Markets live chat transcript for the chat ending at 12:17 on 10 Oct 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH) Sam Jones (SJ) Stacy-Marie Ishmael (SMI)
PM:
This is Markets Live — FT Alphaville’s daily market chat
PM:
We are early today — 10am, rather than 11am
PM:
But just cos we are early doesnt mean which have anything lucid to day
NH:
of course some of us were posting last night, as the street went into melt down
PM:
But first to important stuff
PM:
What’s the quote Neil?
PM:
Dear me — what a mess
PM:
That’s dread ful news
PM:
We are talking about Party Gaming, of course
PM:
Price taken another knock this morning
PM:
Got some stuff from Greg Johnson at Shore Capital
PM:
Bit out of date — couple of weeks old — but you’ll get the picture
PM:
Partygaming^ (PRTY) – A poor hand – SELL (from HOLD) at 221p
Muppet stock. PartyGaming would be a penny dreadful, but for a share consolidation.
PM:
Good call at the time
PM:
Liquidity has become a major point of differentiation within the online gaming market and has allowed US
facing online gaming sites such as Pokerstars and Full Tilt Poker to use enhanced liquidity pools to expand
aggressively into the European online gaming market. This competition has led to a slowdown in
Partygaming’s online poker operation, which remains 60% of the group’s net gaming revenue (NGR), and
therefore, in our view, remains at risk. With a high proportion of customers cross-sold into the growing online
casino market, any slowdown in online poker could have the effect of adversely impacting online casino in
our view. Furthermore, this competition is adding to the cost pressures within Partygaming as increased
customer acquisition and retention costs could weigh on margins. The recent interim results highlighted an
anaemic growth in its poker division, with a disappointing start to the second half.
Therefore, due to the slowing momentum within Partygaming, we downgrade our recommendation from
HOLD to SELL. We prefer Sportingbet^ (SBT, BUY at 37.75p) on valuation grounds and 888.com^ (888,
HOLD at 154p) on the potential for further upgrades in the second half, post strong interims and recent
partnership agreements.
PM:
We highlight a number of key reasons for the downgrade to our recommendation:
• An increasingly competitive online poker market, which has resulted in Partygaming’s market
share in online poker dropping considerably – it is estimated that in the week ended 24th August
2008, partypoker.com had c8% of the global online poker market versus c12% in August 2007
(source: Pokersitescout.com, Partygaming).
• Maturing poker market – with a vast array of online gaming operators, customers have become
more market savvy to the potential gains on different sites. With little brand loyalty, regular players
are moving to and from sites, reducing the frequency with which they play on a specific site. In
addition, new players are less frequent and profitable, with both new real money player sign-ups and
active player days (player frequency) down 32% and 7% respectively in H1 08 year-on-year. This
has led to a reduction in the poker yields per unique active player, as the reduced frequency of both
older and new players has driven H1 2008 yields down 5% to $220 from $231 in H1 2007.
• Distribution cost pressures, due to the highly competitive US facing online gaming sites; this has
subsequently led to Partygaming increasing its offerings to customers with increased bonuses and
loyalty schemes. However, this has impacted the cost base with H1 2008 customer
acquisition/retention costs and customer bonuses increasing 70bps and 90bps year-on-year (y-o-y)
to 19.1% and 1.6% respectively, which, in our view, is likely to weigh on future margin gains.
• Online poker slowdown could reduce the cross-selling into online casino, with around c30% of
the total customers within online casino initially registered for poker. Despite the continued strong
growth of online casino, a slowdown in poker, in our view, could have a negative impact on the
growth rate within casino. Total group yield per active player increased just 2% y-o-y in H1 2008 and
was flat quarter-on-quarter, giving possible indications of a slowing poker environment having an
impact on the growth areas of casino, sports betting and bingo.
PM:
Valuation and recommendation
Our full year estimates remain unchanged, with 2008F CPBT of $118.7m, giving EPS of 26.4c, implying
continued acceleration of trading in H2 with growth expected in key areas such as online casino, sports and
bingo. However, we remain cautious on our full year estimates and outlook for the medium to long term, with
the weakness in online poker, in our view, expected to dampen growth within other areas of online gaming.
With the momentum slowing within Partygaming, we believe the valuation appears full, with Partygaming
trading on a 2008F PER of 15.7x and an EV/EBITDA multiple of 8.0x. With growth slowing, to our minds, we
feel better value within the sector could be gained elsewhere such as with Sportingbet and 888, with
Sportingbet, in particular, a more attractive proposition, in our view. Sportingbet trades on a material discount
to the sector on a 2008F PER of just 9.5x, the stock has low exposure to the slowing online poker market
and large exposure to the growing casino and sporting betting markets. In addition, 888, (2008F PER of
17.5x) is seeing continued momentum, with the recent strong set of interims and continued focus on
increasing the number of strategic partnerships enhancing revenue streams to new diverse customer bases.
Therefore, we downgrade our recommendation on Partygaming from HOLD to SELL.
Analysts: Greg Johnson – 0151 600 3704 / Karl Burns – 0151 600 3720
NH:
stop messing about. let’s get to the market
NH:
about the only positive thing I can say is that we are off the lows
NH:
at the open - well 7 minutes are the open
PM:
Yep double digit fall
NH:
FTSE 100 was off 439.8 points at 3,874
NH:
Barclays statement out
NH:
10 October 2008
BARCLAYS PLC
Further comment on UK Government announcement
Further to its recent statement, Barclays confirms that it is considering a number of options, including capital raising, relating to the industry-wide commitment to increase Tier 1 Capital in the sector by an aggregate £25 billion, as announced by the UK Government on 8 October 2008. The agreement between the industry and the UK Government is that the additional capital will be raised by the end of 2008. Barclays will update the market on its plans in accordance with this timetable
NH:
anyway, FTSE 100 currently down 257 points at 4,056
PM:
index been all over the shop
NH:
a fall of 6.2% for the FTSE 100
NH:
worst week since Oct 87
PM:
FTSE traded in a band from 4313 to 3874
NH:
what’s Barclays doing on the back of that statement?
PM:
It’s being smashed generallyPrice is down 30p at 211.5
NH:
banks were down about 6-7% 30 mins ago
PM:
Oh my — looked at RBS
PM:
|Havent seen RBS at that level for 15 years
PM:
Talk about value destruction
NH:
now on Barclays there is a lot of concern that they could be exposed in some way to the great Lehman CDS unwind
PM:
That worry still around?
NH:
yup, Barc a big writer of CDS’s
NH:
no one really knows what the exposure
PM:
Yeah — we need Sam on this case
PM:
Wots this Leh CDS unwind thingy?
NH:
while sam answers that I have a credit suisse note on barc and RBS
NH:
looks the implications for shareholders of a recap
NH:
I wait for Sam finish before posting that
SJ:
ISDA - the CDS unofficial regulator is holding a LEH CDS auction today
SJ:
which will settle the prices for CDS contracts which reference LEH
SJ:
judging from where the bonds are trading it will be nasty
SJ:
There’s around $400bn - notional - CDS referencing LEH
SJ:
Bonds indicate losses of around 75-85 cents on the dollar
PM:
that sounds like trouble
SJ:
So we’re talking about a huge settlement process
PM:
Serious trouble — potentially
NH:
I heard a figure of $360bn payout on the LEH CDS yesterday
NH:
does that sound right??
SJ:
the key thing is that its a huge knot which needs to be very quickly untied
SJ:
- its why banks are hoarding cash at the moment
SJ:
irregardless of central bank money market ops
NH:
yup, that’s why the LIBOR-OIS spread keeps rising
SJ:
and of course, there are more big CDS auctions to come
SJ:
WaMu is coming up in a couple of weeks time
NH:
Auction starts lunchtime EST
NH:
interim results will be posted on Markit.com
NH:
they will be the places to look for the figures
PM:
Hmm
NH:
hopefully we will be around to bring them to you
NH:
right, back to the Credit Suisse note
SJ:
I’ll also just quickly point to the huge uptick in tbill repo failures
SJ:
which is another consequence of CDS unwind worries
SJ:
major major major bank liquidity fears
SJ:
2.5 trillion repo failures reported by fed the past week
PM:
This was noted by Alea earlier
PM:
More explanation pse Sam
PM:
Im a bit shaky on treasury repos
SJ:
Right - so when the fed conducts its money market ops it lends tbills in repo auctions to primary dealers
SJ:
who then re-repo the tbills to other banks
SJ:
the problem is that those other banks aren’t honouring their commitments to return the tbills to the primary dealers on time
SJ:
because they’re hoarding liquidity
SJ:
in turn, the primary dealers aren;t lending out the tbills anymore
SJ:
and so that’s why, in spite of huge increases, a lot of the central bank money market ops aren;’t being covered
SJ:
because the primary dealers don’t want to re-lend the tbills
SJ:
it’s a disaster anyway
SJ:
but you all knew that anyway
PM:
Blinkin eck — thanks for all that Sam
PM:
Neil — you were going to give us something on RBS
NH:
The Master Plan - impact on all the banks
■
Government initiatives extremely useful, but potentially costly to equity
■
We believe the domestic sector might raise around £25bn of equity
■
We don’t think the shares are cheap enough…yet
This research follows on from our piece yesterday in which we looked at the
potential effect of the Government initiative on RBS.
