achievement of net cost savings of $1.5Bn by 2010 (15-
20% of Wamu’s noninterest expense base—reasonable when evaluated in the context
of prior bank mergers)—requisite investment spending to upgrade systems and
infrastructure have been factored in. Upside owes to the potential for more effective
cross-selling of banking and investment products through the Wamu branches, over
time (as this management has demonstrated with heritage Bank One, heritage Chase,
and more recently the Bank of New York branches). Transaction economics are further
supported by the marking down of the acquired loan portfolio by approximately $31Bn
(see Exhibits 1-2). Pre-tax merger costs are estimated at $1.5Bn.
accretive in 2009 (roughly $0.50 per share), 14% accretive in 2010, and 15% in 2011.
The forecast is reliant on the achievement of net cost savings of $1.5Bn by 2010 (15-
20% of Wamu’s noninterest expense base—reasonable when evaluated in the context
of prior bank mergers)—requisite investment spending to upgrade systems and
infrastructure have been factored in. Upside owes to the potential for more effective
cross-selling of banking and investment products through the Wamu branches, over
time (as this management has demonstrated with heritage Bank One, heritage Chase,
and more recently the Bank of New York branches). Transaction economics are further
supported by the marking down of the acquired loan portfolio by approximately $31Bn
(see Exhibits 1-2). Pre-tax merger costs are estimated at $1.5Bn.
NH:
Strategic implications… management of JPMorgan Chase has patiently waited for an
opportunity to meaningfully expand its branch banking presence in a shareholder
friendly fashion. This evening’s acquisition does just that, with footprint expansion into
attractive geographies (CA, FL and WA, each with significant market shares to build
from and increased market share in a number of existing markets) and significant
opportunities for realization of both expense and revenue synergies, as detailed above.
opportunity to meaningfully expand its branch banking presence in a shareholder
friendly fashion. This evening’s acquisition does just that, with footprint expansion into
attractive geographies (CA, FL and WA, each with significant market shares to build
from and increased market share in a number of existing markets) and significant
opportunities for realization of both expense and revenue synergies, as detailed above.
NH:
Estimates and target price… previously anticipated adjustments to our 3Q estimates
given the more challenging credit and capital markets environment coupled with the
$2Bn reserve addition related to this evening’s Wamu acquisition takes our 3Q08
estimate to a loss of $0.25 per share; full year 2008E now stands at $1.65 (old: $2.50).
Our above-consensus 2009 estimate is unchanged at $3.75; we are confident in the
achievability of forecast acquisition-related cost savings; we are less confident in the
cost of the current credit and capital markets cycle to the bank’
given the more challenging credit and capital markets environment coupled with the
$2Bn reserve addition related to this evening’s Wamu acquisition takes our 3Q08
estimate to a loss of $0.25 per share; full year 2008E now stands at $1.65 (old: $2.50).
Our above-consensus 2009 estimate is unchanged at $3.75; we are confident in the
achievability of forecast acquisition-related cost savings; we are less confident in the
cost of the current credit and capital markets cycle to the bank’
PM:
Sam has just reminded me that we did the Trillion Dollar reversion chart back in July.
NH:
here’s BarCap
NH:
In our view, JPM should benefit from its
entrenched management team, market share
gains among a changing landscape, and the
international expansion of AM, TSS and IB. Still,
near-term results could be constrained by elevated
credit costs, particularly on the consumer side,
and market-related write-downs.
entrenched management team, market share
gains among a changing landscape, and the
international expansion of AM, TSS and IB. Still,
near-term results could be constrained by elevated
credit costs, particularly on the consumer side,
and market-related write-downs.
NH:
We are initiating coverage on JPM with a 1-OW
rating and a $50 price target, which represents
15.2x our 2009 EPS estimate of $3.30. This is in
line with our previous rating and price target at
Lehman Brothers.
rating and a $50 price target, which represents
15.2x our 2009 EPS estimate of $3.30. This is in
line with our previous rating and price target at
Lehman Brothers.
