Markets live chat transcript for the chat ending at 12:13 on 15 Dec 2008. Participants in this chat were: Paul Murphy, FT (PM) Neil Hume, FT (NH)
PM:
Okay!
PM:
It’s 11.02
PM:
Time for Markets Live — FT Alphaville’s last minute panic
PM:
Neil is here
PM:
And he’s even logged
PM:
in
PM:
I think
PM:
You there neil?
NH:
I am
NH:
Good morning
PM:
Do email us at alphaville@ft.com if you have commenting probs
PM:
In the meantime, weve got to go straight to one Bernie Madoff
PM:
Pronounced Made-off
NH:
as in he made off with the money
PM:
Bernie bolted
PM:
Of course he didn’t
PM:
Has yet to face trial of course
PM:
Innocent till proven guilty
NH:
hmmm
NH:
still, guilt or not guilty, there has been a flurry of confessional statements this morning
PM:
but not much share price reaction?
NH:
not really. relatively muted
NH:
Man Group fessed up to $360m exposure
NH:
but it shares have really not done anything
NH:
in fact, they are actually up on the day
NH:
4p better at 250p
PM:
relief??
NH:
I guess so
NH:
some people might have worried about a larger exposure
NH:
although our hedge fund correspondent James Mackintosh was just about spot on with his estimate
NH:
to put this into a bit of perspective
NH:
$360m is around 1.5% of RMF’s assets under management
PM:
RMF, that’s a division of Man Group right
NH:
yes
NH:
Merrill Lynch has been looking into all this
NH:
and assuming that these funds are written off
NH:
it says the consequences are
NH:
an embarrassment for RMF, but the fund has outperformed the
broader industry “materially” according to Man until the end of November, even if
you wipe out all the Madoff exposure. Relatively speaking, RMF still looks an
industry outperformer.
broader industry “materially” according to Man until the end of November, even if
you wipe out all the Madoff exposure. Relatively speaking, RMF still looks an
industry outperformer.
NH:
Importantly, RMF is almost exclusively an institutional product. Man’s retail fund
of funds had no exposure to Madoff. The retail funds accounted for around 87%
of Man’s H1 09 revenues.
of funds had no exposure to Madoff. The retail funds accounted for around 87%
of Man’s H1 09 revenues.
NH:
For the hedge fund industry as a whole, should Madoff prove to be fraud, we think
the consequences are likely to be pretty unfortunate; we believe that the negative
publicity which the industry has suffered in 2008 is largely undeserved; the
negative publicity which it would (deservedly) receive for a major fraud would
compound this, thus, we would expect to see more institutional outflows as a
result.
the consequences are likely to be pretty unfortunate; we believe that the negative
publicity which the industry has suffered in 2008 is largely undeserved; the
negative publicity which it would (deservedly) receive for a major fraud would
compound this, thus, we would expect to see more institutional outflows as a
result.
NH:
For Man, we will review our estimates, but would expect to reduce our AUM
assumptions noticeably for the institutional business to reflect this even more
difficult environment. We would not expect to make any changed to retail asset
gathering, as our existing estimates strike us as relatively conservative, Man’s
retail products have essentially no Madoff exposure, and strike us as extremely
well suited to current conditions. We will also, in passing, increase retail AUM
estimates and performance fee estimates to account for the recent strong
performance of AHL.
assumptions noticeably for the institutional business to reflect this even more
difficult environment. We would not expect to make any changed to retail asset
gathering, as our existing estimates strike us as relatively conservative, Man’s
retail products have essentially no Madoff exposure, and strike us as extremely
well suited to current conditions. We will also, in passing, increase retail AUM
estimates and performance fee estimates to account for the recent strong
performance of AHL.
NH:
This development is hardly conducive to our overall Buy case on Man; however,
we note that the falls in the company’s share price on Friday were greater than
the percentage of the company’s revenues derived from the whole institutional
business. We think this is an extreme reaction to what is clearly bad news. We
therefore retain our Buy on the stock.
we note that the falls in the company’s share price on Friday were greater than
the percentage of the company’s revenues derived from the whole institutional
business. We think this is an extreme reaction to what is clearly bad news. We
therefore retain our Buy on the stock.
PM:
Hmmm
PM:
Man was of course off very heavily on Friday
PM:
So not much of a bounce this morning
PM:
You know — i think people are underestimate the repurcussions of all this
NH:
what in terms of a fresh wave of redemptions?
PM:
Exactly.
PM:
Even honest hedgies might suffer 
NH:
but, can anyone actually withdraw cash from a hedge fund now
PM:
Good question
NH:
I saw Citadel is blocking everything until March
PM:
Hedge industry is going to take years and years to recover from this
PM:
in fact, it will just have to re-invest itself under a new name
PM:
What could be the new name?
NH:
dunno
NH:
but they need a new one
PM:
Anyway — lots of good points below
PM:
Agree with Mr Salmon’s coverage
PM:
Also Clusterstock worth reading on the matter
PM:
How about others with exposure to Bernie?
PM:
what about RBS?
PM:
they have detailed an exposure of £400m
PM:
cash they cannot afford to lose
PM:
Sorry — cash we cannot afford to lose
NH:
er, they up 1.1p at 57.2p
NH:
but they did get smashed on Friday, though that was probably more to do with the shocking statement from HBOS
NH:
but then most of the banking sector is up this morning
NH:
even HBOS
NH:
and Lloyds
PM:
NH:
which after Friday’s trading statetment shocker
NH:
and downgrades this morning is a surprise
NH:
anyway
NH:
HSBC is down
NH:
it has not confirmed our story this mornign of a $1bn exposure
NH:
but the stock is down
NH:
14p at 719p
NH:
now some brokers think this could mean that HSBC has to cut its dividend
PM:
Really!
