Markets live chat transcript for the chat ending at 12:16 on 19 Jan 2009. Participants in this chat were: Paul Murphy, FT (PM) Neil Hume, FT (NH)
PM:
Okay – welcome everyone
PM:
This is Markets Live, the FT Alphaville’s daily markets chat.
PM:
Not going to faff around this morning. Too much going on.
NH:
So we’re going to kick off with the big news.
PM:
We’re going to print the statement in full – so that we have the primary source information to hand as a basis for discussion.
NH:
PEARSON TRADING UPDATE
Pearson plc is the parent company of the Financial Times, publisher of FT Alphaville.
NH:
Pearson is today providing its regular January trading update ahead of announcing its preliminary results for 2008 on 2 March 2009.
We will report good growth and continued progress on our financial goals for 2008, despite the worsening macroeconomic environment. Trading conditions were more difficult in some of our markets in the fourth quarter, but all of our businesses achieved or exceeded our guidance for 2008. We also benefited from the strength of the US dollar against sterling* and a lower tax rate.
We will report good growth and continued progress on our financial goals for 2008, despite the worsening macroeconomic environment. Trading conditions were more difficult in some of our markets in the fourth quarter, but all of our businesses achieved or exceeded our guidance for 2008. We also benefited from the strength of the US dollar against sterling* and a lower tax rate.
NH:
As a result, we now expect to report headline earnings growth of around 20% for 2008 (against adjusted EPS of 46.7p in 2007), ahead of the consensus of market expectations (approximately 51p, according to Reuters and Bloomberg).
Marjorie Scardino, chief executive, said: “We are naturally cautious about the economic environment, but we take confidence from our performance in 2008. It provides evidence that our strategy for long-term, sustainable growth is working. Some of our markets will be tough this year and we are managing the company accordingly. But that strategy, our record of investment and our resilience will enable us to take full advantage of the opportunities this environment gives us to build our business and gain share.”
Marjorie Scardino, chief executive, said: “We are naturally cautious about the economic environment, but we take confidence from our performance in 2008. It provides evidence that our strategy for long-term, sustainable growth is working. Some of our markets will be tough this year and we are managing the company accordingly. But that strategy, our record of investment and our resilience will enable us to take full advantage of the opportunities this environment gives us to build our business and gain share.”
NH:
Our education business finished the year ahead of our expectations, with good growth in our testing businesses and particular strength in US Higher Education and International Education. These have more than offset some weakness in the US School publishing market caused by pressure on state budgets. Penguin also performed well, in line with our expectations, in a slower holiday trading season for the overall books market. FT Publishing has produced good sales and profit growth despite the slowdown in the advertising market in the fourth quarter, and Interactive Data will report its Q4 performance and full-year results on 19 February 2009.
We expect our effective tax rate to be around the low end of our previous guidance of 27-29%.
Looking ahead to 2009, we are planning on the basis that the worldwide economic environment will be tough and that trading conditions will continue to be challenging in some of our markets. However, we expect the company to prove durable once again thanks to the strength and breadth of our education business, Penguin’s consistent publishing performance and the FT Group’s shift towards subscription and content revenues.
We expect our effective tax rate to be around the low end of our previous guidance of 27-29%.
Looking ahead to 2009, we are planning on the basis that the worldwide economic environment will be tough and that trading conditions will continue to be challenging in some of our markets. However, we expect the company to prove durable once again thanks to the strength and breadth of our education business, Penguin’s consistent publishing performance and the FT Group’s shift towards subscription and content revenues.
PM:
PM:
What?
NH:
That’s a key talking point in London today – a warning from Pearson that profits are going to be better than expected.
PM:
Way better.
PM:
What’s the market reaction Neil? Stock reached the moon yet?
NH:
Well, it’s Sort of on the way.
NH:
UP 28.5p at 626p – which is almost 5 per cent.
PM:
Excellent.
PM:
PM:
Just give people a moment to re-read that statement.
NH:
Okay – let’s move on – what else can we chat about?
11:05AM
PM:
Suppose we talk about how far the banking sector is from full public ownership.
PM:
Unless there’s something else
NH:
er, no
NH:
The market is just taking this cold, cold view….
NH:
RBS – the stock is now priced like an option – 22.3p.
PM:
Nationalised Westminster Bank
NH:
Assumption is that no one will support the cash call at 32p – the government can have that.
