Markets live chat transcript for the chat ending at 12:09 on 8 Dec 2008. Participants in this chat were: Paul Murphy, FT (PM) Neil Hume, FT (NH)
PM:
This is Markets Live, FT Alphaville’s daily market chat.
PM:
Okay, wot the blinkin eck have we seen this morning?
NH:
Bear squeeze – following the 3 per cent rally on Friday.
NH:
Whatever –stocks shot up first thing. Footsie was up 6 per cent or so at the opening
NH:
You know what it is – people are lurching from utter depression to blind conviction that we’ve seen the worst and therefore they are going to miss the greatest buying opportunity of their lives.
PM:
So we seen unemployment numbers on Friday that are about 60 per cent higher than the market is expecting.
PM:
We have incontrovertible evidence that economies on both sides of the Atlantic are headed into deep deep distress – and so people say “buy.”
NH:
Well, it’s the Obama effect?
NH:
Well it’s just so bad – that Obama goes on the box in the US and explains that he is going to spend America out of recession – roads, internet, green tech – the lot.
NH:
And what ever your politics, that makes people feel hopeful for the future. It’s a reminder that that dangerous clown Bush really is coming to an end.
PM:
What’s Bush going to do for his retirement? Hide?
PM:
Anyway – at the open not a single Footsie stock was in positive territory. But that’s no longer the case,is it?
NH:
It is not – although not much is down
Standard Chartered (STAN:LSE): Last: 730.50, down 37.5 (-4.88%), High: 811.00, Low: 730.50, Volume: 4.76m
Liberty International (LII:LSE): Last: 483.50, down 10 (-2.03%), High: 525.00, Low: 479.25, Volume: 589.62k
NH:
Footsie has come off the boil – now up 186 at 4,233
NH:
and lower down the market, there are many more fallers
PM:
just look at Carphone Warehouse
PM:
they are both bucking the trend
PM:
carphone is off 4.25p at 88.75
PM:
Big Yellow off 9.5p at 203
PM:
and the reason is David Ross??
PM:
founder of Carphone and a director of Big Yellow
PM:
and it seems that he had got confused over the FSA’s listing rules
NH:
yes specifically the rules regarding shareholdings that have been pledged at collateral for loans
NH:
now, the rules covering this are
NH:
or can be found in the FSA’s full listings book
NH:
http://fsahandbook.info/FSA/html/handbook/
NH:
Persons discharging managerial responsibilities and their connected persons, must notify the issuer in writing of the occurrence of all transactions conducted on their own account in the shares of the issuer, or derivatives or any other financial instruments relating to those shares within four business days of the day on which the transaction occurred. [Note: Article 6(4) Market Abuse Directive and Article 6(1) 2004/72/EC]
NH:
that was from disclosure and transparency rules
NH:
and also in the model code
NH:
using as security, or otherwise granting a charge, lien or other encumbrance over the securities of the company;
NH:
now, what has happened here is that Ross has been forced to resign from Carphone
NH:
because he did not inform the company that his 15% holding has been pledged as collateral for a loan
NH:
and as we can see above if a company director pledges his stock as collateral for a loan
NH:
it has to be reported
PM:
And Mr Ross forgot to do that, which is unfortunate
PM:
So do we think he faces questions over market abuse???
NH:
I think the FSA will be taking a close interest in this one
PM:
How much stock has been pledged exactly??
NH:
hang on, will grab the statement
NH:
The Carphone Warehouse Group PLC (The ‘Company’)
Director’s Dealings and Board Change
On 7 December 2008, the Company received notification from David Ross, a Director of the Company, that he had, through various agreements between 2006 and 2008 and as part of a package of security comprising other assets of substantial value, pledged 136.4 million ordinary shares in the Company against personal loans.
David Ross has also notified the Company that none of these loans is currently in default and that he has no current intention to sell any of his shares in the Company. In addition, he has given an undertaking to the Board to facilitate an orderly market, where possible, for any potential future disposal of shares in the Company.
