Markets live chat transcript for the chat ending at 12:06 on 22 Dec 2008. Participants in this chat were: Neil Hume, FT (NH) Paul Murphy, FT (PM)
NH:
Good morning and welcome to Markets Live
NH:
Alphaville’s daily stock market knock about
NH:
and I am on my own today
NH:
we are Murphyless once more
NH:
he has gone down with a cold
NH:
and has decided to stay at home so he does not give it to anyone else
NH:
such as selfless act
NH:
only one problem with that
NH:
everyone else has it already
PM:
Actually I am here
PM:
As in, on ML
PM:
Not in the office
NH:
Live from your sick bed.
PM:
Yep
NH:
how are you?
PM:
Beuty of modern tech
PM:
I blame you — stupid cold
NH:
why me?
PM:
Just in time for Xmas
NH:
(Praxis – that copy has been in the hold box over the weekend)
11:07AM
NH:
Right, where shall we start?
PM:
You tell me
NH:
fancy talking about the Great Irish Banking Bail Out
NH:
seems to be the only real news around this morning
PM:
Ah yes — I bet Irish banks have soared on that
NH:
well, share prices have moved up
NH:
Bank of Ireland has added 33%
NH:
the last time I looked
NH:
now up 40%
NH:
Allied Irish 19%
NH:
and even Anglo Irish, which will be as good as nationalised under the terms of the plan, is up 21%
NH:
actually that’s not true anymore
NH:
it is down on the day
NH:
off 14% now
PM:
I think those moves are mad
NH:
I agree
PM:
Just look at the recent performance of UK banks, post bailout
NH:
sure, but didn’t we have a dead cat bounce too?
PM:
If anything the Irish bailout is not big enough
NH:
that’s certainly view among traders that I have spoken to
NH:
after all it is only EUR7.5bn
NH:
which in great scheme of things
NH:
can’t be enough
NH:
given the lending the Irish banks have been involved
NH:
and on a more technical point
NH:
this capital injection is non equity Tier 1 capital
NH:
not equity Tier One
NH:
which is arguably the most important measure
NH:
those ratios are unaffected by today’s news
NH:
and leave Irish bank still under capitalised compared with their UK counterparts
NH:
which is kind of scary
PM:
OK
PM:
So what are we saying here?
PM:
that this is a sticking plaster
PM:
and further capital injections will be necessary
NH:
yup
NH:
of course
NH:
this could be just the first step in the recap of the Irish banks
NH:
first we get this move
NH:
and then there is the equity issuance
NH:
underwritten by the Irish govt
NH:
that’s about the size of it
NH:
here’s some analyst comment
NH:
picked this up from Collins Stewart
NH:
Government announce up to €7.5bn bailout – could be too little
Anglo Irish is to receive €1.5bn of non-equity Tier 1 capital with BKIR and ALBK both to receive €2bn with an option of a further €1bn each.
Anglo Irish is to receive €1.5bn of non-equity Tier 1 capital with BKIR and ALBK both to receive €2bn with an option of a further €1bn each.
NH:
This moves headline Tier 1 ratios up to 9.6%-10.6% for the Irish which compares unfavourably with the 12% average of the UK domestic banks. Further, equity Tier 1 (the most important measure, in our view) is unaffected as this is a non-equity injection. Irish banks therefore continue to show an average equity Tier 1 ratio of 5.5% which is materially weaker than the 8.6% average of the UK domestic banks and the level to which most European banks are being recapitalised (mostly more than 7%).
NH:
Anglo also to be government controlled
The Irish government is to take 75% of voting rights at Anglo meaning it is state controlled though remains publicly-owned. In our view, this means the equity remains highly dangerous in the near-term. We would continue to avoid. ALBK and BKIR are relinquishing just 25% of voting rights on “major decisions”. We would continue to avoid ANGL which can remain highly volatile, in our view.
The Irish government is to take 75% of voting rights at Anglo meaning it is state controlled though remains publicly-owned. In our view, this means the equity remains highly dangerous in the near-term. We would continue to avoid. ALBK and BKIR are relinquishing just 25% of voting rights on “major decisions”. We would continue to avoid ANGL which can remain highly volatile, in our view.
NH:
Commitments to lend and major state regulation
The government is also taking the opportunity to massively regulate the sector with lending targets being imposed in SME banking, mortgage lending and environmental funds being set up. At least this should start to arrest asset price declines in Ireland and appears to have a strong chance of saving the economy.
The government is also taking the opportunity to massively regulate the sector with lending targets being imposed in SME banking, mortgage lending and environmental funds being set up. At least this should start to arrest asset price declines in Ireland and appears to have a strong chance of saving the economy.