NH:
apparently
NH:
got this earlier this morning
NH:
think is it from one of the wires
NH:
looks RAW to me
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:
HSBC (HBC) may have to cut its dividend, a trader says, following a press report that the bank has about a $1B exposure to the Bernard Madoff scandal. However, another trader sees the bank as big enough to take a $1B hit without causing too many problems. “A billion dollar hit is not good news,” he notes, but says the bank should be able to weather the storm. HSBC was not immediately available for comment.
PM:
Yes, does look rather raw
11:17AM
PM:
how about Santander
PM:
They seemed to say they had limited exposure, but then their clietns are in for 2.3billions euros or so
NH:
yeah, read the statement. funny.
NH:
it was almost as they were saying, your problem clients not ours.
PM:
ho ho
ho hoNH:
we just advised you to put the money their
PM:
Santander down 12 cents at 6.42
PM:
Again, not much follow through
PM:
I’ll make one prediciton tho…
PM:
Santander will end up wearing that 2.3bn
NH:
how so? through the courts?
PM:
dont think it will even need that
PM:
What happened to the whole idea of due diligence??
PM:
Weren’t hedgies in general supposed to be un or lightly regulated — usually off-shore — buyer beware
PM:
Therefore you hired an expert to check out the fund
PM:
Hello?
PM:
The whole thing is crazy
PM:
There’s been loads of detail about how the auditors worked out of a broom cupboard
PM:
And how no one could replicate bernie’s supposed investment strategy
PM:
etcetc
NH:
i blame the regulators. Like Nicola Horlick
. Like Nicola HorlickNH:
it is all their fault
PM:
Oh yea?
NH:
I love this idea that you can invest and if it all goes wrong, it is not your fault but the regulators for not spotting a fraud
PM:
So nanny state meets finance — it’s always someone else’s fault
NH:
i think is pretty clear there were enough warning signs on this fund for those who were invited to invest
NH:
clearly they just got carried away in a bull market
PM:
That MAR/Hedgge article was a good one — you will find it on Naked Shorts
NH:
I recommend reading that
PM:
Daddy mentiones below that Bernie was not actually operating a hedge fund
PM:
he was a “securities house” — but he clearly head an investment management operation
PM:
With feeder funds and every other hedge-like piece
NH:
but unlike most hedge funds he did not go down the 2 and 20 route
NH:
he did not want any of that
NH:
just the commissions from the trades
NH:
that’s all
NH:
humble man
11:25AM
11:25AM
NH:
GBK continues melt against the Euro
NH:
almost at 90 vs Euro
PM:
89.98 to be precise
NH:
but stable(ish) against the dollar
NH:
$1.4982
PM:
dollar threatening to go thru 90 against the yen — again
PM:
90.84 currently
PM:
It’s probably jsut a month since someone asked here what odds they might get for sterling parity with the euro and the dollar
NH:
will get there before Xmas
NH:
predictions please
11:28AM
PM:
ok
NH:
(EUR pls)
PM:
time to have a look at the wider equity market
PM:
We are up i presume — given the upbeat news flow
NH:
we are
NH:
after Friday’s interuption
NH:
the bear market rally continues
NH:
and I suppose its because the US ended higher on Friday
NH:
I just can’t believe how relaxed the market is about bad news at the moment
NH:
anyway,
NH:
FTSE 100 31 points higher at 4,311
NH:
banks leading the way
NH:
miners and property companies also good
11:30AM
PM:
BREAK — NEWS
NH:
Sterling at record low vs Euro – 90.01p
PM:
According to Reuters
PM:
Momentarily — now just back below
NH:
any thoughts on the GBK
PM:
Well, iw as reading this stuff from Jim Reid at Deutsche earlier
NH:
he’s good
NH:
go on
PM:
Well, his general tone was : property prices in the UK have much further to falll
PM:
Hang on will get note
PM:
So 2009 will likely be about the willingness and ability of the authorities to pursue
policies to mitigate the worst side-effects of a world that needs to see colossal
rebalancing and an Anglo-Saxon world that still needs to de-lever massively over
the next few years. Given the events of the past 2-3 months the willingness to
intervene is now unlikely to be questioned. However the big question mark
remains over the ability to intervene. Yes, the authorities can print as much money
as they want and yes, Governments can spend significant amounts of money on
propping up aggregate demand around the world. However as we’ve discussed in
this daily many, many times this year, for every action there is usually an equal and
opposite reaction. Sovereign CDS has already borne the brunt of this new found
willingness since the end of Q3.
policies to mitigate the worst side-effects of a world that needs to see colossal
rebalancing and an Anglo-Saxon world that still needs to de-lever massively over
the next few years. Given the events of the past 2-3 months the willingness to
intervene is now unlikely to be questioned. However the big question mark
remains over the ability to intervene. Yes, the authorities can print as much money
as they want and yes, Governments can spend significant amounts of money on
propping up aggregate demand around the world. However as we’ve discussed in
this daily many, many times this year, for every action there is usually an equal and
opposite reaction. Sovereign CDS has already borne the brunt of this new found
willingness since the end of Q3.
PM:
So if 2009 goes horribly wrong it’s probably because there’s a run on a major
currency or a Government bond market than because of wide scale corporate
defaults. At the moment the UK remains the lowest hanging developed market
fruit. For those of us living in the UK it remains scary how exposed we are to the
full force of this credit crisis.
Indeed it still make us confused how the UK still has one of the most expensive
property markets in the world. Why? Although one thing we should comment on
is the fact that UK property (-10 to -15% in 2008) has fallen about 30-35% in Euros
terms so far in 2008 and nearly 40% in Dollar terms. If the UK won’t do the
adjustment internally, then the currency market is rapidly helping us on our way.
currency or a Government bond market than because of wide scale corporate
defaults. At the moment the UK remains the lowest hanging developed market
fruit. For those of us living in the UK it remains scary how exposed we are to the
full force of this credit crisis.