David Ross has tendered his resignation as a Director of the Company with immediate effect and will continue to pursue his various other business interests.
No other Director of the Company has granted security over or entered into any financial instruments relating to any of their holdings of ordinary shares in the Company.
PM:
So, Dunstone did not know about any of these arrangements
?
NH:
BTW - 136.4m is 15% of the company
PM:
and Ross is saying he is not a forced seller
NH:
but the lower Carphone shares go
NH:
the greater the possibility of that happening
NH:
and of course the market can now smell blood
NH:
so what’s the betting the price is driven down even further
NH:
and the whole thing becomes self fulfilling
PM:
well, it happened with Asil Nadir
PM:
Polly Peck — Nadir had loads of stock — pledged to Citigroup i think
PM:
Inland revenue starting investigating Polly Peck — price fell — Nadir could not meet margin calls
PM:
Citi started selling the collateral
PM:
The whole business was gone within a few weeks
PM:
They that led to rules changes on disclosure
PM:
There was the maxwell example of course — also seriously criminal
PM:
But has also happened to up-right people like….
PM:
he was caught with pledged stock in What Everyone Wants
PM:
Forced him out of the business
PM:
Cant remember immediately
NH:
well that’s more than enough
PM:
Actually - another point to make here
PM:
Ross borrowed how much ?
NH:
well, the thing is, Ross against a wide range of equity holdings
NH:
including the following
NH:
Big Yellow Group PLC (The ‘Company’)
Monday 8 December 2008
Director’s Declaration
This morning, the Company received notification from David Ross, a Director of the Company, that he had, on various dates on or after 23 March 2006 and as part of a package of security comprising other assets of substantial value, pledged 11,456,140 ordinary shares in the Company against personal loans.
David Ross has also notified the Company that none of these loans is currently in default and that he has no current intention to sell any of his shares in the Company. In addition, he has given an undertaking to the Board to facilitate an orderly market, where possible, for any potential future disposal of shares in the Company
NH:
National Express Group PLC (”the Company”)
The Company today received notification from David Ross, the Chairman of the Company, that he had through various agreements on various dates on or after 23 March 2006, and as part of a package of security including other assets of substantial value, pledged a total of 3,013,402 ordinary shares of 5 pence each in the Company to support personal borrowings from several banks.
David Ross has also notified the Company that none of these loans is currently in default. He has given an undertaking to the Board to facilitate an orderly market, where possible, for any future disposal of shares in the Company.
No other Director of the Company has granted security over or entered into any financial instruments relating to any of their holdings of shares in the Company.
Name of contact and telephone number for queries: Tony McDonald, Group Company Secretary on 020 7506 4325.
PM:
Well dont you think his bankers and advisers might have been expected to point out to him that he would have to make public disclosure?????
PM:
People like Ross pay their advisers spectacular amounts of money — and you’d expect these advisers to know the FSA rulebook
NH:
true, can’t disagree with that
NH:
and did Dustone know?
PM:
Dunno. His specialiality is flogging phones
NH:
anyway, Ross has a couple of directorships in addition to the above
NH:
and also a little thing called Cosalt
NH:
which supplies marine and industrial safety equipment and clothing
NH:
he owns 15% of this company
NH:
and I suspect Mr Ross won’t be the only company director to get into trouble with these margin loans
NH:
in fact I am hearing there could be a lot of margins calls on this collateral lending by the year end
NH:
and of course, it has already been happening in the mining sector
NH:
Zhevago forced to offload 20% stake in Ferrexpo
By Michael Kavanagh
Published: October 6 2008 17:32 | Last updated: October 6 2008 17:32
The controlling shareholder in Ferrexpo has been forced to sell a 20.8 per cent stake in the Ukrainian iron ore producer after a fall in its share price prompted bankers JPMorgan Chase to recall a loan.