NH:
Sadly, this is wrong form of capital
Much as the government and banks consistently describe this as core Tier 1 (which it is), it is not equity Tier 1 which is an important difference in the capital structure of the banks. Firstly, it does not share the equity dividend nor confer control (ex-ANGL) therefore meaning Irish taxpayers lose out on potential upside as the Irish economy reflates at some point in the future. This differs from the UK bailout. Secondly, equity would likely be better received by ratings agencies and the funding markets.
Much as the government and banks consistently describe this as core Tier 1 (which it is), it is not equity Tier 1 which is an important difference in the capital structure of the banks. Firstly, it does not share the equity dividend nor confer control (ex-ANGL) therefore meaning Irish taxpayers lose out on potential upside as the Irish economy reflates at some point in the future. This differs from the UK bailout. Secondly, equity would likely be better received by ratings agencies and the funding markets.
NH:
Good chance this stabilises banks in short-term
We do feel this has a good chance of stabilising the banks – whilst the quantum is smaller than we had hoped for, the implicit guarantee that the Irish government will “do what it takes” should help the banks in the near-term. We would continue to avoid Irish banks on a fundamental basis but can see the potential for a relief rally today. ALBK remains our preferred of the three banks (but this is not saying much), as the value of its stake in M&T (now €1.22 per share or 74% of market cap) can potentially still be sold, we feel.
We do feel this has a good chance of stabilising the banks – whilst the quantum is smaller than we had hoped for, the implicit guarantee that the Irish government will “do what it takes” should help the banks in the near-term. We would continue to avoid Irish banks on a fundamental basis but can see the potential for a relief rally today. ALBK remains our preferred of the three banks (but this is not saying much), as the value of its stake in M&T (now €1.22 per share or 74% of market cap) can potentially still be sold, we feel.
PM:
Any more
NH:
yep, this is from Davy
NH:
Government to make preference investment of €5.5bn
• The Irish government has announced that it is to put
€5.5bn in preference shares into the three main Irish
banks. ALBK and BKIR are to get €2bn each at a
coupon of 8% (UK banks paying 12%) and have
both expressed an interest in the government
underwriting a further €1bn in core tier 1 in the New
Year (we assume this means equity at least in the case
of BKIR). Meanwhile, ANGL is to get €1.5bn in
preferences costing 10% and further capital “if
required”. There is no mention of IPM, but media
reports suggest that it may get €500m later.
Preferences counted as part of core tier 1 but not equity
tier 1
• The Irish government has announced that it is to put
€5.5bn in preference shares into the three main Irish
banks. ALBK and BKIR are to get €2bn each at a
coupon of 8% (UK banks paying 12%) and have
both expressed an interest in the government
underwriting a further €1bn in core tier 1 in the New
Year (we assume this means equity at least in the case
of BKIR). Meanwhile, ANGL is to get €1.5bn in
preferences costing 10% and further capital “if
required”. There is no mention of IPM, but media
reports suggest that it may get €500m later.
Preferences counted as part of core tier 1 but not equity
tier 1
NH:
The preferences will be treated as part of “core” tier 1
capital by the Irish Regulator. Adding this into our
2009 numbers adds 135bps and 170bps to ALBK and
BKIR’s risk weighted ratios but will not improve our
current forecasts for “equity” tier 1, which are 6.65%
(M&T sold) and 6.0% for the end of 2009. Building
in an extra €1bn of equity would add a further 65bps
and 85ps to both equity and core tier 1. ANGL’s
2009 ratios will rise 170bps (last reported core tier 1
goes from 5.9% to 7.7%).
capital by the Irish Regulator. Adding this into our
2009 numbers adds 135bps and 170bps to ALBK and
BKIR’s risk weighted ratios but will not improve our
current forecasts for “equity” tier 1, which are 6.65%
(M&T sold) and 6.0% for the end of 2009. Building
in an extra €1bn of equity would add a further 65bps
and 85ps to both equity and core tier 1. ANGL’s
2009 ratios will rise 170bps (last reported core tier 1
goes from 5.9% to 7.7%).
NH:
Market will want equity issuance, but this is a good start
• While the market will want to see some equity
issuance, this is a good start. On top of the €5.5bn,
“the government has a substantial pool of additional
capital available to underwrite and otherwise support
the issuance of core tier 1 capital”. This should help
put a floor under the banks and get us into the New
Year.
• While the market will want to see some equity
issuance, this is a good start. On top of the €5.5bn,
“the government has a substantial pool of additional
capital available to underwrite and otherwise support
the issuance of core tier 1 capital”. This should help
put a floor under the banks and get us into the New
Year.