PM:
Down 36%
NH:
wow
NH:
Lloyds Bank Group – trading in its new form now – well, on that one people are hedging their bets slightly
NH:
of 10p at 88.5p
NH:
that’s only the 10%
PM:
Eric Daniels, what have you done.
PM:
Our equivalent of Ken Lewis – did all the DD on HBOS – knew what they were buying, knew what the short-term future held.
NH:
cept they didn’t.
PM:
PM:
And then there’s Barclays.
PM:
Collapsed on Friday of course – causing it to put out its own warning that profits were going to be rather better than expected.
PM:
And that’s good for what? — er, 6p on the price????
NH:
no, lower
PM:
Go on
NH:
4.4p
NH:
not sure that even counts as a
NH:
PM:
The stock started last week at 185p – collapse to 98p after the 25 per cent drop during the last hour on Friday.
PM:
This morning the stock opened at 122p – leading to the assumption that certain Mayfair types would find their fingers ablaze.
PM:
PM:
But no!
NH:
The bounce has all but disappeared.
11:09AM
PM:
All much too much to go thru this morning
NH:
so many announcements
NH:
and plans
NH:
though for my money the most interesting was the asset protection scheme
PM:
HM Monoline
PM:
Or AIB , as Sam put it earlier
NH:
but generally the feeling out there in the market place is that the measures won’t make a great deal of difference
PM:
hmm — latest box of sticking plasters
NH:
I have been assembling a load of reaction to the plans
NH:
want me to put it up
PM:
Slam ‘em all up Neil — so people can digest at their own speed
NH:
OK, will start with Merrill
NH:
Asset protection scheme is the critical element
As has been suggested in the press, the UK government is to provide protection
for the banks against losses in certain asset classes. The assets expected to be
covered are mortgages (both commercial and residential); structured credit; and
certain other corporate / leveraged loans. Under the scheme, the banks would
retain the first loss tranche on these loans, and losses above a certain level would
be split 90% to Her Majesty’s Treasury (HMT) and 10% to the banks. A fee will be
payable to the government, normally in the form of alternative capital instruments
issued to the government (not ordinary shares).
As has been suggested in the press, the UK government is to provide protection
for the banks against losses in certain asset classes. The assets expected to be
covered are mortgages (both commercial and residential); structured credit; and
certain other corporate / leveraged loans. Under the scheme, the banks would
retain the first loss tranche on these loans, and losses above a certain level would
be split 90% to Her Majesty’s Treasury (HMT) and 10% to the banks. A fee will be
payable to the government, normally in the form of alternative capital instruments
issued to the government (not ordinary shares).
NH:
Looks like the US model
This proposal looks to us to be similar to agreements reached in the US. The big
benefit to the banks of such a scheme is that the risk weighting on the assets
insured drops sharply: in the US, the risk weighting fell to ~20%, thus boosting
capital ratios. The level of first loss for the banks is typically ~10% of the assets
covered. In terms of the fees for the insurance, using Citigroup as an example,
$7bn of preference shares were issued at a coupon of 8% to cover ~$300bn of
assets. We should note that the Citi scheme also involved the issue of warrants
(which HMT does not seem to be proposing). Other US government asset loss
protection schemes have incurred a fee 3.4%. We should note that the Citi
scheme involved the issue of warrants (which HMT does not seem to be
proposing). Other US government asset loss protection schemes have incurred a
fee 3.4%.
This proposal looks to us to be similar to agreements reached in the US. The big
benefit to the banks of such a scheme is that the risk weighting on the assets
insured drops sharply: in the US, the risk weighting fell to ~20%, thus boosting
capital ratios. The level of first loss for the banks is typically ~10% of the assets
covered. In terms of the fees for the insurance, using Citigroup as an example,
$7bn of preference shares were issued at a coupon of 8% to cover ~$300bn of
assets. We should note that the Citi scheme also involved the issue of warrants
(which HMT does not seem to be proposing). Other US government asset loss
protection schemes have incurred a fee 3.4%. We should note that the Citi
scheme involved the issue of warrants (which HMT does not seem to be
proposing). Other US government asset loss protection schemes have incurred a
fee 3.4%.
NH:
Impact of the scheme
There is no indication of the size of the scheme from the government. In total, we
believe RBS, Barclays and LBG have ~£900bn exposure to CRE, residential
mortgages, and structured credit. We do not think all of this will need to utilise the
asset protection scheme. We have previously estimated that the size of a ‘bad
bank’ in the UK might need to be £100bn. We will be revisiting assumptions now
that more detail has been provided.