Kostyantin Zhevago, the 33-year-old Ukrainian billionaire businessman and politician, confirmed on Monday that he had sold the stake to the investment vehicle of Zdenek Bakala, controlling shareholder in New World Resources, a fellow London-listed Czech coal miner.
Mr Zhevago, a sitting Ukrainian MP who retains a 51 per cent stake in Ferrexpo through holding company Fevamotinico, sold the stake at 83p a share, a sharp discount to Friday’s closing price of 117½p.
PM:
Any analyst comment on all this??
NH:
not much at the moment, but this came out of Oriel Securities this morning
NH:
Co-founder and non-executive chairman David Ross has tendered his resignation as
Director of Carphone Warehouse with immediate effect to pursue other business
interests.
NH:
• Yesterday David Ross informed the company that he had pledged 136.4m ordinary
shares (15%) in the Company against personal loans in various agreements between
2006 and 2008.
NH:
• None of these loans is currently in default and David has informed the company he has
no current intention to sell any of his shares in the Company and he has furthermore
given an undertaking to the Board to facilitate an orderly market in any future disposal
NH:
There is a conference call at 8am to discuss this news, but until clarification is provided
no doubt the market will speculate that this position could easily now turn into a rather
large stock overhang. We understand that David has build up a rather large exposure to
retail property over the last 5 years that we contend must be a worth a lot less now than it
once was. David Ross owns 19.4% in total. The shares should decline on the news
today.
PM:
So it is propoerty then
NH:
well, that is the word in the market this morning
NH:
that’s what he needed all this cash for
NH:
to invest in property
NH:
OK, so this is all 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:
Ross pledged the stock as collateral when Carphone was trading around 300p a share
NH:
and it was needed for a property venture with Morgan Stanley
NH:
this is one, apparently
NH:
David Ross in Morgan Stanley link-up
By Jim Pickard in London
Published: November 12 2006 22:03 | Last updated: November 12 2006 22:03
David
NH:
David Ross, the entrepreneur who co-founded Carphone Warehouse, has launched a property company in a joint venture with Morgan Stanley, the US investment bank.
The business, called Kandahar Real Estate, already owns about £500m ($955m) of property contributed from the two partners.
Morgan Stanley Real Estate, best known in the UK for leading the takeover of Canary Wharf two years ago, has contributed Drake Circus, a 560,000 sq ft shopping centre in Plymouth worth about £250m.
NH:
Mr Ross has injected his privately owned £243m portfolio of high-street shops, covering about 1m sq ft, into the new company.
It is understood that Kandahar Real Estate will seek to buy or develop more retail and leisure schemes in the UK.
Ultimately the partners could float it on the stock market as a Reit (real estate investment trust), a type of tax-free property vehicle that will be introduced in the UK in January.
David Ross founded mobile phone retailer Carphone Warehouse with Charles Dunstone in 1989 and remains deputy chairman.
NH:
Mr Ross, chairman of National Express, is also a non-executive director at Trinity Mirror, Gondola Holdings and Big Yellow Group.
The Kandahar venture reflects the trend for successful entrepreneurs to diversify into real estate as a way of preserving their fortunes.
NH:
you can get further detail in this here
NH:
shopping centres in Plymouth
NH:
that’s where all the cash has gone, alledgedly
PM:
Now — to the Save FKA Campaign below
NH:
he was only banned for one hour. more as beta test than anything else
NH:
not sure why he has not logged back in
NH:
perhaps he has had enough
PM:
But maybe he’s stuck in some sort of ML limbo
PM:
We havent tested whether the ban comes off automatically
PM:
he might be still out there — forced to lurk
PM:
Anyway — why would you name a property joint venture after a lawless Afghan province?