Overall, we believe the plan will lead to UK domestic banks raising around
£25bn of equity or quasi-equity (e.g. in the form of mandatory convertible
preference shares), and £5bn of non-equity (e.g. perpetual preference
shares).
NH:
Within that, we believe Barclays could be encouraged to raise around £5bn of
ordinary share capital, HBOS around £5bn, Lloyds TSB around £4bn and RBS
around £10bn. There remains a degree of upside risk to these numbers
depending on credit write-downs and the impact of lower equity markets on
investment variance (specifically HBOS and Lloyds TSB), but as things stand
these injections will take the equity tier 1 and total tier 1 of each bank to 7.5%
and 10.5% respectively.
NH:
The Government will likely provide some of this funding, but we believe there’s
a good chance existing shareholders get involved with Government supporting
such issues. The alternative is seeing their bank 20-40% nationalised.
The downside is that such substantial equity issue will lead to EPS dilution in
2009E of 25% at Barclays, 60% at HBOS, 25% at Lloyds TSB and 40% at RBS.
It will also force return on tangible equity towards the cost of capital at all banks.
NH:
Combined with the potential for limited or zero dividends, and a likely severe
downturn in the economy putting impairment forecasts at risk, we think banks
will fall until such point that they trade at a notable discount to book value. At the
moment, the average tangible book multiple of Barclays, the combined Lloyds
TSB HBOS and RBS is around 0.8 times, not low enough in our view.
To summarise, there is no doubt that the UK banks are becoming more
interesting, and it won’t take a significant further fall in share prices before
valuations are more appropriate for the newly recapitalisation, liquidity
guaranteed organisations. But we aren’t there yet. We lower our 12-month
target prices on Barclays from 310p to 220p, HBOS to 145p from 165p and
Lloyds TSB to 170p from 195p. We lowered RBS yesterday from 220p to 120p.
NH:
that was by Jonathan Piece BTW
NH:
on top of the £12bn they made
NH:
Fred is toast if that happens
NH:
which brings me back to something Paul said yesterday
NH:
that if Jeff Randall’s story about Fred being shredded was wrong
Jeff Randall, the Telegraph’s Editor-at-Large is available for speaking engagements through The Gordon Poole Agency, the UK’s premier talent and speaker bureau. Fee group: £5k - £10k.
PM:
I don’t remember that.
PM:
Dont start making stuff up –not on here
PM:
Well,, this is not a cut and dried thing is it?
PM:
And we’ve got to work out our contracts
PM:
And if he’s not gone by the time 3m is up, well …
PM:
We will be joining Jeff down at the dollie office
PM:
Actaully — just look at this
PM:
BS stock already back to 92 levels
PM:
And it needs to go to the gov and ask for £10bn
PM:
Which will dilute holders out of site
PM:
And is the government going to hand £10bn to a failed management team?
NH:
and we can we wiggle out of resignation on this technicality
NH:
will the editor allow it??
NH:
the readers would be happen
NH:
they would have the junior team
PM:
what on earth happened in the last hour of trading on Wall Street last night
NH:
well as far as I can work, it was selling by mutual funds
NH:
in the last hour or so
NH:
they need cash to meet redemptions because the public are panicking
NH:
they are seeing the headlines and selling
NH:
and as the Dow breached 9,000 that drove another wave of stop loss selling
NH:
and here’s an interesting fact, from a friendly broker
NH:
in the past five weeks, 2.5% of all US equity funds assets have been withdrawn
NH:
and this must b ethe thing that central banks and govts feared the most
NH:
negative feedback loop
NH:
or in the common vernacular
NH:
people are selling because they are worried, they pushed the market down, which makes more people worried, so they sell, and on and on and on
NH:
and nothing central banks or govts are doing seems to be able to draw a line under it
NH:
and get confidence back into the system
NH:
arguably they have been too slow to realise the scale of the financial crisis
NH:
and it might be too late now
NH:
also US pension are also selling equities and moving into T-bills
NH:
trying to match liabilities
PM:
And update London wise
PM:
We’re off the lows — but it v v v uncomfortable still
NH:
and from what I can make out there was loads of forced selling first thing this morning
NH:
a couple of spread betting houses this morning
NH:
just sold clients positions if they did not have margin in their accounts to cover losses
NH:
there was not even a call to the clients
NH:
now, most houses don’t do this
NH:
they give clients a few hours to come up with the readies
NH:
and of course that could drive another way of selling later today
NH:
Stacy points out that US markets are shut on Monday for Columbus day
NH:
so we might see more heavy selling this afternoon as investors decided they do not want to be long going in to the weekend
NH:
Or because they wake up to realise europe is going down in flames
PM:
Stacy is just checking that
PM:
Equities will trade on Monday she says
PM:
But vol expected to be v v low
NH:
but it will be effectively shut, there will be little volume
NH:
or perhaps this time there will be
PM:
Neil — got any general comment?
NH:
yup, this is from Adrian Cattley at Citi
NH:
Battered, bloody and bruised. Equity markets have been hit hard. Valuation
rarely so compelling in 40-50 years. But, who cares? Out-sized policy response
looks inevitable. But, who cares?
NH:
Confidence rock-bottom. Trust broken.
Capital markets frozen. Investor sentiment at its lowest ebb. Capitalism and
financial markets appear to be on their knees. The great leverage wind-up (20-
30 years in the making) has become the accelerated leverage unwind (12-18
months and counting)
NH:
Easy to be bearish. Recession, profits collapse, credit
crunch, bank nationalisations — take your pick. But, increasing signs of
capitulation within the market. Capital protection taking precedence over
capital returns. Good companies being thrown out alongside bad. We believe
investors should focus on: 1) balance sheets and 2) dividend resilience. We
stick with our “short leverage/long growth” investment mantra.
NH:
Macro — more pain ahead
Economists have been cutting GDP forecasts for over a year. Recession in
Europe and US increasingly likely. Emerging markets will not escape
unscathed. Inflation fears take a back seat as oil prices suffer sharp retreat.
NH:
Policy response — kitchen sink
Governments are busy bailing out distressed financial institutions. Co-ordinated
rate cuts from central banks around the world. Together, authorities trying to
defrost capital markets. Still frozen, for now. More action to come.
NH:
Profits — big downgrades to come
Analysts do not yet forecast earnings to fall, 2008-10. Bottom-up expectations
and corporate guidance remain highly optimistic. But, market is already there.
Recession and earnings collapse look priced in. Big downgrades likely.
NH:
Valuation — extreme levels
European equities trade on historic P/E of 8.5x. Back to mid-1980s levels.
Need a 40% earnings fall to mean revert P/Es. UK & European equities now
yield more than bonds/cash. Should provide some resistance to downside risks.
NH:
Risks — take your pick
Four main risks: 1) systemic/financial, 2) macro, 3) profits and 4) investor
behaviour. Authorities are working hard to stave off systemic risks. Economic
and profit downside risks are building. More forced selling in evidence.
NH:
Sectors — long growth/short leverage
Strong balance sheets key to investment, today and tomorrow. We also seek
dividend resilience. Overweight Health Care, Telecoms & Insurance.
Underweight Utilities, Construction & Autos. Short leverage/long growth.
Most favoured stocks
Analysts’ top picks in our Overweight sectors: Allianz, Anglo American,
GlaxoSmithKline, Inbev, KPN, Merck, Nestle, Sampo, Vodafone, Xstrata.
NH:
Nick Burns at Deutsche Bank
NH:
The equity market slumped again late in the US session (S&P 500 falling almost 7% in
the final two hours to finish the day down 7.62%) and has finally listened to the
repeated screams from the credit markets. We have been astonished at how well
equities have held in prior to the last week or so
NH:
We still think US equities are actually
slightly rich historically (see yesterday’s EMR) and certainly not at stressed levels even
with the last few weeks of utter chaos. However they are starting to approach longterm
valuation levels that we are getting comfortable with for perhaps the first time in
over a decade.
NH:
They are now catching up with the utter stress in the cash credit market
which was once again demonstrated yesterday with price actions in the leveraged loan
market. The failure of the Icelandic banks has prompted the forced selling of leveraged
loans, which was a key factor in the slump in the LevX index. Series 3 fell by around 6
points on the day, which is more than 300bps of spread widening, pushing spreads up
to around the +1,200bps mark.
NH:
The implied default rate for the LevX index is now
around 87% with an assumed recovery of 70% and around 64% with an assumed
50% recovery. Inevitably with the secured market unravelling it also put pressure on
the unsecured HY market, although by no means to the same extent, as we saw cash
HY gap wider and the iTraxx Crossover index widen by nearly 40bps with Series 9
actually trading above +700bps for the first time intraday. At the other end of the
spectrum continued government support of banks has certainly helped to stabilise
senior financials with the iTraxx Financial Senior index now trading around 15- 20bps
inside the Main IG index, close to the best relative levels seen over the past 12
months.