NH:
With at least two possibly horrible years for earnings ahead, the market
is looking out to 2011 as being a year when profits will hopefully start to
recover. We have previously talked of normalised pre-tax profits of at
least €1.2bn at ALBK and €1bn at BKIR (taking operating profits down
a harsh 25% from peak and normalising impairment). But investors are
now possibly looking at c.€280m of this going to pay the government
before ordinary shareholders see any benefit. This will make it hard to
get ROEs into double digits and ahead of COE. True, the guarantee is
supposed to expire in September 2010, but it looks increasingly likely to
us that this will be extended either in its current form or in a more
targeted version.
is looking out to 2011 as being a year when profits will hopefully start to
recover. We have previously talked of normalised pre-tax profits of at
least €1.2bn at ALBK and €1bn at BKIR (taking operating profits down
a harsh 25% from peak and normalising impairment). But investors are
now possibly looking at c.€280m of this going to pay the government
before ordinary shareholders see any benefit. This will make it hard to
get ROEs into double digits and ahead of COE. True, the guarantee is
supposed to expire in September 2010, but it looks increasingly likely to
us that this will be extended either in its current form or in a more
targeted version.
NH:
Credit package
As the quid pro quo for the investment, there is a credit package. For
SMEs, the banks will provide at least an additional 10% capacity (we
assume this means gross lending), while the banks will also offer an
additional 30% capacity for first-time buyer mortgages.
There are various other commitments too, but they are not worth
mentioning here.
As the quid pro quo for the investment, there is a credit package. For
SMEs, the banks will provide at least an additional 10% capacity (we
assume this means gross lending), while the banks will also offer an
additional 30% capacity for first-time buyer mortgages.
There are various other commitments too, but they are not worth
mentioning here.
PM:
Thanks for all that
11:15AM
PM:
Right, lets head back to the UK
PM:
Wots moving?
NH:
well, the retailers are weak
NH:
but that’s not surprising given some of the gloomy weekend press
NH:
one paper was flagging up a report by Begbies Traynor, the insolvency specialist
NH:
they reckon that that 10-15 ‘national’ chains will fail before mid-January, with quarterly rent due this week posing a major obstacle to many more.
PM:
Crikey
NH:
and I think one of the companies facing a quarterly rent bill this week is Land of Leather
NH:
I believe they need to come up with something around £6m
PM:
Hmm
NH:
and there are some more John Lewis sales figures out
NH:
and while, there has been some progress week on week
NH:
the numbers of still massively down on last year
NH:
here’s a quick bit of comments from Singer Capital markets
NH:
John Lewis ~ More Week-on-week Progress But Still Down Heavily Y-o-Y. In the week ending 20 December, John Lewis saw a sales decline of 1.8%. On average the same-store-sales decline was still around 6% though after taking into account new stores and john.lewis.com, which continued to contribute positively to the overall growth rate. Within the mix, seasonal Gifts led the way although the level of sales decline outside seasonal gifts was not released.
NH:
Gaming, Technology and personal care also did extremely well according to the latest press release. As was always going to be the case, management at John Lewis has flagged this Monday as another particularly important day for sales given with Xmas falling on Thursday although Visa Europe has indicated that Saturday will have been the biggest day overall.
NH:
Retail sales ~ Spending Will Revert to Being ‘Discretionary’ After Xmas. The bounce in sales, from those depressed levels seen in Oct/Nov, comes as a great relief for many of the struggling retailers on the high street. However, it should be noted that the margin performance this year could well be the worst on record with researchers into discounting indicating that 82% of the 100 largest retailers were all discounting before Xmas.
NH:
and I can second that
NH:
every shop I went into at the weekend was on sale
NH:
it might have been heaving with customers
NH:
but they are discounting aggresively
NH:
clearly they all have too much Xmas stock
NH:
and given some of the long lead times
NH:
they would have been buying it before the Lehman Brothers blow up
NH:
so, yes, margins are going to be awful this year
NH:
back to Singer
NH:
Although the issue of a stock problem emerging after Xmas is diminished (with only savage discounting of 75% or more likely to clear any overhangs thereafter), we continue to believe that a reversion to normal discretionary times will leave retailers’ sales back at very depressed levels again (i.e. Oct/Nov levels). Most retailers interviewed in the press agree that this will be the case.
NH:
This reversion to trend remains a concern for forecasts across the piece. Insolvency specialists Begbies Traynor suggest that 10-15 ‘national’ chains will fail before mid-January, with quarterly rent due this week posing a major obstacle to many more. As a consequence of the margin hit that retailers have taken to get sales moving, and on the basis that sales revert back to trend (i.e. substantially down) in Q1’09, we believe that the recent sector rally looks premature and overly pronounced. This includes big names such as Next, Kingfisher, and especially Marks & Spencer and Home Retail. We continue to view the sector negatively ahead of this impending H1 downturn.