Indeed it still make us confused how the UK still has one of the most expensive
property markets in the world. Why? Although one thing we should comment on
is the fact that UK property (-10 to -15% in 2008) has fallen about 30-35% in Euros
terms so far in 2008 and nearly 40% in Dollar terms. If the UK won’t do the
adjustment internally, then the currency market is rapidly helping us on our way.
PM:
Indeed it seems fitting to end the year discussing the topic that set off this whole
credit crisis and the associated chain reactions. Indeed the global property market
remains overvalued globally and the only way this corrects itself is through further
price falls or eventually higher inflation. Nominal prices wouldn’t look as expensive
and stressed mortgage assets would be less vulnerable, if every (and potential)
homeowner around the world was given freshly printed currency. The trick for the
authorities is how to do this without setting off panic in the interest rate and
currency markets.
credit crisis and the associated chain reactions. Indeed the global property market
remains overvalued globally and the only way this corrects itself is through further
price falls or eventually higher inflation. Nominal prices wouldn’t look as expensive
and stressed mortgage assets would be less vulnerable, if every (and potential)
homeowner around the world was given freshly printed currency. The trick for the
authorities is how to do this without setting off panic in the interest rate and
currency markets.
NH:
interesting
NH:
just been on to the M&S website
NH:
the Travel Money section
NH:
and
NH:
M&S exchange rate
1 GBP = 1.0761 Euro
1 GBP = 1.0761 Euro
PM:
of course — tourist rates will get to parity quicker than the market rate
PM:
Is it offensive to Scandanavian types for us to keep referring to the GBK?
11:37AM
PM:
Anyway — tell us why the British banks are up
NH:
er, can I pass on that one
NH:
HBOS up 8.8p at 76.3p
PM:
Top of the footsie leader board
PM:
Why?
PM:
I know it got battered on Friday
PM:
but why the dead cat bounce?
NH:
beats me
NH:
most of the analyst stuff I have seen this morning has been negative
NH:
with the exception of something from Sandy Chen
NH:
and the more one looks at HBOS
NH:
the more one thinks that this bank is going to need more capital as the recession goes on
NH:
even if it is part of Lloyds TSB
NH:
look at this from Credit Suisse
NH:
On HBOS specifically, we have lowered our forecasts again. We were already
expecting negative EPS of 3p in 2009, but now forecast -18p. More importantly,
our new 2010E tangible NAV estimate for Lloyds Banking Group has fallen 21%
to 183p, leaving the group trading on 0.7 times.
expecting negative EPS of 3p in 2009, but now forecast -18p. More importantly,
our new 2010E tangible NAV estimate for Lloyds Banking Group has fallen 21%
to 183p, leaving the group trading on 0.7 times.
NH:
This also has capital implications. Because Lloyds TSB does not expect the fair
value adjustment on acquisition to change materially (despite writedowns and
impairment at HBOS of £3bn in the last two months) we believe the combine will
start 2009 with an equity tier 1 ratio of just 6.2%, of which 150bps is embedded
value. Further losses could deplete this further, and our stress test has the ratio
nearer 4% in two years time.
value adjustment on acquisition to change materially (despite writedowns and
impairment at HBOS of £3bn in the last two months) we believe the combine will
start 2009 with an equity tier 1 ratio of just 6.2%, of which 150bps is embedded
value. Further losses could deplete this further, and our stress test has the ratio
nearer 4% in two years time.
NH:
One small positive is the potential for a reworking of mortgage risk weight
calculations. In particular, it is likely the banks will now be allowed to calculate
downturn LGD on the basis of a 40% haircut to last August’s peak property
prices. This should reduce, and potentially reverse some of the procyclicality
issues we have discussed before. However, banks cannot ignore what is going
on in practice, and if losses exceed this haircut (which we think they
increasingly will) the calculation must reflect this. Another positive is that retail
deposit inflows appear to have resumed at HBOS. Nonetheless, we think the
loan to deposit ratio of the combined group will still be about 165% – we will
have to wait until full year results to gauge this accurately.
calculations. In particular, it is likely the banks will now be allowed to calculate
downturn LGD on the basis of a 40% haircut to last August’s peak property
prices. This should reduce, and potentially reverse some of the procyclicality
issues we have discussed before. However, banks cannot ignore what is going
on in practice, and if losses exceed this haircut (which we think they
increasingly will) the calculation must reflect this. Another positive is that retail
deposit inflows appear to have resumed at HBOS. Nonetheless, we think the
loan to deposit ratio of the combined group will still be about 165% – we will
have to wait until full year results to gauge this accurately.
NH:
Overall, Lloyds TSB / Lloyds Banking Group remains our least preferred UK
bank, although we believe further considerable downside from here is unlikely.
We have lowered our target price to 125p from 150p, and have reduced our
HBOS target price to 75p from 90p.
bank, although we believe further considerable downside from here is unlikely.
We have lowered our target price to 125p from 150p, and have reduced our
HBOS target price to 75p from 90p.
NH:
and this from Cazenove
NH:
Lloyds TSB – (LLOY.L LLOY LN UNDERPERFORM/NEUTRAL 130p) / HBOS – (HBOS.L HBOS LN UNDERPERFORM 67.5p)
Following the two trading statements on Friday, we revise our estimates materially.
Even for standalone Lloyds we cut EPS by 18% and 23% for 2009E and 2010E
HBOS makes larger losses such that the combined group, Lloyds Banking Group, is loss-making through 2010E on our estimates
Equity tier 1 ratio falls to below 5% by the end of next year
Following the two trading statements on Friday, we revise our estimates materially.
Even for standalone Lloyds we cut EPS by 18% and 23% for 2009E and 2010E
HBOS makes larger losses such that the combined group, Lloyds Banking Group, is loss-making through 2010E on our estimates
Equity tier 1 ratio falls to below 5% by the end of next year
NH:
Though we recognise there is greater uncertainty in our estimates than usual, we change our recommendations from IN-LINE to UNDERPERFORM on both Lloyds TSB and HBOS.