NH:
We still like our longstanding Euro senior financials vs. both IG and HY corporates
trade, but these moves in the loan market are starting to serve up some astonishing
opportunities for anyone with a balance sheet to hold them. We should note though
that US credit was certainly not immune to the sell-off in equities as we saw significant
widening in both IG and HY so we would expect European credit to open weaker this
morning and would not be surprised to see Crossover trade above +700bps.
NH:
Back now to US equities and the continued slump helped to push the VIX index to
fresh all-time highs as it broke through the 60 barrier today, closing at just below 64. All
10 of the broad sector indices of the S&P 500 finished the day in negative territory.
Financials (-11.47%) were the worst performers despite reports that the US
Government is set to buy stakes in a wide range of banks in the coming weeks,
although the expiration of the short-selling ban probably did not help. After hours we
also saw Moody’s ($23.92) put the A1 rating of Morgan Stanley (Hold, $12.45) on
review for downgrade and change the outlook on Goldman Sachs (Hold, $101.4)’ Aa3
rating to negative. The pressure on these companies to recapitalise or consolidate
would intensify.
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:
Nice of you to join us
SMI:
I’ve got some credit comment from DB’s Jim Reid - who’s turned massively bearish in the last week
SMI:
Ah come on Paul you know I couldn’t resist
SMI:
He thinks equities are only just - and barely - waking up the nightmare credit has been screaming about
SMI:
From a note this morning
SMI:
The equity market slumped again late in the US session (S&P 500 falling almost 7% in the final two hours to finish the day down 7.62%) and has finally listened to the repeated screams from the credit markets. We have been astonished at how well equities have held in prior to the last week or so. We still think US equities are actually slightly rich historically (see yesterday’s EMR) and certainly not at stressed levels even with the last few weeks of utter chaos. However they are starting to approach long-term valuation levels that we are getting comfortable with for perhaps the first time in over a decade. They are now catching up with the utter stress in the cash credit market which was once again demonstrated yesterday with price actions in the leveraged loan market. The failure of the Icelandic banks has prompted the forced selling of leveraged loans, which was a key factor in the slump in the LevX index. Series 3 fell by around 6 points on the day, which is more than 300bps of spread widening, pushing spreads up to around the +1,200bps mark. The implied default rate for the LevX index is now around 87% with an assumed recovery of 70% and around 64% with an assumed 50% recovery. Inevitably with the secured market unravelling it also put pressure on the unsecured HY market, although by no means to the same extent, as we saw cash HY gap wider and the iTraxx Crossover index widen by nearly 40bps with Series 9 actually trading above +700bps for the first time intraday. At the other end of the spectrum continued government support of banks has certainly helped to stabilise senior financials with the iTraxx Financial Senior index now trading around 15-20bps inside the Main IG index, close to the best relative levels seen over the past 12 months.
SMI:
(Q - I think you’re thinking of the Octabox…we’re only halfway there)
NH:
market update - back down through 4,000. off 323 points at 3,991
PM:
Oh my — waves of selling comeign thru now
PM:
Nowing up in the Footsie
NH:
and these asset managers are also being smashed
PM:
barclays is giong to co thru two quid
NH:
Shroders off 134.5p at 992p
PM:
Yeah — asset managers
NH:
New Star Asset Management off 4.75p at 32.25p
NH:
and remember our former colleague Sarah Spikes now at Arden said NSAm would breach banking covs if the FTSE 100 went below 4,400
PM:
Well — i think it was not a hard FTSE level
PM:
But there is a covenant linked to retail assets under management
PM:
And that shrinks with the Footsie
PM:
NSAM will be talking with their bankers…
NH:
actually I have a note from Spiko, she has been looking impact of the Asian market melt down on UK asset managers
NH:
UK asset managers are suffering from the sharp deterioration in Asian markets overnight.
The Asian decline came the same day that Henderson made a profit warning, which was light on details.
NH:
Aberdeen, which on Oct 2nd announced a joint-venture with Mitsubishi UFJ, has both institutional and retail business in Asia, has about half of its equities allocation in Asia (54% of its £34bn in equities in Asia according to its Report and Accounts 2007).
Ashmore’s largest fund, EMLIP, has about 22% allocation to Asia, while its Emerging Markets and Currency Fund has 20% in Asia.
NH:
New Star launched an Indian equities fund in June, and also has exposure to Asia through its institutional business.
6% of Henderson’s AUM are from clients based in Asia, Middle East and Australia.
NH:
Bluebay has about 16% of its funds in Asia.
Hansard Global has 35% of its new business from clients based in the Middle and Far East.
To what degree the dollar’s decline will offset some of the impact is not yet clear, not least because the outlook for the dollar is uncertain.
NH:
and Citigroup have weighed in with a big sell note on Shroders
PM:
BTW — did people see the stuff on AV yesterday about Tosca — that was the stuff we recieved during ML yesterday, but couldnt print immediately
PM:
i found the language in that Tosca report fascinating
PM:
Mangled — but also as fantastical
PM:
Idea that Martin Hughes strides the globe arranging bank mergers
PM:
That then get blow up by the Fed
NH:
here’s the Citi note on Schroders for those who are interested
NH:
Defying Gravity
Defying gravity — Schroders’ share price has held up well, outperforming the
FTSE 100 by 4.5% and UK Asset Managers by 13% year to date. This is quite
an achievement for a fund manager with around 70% of AUM in equities.
Flagship Funds down 32% since end June — Based on reported fund NAVs
(i.e. ignoring any fund redemptions), we estimate that the high-profile retail
fund winners of 2007 (Korea, ISF BRIC, Agriculture, Commodity, UK Mid 250
and UK Alpha Plus) are now down 32% since the end of June.
NH:
Surely means further redemptions in Q3 — Schroders saw net retail outflows of
£700m in Q2 2008. We expect more in Q3. Admittedly, -32% performance is in
line with markets. However, with such big numbers, we expect retail investors
to redeem rather than take comfort that the funds have not underperformed.
NH:
Reducing our AUM forecasts by 25% — Based on recent negative market
movements and forecast outflows, we reduce our end 2008 AUM forecast by
25% from £119.8bn to £90bn. This reflects new forecasts of 25% negative
investment performance and net outflows of 6% of end June AUM in H2 2008.
NH:
Reiterate Sell — As a result, we forecast a 19% fall in revenues in 2008. In the
face of such declines, we believe Schroders must cut costs, and so although no
suggestion has been made it will, we forecast a 10% cut in asset management
costs. Accordingly, our new 2008E EPS only falls by 13% to 66.4p. We
reiterate our Sell recommendation, with new 800p (voting shares) and 720p
(non-voting shares: SDRt.L; £7.70; 3M) target prices. Next news: Q3 AUM
Statement, 28 October.
NH:
Don’t be fooled by H108. Alternatively, the group did benefit from strong retail
fund inflows in late 2007, which helped provide forward momentum to earnings
and operating margins, and helped H108 to a stable asset management and
private banking cost income ratio (66% in both H107 and H108), even though
AUM fell by 5% year on year — a better performance than peers.
NH:
Retail outflows. However, from here, we expect a sharp fall in operating
margins. H208 does not have the same benefit when compared to H207, as
both periods will include the benefit of more retail funds in the mix. In fact the
situation is worse than this: Schroders saw net retail outflows of £700m Q208,
vs. inflows of £500m Q108 and £8.8bn FY 2007. We expect this retail outflow
trend to continue in Q3 2008 due to poor investment performance.
Negative operational leverage. As AUM levels fall, revenues will too. Even
though we forecast strong cost discipline at Schroders (we assume -10%
reduction in asset management costs this year, vs. 19% increase in 2007), any
percentage fall in revenues will drive a much higher percentage fall in profits.
We forecast a 19% fall in total income, driving a 26% fall in pre-tax profits.
Needed to change our forecasts. In our numbers published on 12 August, we
only forecast a 14% fall in AUM 2008, reflecting -£3.9bn negative net flows
(-3%) and -£16.6bn negative investment performance (-12%).
NH:
These numbers now look too conservative. Most developed equity markets are
down around -30% year-to-date. Investors are unlikely to have been
encouraged into purchasing new investment products or dissuaded from
redeeming their funds against such a market backdrop.
As a result, we now forecast a 35% fall in AUM in 2008, with 31% of this fall
happening in H2 2008. This reflects forecast 30% negative investment
performance (of which 23% in H2) and 6.5% net outflows (5.7% in H2).
NH:
right, Stacy has some CDS prices
SMI:
Here’s a CDS update - iTraxx Xover at an all-time ridiculous high of 741.7bps (previous record around 653bp before Bear was rescued)
SMI:
The iTraxx Europe - which is supposed to have the “good stuff” - at 143bp
SMI:
Some of this reflecting expectations of much lower recovery values in the event of a default
SMI:
As well as expectations of much higher defaults than previously forecast
SMI:
Across both investment grade and junk
PM:
Suddenly pointing to widespread defaults amongst junk issuers
SJ:
I’ll just quickly jump in here and point out that the rating agencies have been warning of a sharp and sudden uptick in default levels
NH:
FTSE 100 down 340 points at 3,947
SJ:
Ones to watch will be LBOS… first agains the wall
SMI:
To say nothing of homebuilders, car makers….