There is no indication of the size of the scheme from the government. In total, we
believe RBS, Barclays and LBG have ~£900bn exposure to CRE, residential
mortgages, and structured credit. We do not think all of this will need to utilise the
asset protection scheme. We have previously estimated that the size of a ‘bad
bank’ in the UK might need to be £100bn. We will be revisiting assumptions now
that more detail has been provided.
NH:
this from Bruce Packard at Evolution Securities
NH:
EVO take: Following various announcements we could see a bounce this morning, in all the banks ex RBS, because the rest of the sector is not being forced to recapitalise, and therefore there is no further dilution to equity shareholders. Fundamentally though we would steer clear and concentrate on sectors which can be analysed rationally. Gordon Brown quoted as saying “We know the essential problem is the resumption of lending.” Underlines just how much “political risk” there is investing in the bank sector. We expect the UK Govt to try to solve the obesity crisis next week, by nationalising the supermarkets, so that they can then resume the supply of cheap doughnuts to fat people.
NH:
Detail: BARC ADR recovered after UK market closed, because bank put out a statement saying PBT would be at least £5.3bn.
RBS has also put out a statement saying it is to converted £5bn of UK Govt prefs into equity (rights price 32p). RBS statement also says that the bank is to report a £7-8bn FY post tax lost. However, this is before any goodwill impairment, and the difference may account for the FT reporting a possible £20bn loss.
LLOY has also put out a statement. They have reiterated their previous guidance in November, and now expect synergies of greater than £1.5bn. No change in HBOS conditions since December. Also in the press, suggestions that UK Govt to get NRK lending again (Peston & Sunday Times). Govt to creates a £100bn insurance scheme so that structured credit assets are not going to see ballooning of capital requirements.
Valuation and Recommendation: We believe banks ex HSBC represent option value. We believe that relieving worries about structured credit asset valuation makes a rights issue by HSBC, which we thought was unlikely, even less likely. Our Rec on HSBC is BUY TP 950p.
RBS has also put out a statement saying it is to converted £5bn of UK Govt prefs into equity (rights price 32p). RBS statement also says that the bank is to report a £7-8bn FY post tax lost. However, this is before any goodwill impairment, and the difference may account for the FT reporting a possible £20bn loss.
LLOY has also put out a statement. They have reiterated their previous guidance in November, and now expect synergies of greater than £1.5bn. No change in HBOS conditions since December. Also in the press, suggestions that UK Govt to get NRK lending again (Peston & Sunday Times). Govt to creates a £100bn insurance scheme so that structured credit assets are not going to see ballooning of capital requirements.
Valuation and Recommendation: We believe banks ex HSBC represent option value. We believe that relieving worries about structured credit asset valuation makes a rights issue by HSBC, which we thought was unlikely, even less likely. Our Rec on HSBC is BUY TP 950p.
NH:
here’s Sandy Chen at Panmure
NH:
he reckons any rally on the back of these proposals will be short lived
NH:
in fact there has been no rally
NH:
so he was wrong on that
NH:
UK Banks
Another bailout, another rally? Not for long
Any euphoria from the plethora of government bank support programmes
announced today will prove short-lived, we think – the further losses from the
combination of deflation and deleveraging will consume these additional
funds, leaving equity shareholders at risk of further dilution.
Another bailout, another rally? Not for long
Any euphoria from the plethora of government bank support programmes
announced today will prove short-lived, we think – the further losses from the
combination of deflation and deleveraging will consume these additional
funds, leaving equity shareholders at risk of further dilution.
NH:
The UK government has announced a plethora of support programmes for the banking
sector. Four of the key initiatives are: 1) a credit guarantee scheme; 2) a guarantee
scheme for asset-backed securities; 3) a £50bn BOE-administered asset purchase facility; and 4) a capital and asset protection scheme. Details are still being released, but press reports indicate that £100bn–200bn of additional government funding could be committed.
sector. Four of the key initiatives are: 1) a credit guarantee scheme; 2) a guarantee
scheme for asset-backed securities; 3) a £50bn BOE-administered asset purchase facility; and 4) a capital and asset protection scheme. Details are still being released, but press reports indicate that £100bn–200bn of additional government funding could be committed.