NH:
actually we will have to do draw up some listing rules for the posters
PM:
Will try and keep it shorter than the FSA’s tho
PM:
People have got enough crap to read
PM:
i should mention that we are a bit slow this morning
PM:
having to ttype Ml while eating chocolates
PM:
Dropped off by Andrew Betts of Assanka
Cracking little software shop who built FT Alphaville
PM:
Knows the way to the heart of certain AV-ers at the FT
NH:
few more things on Carphone. Brokers are telling me it is very difficult to borrow stock and short the company
NH:
so perhaps that explains why it is had not fallen further
NH:
and I have not checked this, but Ross is apparenntly a descendant of the Ross frozen food family/empire from the north east
PM:
ADS and others below having probs with City INdex prices
PM:
Can we suggest you empty your cache (not jsut delete temp internet files) and refresh
PM:
You read this: - just dropped in my inbox
PM:
Discussion Paper No. 26
Monetary policies and low-frequency
manifestations of the quantity theory
Thomas J Sargent(1) and Paolo Surico
PM:
Neither have I. let’s move on, smartish
PM:
Abstract
To detect the quantity theory of money, we follow Lucas (1980) by looking at scatter plots of filtered time series of inflation and money growth rates and interest rates and money growth rates. Like Whiteman (1984), we relate those scatter plots to sums of two-sided distributed lag coefficients constructed from fixed-coefficient and time-varying VARs for US data from 1900–2005. We interpret outcomes in terms of population values of those sums of coefficients implied by two DSGE models. The DSGE models make the sums of coefficients depend on the monetary policy rule via cross-equation restrictions of a type that Lucas (1972) and Sargent (1971) emphasised in the context of testing the natural unemployment rate hypothesis. When the US data are extended beyond Lucas’s 1955–75 period, the scatter plots mutate in ways that we attribute to prevailing monetary policy rules.
Key words: Quantity theory, policy regimes, time-varying VAR.
NH:
Time-varying VAR - I think we’d better scarper.
PM:
We’re looking for an early getaway today.
PM:
Off for a spot of lunch – the AV team.
PM:
Sign of the times – less than three weeks to Xmas, we hadn’t booked – table for five, cos Sam is sick….
PM:
Bleeding Heart – no problem Mr Hume.
PM:
Neil is referring to the fact that I suggested he booked – rather than myself.
PM:
Neil, when he was a rookie market report, used to use my name to get reservations at the Bleeder – and long with an optimal table.
PM:
They actually complained to me – and I had to tell him to stop it.
PM:
He can now command his own reservation at top City restaraunts, of course.
PM:
Seen this stuff from JP Morgan on newspaper publishers?
NH:
Oh, here we go, the Pearson stock support operation.
Pearson plc is the parent company of the Financial Times, publisher of FT Alphaville.
PM:
No no – Pearson not mentonied
PM:
M&A Potential: Regulations Must Change; How to
Save Newspapers and Extract Value for Shareholders
PM:
Restrictions must change. Regulations on newspaper M&A cling to dual beliefs that local news content and competitive ad markets must be maintained, yet in both instances the market definition is limited to print newspapers. Reports from the House of Lords and OFT as recent as this year defend this view, even as they acknowledge the challenge posed by the internet. We worry that without a relaxing of M&A rules, the worsening financial situation of some newspaper publishers could eventually force them into trouble with debt and lead to more local title closures – precisely what the government aims to avoid.
M&A synergies could make a difference. In this note we attempt to model individual company merger synergies, assuming title closures and cost savings that under various scenarios could as much as double margins, boost FCF by 10%-90%, and cut net debt ratios by 20%-40% by our
estimates.
But debt remains an impediment, and equity valuations are low. Cash deals seem near-impossible and equity transactions would also be tough at current depressed stock prices. Well-funded larger entities, including publicly-supported enterprises, may be the only deal-makers.
PM:
Potential catalysts: cycle turn, debt refinancings and regulatory changes. A return to cyclical growth or easing of credit terms (lifts in covenants and/or extensions) would likely produce a bounce in multiples, possibly in 2009 in our view. Regulatory changes may take longer to enact. We think it is too early to play an M&A angle and cannot identify particular winners (all are potential sellers), but think all stocks would benefit. We remain cautious on newspapers in light of regulatory stasis and ad revenue drops; we are nowhere near calling an inflection point on either. We expect 2009 ad revenues down 18% across DMGT, Trinity Mirror and Johnston Press, and circulation volumes to drop 5-6%.