PM:
Yep — somethign that Albert Edwwards keeps pointing out — corporate defaults still havent risen as they should in a downtrn
NH:
have you seen the Fitch note today
NH:
Fitch: Negative Rating Actions Rise in 2008 for European Leveraged Borrowers
NH:
Fitch Ratings-London/Paris/Frankfurt-10 October 2008: Fitch Ratings says the deterioration in the credit quality of European leveraged borrowers has accelerated since the beginning of 2008, as the ongoing credit crunch takes its toll on economic growth, translating into more widespread underperformance against original base-case assumptions.
NH:
“Aggressive base-case forecasts and the current impaired credit and economic climate will make de-leveraging more difficult for leveraged buy out transactions on the basis of operating performance,” says Pablo Mazzini, Senior Director at Fitch’s Leveraged Financed group.
NH:
In one of two special reports published today, Fitch says most European leveraged borrowers in its shadow-rated portfolio have so far continued to perform within the thresholds of its conservative forecast scenarios - typically referred to as the “Fitch case”. This is reflected in Fitch’s distribution of rating Outlooks. At end-Q308, 70% of European leveraged shadow ratings had a Stable Outlook. Fitch notes, however, that the portfolio of shadow ratings is already strongly biased towards the ‘B- (B minus)*’/'B*’ ratings, i.e. at the low-end of the ‘B*’ rating category.
NH:
Since the onset of the credit crisis in the summer 2007, Fitch has seen a substantial rise in downgrades of shadow-rated European leveraged borrowers. This is reflected in an increase in the quarterly downgrade/upgrade ratio to 4.7x in Q308 from 0.3x in Q307. However, in the 12 months to September 2008, there were 358 rating affirmations - including formal reviews on individual credits at least twice a year, subject to availability of information - which reinforces the degree of rating stability.
NH:
Rating downgrades (37 in the 12 months to September 2008) have so far occurred principally amongst transactions in the 2006 and 2007 rating vintages, which form the bulk of Fitch’s overall shadow rating portfolio. The downgrades reflect the combination of aggressive, peak-of-the-cycle projections and high financial leverage and are largely concentrated on industrials-related credits (57% of downgrades), mainly in the building/materials, automobiles and packaging segments. The same period saw 13 upgrades. These reflect successful implementation of business plans and the niche nature (and sometimes counter-cyclical demand profile) of certain sectors and borrowers, which often lead to de-leveraging through debt prepayment ahead of schedule.
NH:
Performance will vary by industry, depending on the business prospects of individual sectors and the degree of resilience of the business model for each credit. An underperformance to Fitch’s own forecasts, particularly if combined with execution risk in management’s business plan amid tougher economic conditions, will likely leave limited headroom, leading to further negative rating actions. The risk of further deterioration in performance is compounded by prospects of diminished orders and slower investments by larger companies to which leveraged borrowers are often suppliers.
NH:
In Fitch’s view, further rating actions, changes in Outlook and, ultimately, a rise in default rates will depend on a number of factors, namely: the extent of deterioration in global economic growth; the resilience of the LBO business model in the face of an economic downturn; the potential involvement of financial sponsors via equity cures, cash injections and loan amendments with creditors, and a meaningful return of liquidity to leveraged credit markets in time to meet substantial maturities by 2013.
PM:
hey look at this sent over by Bryce — SEB Enskilda macro team
PM:
Policy makers will meet during the
weekend – and they better start acting
quickly and convincingly.
• The piecemeal or liquidity directed
approach so far adopted to cope with the
banking sector meltdown is getting a
clear vote of no confidence from global
equity markets (upper chart). The
coordinated global easing of monetary
policy has thus already failed to stem the
panic.
• In our view, much bolder action is
required. In addition to a commitment to
further, large policy easing, policy
makers must offer broad deposit
guarantees while the solvent institutions
are sorted from insolvent peers and
crucially, public money must be used to
recapitalise financial institutions. Global
coordination will be crucial, so this
weekend’s G8 summit offers a unique
opportunity to see eye-to-eye and put
away their differences. The IMF is
likely to be an ideal candidate for
overseeing the tremendous effort.
• Equity markets are at a riot point and are
deeply oversold. Our tactical indicator
flags for a solid, immediate bounce if
policy makers manage to deliver.
SMI:
Just another quick point on CDS - markets right now are vv illiquid, with quite wide bid/offer spreads. So take all indicated prices with large grain of salt.
SMI:
One broker told this morning “offers are by invitation only”
SMI:
Insurers are definitely getting hammered though
SMI:
V good point from Alt-A
SMI:
All that uncertainty one of the reasons Markit has been delaying index rolls
SMI:
Still, the indices remain the most liquid in this market - and what they’re telling us is not pretty
NH:
Paul Davies just been over with some CDS prices
NH:
Paul is from the Cap Markets Desk
NH:
so we have the insurers really getting beaten up this morning
NH:
that’s looking a bit tasty
NH:
Barclays around 135bps
PM:
Remember — Bar, RBS have gov guarantees
NH:
these are 5yr prices - Europe Itraxx series
NH:
Right we are going to break here for a min
PM:
Just five minutes — have a quick coffee
PM:
Line up some more research etc
NH:
just thought I would put up this
PM:
Will leave the chat up of course
NH:
don’t know why but fascinated with this company
NH:
it looks doomed in spite of yesterday’s silly bid rumours
NH:
aside from the fact Kaupthing control 30% of the company
NH:
and lent them £20m in emergency funds
NH:
it seems the company is having trouble paying its rent
NH:
LONDON (Dow Jones)–JJB Sports PLC (JJB.LN) has had some its stores visited by bailiffs after the U.K. sports retailer failed to pay its rents and issued postdated rent checks, trade magazine Retail Week reports Friday.
JJB owes at least GBP500,000 on empty stores for which it is still liable, the report said. The retailer has 14 days to pay before a creditor can start bankruptcy proceedings.
NH:
A spokesman for JJB Sports said: “I’m not going to deny the story.”
‘We have paid rent in full and in a timely manner at all of our operational stores and are in negotiations with landlords regarding a handful of stores where we have ceased trading,” he said.
The retailer is backed by Icelandic insurance group Exista (EXISTA.IC) and recently secured a loan from Kaupthing (KAUP.IC).
PM:
back in five
SMI:
Just had some stuff in from Dresdner
SMI:
saying the selling is all very logical
SMI:
We fear that the unwind has further to run and remain underweight on credit. Money markets remain key for confidence as well as fundamentals, and they are not reacting to the most recent central bank and government initiatives. But credit may well outperform equities, if that is any consolation. Higher capital needs at banks have led bank stocks to underperform bank spreads, but we think deleveraging should lead to a similar relative performance in non-financial corporates as well.
SMI:
But the main driver of weakness continues to be dysfunctional money markets, which have benefited little from the coordinated rate cuts. 3 month Libor is rising further, both from an absolute perspective and relative to OIS. There is some improvement in CP markets though, in particular for non-financials, but only in the very short end (below 3 months), and for A1/P1 quality.
SMI:
We think the flight out of financials, cyclicals and companies with high cash burn is therefore very logical: banks will likely not lend much to corporates if they are not lending to each other. Automotives remain a clear underweight. Equity investors we have met remain extremely negative, and we think that equities will continue to underperform credit as deleveraging continues. This should not only be the case in financials, but also for corporates, we think.
SMI:
Dunworrying - shift system, doncha know
SMI:
Ando - on ISDA, a reasonable point. But the ISDA website does in fact have quite a lot of information on both derivatives generally and CDS in particular
NH:
Paul is putting on another nicotine patch
NH:
I have just had a swig from the hip flask
NH:
my nerves are much better now
NH:
welcome regular 11.00am readers
NH:
we have been on for an hour
NH:
another emergency session of ML
PM:
FTSE currently at 4009
PM:
back above 4k while i was getting coffee
PM:
But still down 316 points
PM:
Ah, back below 4k now
PM:
S Simpson — we are going to take issue with you regarding Peston
PM:
Peston’s doing his job
NH:
and they do it in the mistaken belief that it will bring calm to the market
NH:
just makes a bad situtation worse
NH:
right, we should talk about Morgan Stanley
PM:
Does Gillian know she’s getting loads of fan mail this morning
NH:
she gets loads of emails every day
NH:
anyway Morgan Stanley
NH:
is this deal with the Japanese going to happen
PM:
What price were MS when the deal was forged?
NH:
not sure what the price is
NH:
but they agreed to buy a 21% stake a $25 a share
NH:
now, MS shares closed at $12.45 last night
PM:
So half the MUFG level
PM:
Mitsubishi UFJ Financial Group
NH:
if they injected $9bn at last night’s price
NH:
they would control 65% of the company
NH:
now why is the deal going to happen
NH:
why are the Japanese going to take an immeidate 50% hit
NH:
this deal will have to be reset
NH:
also wasn’t there a ratings call on MS last night??