NH:
The obvious question is: will all this money turn things around? We think there is a high risk that it will not. Our main concerns are that: 1) the loan guarantee/insurance
programmes could cost the government (read: taxpayers) far more than anticipated; 2)
banks could be dragged through a creeping nationalisation that severely dilutes existing shareholders; and 3) none of the above will achieve the desired result, which (we assume) is to lay a firm foundation for economic recovery.
programmes could cost the government (read: taxpayers) far more than anticipated; 2)
banks could be dragged through a creeping nationalisation that severely dilutes existing shareholders; and 3) none of the above will achieve the desired result, which (we assume) is to lay a firm foundation for economic recovery.
NH:
In our view, the loan guarantee/insurance programmes would work if the economic
environment quickly turned out to be better than expected. Unfortunately, things seem
to be going in the opposite direction, with asset prices in particular falling more quickly than anticipated. For the guarantee/insurance programmes, this would mean that defaults rise more quickly than expected (triggering the guarantees) and that losses would be bigger than expected (driven by the falling asset prices). This harks back to our main investment thesis for the banks: that the combination of deflation and deleveraging will drive a rise in loan defaults as well as higher losses on those loans (see our December 2008 note, “This Is A Large Crisis”).
environment quickly turned out to be better than expected. Unfortunately, things seem
to be going in the opposite direction, with asset prices in particular falling more quickly than anticipated. For the guarantee/insurance programmes, this would mean that defaults rise more quickly than expected (triggering the guarantees) and that losses would be bigger than expected (driven by the falling asset prices). This harks back to our main investment thesis for the banks: that the combination of deflation and deleveraging will drive a rise in loan defaults as well as higher losses on those loans (see our December 2008 note, “This Is A Large Crisis”).
NH:
Of course, what makes this bad debt cycle potentially far worse than those of the 1990s, 1980s or 1970s is that the leverage is far higher – in the UK, M4 lending currently stands at 177% of GDP, versus 120% throughout the 1990s and 60–80% from the 1960s through the 1980s. Our estimate of potential bad loans is similar to our estimate of the scale of deleveraging: c£500bn. And this estimate does not include potential further losses on the structured credits – ABS, CDOs, CLOs, synthetic CDOs etc – that are derived from loans and bonds. These potential bad debts dwarf even this additional bailout programme.
NH:
And, in our view, the government’s rising equity stake in RBS – from 58% to 70% – is an indicator of the path ahead for other UK banks as well, driven by further losses that are covered by government protection schemes that are paid for with new equity. And the more the losses, the greater the pressure for an across-the-piste recognition of mark-to-markets – which, in our view, implies that BARC has significantly further to go in terms of recognising mark-to-market losses, especially on its leveraged loans, commercial real estate, monolines and other structured credits portfolios.
Which brings up the key question from our point of view – why would we want to
maintain the suffocating debt levels that we have reached? In some ways, the M4 lending/ GDP levels could be looked at as national private debt versus income; for the 1960s
NH:
through the 1980s, as a nation we lived well within our means in terms of debts; now we have roughly treble the debt burden. Not only have banks cut back on their lending, companies and individuals have cut back on their borrowing as the economic outlook has worsened. We think all this (and the pullback in consumption) is only prudent
behaviour given the macro outlook, and (from a distinctly Austrian/Hayekian viewpoint) the sooner asset prices fall to clearing levels, the sooner we can build a robust foundation for economic recovery.
behaviour given the macro outlook, and (from a distinctly Austrian/Hayekian viewpoint) the sooner asset prices fall to clearing levels, the sooner we can build a robust foundation for economic recovery.
What does all this mean for the UK banks’ share prices? Although we would expect a
short-term uplift from yet another government bailout, we would also expect further
downside as further losses consume these additional funds – leaving existing
shareholders at risk of further dilution. We maintain our severely negative stance on UK banks, and our key Sells on RBS and BARC.
PM:
Good note
NH:
here’s Nomura
NH:
or the former Lehman Brothers banking team
NH:
led by Robert Law
NH:
Investment Conclusion
We would regard the indicated latest plans as positive at the margin, but not changing the key issue of the unknown and potentially unlimited losses of the banking system and therefore whether it will ultimately require further capital injections. We therefore remain negative on the domestic banks and prefer the Far Eastern names and the Swiss banks on a relative basis. We would regard any strength on the measures as a selling opportunity. The RBS statement illustrates the scale of dilution from the effects of the downturn.
We would regard the indicated latest plans as positive at the margin, but not changing the key issue of the unknown and potentially unlimited losses of the banking system and therefore whether it will ultimately require further capital injections. We therefore remain negative on the domestic banks and prefer the Far Eastern names and the Swiss banks on a relative basis. We would regard any strength on the measures as a selling opportunity. The RBS statement illustrates the scale of dilution from the effects of the downturn.