NH:
so, all in all
NH:
I am expecting a wave of profit warnings in January
NH:
if not before
NH:
I think we could get a few retailers issuing trading statements in the period between Xmas day and New Year
NH:
anyway, some share prices
Home Retail Group (HOME:LSE): Last: 207.75, down 26.75 (-11.41%), High: 236.75, Low: 205.25, Volume: 2.08m
Marks and Spencer Group (MKS:LSE): Last: 214.00, down 11.75 (-5.20%), High: 226.00, Low: 213.25, Volume: 2.68m
PM:
This drop off in retail activity hasnt reached my kids yet
NH:
really
PM:
There’s Xmas lists on are on this computer
NH:
and what are they asking Santa for??
PM:
ß Good fitting jeans, like Hollister skinny ones, Abercrombie & fitch skinny ones, or miss selfidge skinny ones. Blue, or dark blue
ß Comfy hoodie like the Abercrombie & fitch ones or the Hollister ones
ß Big earings
ß Urban outfitters necklaces and jewlery
ß A graphic t-shirt from urban outfitters
ß A flower for my room that I can water and keep alive
ß A nice bag like
ß A nice purse like
PM:
That’s one
NH:
wow
NH:
you need some freelance work for that
PM:
Let me find the other one
PM:
Cant find it
NH:
OK, let’s move on?
NH:
wider market perhaps?
PM:
Sure — how is it doing ?
NH:
well, as you can imagine
NH:
it is very, very quiet out there
NH:
FTSE 100 is down 28.8 points at 4,258.1
NH:
miners and banks doing the damage
NH:
been watching the miners closely again
Xstrata (XTA:LSE): Last: 614.00, down 31.5 (-4.88%), High: 639.00, Low: 603.00, Volume: 2.79m
RIO TINTO (RIO:LSE): Last: 1,410, down 19 (-1.33%), High: 1,439, Low: 1,374, Volume: 1.22m
BHP Billiton (BLT:LSE): Last: 1,205, down 30 (-2.43%), High: 1,210, Low: 1,176, Volume: 3.53m
Anglo American (AAL:LSE): Last: 1,418, down 32 (-2.21%), High: 1,470, Low: 1,382, Volume: 2.05m
Vedanta Resources (VED:LSE): Last: 574.50, down 27.5 (-4.57%), High: 594.50, Low: 556.00, Volume: 445.27k
Eurasian Natural Resources Corp (ENRC:LSE): Last: 311.50, down 4.25 (-1.35%), High: 318.50, Low: 300.00, Volume: 450.26k
NH:
I think a lot of people are still digesting Friday’s note from UBS on coal
NH:
in which, there were some incredibly bearish forecasts on thermal and coking coal
NH:
and if these come true most of the coal mines in the world be unprofitable
NH:
for those of you how missed the note
NH:
here are the lowlights
NH:
and note just how dependent many of the big mining companies are on coal
NH:
it has been a real cash generator for many of them
NH:
The stalling cash engine Coal prices cut by circa 45% in 2009
Our commodity team have cut their 2009 coal price forecasts by 40% for thermal and 53% for coking coal. We are now forecasting the benchmark contract price in 2009 to be US$60/t for thermal and US$85/t for coking – our estimate of the marginal cost of production.
Our commodity team have cut their 2009 coal price forecasts by 40% for thermal and 53% for coking coal. We are now forecasting the benchmark contract price in 2009 to be US$60/t for thermal and US$85/t for coking – our estimate of the marginal cost of production.
NH:
This is lower than the current spot thermal coal price of US$80/t. The 2010 forecasts are also lower – 11% for t.hermal and 12% for coking.
NH:
Coal contributes between 19% and 68% of ’09E EBITDA for diversifieds
Coal is now a significant earnings contributor to the large 4 diversified miners listed in the UK – even more importantly for 3 of them (Anglo, Rio and Xstrata) it is also a significant cash generator. Price weakness will apply even more pressure on overstretched balance sheets.
Coal is now a significant earnings contributor to the large 4 diversified miners listed in the UK – even more importantly for 3 of them (Anglo, Rio and Xstrata) it is also a significant cash generator. Price weakness will apply even more pressure on overstretched balance sheets.
NH:
We forecast coal will contribute 68% of Xstrata’s 2009 EBITDA – 37% for Anglo, 24% for BHP and 19% for Rio. We have also lowered volumes but believe the risk of further cuts remain especially in Q1’09 ahead of the new, lowered priced contracts are settled from April 1st.
Lower ’09E EPS by 12% to 45% on coal alone
Following these coal price revisions we are lowering our 2009E EPS by 32% for Anglo, 16% for BHP, 12% for Rio and 45% for Xstrata. We have made other cuts to Anglo and Xstrata – detailed in separate notes. The total EPS cut for BHP is 27% and 6% for Rio.