NH:
In our view, the probability of nationalisation now feels uncomfortably high and not reflected in a price/book multiple approaching 0.9x for Lloyds Banking
PM:
Goodness me
PM:
And the stock is up 13 per cent
NH:
that was penned by Simon Pilkington
PM:
Top Cazman
NH:
here’s some more
NH:
The total losses through the recession may not have increased, though we assume some increase in our estimates, but undeniably the speed with which loan losses arise has accelerated reducing both
book value and capital.
book value and capital.
NH:
We are conscious that our estimates show a poor outcome and there is great uncertainty. Yet the speed and scale of deterioration at HBOS Corporate is remarkable. Our 2009E estimates are
below the annualised rate of impairment seen in the past five months, though the trend is accelerating and most observers expect commercial property values to fall further in 2009. Even before considering our 2010E estimates, the probability of LBG needing to raise additional capital has risen.
below the annualised rate of impairment seen in the past five months, though the trend is accelerating and most observers expect commercial property values to fall further in 2009. Even before considering our 2010E estimates, the probability of LBG needing to raise additional capital has risen.
NH:
but as I mentioned earlier
NH:
Sandy Chen at Panmure
NH:
is positive on the Lloyds Banking Group
NH:
or what ever its name might be
NH:
We do still think that LLOY-HBOS represents the best long-term value
proposition amongst its peers. It has the potential to create the dominant
banking franchise in the UK underpinned by a major funding cost advantage,
it has relatively less exposure to the toxic areas in global banking, and the
negative goodwill will prove a useful short-term resource in absorbing
negative fair value adjustments. Thus, a Hold, where we rate all the other UK
banks a Sell.
proposition amongst its peers. It has the potential to create the dominant
banking franchise in the UK underpinned by a major funding cost advantage,
it has relatively less exposure to the toxic areas in global banking, and the
negative goodwill will prove a useful short-term resource in absorbing
negative fair value adjustments. Thus, a Hold, where we rate all the other UK
banks a Sell.
NH:
With the HBOS shareholders’ approval of their takeover by LLOY, we will switch off
our HBOS and LLOY models over the course of 1H 2009 and switch on our LLOYHBOS pro forma estimates model.
our HBOS and LLOY models over the course of 1H 2009 and switch on our LLOYHBOS pro forma estimates model.
The mid-Jan 2009 completion date for the LLOY-HBOS deal will be important; not
least because it will set the amount of negative goodwill that will be recognised on the
P&L (thus creating a positive P&L item against which the negative fair value adjustments upon acquisition can be recognised).
NH:
As we have noted earlier, in a convoluted way, the lower the LLOY share price on this recognition date, the better for the LLOY-HBOS deal, because the negative goodwill item would be higher.
Given recent volatility, who knows where the LLOY share price will be at mid-Jan, but a £20bn negative goodwill item doesn’t seem far-fetched as a working assumption. This could absorb not just the additional losses disclosed by HBOS
last Friday, but a lot more pain on the residential and commercial property loan books.
NH:
LLOY-HBOS will obviously be exposed to the same deteriorating UK macro as all of
the other UK banks, but it does have relatively less exposure in the areas about which we are particularly worried, namely, structured credits (leveraged loans/CLOs, synthetic CDOs/CLNs etc).
the other UK banks, but it does have relatively less exposure in the areas about which we are particularly worried, namely, structured credits (leveraged loans/CLOs, synthetic CDOs/CLNs etc).
Also, neither LLOY nor HBOS were active in lending to (or participating in) the fund of funds that are being affected by the alleged $50bn Madoff
fraud. Thus, although we remain on the lookout for downside earnings surprises, we see less likelihood with LLOY-HBOS than with BARC, RBS and HSBC.
On our fundamental, long-term ROIC-based valuation, our mid-2009 valuation for
LLOY-HBOS is a bit above £1 and our mid-2010 valuation is a bit above £4. Our share price target of 180p (we hope) reflects both the near-term risks and the long-term potential for LLOY-HBOS. Incidentally, these valuations (which do assume a successful integration and the establishment of a dominant position in the UK market) actuallyhaven’t changed much over the past few weeks.
Stepping back and looking at what remains of the UK banks, we do still think that
NH:
LLOY-HBOS represents the best long-term value proposition amongst its peers. It has
the potential to create the dominant banking franchise in the UK underpinned by a
major funding cost advantage, it has relatively less exposure to the toxic areas in global banking, and the negative goodwill will prove a useful short-term resource in absorbing negative fair value adjustments. Thus, a Hold, where all the other UK banks we rate Sell.
the potential to create the dominant banking franchise in the UK underpinned by a
major funding cost advantage, it has relatively less exposure to the toxic areas in global banking, and the negative goodwill will prove a useful short-term resource in absorbing negative fair value adjustments. Thus, a Hold, where all the other UK banks we rate Sell.
PM:
So he’s a fan!
NH:
good luck with that call
11:42AM
PM:
While we are on the banks
PM:
How about Ireland??
PM:
some very interesting news this morning
PM:
or overnight rather
PM:
The Irish government announced its intentionto invest €10bn to
recapitalise the Irish bank sector,
recapitalise the Irish bank sector,
NH:
what are the details?
PM:
well, everything is pretty sketchy but
PM:
The injections will be a combination of preference and ordinary shares, with private investment and subscription by existing shareholders.
PM:
But the government and the banks are still at the discussion stage
NH:
hmm
NH:
and how are the Irish banks doing on the back of that
PM:
hang on
PM:
They are flying
PM:
Bank of ireland up 12 % at just udner a euro
PM:
AIB up just 3% tho at just over 2 euors
NH:
so why is this good news? massive dilution lies in wait for investors
PM:
Sure
NH:
seems odd
NH:
actually
NH:
got a quick bit of analyst comment
NH:
this is from Merrill Lynch
NH:
One, we think this is a positive step for the banks and the economy, but whether
or not it is good for bank equity holders will depend on the terms. While, the UK
experience for example suggests investors should be cautious, we suspect the
removal of uncertainty could cause a positive reaction today. Irish bank stocks
are down 96% to 99% from their peaks.