PM:
Sam! — where’s this ratings call?
SJ:
Moody’s reviews A1 Morgan Stanley for downgrade; Prime-1 affirmed
Approximately $200 billion in long-term debt affected
SJ:
New York, October 09, 2008 — Moody’s Investors Service placed the long-term debt ratings of Morgan Stanley (senior debt at A1) and its subsidiaries on review for downgrade. All short-term ratings were affirmed at Prime-1.
Moody’s review is based upon its expectation that an extended downturn in global capital market activity will reduce Morgan Stanley’s revenue and profit potential in 2009, and perhaps beyond this period. In addition to the depressed market environment, Morgan Stanley will need to adapt the firm’s business activities and balance sheet to operate in a bank holding company structure. This could limit profit opportunities for Morgan Stanley, though the firm’s risk profile could be lowered, thus mitigating this concern.
SJ:
Here’s the killer bit though:
SJ:
As well, customer and investor concerns regarding wholesale investment banks have also put pressure on Morgan Stanley. Investor, counterparty and customer confidence is critical to the funding and profit generation of the firm, especially in a hostile market environment. During its review, Moody’s will focus on the success of the actions that management takes to alleviate these confidence pressures and maintain customer franchises, while retaining key producers in a difficult environment.
PM:
Hmmm. cheers for that
NH:
So if the Japanese don’t cough up, it is game over
NH:
or is that too simplistic??
SJ:
people people - it doesnt matter whether you care what the CRA’s say - they do still matter
SJ:
- rating downgrade has big funding implications
NH:
also MS released their Q3 10-Q statement last night
NH:
had a few interesting bits in it
NH:
this is what Bar Cap made of it
NH:
Investment Conclusion
This evening, MS released its 3Q08 10-Q. We are
highlighting a few of the more interesting
datapoints below including updated fair value
disclosures, retained interest and loan balances,
daily distribution of trading revenue, liquidity
metrics and capital ratios.
NH:
Level 3 assets increased 13% from $69bn (6.7%
of total assets) to $78bn (7.9% of total assets).
The largest contributor to the increase was an
11% rise in corporate and other debt to $33bn
(mostly from transfers into Level 3).
NH:
Consistent with the earnings conference call, MS’s
Tier 1 ratio was 12.7% at the end of 3Q08, up
from 12.4% in 2Q08 and compares to GS’s stated
3Q08 ending ratio of 11.6%. Due to capital raises
after the end of the quarter, we estimate that GS’s
pro-forma Tier 1 ratio rose to 14.3% and MS’s Tier
1 ratio rose to 15.7% (the MUFG transaction is
scheduled to complete on October 14).
NH:
MS noted that its liquidity reserves have declined
since the end of August ($179bn) and that it has
begun implementing certain liquidity preservation
efforts. MS said that its liquidity reserves remain
“at levels well in excess of those observed on
average for 2007″ (which was $85bn).
NH:
Fair Value Disclosures
In Figure 2 below, we break down the full fair value disclosures for MS. We would characterize the Level 3 assets as in-line with
management commentary during the earnings conference call last month of “about 8%”. MS’s Level 3 assets increased 13% from $69bn
(6.7% of total assets) to $78bn (7.9% of total assets). Contributing to the increase vs. 2Q08 was an 11% increase in corporate and other
debt to $33bn (mostly from transfers into Level 3 from other levels) and a 24% increase in derivative assets in Level 3 (although we note
that on a net basis after accounting for the liability side, derivatives were up somewhat less at 7%).
NH:
Figure 1: Summary Level 3 Fair Value Metrics
MS
3Q07 4Q07 1Q08 2Q08 3Q08
Level 3 Assets () $89,850 $73,659 $78,168 $69,198 $78,377
% of Total Assets 7.6% 7.0% 7.2% 6.7% 7.9%
% of Total Equity 254.9% 235.6% 234.9% 200.6% 219.1%
Source: Company filings
NH:
In Figure 3 below, we show charts of MS’s distribution of daily trading revenues.
Retained Interest Exposures
In Figure 4, we show MS’s retained interest exposures. Both residential and commercial mortgage loan retained interests declined notably
during the quarter. Interestingly however, investment grade US Agency CMO retained interests increased sharply from $228mm to
$674mm, resulting in an overall 8% increase in total retained interests to $2.1bn from $1.9bn last quarter.
Lending Exposures
In Figure 5, we provide the lending exposure tables for MS. Total non-investment grade lending exposures were down 14% to $21.2bn
while investment grade exposures were down 10% to $48.8bn.
NH:
got a really good Bernstein note
NH:
Morgan Stanley: How Long Can the Holding Company Operate
Without Access to the Debt Market?
NH:
Highlights
• Credit default spreads on Morgan Stanley senior debt have reached unprecedented levels. This has raised
concerns among equity investors, bondholders and counterparties. Effectively, the debt issuance market
is now closed to the company.
• By all traditional credit measures, Morgan Stanley is well capitalized. Pro forma for the Mitsubishi
investment, gross and net leverage has declined to 19.6x and 17.0x, respectively, and double leverage is
below 1.0x. We calculate that the firms’ net cash capital position (pro forma for the capital raise from
Mitsubishi) is a very strong $51+ billion. The earnings performance of the company has recovered. In
Q3, Morgan Stanley booked diluted earnings per share of $1.32 and achieved a return on equity of
16.5%. Its legacy exposures are limited.
NH:
Bernstein is not concerned about the short term funding of Morgan Stanley’s operating subsidiaries. The
Federal Reserve has revised it policies to allow both the U.S. and U.K. broker-dealer units of Morgan
Stanley to pledge a broader range of collateral to the Fed. With the Federal Reserve now backing up the
funding of the U.S. and U.K. broker dealers, an estimated 85% of MS balance sheet is being guaranteed
by Federal Reserve-backed programs.
NH:
But MS’s holding company cannot defer long term debt issuance forever. And the Morgan Stanley
holding company, like the holding company of any bank, is not supported by the Federal Reserve. This
means that the holding company must rely on its own sources of liquidity to fund the steady maturity and
redemption of long term debt as long as the debt markets are closed.
NH:
And while the holding company’s cash and credit resources are large – over $70 billion of collateralized
inter-company loans that can be called, $19 billion in cash and a $5 billion revolving credit facility – we
note that its cash needs are also significant with quarterly parent company cash demands of $22 billion in
Q4 2008, $11.4 billion per quarter in 2009 and $9.6 billion per quarter in 2010.
NH:
Based on Bernstein’s analysis, we believe the Morgan Stanley holding company can successfully operate
without access to the long term debt markets through at least Q3 2009. In the unlikely event that credit
markets are still completely frozen at that point, the company would likely find its credit ratings under
pressure as its core liquidity position weakens. With aggressive balance sheet management, we calculate
it is possible that the holding company could continue to operate through Q2 2010.
NH:
Bernstein is not forecasting that today’s virtually frozen debt capital market environment will continue ad
infinitum
NH:
The Federal Reserve is attempting to support bank lending and the money markets, and the
NH:
Treasury will start its new Troubled Asset Relief Program (TARP) in the second half of November. But
looking forward, Bernstein does not expect the TARP program to be a panacea, and we are forecasting
that a full credit market recovery will not be achieved until mid 2009.
• Our base case scenario assumes that the frozen credit markets will begin to thaw in early 2009. With
Morgan Stanley trading at 0.70x Q3 2008 book value, we believe the stock offers upside based on that
expectation. We forecast that Morgan Stanley’s book value should remain secure during the final quarter
of this year and into 2009 and we expect the firm to eventually benefit as one of the survivors of this
financial crisis. Nonetheless, given the continuing disruptions occurring in the credit markets, any
investment in this financial institution comes at a significant risk. We rate Morgan Stanley Outperform
with a target price of $50 per share.
NH:
Paul, just on the phone
NH:
no doubt concerned about its share price
NH:
which is off 20.25p at 192.8p
NH:
biggest faller in the FTSE 100 at the moment
NH:
plenty of head nodding
PM:
Just chatting about this bleeding CDS LEH unwind
PM:
The view seems to be that Barclays do not have any net exposure here
NH:
yeah, but the assumes the CP pays out. and we don’t know if this will happen
NH:
what happens if is a hedgie
NH:
and they have another position that does not get paid out
NH:
I can’t see how anyone can predict the outcome of this auction
PM:
Assuming unwind goes ok — cos we have no reason to believe otherwise — I dont think Barclays will be looking at any losses here
NH:
but given the stress in the system
NH:
will this really all go to plan
NH:
and apologies I got the barc price wrong
NH:
CD - do you have that list and can u send it to us??
PM:
What’s the market doing generally neil?
NH:
er down 331 points at 3,983.9
NH:
waves of program trading going through
PM:
Futures predicting another 250 off the Dow
NH:
and it will soon be time for those LIBOR quotes
PM:
Another 20 mins or so
NH:
right let’s change tack
NH:
moved away from equities from a moment and look at currencies
NH:
what about the British Krona?