NH:
We prefer BHP over Anglo and Rio over Xstrata
We are lowering target prices across the board – we are also downgrading ratings on Anglo to Neutral (with a Short-term Sell based on valuations) and Xstrata to Neutral.
We are lowering target prices across the board – we are also downgrading ratings on Anglo to Neutral (with a Short-term Sell based on valuations) and Xstrata to Neutral.
NH:
Now
NH:
in separate note
NH:
UBS looked at the impact all of this would have on Xstrata
NH:
and the worrying conclusion
NH:
was that the company could breach its banking covenants
NH:
and be forced to axe its dividend
PM:
Hmm — is that likely to happen?
PM:
I thought Xstrata’s covenants were backward looking
PM:
and the earliest a breach was possible was 2010
NH:
well, that’s what the company says
NH:
here’s an email they recently sent round
NH:
it was actually penned by Liberium Capital
NH:
but gives a pretty good outline of Xstrata’s debt, covs and repayment schedules
NH:
Xstrata – default on debt concerns overdone and no default likely in 2009
NH:
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:
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
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!!
PM:
thanks for that
11:28AM
11:28AM
NH:
Thanks for all your tales from the sales.
NH:
keep them coming
PM:
Ihavent done any shopping yet at all
NH:
House of Fraser in the City had big discounts when I popped in Friday
NH:
one just about every label in there
11:30AM
PM:
Anything else going on out there?
NH:
there are a couple of other things
NH:
but before we look at this
NH:
there is one other interesting thing that happened in the mining world this morning
NH:
occured down under
NH:
a mining company issuing new share to pill its bills
PM:
no way
PM:
That cant be right, can it?
PM:
or allowed
NH:
well, the company is question, Fortescue Metals, and it has done exactly that
NH:
and this is no mickey mouse outfit
NH:
the third biggest iron ore producer in Australia no less
NH:
here’s a report from Dow Jones
NH:
MELBOURNE (Dow Jones)–Fortescue Metals Group Ltd. (FMG.AU) said
Monday it may continue to issue small numbers of shares to pay some contractors in
An effort to protect its cash position.
Monday it may continue to issue small numbers of shares to pay some contractors in
An effort to protect its cash position.
The iron ore miner last week issued about A$3.6 million worth of
shares to pay a contractor, sparking concern among some investors about its cash
position, but a spokesman for the miner said it remains in a strong
financial position.
NH:
Shares in the miner, which is also facing potential legal claims after
suspending shipping contracts, fell 18% to A$1.77 by 0432 GMT in a
broader Australian market that was down 1.6%.
suspending shipping contracts, fell 18% to A$1.77 by 0432 GMT in a
broader Australian market that was down 1.6%.
Fortescue issued 1.55 million shares last week at A$2.36 per share to
A contractor as payment for goods and services provided, and a spokesman
said the action had been taken to preserve the miner’s cash position.
NH:
“It is to protect our cash reserves, with the cash positions of
Companies being so important at the moment,” he said.
Companies being so important at the moment,” he said.
Fortescue could look to issue shares to pay bills again in the future,
“in a limited number of cases”.
“There may possibly be some more but it won’t be widespread,” the
Spokesman said.
NH:
The Perth-based company said at its recent annual general meeting that
Its cash position as at Sept. 30 was A$624 million.
Its cash position as at Sept. 30 was A$624 million.
The spokesman said the company would update this at the time of its
First half results but that the miner “remains in a strong financial
position”.
Fortescue and its charismatic Chief Executive Andrew Forrest have
shaken up the iron ore mining industry in Australia, creating a major new producer
in the Pilbara region of Western Australia state, cheered on by Chinese steel
mills keen to see new source of supply.
NH:
But the recent slump in demand for iron ore has forced the miner to
Delay aggressive plans for expansion of its output to 80 million metric tons,
Which was to have been funded by cashflow from its exports.
Delay aggressive plans for expansion of its output to 80 million metric tons,
Which was to have been funded by cashflow from its exports.
There has been a steady flow of rumors that Fortescue has been talking
To Chinese steelmakers about providing funding to drive expansions in
return for an equity stake.
The Age newspaper reported Monday that Forrest has been in talks with
numerous Chinese entities but had been seeking a premium of 100% for any
stake, which had been too steep for the Chinese to accept.
NH:
Executive
Director Graeme Rowley that the company has been in talks for years on
Possible joint-venture equity holders but has never been able to agree on a
price.
Director Graeme Rowley that the company has been in talks for years on
Possible joint-venture equity holders but has never been able to agree on a
price.