One, we think this is a positive step for the banks and the economy, but whether
or not it is good for bank equity holders will depend on the terms. While, the UK
experience for example suggests investors should be cautious, we suspect the
removal of uncertainty could cause a positive reaction today. Irish bank stocks
are down 96% to 99% from their peaks.
NH:
Two, the amount of capital being injected is less than we have included in our
hypothetical base case scenario analyses in recent notes, where we estimated
close to €10bn was required for AIB, BOI and Anglo alone. In our view, capital
requirements are highly sensitive to asset quality assumptions and we think over
capitalisation is preferable to undercapitalisation, given increased uncertainty in
asset quality assumptions at this point in the cycle.
hypothetical base case scenario analyses in recent notes, where we estimated
close to €10bn was required for AIB, BOI and Anglo alone. In our view, capital
requirements are highly sensitive to asset quality assumptions and we think over
capitalisation is preferable to undercapitalisation, given increased uncertainty in
asset quality assumptions at this point in the cycle.
NH:
Three, the blanket guarantee which was announced on 30th September
contained, but did not resolve a crisis. We think resolution requires that the banks
balance sheets be fixed. Recapitalisation is a step in the right direction, but it
does not fix the 160% industry loan to deposit ratio. As we have seen in the UK
lending standards have remained tight post recapitalisations.
contained, but did not resolve a crisis. We think resolution requires that the banks
balance sheets be fixed. Recapitalisation is a step in the right direction, but it
does not fix the 160% industry loan to deposit ratio. As we have seen in the UK
lending standards have remained tight post recapitalisations.
PM:
Cheers for that
11:46AM
PM:
Lets try and get away from the banks for a mo
PM:
Any thoughts on Imperial Energy — we ahve some requests below…
NH:
well, there was loads of comment over the weekend on the deal
NH:
some interesting detail
NH:
but it did not tell us anything new
NH:
ONGC don’t want to buy IEC
NH:
but they have boxed themselves
NH:
the only hope they have is not getting 90% acceptances at first closing date
NH:
now, there was a story on Friday that 4% of IEC was lost at Lehman Brothers
NH:
but I thhink we managed to clear that up
NH:
apparently the stake has been released
NH:
other than that
NH:
here are some of the press stories
NH:
According to the Economic Times of India, ONGC has a chance to save around $1bn in its takeover of IEC by opting for only a 51% equity stake if IEC’s investors fail to tender a minimum of 90% by December 30. The paper cites an official close to the deal as saying that ONGC could then claim management control in the company. The Standard reported yesterday that the scientific and technical officers of ONGC complained to management that the deal is overvalued and the assets not financial viable.
NH:
and
NH:
The scientific and technical officers of ONGC have objected to the company’s decision to go ahead with the acquisition of IEC, saying that the deal is over-valued and the assets not financially viable, rpeorts the Indian Business Standard. The Association of Scientific and Technical Officers (ASTO), the largest organisation of ONGC officers, has written to Petroleum Secretary R S Pandey and ONGC Chairman R S Sharma, complaining that the cost of acquisition and field development cannot be recovered since production at IEC’s assets are in inhospitable geographies.
NH:
“The quality of the deal is questionable. Russian companies such as Rosneft have refused to partner in the deal at this cost. It seems that Rosneft is aware of the real conditions of the field and the real worth of Imperial Energy,” Amit Kumar, president- central working committee of ASTO, said in the letter.
“The current crude (oil) production of the company (Imperial) is close to 12,000 barrels a day only. This figure is also debatable as the technical team that visited the fields found that the production was around 8,000 barrels a day. The upside of production, as being planned, calls for huge investments in the field in addition to the investment being made to acquire the company. The field terrain is very tough and inhospitable,” said ASTO.
NH:
Advisers to IEC have targeted 60 to 65 key shareholders to push through the sale to ONGC, reports the Independent. A market source told the paper that these fund managers hold more than 90% of IEC.
NH:
hope that helps
NH:
think the closing date is Dec 20
NH:
and advisers on both sides will be pulling out all the stops to get 90% acceptances
NH:
I think trackers will vote on this
PM:
That’s a very funny situation
PM:
Pig in a poke
NH:
will have to check on what happens if they don’t get 90% and decide to go for 50%
NH:
oh and there is another report up on IEC
NH:
NEW DELHI, Dec 15 (Reuters) – Russia’s top oil producer, Rosneft
, will not buy a stake in Imperial Energy , which
India’s state-run ONGC is acquiring, Indian government and
ONGC sources said on Monday.
“Earlier, they (Rosneft) said they wanted to have some stake in
Imperial but now they have said that due to financial meltdown they are
not able to arrange funds,” an ONGC official told Reuters, referring to
the global credit crisis.
India’s state-run ONGC
ONGC sources said on Monday.
“Earlier, they (Rosneft) said they wanted to have some stake in
Imperial but now they have said that due to financial meltdown they are
not able to arrange funds,” an ONGC official told Reuters, referring to
the global credit crisis.
NH:
An Indian government official, who could not be named, confirmed
Rosneft was now not keen on participating.
Rosneft’s finance chief recently said he expected a tough fourth
quarter and hoped state aid would help it refinance its massive foreign
debts. [ID:nL1589501].
Rosneft has said in the past that it was not interested in a stake in
Imperial but analysts and sources
Rosneft was now not keen on participating.
Rosneft’s finance chief recently said he expected a tough fourth
quarter and hoped state aid would help it refinance its massive foreign
debts. [ID:nL1589501].