NH:
Summary
RBS statement shows the effects of the downturn on credit quality and the dilution this causes. Negative read across to other names,
especially Lloyds TSB in our view.
RBS statement shows the effects of the downturn on credit quality and the dilution this causes. Negative read across to other names,
especially Lloyds TSB in our view.
Range of measures to support funding and increase credit flow, but with more limited dilution to shareholders at this stage and
keeping the banks as independent institutions. This is positive at the margin.
However, until the scale of ultimate credit losses is
known, we would see the risks of additional capital raising and associated dilution as on the downside, with full scale nationalisation as the likely next step if the latest initiative proves insufficient.
NH:
capital bases, so if this triggers further write-downs to capital it has potentially negative side-effects. At the same time Gordon Brown is
quoted as saying he expects bad assets to be ‘dealt with,’ ie presumably written down. Estimates for the scale of assets here range
from £100-200bn. However, what is important is not the size of the face value of the assets, but the size of the write-downs. We believe
that, for the three domestic banks alone, this could come to £30bn and we don’t think that is likely here.
quoted as saying he expects bad assets to be ‘dealt with,’ ie presumably written down. Estimates for the scale of assets here range
from £100-200bn. However, what is important is not the size of the face value of the assets, but the size of the write-downs. We believe
that, for the three domestic banks alone, this could come to £30bn and we don’t think that is likely here.
NH:
More importantly, however, we think the key issue here is not the financial assets (large though the write-downs and the required capital
to fund those write-downs are), but the likely size of credit quality problems associated with loan books; these are only just starting to go
bad and will be significantly bigger in our view. A bad bank/credit guarantees will not address that, unless they are also extended to
assets going bad in the future ie over the next few years.
BoE asset purchase facility.
to fund those write-downs are), but the likely size of credit quality problems associated with loan books; these are only just starting to go
bad and will be significantly bigger in our view. A bad bank/credit guarantees will not address that, unless they are also extended to
assets going bad in the future ie over the next few years.
BoE asset purchase facility.
NH:
and finally
NH:
JP Morgan
NH:
Asset Protection Scheme: The UK Government will offer capital and asset protection on assets most impacted by the economic environment.
While the first two measures relate to liquidity support for the banking sector, the last two measures are focused on providing implicit capital support. The purchase facility would appear to reflect some influences of the US TARP programme and may be targeted at purchasing more problematic assets such as leveraged loans and lower-rated ABS structures.
While the first two measures relate to liquidity support for the banking sector, the last two measures are focused on providing implicit capital support. The purchase facility would appear to reflect some influences of the US TARP programme and may be targeted at purchasing more problematic assets such as leveraged loans and lower-rated ABS structures.
As with the original US programme, there are likely to be issues with regard to the valuation of the assets and whether these are purchased at on-market or off market levels and no details have yet been provided. The asset protection scheme also reveals some US influences in that it mirrors the role that institutions such as Freddie Mac played in the US financial sector by providing assets wraps to other financial institutions, thereby massively increasing leverage in the financial system.
NH:
We think that this method is being favored by the UK Government given that it allows for potentially maximum impact while having a limited upfront cost. In the event that these measures are successful in reducing counterparty risk, spurring lending and improving liquidity the eventual cost to the UK Government maybe significantly lower than a potential further round of consolidation. To this extent, the guarantee scheme would appear to be an attempt to maximise ‘bang for their buck’ while recognizing that alternatives such as further rounds of capital-raising would likely have placed further pressure on already strained public finances.
The announcements today do not change our core recommendations for the UK banks, where we see increased Government sponsorship as an unequivocal positive for credit asset classes which offer limited issuer flexibility. We therefore remain Overweight Senior and Lower Tier II and see today’s measures as enhancing the credit profile of these asset classes. We remain more cautious with regard to the outlook for more deeply subordinated capital instruments such Tier I where we remain Neutral and see increased Government intervention as adding an extra layer of uncertainty with regard to coupon deferral outcomes. Quite simply, in the event of large absolute losses for the sector, potentially there may be a move towards greater sharing of these losses across the whole capital structure, which would be negative for deeply subordinated credit investors.
PM:
Thanks for all that Neil
11:16AM
PM:
We should also note The Return of the Crock
Readers may also know this former bank as Northern Rock.
PM:
Crock going to be used as the Gov’s own bank — rather than being run down
PM:
Sadly, not in a form we can have much fun with
NH:
so we get our own Freddie or GSE in the shape of the Crock
NH:
they will be chasing new mortgages again
NH:
is that right?