A spokesman for Fortescue declined to comment on the report in The
Age. One analyst, who did not want to be named, said if Fortescue wanted to
Press ahead with rapid growth, it would likely need to turn to the Chinese,
but that it might make more sense to delay expansions and consolidate its
position until the demand outlook was clearer.
PM:
That’s extraordinary
NH:
it is
PM:
company sounds in a bit of difficulty
NH:
wonder if that could happen over here
NH:
DSG paying its bills in stock
NH:
would anyone take it?
PM:
hmm
11:33AM
PM:
Any re-Xmas RAW for the readers?
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:
not really
NH:
WPP are off 25p at 387p
NH:
rumours of tough trading
NH:
and of a possible profits warning in the new year
NH:
mind you
NH:
none of that is particularly new
NH:
the bears have been making these noises for a few weeks now
NH:
other than that
NH:
there is a bit of a buzz around in Genetech
NH:
which is US biotech company that Roche already owns a large slug of
NH:
56% to be precise
NH:
in July, Roche offered to buy all outstanding shares of Genentech for $89 apiece,
NH:
that offer was quickly rebuffed by Genetech, but it suggested it would consider a higher offer
NH:
A special committee of board members would consider a proposal that “recognises the value of the company and reflects the significant benefits that would accrue to Roche as a result of full ownership.”
NH:
now on Friday in the US
NH:
there was lots of activity in the options market
NH:
buying of call options
NH:
the rumours seems to be that Roche has got financing to make its offer
NH:
and in order to push it through will offer $100 a share
NH:
perhaps as much as $110 a share
PM:
So what options were being acquired?
NH:
looks to have been January $90 calls, which are priced at $1.50
NH:
Genentech’s shares rose $3.45, or 4.3%, to close at $83.75 on Friday
PM:
thanks for that
11:36AM
PM:
Just while we are on RAW – did you see the Christie’s post i put up earlier
PM:
I think PPL needs a good look at
PM:
Pinault under pressure
PM:
I here there is some serious activity in the background, bt people are not quite sure which assets are on the block
NH:
i agree
NH:
does this mean the art bubble has well and truly burst
PM:
Yes, christie’s cant be worth what it was a year ago or so
PM:
But on the block I am told
PM:
anyway — wait and see what happens
11:38AM
PM:
moving on
PM:
let’s have a look at SVG Capital
PM:
the stock continues to sink
NH:
that’s right
NH:
off a further 11.5% to 94.5p this morning
NH:
which will not impress those shareholders who decided to back its £70m placing at 100p a share last week
NH:
that placing, of course, was part of a large £200m capital raising
NH:
the rest is coming through a rights issue – which is also price at 100p a share
NH:
the terms of the offer are 1 for 1
PM:
So could it fail?
NH:
don’t think so
NH:
from what I can see, almost half of SVG’s shareholders have agreed to back the rights issue
NH:
so I guess they are going to get most of the money, what ever happens
NH:
nonetheless this all quite embarrassing for the company and its advisors
NH:
and those shareholders who agreed to back the cash call
PM:
but why are the shares weak this morning?
PM:
has there been some news on Permira?
NH:
or was
PM:
for those of you who have not follwed SVG
PM:
it is a big investor in Permira funds
NH:
or was
NH:
it is scaling back its commitments
NH:
this was all outlined in last week’s shocker of a statement from the company
NH:
when it wrote down the value of its investments by 40%
NH:
today’s weakness is down to this, I think
NH:
a bearish note from Merrill Lynch
NH:
they have downgraded to underperform
NH:
they say, while the restructuring will leave SVG with a solid balance sheet
NH:
the company will have little firepower to take advantage of future opps
NH:
as such, the rating of the company at the moment is too expensive
NH:
Expensive on P/NAV after dilution and impairment
Post restructuring we view SVG capital as (i) an LPE with a solid balance sheet,
but with limited fire power to take advantage of future investment opportunities,
(ii) an LPE with long term option value in its portfolio, but in a segment of the
private equity market that will struggle with performance and news flow in 2009
and (iii) the most expensive LPE we cover on a price to adjusted NAV basis.
Post restructuring we view SVG capital as (i) an LPE with a solid balance sheet,
but with limited fire power to take advantage of future investment opportunities,
(ii) an LPE with long term option value in its portfolio, but in a segment of the
private equity market that will struggle with performance and news flow in 2009
and (iii) the most expensive LPE we cover on a price to adjusted NAV basis.
NH:
We therefore downgrade SVG Capital to Underperform.
Expensive restructuring
Our view on the restructuring is that SVG Capital was at risk of breaching its non-public net worth covenant and at risk of having a fire sale its assets. In this
context, this restructuring strikes us as sensible and probably the least onerous of
a range of solutions. That said, it comes at a hefty price, with management fees
on Permira 4 going up 65%, SVG Capital foregoing 25% of distributions and NAV
ps coming down 54% as a consequence of this and the rights issue.