Rosneft has said in the past that it was not interested in a stake in
Imperial but analysts and sources
NH:
IEC shares down 35p at 990p
NH:
against offer price of £12.50
11:52AM
PM:
What else is moving out there this morning?
NH:
Drax
NH:
they are getting whacked
NH:
down 37.5p at 402p
NH:
a drop of 7%
PM:
What has caused that??
NH:
A Merrill downgrade
NH:
this is all pretty complicated
NH:
all about UK dark green spreads in the electricity world
PM:
PM:
dark green spreads
PM:
Is nt that something that sits in the back of the fridge, undiscovered for weeks…
NH:
but what I think they are trying to say is that electricity prices are going to be under pressure in 2009
NH:
anyway here’s the note
NH:
i won’t even attempt to try and explain what they are
NH:
over to Merrill
NH:
Power price risks on the downside
We think power prices will remain under downward pressure in 2009, with fuel
costs and CO2 falling, and potentially weaker demand. We have lowered our
German base load power price assumptions for 2009/10E to EUR50/MWh (real),
close to our estimates of short run marginal costs, and 10-15% below current
forward curves; and UK to c£47/MWh.
We think power prices will remain under downward pressure in 2009, with fuel
costs and CO2 falling, and potentially weaker demand. We have lowered our
German base load power price assumptions for 2009/10E to EUR50/MWh (real),
close to our estimates of short run marginal costs, and 10-15% below current
forward curves; and UK to c£47/MWh.
NH:
Lower power prices may lead to some European generators facing a drop in
earnings in 2010E compared to consensus expectations of growth. Reduced
earnings visibility and the need to maximise liquidity could lead to more modest
dividend growth in next 2-3 years.
We also revisit power market fundamentals and reduce marginally our long term
assumptions for Germany to EUR65/MWh (real, from EUR70/MWh). UK is
unchanged at £58-60/MWh (real).
earnings in 2010E compared to consensus expectations of growth. Reduced
earnings visibility and the need to maximise liquidity could lead to more modest
dividend growth in next 2-3 years.
We also revisit power market fundamentals and reduce marginally our long term
assumptions for Germany to EUR65/MWh (real, from EUR70/MWh). UK is
unchanged at £58-60/MWh (real).
NH:
Be wary of generators unhedged for 2010E
Our SOP sensitivity analysis implies that some stocks are already discounting the
power price equivalent of oil at $40-50/bbl, suggesting value opportunities for
believers in medium term power price recovery.
Despite this, we’re not convinced this is the time to weight up positions in most
power stocks, and think risks are still on the downside. Drax is a case in point,
and our new concern about fragile UK dark green spreads into the new year leads
us to downgrade to Underperform. We remain Neutral on the Germans, and
still (marginally) prefer RWE over E.ON. Fortum, Verbund and Cez are
particularly exposed to power price falls, and remain Underperform. We prefer to
play the generation space via GDFSuez (Buy), with its restructuring story and
partial hedge via the gas retail business.
Our SOP sensitivity analysis implies that some stocks are already discounting the
power price equivalent of oil at $40-50/bbl, suggesting value opportunities for
believers in medium term power price recovery.
Despite this, we’re not convinced this is the time to weight up positions in most
power stocks, and think risks are still on the downside. Drax is a case in point,
and our new concern about fragile UK dark green spreads into the new year leads
us to downgrade to Underperform. We remain Neutral on the Germans, and
still (marginally) prefer RWE over E.ON. Fortum, Verbund and Cez are
particularly exposed to power price falls, and remain Underperform. We prefer to
play the generation space via GDFSuez (Buy), with its restructuring story and
partial hedge via the gas retail business.
NH:
and here’s a little bit more
NH:
Despite this, we are not convinced this is the time to buy into most power stocks.
We think near term the risks are still on the downside: from ongoing weakness in
power prices; the knock on effect on earnings, particularly for 2010E and beyond;
and the prospect of more modest DPS growth than before. These three factors
give the sub-group a lack of visibility compared say with certain regulated utilities.
We have downgraded Drax to underperform due to worries that worsening UK
power market dynamics will further erode spreads and sentiment during 2009E.
In continental Europe, we remain Neutral on both Germans; despite the recent
outperformance RWE remains the better placed of the two (coal/CO2 hedge). We
prefer to play the generation space via GDFSuez (Buy), with its restructuring
story and partial hedge via the gas retail business. The high beta plays (Cez,
Fortum and Verbund) remain Underperform as most exposed to 2010E power
price risks.
We think near term the risks are still on the downside: from ongoing weakness in
power prices; the knock on effect on earnings, particularly for 2010E and beyond;
and the prospect of more modest DPS growth than before. These three factors
give the sub-group a lack of visibility compared say with certain regulated utilities.
We have downgraded Drax to underperform due to worries that worsening UK
power market dynamics will further erode spreads and sentiment during 2009E.
In continental Europe, we remain Neutral on both Germans; despite the recent
outperformance RWE remains the better placed of the two (coal/CO2 hedge). We
prefer to play the generation space via GDFSuez (Buy), with its restructuring
story and partial hedge via the gas retail business. The high beta plays (Cez,
Fortum and Verbund) remain Underperform as most exposed to 2010E power
price risks.
PM:
thanks for that
11:55AM
PM:
And what else?
NH:
Centrica, down 17p at 235.25p
NH:
think the underwriters to its cash call are trying to place the rump
NH:
take up was good at 91.3%
NH:
hearing they are trying to place the rump around 235p
NH:
not sure what is up with 3i
NH:
they are being hammered
NH:
down 25.75p at 284p
PM:
Oh yes, what’s gonig on there?
PM:
Stock is off 8.3%!!
NH:
there was a story in the Telegraph this morning about the company selling some smaller funds
NH:
perhaps there will be a large write down
11:58AM
PM:
It’s almost noon Neil
PM:
Anything else to squeeze in ???