NH:
Our sector outlook remains positive based on
numerous recent structural changes, which we
believe will be beneficial longer-term, particularly
for the larger names, as well as attractive
valuations for some. Still, we expect near-term
earnings to remain pressured. Within our Large-
Cap segment, any improvement in the credit
markets and competitive landscape as a result of
recent actions would be disproportionately
beneficial to our Integrated Provider sub-segment
(C, JPM, BAC), in our view.
numerous recent structural changes, which we
believe will be beneficial longer-term, particularly
for the larger names, as well as attractive
valuations for some. Still, we expect near-term
earnings to remain pressured. Within our Large-
Cap segment, any improvement in the credit
markets and competitive landscape as a result of
recent actions would be disproportionately
beneficial to our Integrated Provider sub-segment
(C, JPM, BAC), in our view.
PM:
thanks for all those
PM:
deserves a 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:
got more if anyone wants me to put them up on the site
PM:
PM:
Do you notice how everyone seems to be adopting our war analogies.
PM:
Gone from tin hats to battleships in the US.
NH:
Pearl Harbour is in there from Buffett – who is getting the Treasury to detox Goldman Sachs for him.
NH:
And then we’ve got Bush
NH:
If money isn’t loosened up, this sucker could go down.
NH:
Personally, I like the Dr Strangelove analogies
NH:
particularly the idea of Hank Paulson ridding the MOAB as it is dropped on financial markets
NH:
and Sam made a great illusion to this yesterday in his post
NH:
and the end of Dr Strangelove, Vera Lynn plays out in the background
PM:
PM:
Should mention the wider market
PM:
Footsie down 94.4 at 5201
PM:
Futures suggesting the Dow will give up all of yesterday’s rally
PM:
Kanjorski Rally
PM:
Suckers rally
NH:
just got some interesting credit stuff in
NH:
Bungle CDS is now out 1500bps
PM:
no way
PM:
Share price? down 2.25p at 19
PM:
Penny dreadful bank
NH:
and in spite of their evident trouble they are still advertising
NH:
could this be Equitable Life all over again
NH:
here are some more CDS prices from courtesey of credit suisse
NH:
Things are not so good in CDS space. UK bank 5yr spreads are generally indicated around 5-10% wider with Barclays at 200bps (180bps yesterday), HBOS at 300bps (262bps), Lloyds TSB at 190bps (179bps). B&B remains around 1500bps. Fortis is the main mover across Europe though at 450bps from 272bps yesterday.
NH:
actually CS has done some work on the marke reaction to this morning’s liquidity straffing from the BoE
NH:
Conditions in cash markets are a little better than yesterday thanks to the longer term liquidity adds announced this morning by the Bank of England, ECB and SNB. For example, the Bank of England is today offering US$30bn cash for one-week with a US$10bn overnight repo, compared with recent operations of US$40bn all overnight.
NH:
In addition, the Bank of England will start to conduct weekly auctions of 3m sterling money against the extended collateral list (including MBS) with the first a £40bn injection on Monday. As with the US$ operation, this won’t add net liquidity with a respective drain in near-term liquidity, but is aimed at assisting the “turn” (into year end) and the longer end of the curve where rates have become extremely dislocated in recent days. This has assisted cash markets and we expect 3m £ LIBOR to hold reasonably flat at 6.26% today, curbing the increases we’ve seen in recent days.
NH:
That would represent a spread to 3m SONIA of around 150bps. Furthermore, the December 3m £ basis has actually come in a little to around 150bps from 160bps. Obviously all of these spreads remain extremely wide, but are at least moving in the right direction. It is also interesting to note the Barker and Sentance speeches from yesterday (both MPC members). The tone was reasonably dovish (understandably) and the cash markets continue to price in a high chance of a rate cut next month – 68% in fact, with 109bps expected over the next year.
NH:
Clearly though, developments over the weekend will dictate where we move in the very near term. Medium-term, given our concerns on credit availability (as much a function of de-leverage as liquidity, in our view) we remain cautious UK domestic banks. Our weekly credit availability monitor will be published later this morning but conditions remain extremely tight (based on our analysis of the 4,500 mortgage and personal loan products across the industry) implying continued very low levels of mortgage approvals which in turn will drive property prices down further, in our view. On this subject, it is also worth noting the move in commercial property derivatives in recent days. This market (reasonably liquid) now implies a 40%+ drop in capital values.