PM:
think so
PM:
Those that finish short-term fixes are not being pushed on elsewhere
NH:
Mortgages and Northern Rock. The Government will also consider further ways of addressing the loss of mortgage lending capacity in markets. As a first step, the Government can confirm that Northern Rock is no longer actively pursuing a policy of rapidly reducing its existing mortgage book. Northern Rock is releasing a separate statement on this.
NH:
that’s the key par from this morning’s announcements on the Crock
NH:
it is back
NH:
and will probably help create some jobs in the Newcastle area
PM:
Any other snippets worth highlighting
PM:
From the various statements
NH:
well, it looks as if QE is coming to the UK
NH:
and in spite of what you may have read
NH:
the BoE will be in charge
NH:
The programme also provides a framework for the Monetary Policy Committee of the Bank of England to use asset purchases for monetary policy purposes should the MPC conclude that this would be a useful additional tool for meeting the inflation target. In such circumstances, the scale of the scheme could be expanded, a further announcement would be made.
NH:
so that’s official now
NH:
the printing press is being switched on
NH:
and then there is also some interesting stuff on capital
NH:
looks like the govt and FSA are going to try and ease regulatory caps
NH:
Capital regulation. In addition, to address any potential uncertainty and to mitigate unintended pro-cyclical effects, the FSA is today publishing a statement clarifying its expectations around bank capital ratios. The FSA’s statement makes clear that there are no new statutory requirements for capital and that it sees the capital buffers built in as part of the recapitalisation exercise as playing a role in both withstanding losses and facilitating continued lending. The FSA’s statement is consistent with the statement by the Basel Committee on Banking Supervision issued on 16 January.
In the longer term, the Government and the FSA believe that it would be preferable for the capital regime to incorporate counter cyclical measures which lead to banks building up buffers in good years which they can draw down during economic downturns, and the FSA and the Bank will be strongly supporting the work by the Financial Stability Forum and Basel Committee in this area.
NH:
and there’s more on this on the FSA website
NH:
it is a bit nerdy but important we think
NH:
but in essence what these new measures will be able to do is allow the banks to ignore a downturn when risk weighting assets
NH:
which sounds unbelievable and pretty risky
PM:
Whole statement is here:
http://www.fsa.gov.uk/pages/Library/Communication/Statements/2009/bank_capital_.shtml
PM:
But the line we love is this
PM:
In particular, we are amending the variable scalar method of converting internal credit risk models from point in time to through the cycle.
PM:
NH:
we will do some more on this later
11:25AM
NH:
good points from Monty below on Hester
NH:
he ducked the really important question
PM:
Which was??
NH:
what on earth Hester was wearing
NH:
see our front page pic this morning
PM:
What was he wearing?
NH:
dunno I thought it was some sort of shooting outfit
NH:
but then I saw the jeans
PM:
Very strange
PM:
Point below about the difficulty of finding people qualified to fix things — not Sir James Crosby designing the bailout
PM:
???
PM:
HBOS?
11:28AM
PM:
OK, to the wider market
NH:
right, we are up
NH:
78 points at 4,225
NH:
of course that has nothing to do with the banks
NH:
but big oil
PM:
And Pearson of course
NH:
a couple of miners
NH:
and some defensive stocks
NH:
like
GlaxoSmithKline (GSK:LSE): Last: 1,278, up 43 (+3.48%), High: 1,280, Low: 1,241, Volume: 2.51m
AstraZeneca (AZN:LSE): Last: 2,771, up 82 (+3.05%), High: 2,790, Low: 2,711, Volume: 1.42m
NH:
and away from equity markets
NH:
what about the GBK
NH:
how has it taken all of this?
PM:
Art 1.4672 against the dollar
PM:
0.90 against hte euro
PM:
So nothing dramatic there
NH:
thought it would have been weaker
NH:
and what about gilts
NH:
10-year??
NH:
looks like it is down 0.934
NH:
pushing the yield up 0.107
PM:
Driss — we cant find a UK CDS price on Reuters
PM:
maybe someone else has one
11:33AM
11:33AM
NH:
now for something completely different
PM:
Defamation proceedings will be commenced tomorrow (Monday) in London by Roman Abramovich against the publishers of The Sunday Times.