NH:
well, there is a very interesting note out of Cazenove this morning on New World Resources
NH:
and it flags the fact that New World could breach covenants
NH:
if it does not get a good price for coking coal contracts
PM:
That is interesting — wasnt Caz an adviser on the float??
PM:
Just looking at that float — priced at 13.25 as recently as May
PM:
And today’s price is 2.47
PM:
Ooouch
NH:
indeed
NH:
NH:
NWR is negotiating its sales contracts for 2009. It is clear that volumes and prices will fall YoY
although we have very low visibility as to how much. Lower sales volumes combined with
reasonably high financial leverage means NWR’s earnings are likely to come under pressure and
undoubtedly there remains the possibility that NWR could come close to or pass through its
covenants. However, we believe management will cut volumes in an attempt to maintain prices
above the $120/t breakeven level given NWR’s earnings are more than 4x as sensitive to prices
as volumes.
although we have very low visibility as to how much. Lower sales volumes combined with
reasonably high financial leverage means NWR’s earnings are likely to come under pressure and
undoubtedly there remains the possibility that NWR could come close to or pass through its
covenants. However, we believe management will cut volumes in an attempt to maintain prices
above the $120/t breakeven level given NWR’s earnings are more than 4x as sensitive to prices
as volumes.
NH:
Clearly forecast risk is extremely high with NWR (earnings could be positive or negative depending
on the outcome of negotiations) and given the risks to earnings and debt covenants from lower
volumes and prices in 2009, we feel retaining UNDERPERFORM is the correct course of action at
this point. However, RPG remains a supportive and, crucially, highly liquid ‘backstop’ in the event
of default; as a result we sense that large scale downside risks are unlikely to be crystallised.
on the outcome of negotiations) and given the risks to earnings and debt covenants from lower
volumes and prices in 2009, we feel retaining UNDERPERFORM is the correct course of action at
this point. However, RPG remains a supportive and, crucially, highly liquid ‘backstop’ in the event
of default; as a result we sense that large scale downside risks are unlikely to be crystallised.
NH:
: Steelmaking raw material volumes likely to fall ~15% in 2009
Newsflow from the steelmaking raw materials market continues to indicate weak market
conditions. At the most extreme, a number of ferrochrome producers have imposed 100%
production cuts until the end of February; requests for deferrals/cancellations of coking coal
shipments are rife (reports suggest Mittal for example is failing to send ships or even answer
phones); and Rio Tinto has cut its iron ore sales guidance for 4Q08 by 50% and expects a similar
rate of sales in 1Q09. Although visibility is extremely low, our central case is for a 10% decline in
world steel output next year. This, as can be seen below, is unprecedented in scale in the postwar
era – the biggest recent falls have been 9% in 1975 and 1982. Our expectation is for at least a 15% decline in sales volumes for steelmaking raw material producers to account for the
inherent inventory adjustment at the consumer level.
Newsflow from the steelmaking raw materials market continues to indicate weak market
conditions. At the most extreme, a number of ferrochrome producers have imposed 100%
production cuts until the end of February; requests for deferrals/cancellations of coking coal
shipments are rife (reports suggest Mittal for example is failing to send ships or even answer
phones); and Rio Tinto has cut its iron ore sales guidance for 4Q08 by 50% and expects a similar
rate of sales in 1Q09. Although visibility is extremely low, our central case is for a 10% decline in
world steel output next year. This, as can be seen below, is unprecedented in scale in the postwar
era – the biggest recent falls have been 9% in 1975 and 1982. Our expectation is for at least a 15% decline in sales volumes for steelmaking raw material producers to account for the
inherent inventory adjustment at the consumer level.
12:01PM
12:01PM
NH:
Right, competition time
NH:
what will the Fed do tomorrow
NH:
cut by 50bps
NH:
25bps
NH:
or even 75bps
PM:
I’m for 50
NH:
i’m with you
PM:
But apparently the money markets are pointing towards 75
PM:
there a comp underway in the Long Room
NH:
50bps is consensus
NH:
and for those of you who have not made up their minds
NH:
here’s a little note from Investec
NH:
The Federal Reserve meets tomorrow to make its last scheduled
announcement for this year. We join the consensus in looking for a 0.50%
reduction in the Fed Funds Target to 0.50%. This is likely to be the last
conventional monetary policy easing of this cycle. Thereafter the Fed looks
likely to turn to more unconventional measures such as direct Treasury
purchases to reduce rates further along the curve and quantitative easing
announcement for this year. We join the consensus in looking for a 0.50%
reduction in the Fed Funds Target to 0.50%. This is likely to be the last
conventional monetary policy easing of this cycle. Thereafter the Fed looks
likely to turn to more unconventional measures such as direct Treasury
purchases to reduce rates further along the curve and quantitative easing
NH:
Fed’s last cut: Amidst the ongoing uncertainty of a bail-out for the US auto
sector, the Federal Reserve meets on Tuesday for its last scheduled meeting of
the year. We join the consensus in looking for a 0.50% reduction in the Fed
Funds Target to 0.50%. The accompanying statement this time is unlikely to
differ wildly from October’s: economic activity has slowed (more) markedly since
then; ‘core’ US export growth has deteriorated sharply over the past three
months and November’s 533k payrolls drop marked a clear and further
deterioration in the labour market, while last week’s 573k jobless claims implies
further deterioration next month. Importantly, we think the statement will
conclude that the Committee will continue to “act as needed to promote
sustainable economic growth and price stability”. However, this is likely to be the
FOMC’s last conventional monetary policy move in this cycle.
sector, the Federal Reserve meets on Tuesday for its last scheduled meeting of
the year. We join the consensus in looking for a 0.50% reduction in the Fed
Funds Target to 0.50%. The accompanying statement this time is unlikely to
differ wildly from October’s: economic activity has slowed (more) markedly since
then; ‘core’ US export growth has deteriorated sharply over the past three
months and November’s 533k payrolls drop marked a clear and further
deterioration in the labour market, while last week’s 573k jobless claims implies
further deterioration next month. Importantly, we think the statement will
conclude that the Committee will continue to “act as needed to promote
sustainable economic growth and price stability”. However, this is likely to be the
FOMC’s last conventional monetary policy move in this cycle.