NH:
Downgrade to Underperform, 105p PO
We value SVG Capital at 90p, a 30% discount to the ‘average’ European bank which
is now trading on around 0.8x 2009E NAV, or 0.55x 2009E NAV. To this we add 15p
for SVG Advisors. The sum is the basis for our 105p PO. We rate SVG Capital as
Underperform since we believe it offers the lowest upside in our LPE coverage.
We value SVG Capital at 90p, a 30% discount to the ‘average’ European bank which
is now trading on around 0.8x 2009E NAV, or 0.55x 2009E NAV. To this we add 15p
for SVG Advisors. The sum is the basis for our 105p PO. We rate SVG Capital as
Underperform since we believe it offers the lowest upside in our LPE coverage.
PM:
thanks for that
11:44AM
11:45AM
NH:
have you seen the latest John Kempton piece on Bramdean?
PM:
On Horllick — yes did see that.
PM:
Very aggressive again
NH:
controversial, eh?
PM:
It is interesting to see how Ms Horlick is being gangstered by the blogosphere
NH:
she is and her advisers don’t seem to get
NH:
they seem to be focused on old media
NH:
and trying to control the fall out there
NH:
when she is being filleted on line
PM:
Yep
NH:
Nicola wrapped the noose around her neck when she invested with Madoff. The hangman has now pulled the lever.
NH:
that was from the latest Kempton piece
11:48AM
11:49AM
NH:
just cutting back to WPP for the minute
NH:
a friendly broker has just sent over this
NH:
gives some backfground to these negative rumours doing the rounds
NH:
Risk still on the downside
Unsurprisingly, there has been a slew of weakening advertising industry data points over the last few months. Today Nielsen has published details of US adspend for the first nine months of 2008. Auto companies represent historically around 15 to 20% of US adspend, and the US represents around 40% of global advertsing. Elsewhere, Interpublic the third largest global marketing agency group is considering cutting 2,000 jobs, equivalent to 5% of the total.
Unsurprisingly, there has been a slew of weakening advertising industry data points over the last few months. Today Nielsen has published details of US adspend for the first nine months of 2008. Auto companies represent historically around 15 to 20% of US adspend, and the US represents around 40% of global advertsing. Elsewhere, Interpublic the third largest global marketing agency group is considering cutting 2,000 jobs, equivalent to 5% of the total.
NH:
For 9m 2008:
* US adspend reached $100.5bn, broadly flat YoY (-0.6%)
* The ten largest marketeers cut their budgets by 4%
* Ford cut by 23% to $1.1bn, Chrysler by 26% to $694m and General Motors by 4% to $1.7bn
* GM is the largest US advertiser after Proctor and Gamble
* In contrast, fast food restautarant chains increased their spend by 11% to $3.3bn
* By medium, network television ad revenues held up, underpinned by the Olympics and US Presidential spending. After a fall of 6% in H1, it rebounded to finish +0.9% for the 9 months.
* The newspaper industry continues to take the brunt of ad pressures, with nationals -6% and local -9%.
* Radio fell 4%, magazines 5% and online display fell 6%.
* US adspend reached $100.5bn, broadly flat YoY (-0.6%)
* The ten largest marketeers cut their budgets by 4%
* Ford cut by 23% to $1.1bn, Chrysler by 26% to $694m and General Motors by 4% to $1.7bn
* GM is the largest US advertiser after Proctor and Gamble
* In contrast, fast food restautarant chains increased their spend by 11% to $3.3bn
* By medium, network television ad revenues held up, underpinned by the Olympics and US Presidential spending. After a fall of 6% in H1, it rebounded to finish +0.9% for the 9 months.
* The newspaper industry continues to take the brunt of ad pressures, with nationals -6% and local -9%.
* Radio fell 4%, magazines 5% and online display fell 6%.
PM:
Anything else?
NH:
one thing
NH:
a very important TV programme this evening
NH:
you might have heard about it
NH:
especially if you were listening to the beeb this morning
NH:
it was all over the news
NH:
I am of course talking about Bobby Peston’s Panomora special tonight
NH:
and considering the programme lasts for 30mins
NH:
he is going to pack a lot in
NH:
explaining the entire credit crunch it seems
PM:
Is this on something called the new capitalism
PM:
The NEW capitalism
NH:
The point of the Panorama I’ve made with Stephen Scott and Vivien White (which will be broadcast tonight at 8.30pm) is to convey quite how close we came in October to the collapse of the banking system.
It’s a suspenseful story told in interviews with a quartet of the leading actors: the chancellor, Alistair Darling; the deputy governor of the Bank of England, Sir John Gieve; the chief executive of the Financial Services Authority, Hector Sants and the chief executive of Barclays, John Varley.