This follows the publication by them of false claims that he wants to sell his interest in Chelsea FC. Mr Abramovich has already made quite clear, through the directors of Chelsea, that he has no intention of doing so and that neither he nor any of his appointed representatives has been pursuing any such course of action.
NH:
ouch
PM:
Thanks for whoever provided that link below
NH:
that looks heavy
NH:
what did the original story say?
NH:
who penned it?
PM:
Our good friend John Waples
PM:
Who is a very good hack
PM:
V aggressive statement from Mr Abramovich
PM:
All sorts of rumours going around about Mr A — but we dont want to join this particular action
PM:
NH:
deffo not
PM:
ROMAN Abramovich, the Russian billionaire, has been taking soundings over selling Chelsea football club to Gulf Arabs.
Representatives of the oligarch have travelled to Saudi Arabia and Dubai to elicit interest in the club, Gulf sources have told The Sunday Times.
At least one of the meetings was with members of the Saudi royal family. There has been no evidence so far of a potential buyer.
PM:
But Mr A denying that outright
PM:
One to watch
NH:
indeed
NH:
i expect this will run
11:36AM
PM:
Anything else to look at this morning Neil??
NH:
RBS – off 42%
NH:
hang on
PM:
Okay — 42% back to the banks
NH:
in auction now
NH:
just gapped lower
PM:
Barc holding above a quid – just
PM:
Lloyds now down 12.6%
PM:
85p
NH:
RBS uncrossed
PM:
Standard and Smug being hit a bit as well
NH:
at 19.9p
NH:
this really is not going well
NH:
how long before it is a penny dreadful?
NH:
the UK’s grand banking plan
NH:
not doing anything to calm the market
NH:
nothing at all
11:40AM
NH:
right, we will come back to the banks
NH:
but first a little bit of RAW
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
NH:
some speculative buying of Lonmin this morning
Lonmin (LMI:LSE): Last: 953.50, up 113.5 (+13.51%), High: 957.00, Low: 870.00, Volume: 456.27k
NH:
and also a real buzz around national express
NH:
which last hit the headlines, when chairman David Ross was ousted
NH:
but this story is Ross
NH:
the word in the market is that one of their biggest shareholders is plotting something
NH:
possibily a break up bid
PM:
Who??
NH:
Jorge Cosmen
NH:
a Spanish guy
PM:
Who he??
NH:
currently a non-executive director
NH:
has been adding to his stake in NEX recently
NH:
now up around 20%
NH:
he got most of that stake when he sold his business to NEX a few years ago
PM:
(Barcl back below a quid )
NH:
Mr Cosmen was appointed to the board in December 2005 after National Express completed the takeover of Spanish transport firm Alsa.
He was previously corporate manager for the Alsa Group from 1995, becoming chairman in 1999.
He was previously corporate manager for the Alsa Group from 1995, becoming chairman in 1999.
NH:
trying to get some detail on this rumour
NH:
but some pretty good bandits are talking about it
NH:
and I think Mr Cosmen is a Spanish businessman who has managed to preserve most of his capital
NH:
the only stumbling block could be the fact that NEX has to refinance EUR500m of debt
PM:
Thanks for that
NH:
worth keeping a watch on
National Express (NEX:LSE): Last: 428.00, up 8.25 (+1.97%), High: 433.50, Low: 421.00, Volume: 129.70k
11:45AM
PM:
Very good point below from Pitbull
PM:
When Crock went down we all said — at least its not RBS — then we’d be in real trouble…
PM:
PM:
RBS still below 20p
NH:
just going back to NEX for a minute
NH:
does look like it could be a break up target
NH:
here’s a recent note from RBS
NH:
Operationally NEX faces similar challenges to the rest of the sector
National Express (NEX) faces the prospect of a downturn at its rail business. The
subsidy profile at East Anglia is not onerous but still requires growth, so we think
profits will be impacted, albeit not by as much as elsewhere. The major concerns
surround East Coast, where revenue growth of c10% is required. We are more
positive than some for long distance given the ability to yield-manage (which is not
the case for commuter rail). Therefore, the downturn appears to be more than
factored in now.
National Express (NEX) faces the prospect of a downturn at its rail business. The
subsidy profile at East Anglia is not onerous but still requires growth, so we think
profits will be impacted, albeit not by as much as elsewhere. The major concerns
surround East Coast, where revenue growth of c10% is required. We are more
positive than some for long distance given the ability to yield-manage (which is not
the case for commuter rail). Therefore, the downturn appears to be more than
factored in now.