NH:
PM:
Can we switch to JJB — as PC ntoes below — meltdown — stock off 60p at 41p!?!?!?!?
PM:
JJB Sports
NH:
well, things are looking pretty grim for the Mike Ashley wannabe who runs JJB Sports
NH:
share price has been obliterated this morning
PM:
what on earth has gone wrong?
NH:
er, I think it has something to do with this
NH:
from today’s half year results
NH:
Emphasis of matter – going concern
NH:
Without qualifying our conclusion, we draw attention to the disclosures in note
2 of the condensed financial statements concerning the group’s ability to
continue as a going concern.
2 of the condensed financial statements concerning the group’s ability to
continue as a going concern.
These include the following material uncertainties:
PM:
eyeyeye 
NH:
* ongoing availability of the original facilities given the actual and projected
covenant breaches;
covenant breaches;
* the ability to repay the bridging facility from asset sales or seasonal cash
flows;
* achieving the sale of non-core businesses and/or assets within the timescales
and at the values projected; and
* the achievability of forecasts and key assumptions within the forecasts.
NH:
These events and conditions, along with other matters as set forth in note 2,
indicate the existence of material uncertainties which may cast significant
doubt about the Group’s ability to continue as a going concern. The interim
financial information does not include the adjustments that would result if the
Group were unable to continue as a going concern, which would include writing
down the carrying value of assets, including goodwill, to their recoverable
amount and providing for any further liabilities that might arise as it is not
practicable to determine or quantify them.
indicate the existence of material uncertainties which may cast significant
doubt about the Group’s ability to continue as a going concern. The interim
financial information does not include the adjustments that would result if the
Group were unable to continue as a going concern, which would include writing
down the carrying value of assets, including goodwill, to their recoverable
amount and providing for any further liabilities that might arise as it is not
practicable to determine or quantify them.
PM:
PM:
no wonder the stock is off 64%
NH:
now, the guy who runs JJB is called Chris Ronnie
NH:
he is a big mate of Mike Ashley
NH:
he used to work for him
NH:
he bought a controlling stake in JJB a few years back
NH:
he bought the stake of Wigan FC boss Dave Whelan
NH:
with the help of some savvy Icelandic investors he paid 285p for 68m shares
PM:
NH:
that’s a 29% stake – BTW
PM:
Nice one!
PM:
and what exactly has gone wrong??
PM:
company appears to have breached banking covenants
PM:
the dividend, which was quite chunky appears to have been vapourised
NH:
well, the heart of it
NH:
is poor trading
NH:
particularly in a number of business that Mr Ronnie bough – Original Shoe Company (-£5.9m) and Qube (-£0.7m)
NH:
now here is the irony
NH:
Ronnie bought OSC from Ashley for £5m i think
NH:
and Qube from Tom Hunter for £1
NH:
they were supposed to be his friends
NH:
and sold him a couple of pups with all the associated liabilites
NH:
so, this year’s H1 year pretax profit pre-exceptionals fall from £8.3m last year, to -£9.7m.
NH:
and that compares with our forecast for a profit of £2-3m
NH:
on top of that current trading is truly dreadful
NH:
8 weeks into the second half, has seen a further deterioration falling 10%,
NH:
and the company has had to go and get a £20m loan from Kaupthing
PM:
Good gab below from Throg — fin PR for JJB obviously not a felt collar
PM:
Shell suit in this instance is Maitland PR
PM:
NH:
this is getting really good now, JJB is taking legal advice and saying it has not breached covenants
NH:
this just out on RNS
PM:
wot?
NH:
JJB Sports plc reaffirms that on the advice of its lawyers, DLA Piper and accountants Deloitte and Touche, that it is refuting claims that at its financial year end there was a breach of a covenant relating to its £15 million banking facility with Bank of Scotland.
Barclays Bank had accepted that in their view there was no breach of covenant with regard to their £60 million facility.