I hope the programme also gives a sense of the shocks generated by this near catastrophe and the tumultuous year that lies ahead.
For me, what stood out when interviewing this quartet was the revelation about how Royal Bank of Scotland and HBOS were – in October – only hours away from being unable to open for business.
PM:
Because that is what I have sen previewed on the TV as the New Capitalism
PM:
(Sorry to edit posts on links below TImbo)
NH:
yep, his 3,000 word eassy – the New Capitalism
PM:
(Timbo — mail me if you want an explanation — paul.murphy@ft.com)
11:55AM
NH:
before we go, Libor readings
NH:
DJ 3-Month USD Libor Fixed At 1.46625%, Vs 1.4975% Friday
NH:
DJ 3-Month Sterling Libor Fixed At 2.935%, Vs 2.97813% Friday
NH:
DJ 3-Month Euro Libor Fixed At 3.04938%, Vs 3.07625% Friday
NH:
THREE-MONTH DOLLAR LIBOR/OIS SPREAD AT 127 BPS VS 131 BPS ON FRI
NH:
Dec. 22 (Bloomberg) — The London interbank offered rate, or Libor, for three-month loans in dollars fell to the lowest level since June 9, 2004, according to British Bankers’ Association data.
The rate declined three basis points to 1.47 percent, the BBA said today. The overnight rate was little changed at 0.11 percent.
The Libor-OIS spread, a measure of cash scarcity, narrowed four basis points to 125 basis points.
The rate declined three basis points to 1.47 percent, the BBA said today. The overnight rate was little changed at 0.11 percent.
The Libor-OIS spread, a measure of cash scarcity, narrowed four basis points to 125 basis points.
11:56AM
PM:
Sorry — just to clarify on the linking front.
PM:
Below
PM:
Didnt want to appear rude
PM:
But sometimes we have to make quick judgements on whether we want to associate ourselves directly with other content elsewhere on the web
PM:
We get in to grey legal areas…
PM:
You know i would not censor otherwise
PM:
The beauty of ML is that it is fast and open to comment — no clunky pre-moderation
PM:
But that does mean we sometimes have to take stuff down
NH:
but we were more interested re – Hempton
NH:
on the way Horlick and her advisers had failed to notice what is happening in Blog World
PM:
praxis22 — its often what we have time for 
NH:
and the level of digging people had done
11:59AM
PM:
Prometheus — as i say it is a grey area
NH:
anything to finish up on?
NH:
few questions below about IEC
NH:
we have heard nothing re the level of acceptances
NH:
For many people Friday would have been the last day they could effectively tender
NH:
and what we are being told is that verbally over 90% of folk had agreed to tender
NH:
that said
NH:
there have been some comments out the bidder ONGC this morning
NH:
which I will just get
NH:
*INDIA’S OIL & NATURAL GAS CHIEF SHARMA SPOKE IN NEW DELHI
*ONGC WON’T PUT ON HOLD ANY INVESTMENT PLANS, SHARMA SAYS
*INDIA ONGC SAYS $75 A BARREL REASONABLE PRICE FOR OIL COMPANIES
*INDIA ONGC’S MARGINS UNDER `SEVERE PRESSURE,’ SHARMA SAYS
*OIL PRICES NOT `COMFORTABLE’ FOR INDIA’S OIL & NATURAL GAS
*ONGC WON’T PUT ON HOLD ANY INVESTMENT PLANS, SHARMA SAYS
*INDIA ONGC SAYS $75 A BARREL REASONABLE PRICE FOR OIL COMPANIES
*INDIA ONGC’S MARGINS UNDER `SEVERE PRESSURE,’ SHARMA SAYS
*OIL PRICES NOT `COMFORTABLE’ FOR INDIA’S OIL & NATURAL GAS
NH:
so clearly, if they could get out of this deal
NH:
they would
NH:
so shareholders need to be tender
NH:
as for Greenlight and there stake building in Punch
NH:
there was an investor letter out a while ago from Greenlight that outlined the thinking behind the investment
NH:
it was very financial
NH:
not much on the state of the UK pub industry and trading
NH:
just the numbers
12:04PM
PM:
okay — thanks for that Neil
PM:
We are done – in
PM:
I’ll be doing this from home again tomorrow im afraid
PM:
Thanks for joining
PM:
And thanks for doing all the work Neil
PM:
back tomorrow at 11 — last one till Jan 5
NH:
(CG – Greenlight, were explaining to investors why they had bought in)
NH:
see y all tomorrow
NH:
for the final ML of the year
NH:
thanks for all the comments
NH:
we had expected things to be quiet today
NH:
cya