JPR and TNI (both UW) remain our least-favored names as we believe they will bear the brunt of the ad recession. We could become more positive on signs of cyclical rebound or refinancing of debt due in 2010 and 2011, respectively. JPR and TNI could then deliver outsized returns in our view. We prefer DMGT (OW) for its more resilient B2B businesses (60% of profits and growing), relatively better newspaper operations, firm balance sheet, and attractive valuation with 30% upside to our Dec 09 DCF/SOTP based price target of 390p.
PM:
bascially saying the gov have got to relax ownership restrictions
NH:
this does not really apply to us does it. this about relaxing the rules governing local papers
NH:
ie allow Trinity to merge with Johnston Press
NH:
they have been lobbying for this for ages
Johnston Press (JPR:LSE): Last: 8.39, up 0.42 (+5.27%), High: 8.53, Low: 8.05, Volume: 220.21k
Trinity Mirror (TNI:LSE): Last: 48.00, no change, High: 53.50, Low: 45.50, Volume: 348.42k
Pearson (PSON:LSE): Last: 638.00, up 32.5 (+5.37%), High: 655.50, Low: 626.00, Volume: 1.16m
PM:
Okay — how abotu a bit of small cap stuff
NH:
quite a bit happening this morning
NH:
mainly in the stockbroking world though
NH:
one fairly straightforward, although the strategy slightly puzzling
NH:
well it is a real bust up
NH:
let’s start with the simple one
NH:
which is acutally becoming a bit more complex as we speak
NH:
Panmure Gordon have confirmed talks with Ambrian
NH:
which is a small cap mining, oil, clean tech specialist
NH:
not sure I can quite see the logic of the two getting together
NH:
but then again, the name of the game at the moment is survival
NH:
the two companies will have a fair amount of cash and both have a good list of corporate clients willing to pay £25k to £50k a year.
NH:
Obviously, there will also be some scope to cut costs as well
NH:
anyway, the wording of the Ambrian/Panmure statement is interesting
NH:
both sides are saying they could acquire each other
NH:
now, from what I am hearing Ambrian don’t need to do a deal
NH:
they have £18m of cash and commodities trading business and are quite confident they can survive they
NH:
and others are suggesting today’s news it could flush out another buyer for Panmure
NH:
anyway, the more interesting story is at Blue Oar
NH:
Blue Oar is run by Andrew Monk
NH:
formerly of Oriel Securities, which he founded I think
NH:
he went to Oxbridge you see and always names his stockbrokers after something there
NH:
he has built Blue Oar into a mini investment bank
NH:
in fact Monk radically transformed the company
NH:
Blue Oar used to be Corporate Synergy
NH:
and how can I put this
NH:
specialised in the lower end of the Aim and Small Cap market
NH:
now, this background is important because the guys who Monk replaced are back
NH:
they have amassed a 30% holding in the company
NH:
and through an investment vehicle called Evolve Capital are planning to make an all share offer for the company
NH:
this is what they are planning to do with the business
NH:
The Offer will be made on the basis of 1,025 new Evolve Shares for every 1,000 Blue Oar Shares.
NH:
The Offer is based on the following rationale and aims to achieve the following goals:
NH:
Blue Oar has substantial cash resources and given current economic and market conditions, Evolve’s strategy is to prevent any unnecessary further depletion of such cash resources;
The Evolve Directors believe that they have identified valuable business units within the Blue Oar Group, particularly private client stockbroking, where through restructuring and applying resources, they believe the value can either be enhanced or realised;
NH:
The Evolve Directors believe the strength of the Rowan Dartington brand and business should be the key focus gong forward; and
As a result of the above, the Evolve Directors intend that, within 36 months of the Offer becoming or being declared unconditional and subject to any relevant legal and regulatory requirements, Rowan Dartington will be floated on the PLUS-quoted market and its shares distributed to all Evolve Shareholders
NH:
Edward Vandyk, Executive Director of Evolve, said:
‘We believe that Blue Oar would benefit from a new strategic direction in the current economic environment. The preservation of Blue Oar’s financial resources is urgently required to secure the long-term future of the business and we see the Offer as the best way to effect this. We recognise the potential uncertainty any offer can cause for a business and it was thus only after careful consideration that we determined to make the Offer, which is supported by four former directors of Blue Oar.