PM:
The UKK is trading at 1.6961 against, er , the might dollar
NH:
right, thanks to Big Bank
NH:
we have a list of the Leh exposure
NH:
Daily List Of Companies Reporting Lehman Bros Exposure
NH:
as of Sept 15 - when it went under
NH:
Company: Ameriprise Financial Inc. (AMP)
Lehman exposure: $157 million in senior notes (trading at 35% of par
value); will buy up to $100 million in commercial paper (trading at 35% of
par value) to maintain the $1 NAV of money market funds at its RiverSource
Investments unit
Date of disclosure: Sept. 15
Notes: n/a
NH:
Company: Assicurazioni Generali SpA (G.MI)
Lehman exposure: EUR110 million in debt, no stocks
Date of disclosure: Sept. 15
Notes: n/a
NH:
Company: Banco Santander SA (STD)
Lehman exposure: EUR11 million direct exposure, EUR44.6 million in
derivatives with collateral agreement as guarantee at Sept. 12
Date of disclosure: Sept. 15
Notes: n/a
PM:
(Dead Ringer — refresh)
NH:
Company: Bank Hapoalim B.M. (POLI.TV)
Lehman exposure: $109 million, mostly bonds and membership in first-to
default basket; $15 million in net credit default swaps
Date of disclosure: Sept. 15
Notes: Bank Hapoalim said its exposure in credit default swaps was recently
$160 million.
NH:
Company: BNP Paribas (13110.FR)
Lehman exposure: “manageable”
Date of disclosure: Sept. 15
Notes: According to Lehman’s bankruptcy filing, BNP is owed $250 million
and is one of Lehman’s largest creditors.
NH:
Company: Constellation Energy Group Inc. (CEG)
Lehman exposure: several units have contractual relationships with Lehman
Date of disclosure: Sept. 15
Notes: Constellation Energy said Lehman’s bankruptcy won’t hurt the
company.
NH:
Company: Danske Bank A/S (DANSKE.KO)
Lehman exposure: “nothing worth mentioning” for parent company; comfortable
with subsidiary exposure; some trading lines with “significant underlying
securities
Date of disclosure: Sept. 15
Notes: n/a
NH:
Company: Exelon Corp. (EXC)
Lehman exposure: less than $30 million pretax direct exposure to Lehman
Brothers Commodity Services Inc.; $7.6 billion in credit facilities with
lenders including Lehman Brothers Bank (Lehman’s commitment was $238
million at Sept. 12)
Date of disclosure: Sept. 15
Notes: Exelon said it won’t see an adverse material effect from Lehman’s
bankruptcy filing.
NH:
Company: Fortis (NL) N.V. (30086.AE)
Lehman exposure: direct exposure via EUR137 million in bonds, including
EUR5 million secured; EUR270 million collateralized in reverse repo deals;
EUR7 million negative net profit and loss impact in credit default swaps;
EUR117 million indirect exposure through credit default swaps bought from
Lehman as protection on different companies
Date of disclosure: Sept. 15
Notes: Fortis said the marked-to-market value of off-balance-sheet deals
with Lehman was close to zero and are covered by a Credit Support Annex.
NH:
Company: Humana Inc. (HUM)
Lehman exposure: debt securities valued at $25.7 million at Sept. 12; about
$29.2 million of cash collateral under securities lending program invested
in Lehman at Sept. 12; assets related to an interest swap agreement with
Lehman Brothers Special Financing worth about $7.1 million at June 30
Date of disclosure: Sept. 15
Notes: Humana’s debt securities invested in Lehman make up about 0.5% of
the company’s investment portfolio.
NH:
Company: KBC Group NV (KBC.BT)
Lehman exposure: Seen below EUR50 million: EUR145 million purchased bonds;
EUR85 million outstanding credit pacts, of which EUR30 million are secured;
also has indirect exposure in underlying assets of CDOs
Date of disclosure: Sept. 15
Notes: KBC Group owes EUR200 million to Lehman from professional
transactions.
NH:
Company: National Australia Bank (NAB.AU)
Lehman exposure: “negligible;” less than A$100 million, including any
exposure held in conduits
Date of disclosure: Sept. 15
Notes: n/a
Company: Primus Guaranty Ltd. (PRS)
Lehman exposure: $80 million in credit default swaps; also has CDS exposure
in bespoke tranche portfolios; has sold CDS protection to Lehman Brothers
Special Financing Inc. with mark-to-market value $56 million at Sept. 12
Date of disclosure: Sept. 15
Notes: Primus expects to make cash settlement payments to its transaction
counterparties. The company doesn’t expect to have to make payments on its
CDS in the bespoke tranche portfolios but sees capital requirements
associated with each tranche increasing as a result of reduced tranche
subordination. Primus intends to continue swap contracts to maturity until
their mark-to-market value is zero.
NH:
Company: SEB SA (12170.FR)
Lehman exposure: EUR64 million, not related to shares or subordinated debt
Date of disclosure: Sept. 15
Notes: n/a
Company: Skandinaviska Enskilda Banken AB (SEB-A.SK)
Lehman exposure: EUR64 million in bond claims, none related to shares or
subordinated debt issued by the parent company
Date of disclosure: Sept. 15
Notes: n/a
Company: Storebrand ASA (STB.OS)
Lehman exposure: n/a
Date of disclosure: Sept. 15
Notes: Storebrand Livsforsikring AS booked a NOK72 million loss Monday,
including NOK69 million in its customer portfolio and NOK3 million in its
company portfolio. The loss represents less than 0.05% of the company’s
insurance reserves. SPP’s equity holding in Lehman shares resulted in a
NOK1.2 million booked loss.
Company: SEB SA (12170.FR)
Lehman exposure: EUR64 million, not related to shares or subordinated debt
Date of disclosure: Sept. 15
Notes: n/a
Company: Skandinaviska Enskilda Banken AB (SEB-A.SK)
Lehman exposure: EUR64 million in bond claims, none related to shares or
subordinated debt issued by the parent company
Date of disclosure: Sept. 15
Notes: n/a
Company: Storebrand ASA (STB.OS)
Lehman exposure: n/a
Date of disclosure: Sept. 15
Notes: Storebrand Livsforsikring AS booked a NOK72 million loss Monday,
including NOK69 million in its customer portfolio and NOK3 million in its
company portfolio. The loss represents less than 0.05% of the company’s
insurance reserves. SPP’s equity holding in Lehman shares resulted in a
NOK1.2 million booked loss.
PM:
ta — neil — straight to GE
PM:
Figs look to be in line but we are getting waves of selling
PM:
FTSE 100 off 348p oints
PM:
Dunno why the neg reaction to GE’s figs
PM:
Saying divi “sustainable”
PM:
Where were we on the UKK
PM:
Just looking at a Goldman notes — saying a lot of currency mvoes are being driven by cross border deleveraging
PM:
Much of the price action in FX markets recently has been related to
broader deleveraging. In yesterday’s FX Monthly Analyst we looked at the
mechanics of this new driving force and the likely outlook.
PM:
2. The Mechanics of Cross Border Deleveraging
Financial markets are currently experiencing a period of continued
deleveraging, touching virtually all asset classes and leading to
volatility levels not seen for many years. One of the particularities of
this current episode is the money market freeze, which is now affecting
almost all major countries and many less developed ones as well.
In normal times, much of our FX related thinking revolves around the
current account related funding needs of individual countries and the
willingness of foreign investors to commit capital on the basis of direct
or portfolio investment. Interest rate sensitive carry related investments
often also constitute a key source of funding inflows. But, importantly,
almost all our analytical tools implicitly assume that investors are free
in their decision to invest abroad or to keep money at home.
Underlying this investment decision is a credit layer, which in normal
times is barely noticeable. However, virtually any cross-border investment
or FX transaction involves some form of shorter- or longer-dated credit.
And credit is now the constraint causing changes in cross-border
investment allocations.
PM:
ON $ has collapsed back
NH:
three month up though
NH:
3-Month USD Libor Fixed At 4.81875% Vs 4.75%
3-Month Sterling Libor Fixed At 6.285% Vs 6.28125%
Overnight Euro Libor Fixed At 3.8925% Vs 3.93625%
O/N Sterling Libor Fixed At 5.8125% Vs 5.41875%
O/N USD Libor Fixed At 2.46875% Vs 5.09375%
PM:
I will finishoff that Goldman stuff I was printing
PM:
On cross board deleveraging effects on currencies
PM:
3. Unwinding of Currency Mismatched FX Positions
One area that is particularly interesting is the foreign currency exposure
in shrinking financial sector balance sheets. It is quite difficult to get
exact data but the BIS has published the foreign currency breakdown of
reporting banks’ assets and liabilities. The majority, about 53%, of banks’
foreign currency assets and liabilities are denominated in USD—clear
evidence that the Dollar remains the primary international currency. In
absolute terms, Dollar-denominated assets and liabilities by non-US banks
amounted to about $12.0trn at the end of Q1 2008. EUR denominated foreign
currency positions amount to slightly less than half of that or slightly
more than 20% of all foreign currency positions.