PM:
So this is the banks trying to get their money
PM:
This sort of action is inevitable — and is going to cause a lot of grief
NH:
and there will be a lot more of it when Eric Daniels gets control of HBOS
PM:
This is Act II of the Crunch — corporate defaults
PM:
Obviously JJB challenging that
NH:
now, because of the disagreement with HBOS
NH:
JJB had to go and get a bridge loan from the Icelandics
NH:
Kaupthing lent them £20
NH:
this was buried deep, deep down in the JJB statement
NH:
The Group has funded its working capital using bank loan facilities of £60million and £15million (the “original facilities”) and has recently negotiated an additional £20million three month bridging facility. The Board has prepared projected cash flow information for the period ending 12 months from the date of approval of these condensed financial statements (“the Projections”). The Group is also currently claimed to be in breach of certain covenants relating to the £15million facility (the Group refutes this allegation on advice) and the Projections project further breaches of both facilities. In accordance with IAS1, the existing claimed covenant breach has been reflected in the reclassification of the related borrowings as a current liability as at 27 July 2008.
NH:
Having reviewed the cash flow projections, and having made reasonable enquiries in making the underlying assumptions, together with assessing the position of current lenders and the possibility of sale of non-core businesses and assets, the Directors have a reasonable expectation that the Group will be able to meet its liabilities as they fall due for the foreseeable future. It is on this basis that the Directors consider it appropriate to prepare the Group’s interim financial statements on the going concern basis. However for the reasons described above, the Directors recognise that there are material uncertainties that may cast significant doubt on the Group’s ability to continue as a going concern, and therefore, that it may be unable to realise its assets and discharge its liabilities in the normal course of business. These material uncertainties comprise:
NH:
* ongoing availability of the original facilities given the actual and projected covenant breaches;
* the ability to repay the bridging facility from asset sales or seasonal cash flows;
* achieving the sale of non-core businesses and/or assets within the timescales and at the values projected; and
* the achievability of forecasts and key assumptions within the forecasts.
* the ability to repay the bridging facility from asset sales or seasonal cash flows;
* achieving the sale of non-core businesses and/or assets within the timescales and at the values projected; and
* the achievability of forecasts and key assumptions within the forecasts.
NH:
There is a risk that the above material uncertainties as to the Group’s ability to continue as a going concern may not be resolved satisfactorily. The interim financial information does not include the adjustments that would result if the Group were unable to continue as a going concern, which would include writing down the carrying value of assets, including goodwill, to their recoverable amount and providing for any further liabilities that might arise, as it is not practicable to determine or quantify them.
PM:
This is very interesting
PM:
We need to know more about HBOS corporate customres
NH:
well, the head honcho there was a guy called Peter Cummings
PM:
Ah yes
NH:
he was big mate of P Green, M Ashley
NH:
lent stacks of cash to these entreprenuers
PM:
Considered to be quite brilliant
NH:
and others like Tom Hunter
PM:
in the boom years
NH:
are HBOS going through the corporate book now
NH:
and calling in loans
NH:
and what happens when Daniels arrives
PM:
Always looked a bit odd, Cummings taking the stage at various events to laud the entrepreneurship of the people he was lending money to
NH:
this fits in nicely to our thesis about rising corporate defaults
NH:
actually HBOS made plenty of other odd lending decisions
NH:
Crest Nicholson
NH:
McCarthy & Stone
NH:
and what about the huge stake they have in Quitain Estates at the wrong price
PM:
We need some analyst comment on this
NH:
yes, got plenty
NH:
and as you can imagine the analysts have had a field day with this
NH:
forecasts have been halved
NH:
and more or less everyone is saying sell while you can
NH:
This is what Panmure, the house broker made of it
NH:
The statement refers to claimed breaches of covenants and lack of certainty
over the group’s going concern status. While we believe that the use of
language is draconian, the share price is likely to shoot first and ask
questions later. There is other bad news to digest in the shape of first half
losses and the waiving of the interim dividend. We have halved our pretax
profit forecasts for the year and this assumes continued gross margin gains
and reduced losses at the acquired companies. The recovery story remains
intact, but the economy is not.
over the group’s going concern status. While we believe that the use of
language is draconian, the share price is likely to shoot first and ask
questions later. There is other bad news to digest in the shape of first half
losses and the waiving of the interim dividend. We have halved our pretax
profit forecasts for the year and this assumes continued gross margin gains
and reduced losses at the acquired companies. The recovery story remains
intact, but the economy is not.