NH:
Edward Vandyk, Executive Director of Evolve, said:
‘We believe that Blue Oar would benefit from a new strategic direction in the current economic environment. The preservation of Blue Oar’s financial resources is urgently required to secure the long-term future of the business and we see the Offer as the best way to effect this. We recognise the potential uncertainty any offer can cause for a business and it was thus only after careful consideration that we determined to make the Offer, which is supported by four former directors of Blue Oar.
We believe this Offer will preserve, enhance and ultimately realise value in the enlarged group during these challenging times by curtailing the current cash outflow at Blue Oar and by restructuring and refocusing the business and, in particular, capitalising on the strength of the Rowan Dartington brand. We look forward to discussing the Offer with Blue Oar’s Board.’
NH:
Vandyk, or Dr Death as he is known in the market
NH:
was the former CEO of Corporate Synergy
PM:
is that really what he’s known as??
PM:
this has all the makings of a real dust up
PM:
anything from Mr Monk or Blue Oar yet
NH:
yep, a holding statement
NH:
The board of Blue Oar notes this morning’s announcement by Evolve Capital Plc for Blue Oar’s entire issued and to be issued share capital of which it had no prior approach or warning. The Company is considering how to respond. In the meantime, the Company advises shareholders to take no action. A further announcement will follow in due course.
PM:
so, if the Evolve takeover Blue Oar
PM:
it could mean the end of the morning note from mark Brumby
NH:
which would be a pity
NH:
I think Monk and his management team control 20% of the company
NH:
but I am not sure this will be enough to save them
NH:
Blue Oar’s chairman Oliver Vaughan and another director David Snow have resigned from the board as they are part of the bidding consortium
NH:
Evolve says its offer is conditional on its receiving acceptances for 50.1 per cent of the shares.
NH:
And it already has 32 per cent that means it only needs to sway holders of a further 18 per cent.
NH:
now part of Vandyk’s plan is to refocus on the private client stockbroking and wealth management and revive the Rowan Dartington brand name.
NH:
and to that end one of his backers is Barrie Newton, the founder and former managing director of Rowan Dartington, who owns 5.75 per cent of Blue Oar.
PM:
Dartington — not exactly crystal, brand wise
Blue Oar (BLUE:LSE): Last: 9.62, up 0.62 (+6.89%), High: 10.50, Low: 9.50, Volume: 95.00k
PM:
And this is just a load freshly minted paper from the guys who were thrown out
PM:
Sounds a rather idea to me
NH:
Blue Oar does have one powerful institutional backer
NH:
Andy Brough at Schroders - he owns over 7% of the company
PM:
Right — heavy hitter, literally
NH:
and there are some heavyweight non execs too
PM:
Sorry ADS — we will look into — if you can post what browser you are using etc would help
PM:
Looks like the automatic unlocking mechanism got stuck
NH:
yes, terribly sorry about that
PM:
Sorry about that!
PM:
So you can go back to your old handle and long int
PM:
Alida found you somewhere in the back end of the software
NH:
but it should serve as warning to all you below of what can happen, if I hit the moderate switch
PM:
Which was nice of her
NH:
so Zoomy, be very careful otherwise you too could be LOST IN SPACE
PM:
Dead Ringa mentions Lucy Kellaway column this morning
PM:
Did you know that the Illicit encounters website seems to be raking in 200m of revenues????