NH:
Treasury purchases: The Fed has indicated that its next moves could include
influencing interest rates of greater maturity by purchasing Treasuries. This has
already had a marked effect on US Treasury yields and the 10-year currently
stands at just 2.58%. This would lead to a further expansion of the Fed’s
balance sheet, which has already swelled greatly over the course of 2008.
influencing interest rates of greater maturity by purchasing Treasuries. This has
already had a marked effect on US Treasury yields and the 10-year currently
stands at just 2.58%. This would lead to a further expansion of the Fed’s
balance sheet, which has already swelled greatly over the course of 2008.
NH:
Quantitative Easing: Many are discussing the importance of Quantitative
Easing (QE) to Fed policy in 2009. This begins to get quite arcane and it is not
clear that all commentators adopt the same definition of QE. We take QE as the
policy followed by the Bank of Japan in the early years of this decade: namely
an expansion of ‘high powered money’ through increasing commercial banks’
reserves held at the central bank. In truth, we are not convinced of the
stimulative effects of quantitative easing and see much of its benefit deriving
from an indirect commitment to low rates. The Fed is also likely to continue to be
innovative in its changes to monetary operations. Arguably the most successful
policy measures to date have come in the Fed’s venturing into unsecured
lending, in particular to support the Commercial Paper market. This reversed a
significant shrinkage in the market that started in September. Implications extend beyond the US: We will watch the suite of Fed policy
action to gauge the stimulus provided to the economy and help judge when itMeeting Notes
may end the economic contraction.
Easing (QE) to Fed policy in 2009. This begins to get quite arcane and it is not
clear that all commentators adopt the same definition of QE. We take QE as the
policy followed by the Bank of Japan in the early years of this decade: namely
an expansion of ‘high powered money’ through increasing commercial banks’
reserves held at the central bank. In truth, we are not convinced of the
stimulative effects of quantitative easing and see much of its benefit deriving
from an indirect commitment to low rates. The Fed is also likely to continue to be
innovative in its changes to monetary operations. Arguably the most successful
policy measures to date have come in the Fed’s venturing into unsecured
lending, in particular to support the Commercial Paper market. This reversed a
significant shrinkage in the market that started in September. Implications extend beyond the US: We will watch the suite of Fed policy
action to gauge the stimulus provided to the economy and help judge when itMeeting Notes
may end the economic contraction.
NH:
Yet the Fed’s moves will be interesting as
other overseas central banks may need to draw the second arrow from their
quivers too, including the Bank of Japan, the Bank of England and the SNB, and
the Fed’s policy’s will provide a useful first test of these unconventional
measures.
other overseas central banks may need to draw the second arrow from their
quivers too, including the Bank of Japan, the Bank of England and the SNB, and
the Fed’s policy’s will provide a useful first test of these unconventional
measures.
PM:
here’s the LR comp
PM:
Btw –what’s Bramdean’s price this morning?
NH:
down another 2.5p to 40.25p
NH:
trying to find a list of the biggest shareholders
NH:
we know about vincent tchenguiz
NH:
but I think there are a couple of county councils in there
12:06PM
NH:
a couple of quick things to finish up with
NH:
JJB Sports
NH:
now well into penny dreadful territory
NH:
down 1.73p at 6.02p
NH:
apparently this was around on Friday
NH:
Citigroup setting a 1p target price
NH:
I was not
NH:
so I going to put it up
NH:
Target price cut to 1p — The support provided by JJB’s lenders reduced today;
with current trade deteriorating and the lifestyle division still loss making, a lot
now hinges on the value that can be achieved from the disposal of the leisure
division. With softening consumer trends, an under-invested, over-spaced,
loss-making retail chain, we fear that post a forced de-leveraging process,
there may be little value left for equity shareholders.
with current trade deteriorating and the lifestyle division still loss making, a lot
now hinges on the value that can be achieved from the disposal of the leisure
division. With softening consumer trends, an under-invested, over-spaced,
loss-making retail chain, we fear that post a forced de-leveraging process,
there may be little value left for equity shareholders.
NH:
Sell/Speculative rating, target price to 1p (from 20p) — Despite a likely
disposal of the leisure business, further financial support will be necessary in
order for the business to continue to meet supplier obligations. JJB’s fate
seems to be in the hands of their lending banks, a predicament that could
leave the shareholders with little equity value. We retain our Sell/Speculative
risk rating and cut our target price to 1p.
disposal of the leisure business, further financial support will be necessary in
order for the business to continue to meet supplier obligations. JJB’s fate
seems to be in the hands of their lending banks, a predicament that could
leave the shareholders with little equity value. We retain our Sell/Speculative
risk rating and cut our target price to 1p.
PM:
NH:
and also Inchcape
NH:
a profits warning there
NH:
and a nasty share price fall
NH:
I guess we should not be surprised
NH:
but the market is
NH:
stock down 28% at 51p
PM:
So, what — market was expecting bad news from Inchcape????
PM:
Weird
NH:
here’s a downgrade from Caz
NH:
Since the October update, Inchcape has seen the slow
NH:
Interest expense is likely to rise considerably in 2009 as management renegotiates its debt.
Tight stock control in the last two months saw net debt fall £30m to £540m, with management
expecting the year end position to be in the £520
Tight stock control in the last two months saw net debt fall £30m to £540m, with management
expecting the year end position to be in the £520
NH:
stuff on banks is interesting I think
PM:
ta
12:11PM
PM:
Think we are done!
PM:
Thanks for joining us everyone
PM:
And thanks for the zillions of comments
PM:
Hope ther arent too many libels in there
NH:
cya