NH:
Today’s interim results are below our forecasts, primarily due to losses at the acquired
businesses, Original Shoe Company (-£5.9m) and Qube (-£0.7m). Pretax profit preexceptionals has moved from £8.3m last year to -£9.7m, compared with our forecast for a profit of £2-3m. As a consequence, we are cutting our forecast for the full year from £30m to £15m.
businesses, Original Shoe Company (-£5.9m) and Qube (-£0.7m). Pretax profit preexceptionals has moved from £8.3m last year to -£9.7m, compared with our forecast for a profit of £2-3m. As a consequence, we are cutting our forecast for the full year from £30m to £15m.
The implied second half profit is based on our assumption of continued
strong gross margin gains at JJB (300bp up year to date), and reduced losses at the
acquired businesses. The company has decided not to pay the 3p interim dividend, and we are cutting our full year forecast from 10p to 2p.
NH:
The Group is currently claimed to be in breach of certain covenants relating to its £15m facility (which it refutes on advice) and projects further breaches. The Directors are in ongoing discussions with the HBOS re the original facilities. JJB has received
confirmation that it is the banks’ current intention that they will continue to make the
original facilities available. However, the statement draws reference to doubts over the company’s going concern basis, which the Directors believe is unlikely, but will spook the market further initially. It is likely to be a feature of these markets that auditors will take a very cautious view in their statements.
confirmation that it is the banks’ current intention that they will continue to make the
original facilities available. However, the statement draws reference to doubts over the company’s going concern basis, which the Directors believe is unlikely, but will spook the market further initially. It is likely to be a feature of these markets that auditors will take a very cautious view in their statements.
NH:
JJB has negotiated a three month £20m bridging facility with Kaupthing. It is repayable from asset sales or from seasonal cash flows, and from this it could be inferred that JJB plans to make disposals to assist with its long term financing requirements.
The other short term problem facing JJB is that the worst retail conditions for over 30
years are unfolding. Few companies will deliver profit increases. A stable business such as Argos is seeing 30% profit declines. Many companies will move into losses. Today’s John Lewis numbers show that last week’s department store sales fell by nearly 6%.
Even the food retailers are seeing declines in volumes and in margin. JJB has a plan as to where it wants to be but, until it gets there, to expect it to buck the retail trend is
unreasonable.
NH:
As we have said many times before, JJB is at an early stage of its recovery and its profits are currently the small difference between two big numbers, its sales and its costs (£758m and £743m, respectively). We can see tremendous opportunity to increase the former and to reduce the latter, but it is difficult to do so in a consumer recession. H2 is by far the most seasonally important (75% of trading profit last year) which, unfortunately leaves it very exposed to the current collapse in consumer confidence.
While we expect store refits and a better offer to help mitigate against the consumer
recession, JJB is not yet far enough along the road for it to make a big enough difference. Hence, we are reducing our pretax forecasts by 50% to £15m and by 36% to £25m for next year. The recovery story remains intact, but the economy is not.
PM:
The recovery story remains on track???
PM:
Hello?
NH:
been totally de-railed this morning
NH:
this is what someone unconnected made of it all
NH:
Numis
NH:
JJB has demonstrated the inherent volatility of the sports clothing sub-sector,
exacerbated by the weak demand environment. The group effectively warned by
releasing 1H results with an underlying PTP loss of £9.7m versus market
expectations of c.£4m profit (PY £8.3m), and a sensible decision to pay no interim
dividend. As a result we cut our PTP forecasts in half moving Jan-09 to £16m from
£32m, and Jan-10 to £13m from £26m, and also cut our FY dividend forecast to zero
(prev. 10p).
exacerbated by the weak demand environment. The group effectively warned by
releasing 1H results with an underlying PTP loss of £9.7m versus market
expectations of c.£4m profit (PY £8.3m), and a sensible decision to pay no interim
dividend. As a result we cut our PTP forecasts in half moving Jan-09 to £16m from
£32m, and Jan-10 to £13m from £26m, and also cut our FY dividend forecast to zero
(prev. 10p).