NH:
we are in the wrong line of work
NH:
no money in financial news on line
PM:
Ive set up The Clockroom in the LR — we can start matching people there
PM:
We need less stocks, more sex — and more fixed income coverage, apparently
NH:
ah the bond snobs have invaded the Long Room.
NH:
lots bond snobs around in the FT newsroom as well.
NH:
anyway let’s get back to some more equities stuff
PM:
Idiot — refers to me spelling incorrectly
NH:
worth keeping an eye on Xstrata today. company is holding a lunch
NH:
with a number of analyst to address investor concerns
NH:
but this is interesting
NH:
unlike Rio which appears to be caught in the headlights when it comes to discussing its banking covs and debt
NH:
Xstrata has gone on the offensive
NH:
on Friday there were calling round explain their debt positions and covenants
NH:
and pointing out they were backward looking not forward looking
NH:
this seems to have caused some confusion at Numis Securities
NH:
which penned a note saying they could breach
NH:
but apparently that is wrong and the situation is as follows
NH:
this comes from Liberum Capital, but is Xstrata approved
NH:
Xstrata – default on debt concerns overdone and no default likely in 2009
At time of writing, Xstrata is trading down 11.6% at £5.54/shr, its lowest level since December 2003. Reports in this morning’s newspapers refer to growing concerns that in a sustained period of lower commodity prices, Xstrata may begin to test or even breach its debt covenants (gross debt / EBITDA no greater than 3.0x). We believe these fears are overdone and would point to the fact that due to the backward looking nature of its debt covenants (EBITDA for previous 12 months), the earliest Xstrata’s lenders would be able to call default would be circa Feb/Mar 2010. We make the following observations:
NH:
Following the acquisition of its 25% stake in Lonmin, we estimate Xstrata’s gross debt at US$17.3bn. Xstrata’s debt covenants are tested by its lenders every 6 months (end of June and December) and its key debt covenant is gross debt / EBITDA to be no greater than 3.0x, tested using the previous 12 months EBITDA. As shown in the table below, on our provisional numbers at current spot prices we forecast that Xstrata will be compliance with its banking covenants until its next major refinancing in June 2011.
NH:
Given that Xstrata benefits from contracted coking coal contracts at US$360/t and thermal coal at US$145/t until April 2009, in our view it is a formality that Xstrata will not breach its covenants in June, except in all but the most extreme pricing environment. In a worst case scenario where commodity prices fall even further below current spot prices, the earliest period where covenants might become stretched could be December 2009. Even if Xstrata were to be in breach, due to the timing of reporting, lenders would not be able to call default until circa Feb/Mar 2010. It is worth pointing out that Xstrata’s covenanted debt is unsecured and therefore from a weakened position, in a default the lenders would most likely require remedies such as prepayments, rescheduling of repayments and increased cost of debt. Clearly credit markets and the macro-economic environment could be worse in 2010, however we stress that it is only in 2010 that concerns could be realised.
NH:
Xstrata has yet to provide an update on its capex spend in light of current market conditions. However, the company’s mandatory sustaining capital expenditure is c.US$1.5bn therefore it will be able to pare back the previously suggested US$4.5bn of expansion capex in 2009 should cash flow start to become an issue.
NH:
Market rumours continue to speculate about the financial health of Xstrata’s major shareholder Glencore, with yesterday’s Glencore CDSs trading at an enormous 2915bps. Xstrata has a daily dialogue with Glencore and it maintains it is in sound financial condition and that is trading well, particularly oil trading. We understand that following US$900m of repayments in October and November, Glencore currently has US$1.9bn of secured debt drawn and that its debt maturity profile is US$2bn in September 2009 (under its commercial paper programme which has been historically been refinanced without difficulty) and US$1.9bn in 2010. We understand that at the end of September, Glencore had c.US$3.1bn of cash, which represented more than adequate liquidity and that the company continues to suggest that it will prepay debt.