However, EUR denominated positions are subject to a much larger currency
mismatch. Collectively, reporting banks hold significantly more EUR
denominated foreign currency assets then liabilities. In a world of
deleveraging, selling of these EUR denominated assets therefore almost
certainly carries a net FX impact as the Euros have to be converted back
into the funding currency. We calculate that a 10% shrinking of EUR
denominated balance sheet items would lead to a $73bn EUR selling.
PM:
4. FX Funding Pressures
Rising USD Libor rates in recent months have shown that Dollar funding
markets have become very tight. Also, funding problems in offshore USD
appear to have been much worse so far than in other currencies. This is
not really a surprise in light of the BIS numbers. As we mentioned above,
Dollar denominated liabilities by non-US banks globally amount to about
$12tn – far more than in any other currency. Moreover, given the usual
maturity transformation in the banking sector, much of this is likely
funded in shorter maturities. If the offshore Dollar funding markets
freeze, banks have little choice but to fund in their domestic currency
and go through the FX market to buy USD. If only one percent of the US
debt cannot be rolled, the funding shortfall would amount to a chunky
$120bn. With these numbers in mind it is not surprising that the Fed now
provides a total of $620bn of FX swap lines that other central banks can
use to inject Dollar liquidity into their markets. This would reduce the
need to fund through FX markets and could explain why the Dollar has
stabilised somehow in recent days relative to other major currencies.
PM:
5. Marking Down Foreign Currency Denominated Assets
If the value of foreign currency assets declines, an equivalent amount of
foreign currency liabilities is no longer needed and has to be covered.
For example a European bank marking down a fully FX hedged investments in
US mortgage bonds has to buy USD to neutralise the FX risk.
The BIS statistics does not tell us anything about the asset quality or
the regulatory requirements to mark foreign currency assets to market.
However, the total amount outstanding – we are again talking about the
$12tn – is big enough to create some notable reverse hedging flows.
Overall it appears that most of the deleveraging forces mentioned here and
a few more discussed in our FX Monthly Feature have been Dollar-positive.
Also, some EM currencies clearly have come under deleveraging pressure as
Themos Fiotakis discussed in his Global Economics Weekly published on
Wednesday. It appears that countries with large foreign net liabilities,
in particular in the banking sector, are vulnerable to repatriation by
foreign investors. Therefore, if deleveraging continues, these trends
could persist. A partial reversal is likely though if risk sentiment
starts to improve.
PM:
That’s enough of that
PM:
Neil’s just on the phone to a shrewdie
PM:
But in truth the shrewdies dont have a lot to ad in these marekts
NH:
they don’t, very quiet
NH:
some whisper around on MGM Mirage
PM:
market has bounced on those Libor figs — impressed by the $on mvoe, clearly
NH:
what’s the FTSE 100 now??
NH:
OIS continues to rise but the market likes the O/N fall
NH:
OK, I have a little primer for the Lehman auction
NH:
Plain English Summary of the Auction Methodology in the 2008 Lehman CDS Protocol
NH:
This summary is based on the 2008 Lehman CDS Protocol, as published by ISDA on October 6, 2008 (the Protocol) and summarizes the auction methodology contained in Exhibit 3 to the Protocol (the Auction Methodology). This summary is for informational purposes only, is not a summary of the entire Protocol and is subject to the Protocol in all respects.
NH:
Market participants should examine the text of the Protocol itself before deciding whether to adhere to the Protocol or take any other action with respect thereto. ISDA makes no representation or warranty as to the accuracy or completeness of any information contained in this summary and accepts no liability for the accuracy or completeness of such information. All times of day herein refer to such times in New York C
NH:
Market participants should examine the text of the Protocol itself before deciding whether to adhere to the Protocol or take any other action with respect thereto. ISDA makes no representation or warranty as to the accuracy or completeness of any information contained in this summary and accepts no liability for the accuracy or completeness of such information. All times of day herein refer to such times in New York C
NH:
Important Dates
• October 6 → Protocol Published
• October 8 → Cut-Off Date for Adherence Bidding Agreement Letters
• October 10 → Auction Date
• October 15 → Deadline for receipt of Notice of Physical Settlement for trades formed under the Protocol
• October 20 → Settlement Date for trades formed under the Protocol
• October 21 → Cash Settlement Date for Covered Transactions
NH:
Covered Transactions
The Protocol covers the following types of transactions, as further set out in Section 6 of the Protocol (”Definitions”):
• Tranched or untranched Transactions referencing a bespoke portfolio;
• Single name CDS Transactions;
• Constant Maturity Swap Transactions (both portfolio and single name);
• Principal Only and Interest Only Transactions;
• First to Default and Nth to Default Transactions;
• Recovery Lock Transactions; and
• Swaptions (both single name and portfolio);
NH:
provided (a) Lehman Brothers Holdings Inc. (Lehman) is a Reference Entity under the Transaction, (b) either (1) no Reference Obligation is specified or (2) the Reference Obligation is “Not Subordinated” to any of the Deliverable Obligations, (c) the Effective Date is on or prior to September 15, 2008 and the Scheduled Termination Date is on or after September 15, 2008, (d) the Trade Date is on or prior to the Business Day immediately prior to the Auction Date, and (e) the relevant portion of the Transaction is still outstanding. Transactions documented under either the 1999 or 2003 Credit Derivatives Definitions that meet these criteria are covered by the Protocol.
NH:
Auction Timing
October 8, 2008
Before 5:00 p.m. Participating Bidders submit Bidding Agreement Letters.
NH:
The Administrators publish a list of the Participating Bidders.
The Deliverable Obligations for the auction are listed as “Deliverable Obligations” on the Lehman CDS Protocol page of the ISDA website available at:
October 10, 2008 (Auction Date) The auction procedures described below will be conducted and a Final Price will be determined to be applied to all of the Covered Transactions.
www.isda.org. Between 9:45 a.m. and 10:00 a.m., Participating Bidders submit Inside Market Bids, Inside Market Offers, Dealer Physical Settlement Requests and Customer Physical Settlement Requests (to the extent received from customers).
NH:
The Administrators publish a list of the Participating Bidders.
The Deliverable Obligations for the auction are listed as “Deliverable Obligations” on the Lehman CDS Protocol page of the ISDA website available at:
October 10, 2008 (Auction Date) The auction procedures described below will be conducted and a Final Price will be determined to be applied to all of the Covered Transactions.
www.isda.org. Between 9:45 a.m. and 10:00 a.m., Participating Bidders submit Inside Market Bids, Inside Market Offers, Dealer Physical Settlement Requests and Customer Physical Settlement Requests (to the extent received from customers).
NH:
A Participating Bidder’s Inside Market Bid and Inside Market Offer must differ by no more than 2% of par and must be in the size specified in the Protocol ($5 million).
NH:
A Participating Bidder’s Inside Market Bid and Inside Market Offer must differ by no more than 2% of par and must be in the size specified in the Protocol ($5 million).
NH:
If the Administrators do not receive Valid Inside Market Submissions from at least eight Participating Bidders, the timeline will be adjusted according to the Auction Methodology, otherwise it will proceed as follows.
NH:
Between 10:00 a.m. and 10:30 a.m., the Administrators calculate the Open Interest, the Inside Market Midpoint, and any Adjustment Amounts in respect of each Auction.
NH:
Between 10:00 a.m. and 10:30 a.m., the Administrators calculate the Open Interest, the Inside Market Midpoint, and any Adjustment Amounts in respect of each Auction.
NH:
Any Participating Bidder whose Inside Market Bid or Inside Market Offer forms part of a tradeable market will be required to make a payment to ISDA (an Adjustment Amount), calculated in accordance with the Auction Methodology.
NH:
If for any reason no single Inside Market Midpoint can be determined, the procedure set out above may be repeated as set out in the Auction Methodology.
No later than 10:30 a.m., the Administrators publish the Open Interest, the Inside Market Midpoint and the details of any Adjustment Amounts in respect of each Auction.
NH:
Between 12:45 p.m. and 1:00 p.m., Participating Bidders submit Limit Bids (if the Open Interest is an offer to sell Deliverable Obligations) or Limit Offers (if the Open Interest is a bid to purchase Deliverable Obligations) on behalf of customers and for their own account.
NH:
Between 12:45 p.m. and 1:00 p.m., Participating Bidders submit Limit Bids (if the Open Interest is an offer to sell Deliverable Obligations) or Limit Offers (if the Open Interest is a bid to purchase Deliverable Obligations) on behalf of customers and for their own account.
NH:
If the Open Interest is zero, the Final Price will be the Inside Market Midpoint.
• If the Open Interest is a bid to purchase Deliverable Obligations, the Administrators will match the Open Interest against all Inside Market Offers and Limit Offers as further described in the Auction Methodology. If the Open Interest is an offer to sell Deliverable Obligations, the Administrators will match the Open Interest against all Inside Market Bids and Limit Bids as further described in the Auction Methodology.