NH:
With retail LFLs pre-announced (-4%), the retail gross margin and the
recently acquired Original Shoe Company appear to be the principal culprits. While
retail gross margin is presently running up +300bps this is not dissimilar to the 1H
run rate before succumbing to aggressive markdowns (eventual out-turn +30bps).
Against the back drop of such swingeing earnings revisions we move to SELL from
Hold targeting 40p or 10x Jan-10 EPS. Adding insult to injury, the group’s auditors
have also drawn attention to the fact that the group may already be in breach of
covenants. There remains a chance that CEO Chris Ronnie/Exista take JJB off the
market, however this seems unlikely in the current trading and capital market
environment.
recently acquired Original Shoe Company appear to be the principal culprits. While
retail gross margin is presently running up +300bps this is not dissimilar to the 1H
run rate before succumbing to aggressive markdowns (eventual out-turn +30bps).
Against the back drop of such swingeing earnings revisions we move to SELL from
Hold targeting 40p or 10x Jan-10 EPS. Adding insult to injury, the group’s auditors
have also drawn attention to the fact that the group may already be in breach of
covenants. There remains a chance that CEO Chris Ronnie/Exista take JJB off the
market, however this seems unlikely in the current trading and capital market
environment.
NH:
Forecasting FY LFLs -6%, GM +100bps: This remains arguably generous on both
counts and is contingent on a better mark down environment in the second half. Own
brand penetration continues to drive gross margin but the impact of mark-downs appears to be of the order of c.200bps, versus our previous expectation of a 50-100bps hit.
counts and is contingent on a better mark down environment in the second half. Own
brand penetration continues to drive gross margin but the impact of mark-downs appears to be of the order of c.200bps, versus our previous expectation of a 50-100bps hit.
Against tough comps we also believe LFLs are presently down double-digit but should recover against significantly easier comps in the second half.
Original Shoe Company Loss of £5.9m: Recently acquired from Sports Direct for cash
consideration of £15m (£5m plus £10m of associated costs) the Original Shoe Company dragged numbers down.
NH:
Sceptical of a take-out by in the near term: CEO Chris Ronnie & partner Exista bought their 28.9% stake at 275p in Jun-07. The risk of a take-private remains. However, even if funding were available the length and depth of the current trading malaise is likely to deter any immediate corporate action, or certainly action that will yield value to shareholders.
Going Concern issue: Akin to Woolies the auditors have also drawn attention to whether the group is a going concern. While unnamed parties believe the group to already be breach of covenants, the conclusion is disputed by JJB who also believe they have the option of selling non-core assets to raise funds.
NH:
of course, the news on current trading is not good for Mr Ashley’s Sports Direct
NH:
although if JJB went under that would be good news
NH:
SPD shares holding up at the moment
NH:
well, they were
NH:
not anymore
NH:
down 4.75p to 58.75p – that’s a new low
NH:
anyway, Oriel Securities has done a note on the impact for Ashley
NH:
who as we all know is trying to sell Newcastle United
NH:
and apparently lost loads of money punting HBOS
NH:
The JJB Interims look poor and current trading has worsened of late. From afar this looks like one to avoid and it can hardly be a positive read across to Sports Direct.
• JJB suffered losses in H1 as poor LFL combined with a gross margin that was only
slightly ahead.
• Things have got materially worse since half time. In the last 8 weeks the LFL has
deteriorated from -4% to -10%.
• Gross margins are up by 300 bps but that isn’t going to save forecasts which suggest
material growth over the next 2 years.
NH:
• Consensus of 9p this year and 11p next are clearly too high. This looks like one not to own.
• We are merely holders of Sports Direct but there doesn’t look like that one’s going up in the short term either.
PM:
(Footsie off 100 dead at 5097)
NH:
actually Ronnie and Ashley look like they are having a race to the bottom
NH:
Ashely floated at 300p
NH:
and Ronnie bought his stake at 285p
NH:
and the current share prices are
JJB Sports (JJB:LSE): Last: 39.25, down 64.75 (-62.26%), High: 72.00, Low: 38.00, Volume: 12.43m
Sports Direct International (SPD:LSE): Last: 58.50, down 5 (-7.87%), High: 63.25, Low: 56.25, Volume: 1.12m
NH:
game on
PM:
PM:
right
PM:
the Panmure note mentioned some dismal figures from John Lewis
PM:
got any more detail?