NH:
We believe that market concerns over covenant defaults are overdone, at current depressed spot prices, Xstrata is currently trading on 3.7x 2009 EV/EBITDA. Mick Davis is holding an analyst lunch in London on Monday where we expect clarity on a number of key investor concerns. In our view, to mark Xstrata as a sell on fears over debt default can only be the case if investors believe that 2010 will be worse than now until the end of 2009 and if this turns out to the case, Lord help us!!
NH:
and also, Glencore put out a statement late Friday saying they too were OK and would not have to sell their 35% holding in Glencore
NH:
some of which in David Ross style has been pledged as collateral
NH:
Statement by Glencore International AG
Glencore confirms strong liquidity position
Glencore (“the Company”) has noted recent inaccurate and misleading market reports which relate to the potential impact on the Company of current conditions in the global credit and equity markets. In this respect, Glencore wishes to comment as follows:
NH:
· On November 12, 2008, Glencore released its Q3 results which were in line with the strong earnings levels of previous quarters and 2007.
· Glencore’s current liquidity, representing cash and undrawn amounts under its committed bank facilities, exceeds US$3.5 billion, and continues to increase on the back of lower working capital requirements.
· Glencore has sufficient liquidity to comfortably cover debt maturities in the next 12 months.
· Glencore has a small portion of its overall funding secured against the Company’s Xstrata plc shareholding. Glencore has no requirement or intention to reduce such shareholding and confirms that the Company’s current available liquidity resources are sufficient to repay these loans in full if required.
Xstrata (XTA:LSE): Last: 600.50, up 25.5 (+4.43%), High: 635.00, Low: 580.50, Volume: 5.39m
RIO TINTO (RIO:LSE): Last: 1,106, up 57 (+5.43%), High: 1,175, Low: 1,084, Volume: 4.28m
PM:
The Word — extraordainry — think how wide the CDS would be with out the comforting statement
NH:
also, much earlier I was asked about Soco International
NH:
does look as if a deal is close and that the Chinese will buy its Vietnamese operations
PM:
Do you know how much they re worth?
NH:
hang on, have a note from RBS on that
NH:
The Sunday Times reported yesterday that Sinochem (state owned Chinese integrated oil company) is close to a deal to buy most
of SOCOs assets in a deal worth up to £900m. SOCO disclosed in October that it had received a highly preliminary approach for
the majority of the companys asset base (ie Vietnam). The story goes onto say that Sinochem has lined up financing from BNP
Paribas (which is an interesting point in itself and suggests that the debt market may still be open for credit financed upstream
acquisitions)
NH:
The mooted consideration would value the Vietnam assets at c1200p per share, while on the current futures strip
(cUS$50/bl for 2009, cUS$75/bl long-term), our model values the Vietnam assets (on a conservative basis) at c1350p per share.
The story, while brief, has enough substance for us not to dismiss it out of hand, although we would hesitate too place to much
reliance on it ahead of a formal announcement by the company. In our view, a c£900m bid for the Vietnam assets would
disappoint investors who are likely to be looking for something considerably north of c1500p. However, £900m for the Vietnam
assets, and the companys cash pile, would imply a share price of c1530p, a 17% premium to Fridays closing price. We have long
been arguing that SOCO is the most likely bid target in the sector.
PM:
Interesting — one to watch
NH:
(Taxloss, Glencore have pledged some of their Xstrata stake as collateral for a loan. As the price has plunged there have been fears they would become a forced seller)
PM:
Right — thanks for joining us today.
PM:
We must now go for lunch for the rest of the day
PM:
I’m paying
NH:
er, should we be saying things like that in the current environment
NH:
I will be back at 2.00pm
NH:
(No Taxloss. they don’t. and you saw the typo.)
PM:
(NH and Taxloss - pack it in)
PM:
FKA — still good food i believe - and great atmosphere
PM:
Thanks for joining us and thanks for the comments
PM:
We had a few network probs — hope those re just temp
PM:
Back tomorrow sharp at 11.03
PM:
Ah — backgammon has sorted polling software for the worlds worst banker
PM:
See that in the Long Room — he beat me to it