NH:
The Final Price will be the price associated with the matched market that is the highest offer or the lowest bid, as applicable, provided that (a) if the Open Interest is an offer to sell and the price associated with the lowest matched bid is more than 1% of par higher than the Inside Market Midpoint, then the Final Price will be the Inside Market Midpoint plus 1% of par and (b) if the Open Interest is a bid to purchase and the price associated with the highest offer is more than 1% of par lower than the Inside Market Midpoint, then the Final Price will be the Inside market Midpoint minus 1% of par.
NH:
If, once all the Inside Market Bids and Limit Bids or Inside Market Offers and Limit Offers, as applicable, have been matched to the Open Interest, part of the Open Interest remains, the Final Price will be (a) if the Open Interest is a bid to purchase Deliverable Obligations, the highest Limit Offer or Inside Market Offer received or (b) if the Open Interest is an offer to sell Deliverable Obligations, zero.
NH:
No later than 2:00 p.m., the Administrators will publish on www.creditfixings.com (1) the Final Price, (2) the names of the Participating Bidders who submitted bids, offers, Dealer Physical Settlement Requests and Customer Physical Settlement Requests, together with the details of all such bids and offers submitted by each and (3) the details and size of all matched trades.
NH:
Execution of Trades Formed in the Auction Each Participating Bidder whose Limit Bid or Inside Market Bid (or Limit Offer or Inside Market Offer if applicable) is matched against the Open Interest, and each Participating Bidder that submitted a Customer Physical Settlement Request or Dealer Physical Settlement Request, is deemed to have entered into a Representative Auction-Settled Transaction (RAST), and each customer that submitted such a Limit Bid, Limit Offer, or Physical Settlement Request is deemed to have entered into a RAST with the Dealer through whom the customer submitted such bid or offer.
PM:
That’s really useful Neil — thanks.
PM:
cut out and keep for this afternoon
PM:
Hey! we’re back thru 4k
PM:
What’s iceland flash?
NH:
Exista selling stake in food producer Bakkavor
PM:
Tom Braithwaite filed us a lovely little piece from Iceland overnight
PM:
Pointing out how ugly Brown’s treatment of the country has been
NH:
and invoking terror legislation
PM:
Disgraceful, in my view
NH:
and one thing that is puzzling is how the candy brothers are still up and running
NH:
didn’t they borrow lots of money from Kaupthing
PM:
They did — but they also sold a lot of real estate to russian oligarchs at fancy fancy prices
NH:
so, you are saying they managed to book a lot of profits at the top of the market??
PM:
We just don’t know for sure
NH:
but surely there must be some pretty chunky debts
NH:
merits proper investigation not jus those puff piece interviews we keep seeing
PM:
(Hawkyeye — circa Sept 96 was first time FTSE 100 went up thr 4k)
NH:
talking of the Icelandics
NH:
we did some stuff in the paper today about Unity investments
NH:
an investment vehicle part owned by Baugur
NH:
seems that they could be about to sell a load of positions
NH:
from this morning’s paper
NH:
It emerged on Thursday that Unity Investments, an investment vehicle part owned by Baugur, held its stakes through contracts for difference – instruments that allow investors to build up an interest in a company without actually holding the shares – backed by Icelandic banks. This could mean that the stakes have passed to the adminstrators, although a person close to Baugur on Thursday night said it was too soon to say for sure what had happened to those contracts, pointing out that Baugur should still have a claim to those stakes in Woolworths, French Connection, Moss Bros and Debenhams, despite their backers being in administration.
NH:
At the spring of 2007, Unity Investment’s stakes in Debenhams, Moss Bros, Woolworths and French Connection were worth £309m. As of last night, the value of the holdings had fallen to £67m.
Those CFDs were arranged by Icelandic banks that have now been nationalised by the Icelandic government. Some UK operations of Icelandic banks Kaupthing and Landsbanki have been put into administration.
NH:
It was still unclear what had happened to those positions following the rapid unravelling of Iceland’s banks this week, a person close to Baugur said last night. The company was seeking to clarify the matter
NH:
and of course we don’t yet what has happened to the Sainsbury stake
PM:
But it is important to state that Iceland’s troubles are down to the reckless expansion of a handful of entrepreneurs
PM:
And our regulators seemed to be happy with everything they were doing
NH:
and we have not even mentioned GM this morning
NH:
Overnight, S&P warned the company could run out of cash next year
NH:
Bob Schulz, an S&P analyst, said that while GM had adequate liquidity for at least the rest of this year, “the accelerating deterioration in industry fundamentals will be a serious challenge to liquidity during 2009”.
NH:
GM is bledding $1bn of cash a month at the moment
NH:
and the carmaker’s cash reserves have already dropped from $27.3bn last December to $21bn on June 30.
PM:
Hang on — we’ve got a buy signal!!!!!!!!!!
NH:
what Buffett made another investment in pref shares of somoe big bank?
NH:
ah and he has done what??
PM:
Moved into the market — spending hard cash
NH:
what bought the index?
PM:
Nope — he’s taken a full four per cent of Woolworths
NH:
er on last night’s close around £1.8m
PM:
Floor under the market with that news
NH:
not sure what he sees in the company
NH:
doesn’t have a great property portfolio
PM:
And it has some weird cheapo range where you can get a kettle for three quid or something
NH:
perhap he sees it as a distribution outlet for the Emailer
NH:
No Woolies does not have property - or that much
NH:
the property was stripped out by Geoff Mulchacy when WLW was demerged from Kingfisher
NH:
a think all WLW has is a stack of long term leases
NH:
in run down high streets
NH:
suppose they must be worth something
NH:
although in this environment, perhaps not
PM:
Okay — the footsie is back below 4k — so it is safe for us to log off now
PM:
But Neil wants to make one call…..
PM:
re a certain crippled company
PM:
Actually — forget the little crippled co
PM:
I think he might have some other news….
NH:
right the story seems to be that they have lined up a buyer for a division
NH:
not the health club business
NH:
this includes the two rubbish businesses JJB acquired from Ashley and Tom Hunter
NH:
proceeds could be as much as £25m
NH:
which would allow JJB to pay down the £20m loan taken from Kaupthing
NH:
and keep the company going
NH:
however, there are some unknow unknows
NH:
such as what happens to the 30% stake controlled by Kaupthing
PM:
Neil — need to butt in
NH:
that could hit the market too
NH:
dangerous trade if u ask me
PM:
Sainsbury — down 17p at 251
NH:
good luck to all in it
PM:
Im off the phone — and we need to get this out
PM:
it seems that the placing of Mr T’s stake has been pulled
PM:
Or it never quite got off the ground
PM:
according to a prime broker — its all been unwound.
PM:
Whether that means Mr T has come up with the money — we dont know
PM:
I suspect it is just becuase of complications around kaupthing
NH:
yes JJB do fashion of a sort. If you are a chav you might pop in to the Original Shoe Company or Qube
NH:
that’s fashion for youth who loiter outside shopping centres at night sniffing glue
PM:
steady!
NH:
oh and nothing from Bob The Bull today
PM:
Bob the bull got runover i think
NH:
FTSE 100 back below 4,000
NH:
off 328 points at 3,985
PM:
HBOS at the top of the losers — down 18% at 125p
PM:
Followed closely by RBS and Barclays
NH:
and for all those interested in JJB, Bryce has just sent a note over on the fashion division
NH:
Why did management buy Original Shoe Company (OSC) and Qube?
Both of these small fashion footwear-focused chains were loss making when acquired.
Management already had a big turnaround job on its hands with the core JJB Sports
chain – why add to the task? CEO Ronnie said in the meeting that one of the purposes
was to improve relationships with the fashion footwear brands. However this was the
reason given when Sports Direct bought OSC, and they sold it only 18 months later.
Given that JJB’s plan is to increase private label products from about 25% to 45% in the
next year, and that its family-dominated customer base is unlikely to buy the more
expensive fashion brands, we find it difficult to see the need to strengthen JJB’s
relationship with these suppliers.
NH:
Why did OSC and Qube cost £22.2m and not £5m?
In Dec 2007 JJB announced the acquisition of the whole of the issued share capital of
OSC (60 sports fashion stores) for £5m. The annual report repeated this information as a
post-balance-sheet event. However, the interim report states that the cost was £15.1m
made up of cash consideration of £5m and “other directly attributable costs” of £10m.
The total outflow in the cash flow was £15m, which leads us to assume there were
liabilities in OSC of £10m that had to be repaid.
NH:
In May 2008 JJB announced that it had acquired the shares of Qube (22 fashion
footwear stores) for only £1. However the interim results show the cost to have been
£7.1m due to “directly attributable costs” of £7.1m.
Hence the total outflow relating to acquisitions was £22.2m, rather than the £5m that we
had expected. When asked to explain this, management replied it was to do with
payments for stocks – we assume this means clearing trade creditors, since none were
assumed in the case of OSC.
PM:
Cannot guaratee session this afternoon, im afraid
PM:
Our next scheduled session here is 11am on Monday
NH:
we here the sounds of the Doors and The End
PM:
Presuming the market is still open in London
PM:
Thank you very much everyone — all the coments
PM:
Some very very useful — many v funny