NH:
yes
NH:
JL weekly sales down 5.6% and Waitrose was flat
NH:
apparently trading since the collapse of Lehman has been a total disaster
NH:
here’s quick summary from Seymour Pierce on the JL numbers
NH:
John Lewis Partnership
Week ending 20 September: -2.3%
A poor week for the department stores with sales reported to be down by 5.6%. It appears that the turmoil in the financial markets is having a markedly increasing impact on consumer spending whereas in the equivalent week last year, queues outside Northern Rock appeared to have only a muted impact on sales. The figures were also affected by difficult weather comparatives – it was colder at this time last year. Fashion was -0.4%, Electricals -2.4% and Home was -14%. There was some eye catching falls in the out of town stores – Brent Cross -13%, Trafford -17% and Bluewater -15% while growth at Johnlewis.com also slowed up by 15% vs. run rate of +34%.
NH:
It was a very poor week for Waitrose – sales were flat. We have a Sell recommendation on M&S, which is getting close to support levels, and a Hold recommendation on Next. We currently have a Hold recommendation on Debenhams – but are becoming increasingly concerned that even if the company does not breach its covenants, it will be paying significantly more for its debt facility over the next twelve months.
NH:
and of course next week brings the big one for the retail sector – trading update from M&
NH:
and the vibes on that are not good
NH:
NH:
Right Maximus, what would u have us talk about
NH:
what interests you
NH:
(really the level of rudness on this site is getting way to high)
NH:
what about LIBOR – is that weighty enough for you??
NH:
what have we got
PM:
$ overnight 2.31 v 2.56
PM:
so good drop there
PM:
$3m – 3.76 v 3.76
PM:
$3m – 6.255 v 6.276
NH:
not much change on the term stuff
NH:
Sam tells me the LIBOR-OIS is up slightly, now 199bps. that’s a record apparently
NH:
although we have a reading of 201 as well
NH:
and 202
NH:
as we said yesterday this is a BLACK SWAN event
NH:
FTSE 100 is down 100 points
NH:
NH:
right to some comments below
NH:
not sure some of you deserve a response
NH:
Lonmin
PM:
NH:
here’s what we got
PM:
Nah, keep it back Neil
PM:
Maybe hold it for next week
NH:
what about the Marks & Spencer stuff?
PM:
That ‘ll learn ‘em
NH:
shall I sit on that as well
PM:
yep
NH:
and there’s a SABMiller story too
PM:
NH:
There was a no little confusion this week about whether XTA was buying back its own shares. They’ve not bought back since July and, as they’re in an offer period, are in posession of price-sensitive information. Nevertheless, management said at a Credit Suisse conference the other day that they were “actively considering a buyback” at current levels, which unsettled the bid bulls a bit.
NH:
The guidance I’ve had is that no buyback has taken place and they’ll “clarify” the Lonmin “situation” before looking at restarting. Everyone connected is still playing hardball on whether the bid will be formalised by October 2 though.
NH:
SAB – rumours it is looking at Fosters
NH:
and
PM:
That is completely RAW
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
NH:
this on M&S is very raw
NH:
Marks & Spencer ~ has withdrawn from both the Citigroup conference and a 8th Oct presentation
PM:
meaning?
NH:
well, some people reckon next Thursday’s trading statement might, well ummmmm
NH:
come a bit early
PM:
I dont believe that
PM:
I know there has been speculation — but belive it is wrong
Marks and Spencer Group (MKS:LSE): Last: 224.25, down 3.75 (-1.64%), High: 225.75, Low: 222.00, Volume: 4.32m
NH:
and we don’t believe this
NH:
but are just passing it on
NH:
it is going round the unofficial city newswire systems
PM:
Markets going again — footsie off 105
PM:
its when the Americans wake up
PM:
right — we are off.
PM:
Maybe see you next week
NH:
and back to Lonmin – seems there are some worries about whether they can get the financing