NH:
Even Spanish concerns do not explain the valuation disconnect
Along with rail, the market is still struggling to understand the Spanish operation
(even though the company has spent a lot of time attempting to explain it).
Although we believe in the quality of this business, we also believe fares are
unlikely to rise significantly in 2009 given the emergency fare rise in 2008 to cover
increased fuel costs (which, of course are now lower). However, sterling-reported
profits should still be up in 2009 due to translation.
Along with rail, the market is still struggling to understand the Spanish operation
(even though the company has spent a lot of time attempting to explain it).
Although we believe in the quality of this business, we also believe fares are
unlikely to rise significantly in 2009 given the emergency fare rise in 2008 to cover
increased fuel costs (which, of course are now lower). However, sterling-reported
profits should still be up in 2009 due to translation.
NH:
The big difference is over refinancing risk
The biggest issue impacting NEX is re-financing, with €540m of debt falling due
in February 2010. The problem we have is that in normal circumstances this would
not be an issue, with NEX perhaps paying a higher rate to renew facilities.
However, in the current circumstances we do not know what will happen. At the
very least we believe it is unrealistic to believe the company will grow its dividend
by 10%, as previously stated.
Valuation: SOTP-based price target moves from 700p to 500p
We retain our Neutral rating. Although our SOTP analysis puts NEX’s intrinsic
fair value at 576p, we apply a 15% discount to reflect refinancing risk, leading to
our new 500p price target (see Appendix, page 28).
The biggest issue impacting NEX is re-financing, with €540m of debt falling due
in February 2010. The problem we have is that in normal circumstances this would
not be an issue, with NEX perhaps paying a higher rate to renew facilities.
However, in the current circumstances we do not know what will happen. At the
very least we believe it is unrealistic to believe the company will grow its dividend
by 10%, as previously stated.
Valuation: SOTP-based price target moves from 700p to 500p
We retain our Neutral rating. Although our SOTP analysis puts NEX’s intrinsic
fair value at 576p, we apply a 15% discount to reflect refinancing risk, leading to
our new 500p price target (see Appendix, page 28).
11:46AM
PM:
Back to Barc for a mo
PM:
Trading 2p higher at 100p exactly
NH:
shares have been all over the place this morning
NH:
stock got as high as 122.8p
NH:
as the market looked at this flurry of announcements and breathed a huge sigh of relief that fears of full nationalisation
NH:
or banks being forced to dump assets into a bad bank had not come true
NH:
but pretty quickly collapsed in a heap
NH:
as the market realised that Friday’s statement on profits
NH:
which was rushed out in blind panic
NH:
was not as good as it seemed on first glance
NH:
and traders came to the conclusion that the market will shun Barclays until it finally gives some greater transparency on its risky assets
PM:
now, just going back to Friday’s statement from Barc that profits would be ahead of expectations
PM:
what’s the analyst reaction to that??
NH:
well, no one’s impressed
NH:
here’s Merrill Lynch
NH:
Much higher RWA growth than expected
NH:
On Friday evening, Barclays responded to the 25% drop in its share price by
issuing a statement saying that a) PBT should be ‘well ahead’ of consensus of
£5.3bn (ML(e) £4.6bn) and b) the core tier 1 ratio (on the co. basis) will be ~6.5%.
We were surprised that the strong profit performance has not translated into
better capital ratios. Barclays has produced 2H08 PBT of >£2.5bn, but seen
110bps of core tier 1 ratio deterioration. We think the primary cause of this was
faster RWA growth than expected: assuming a profit of £5.8bn for the year would
imply RWAs of ~£445bn, versus £353bn at 1H08 and ML(e) £387bn at year end.
We believe this was due to a combination of currency moves (RWAs in USD and
EUR) and Basel 2 procyclicality.
issuing a statement saying that a) PBT should be ‘well ahead’ of consensus of
£5.3bn (ML(e) £4.6bn) and b) the core tier 1 ratio (on the co. basis) will be ~6.5%.
We were surprised that the strong profit performance has not translated into
better capital ratios. Barclays has produced 2H08 PBT of >£2.5bn, but seen
110bps of core tier 1 ratio deterioration. We think the primary cause of this was
faster RWA growth than expected: assuming a profit of £5.8bn for the year would
imply RWAs of ~£445bn, versus £353bn at 1H08 and ML(e) £387bn at year end.
We believe this was due to a combination of currency moves (RWAs in USD and
EUR) and Basel 2 procyclicality.
NH:
6.2% core tier 1 ratio might cause concern
NH:
Barclays’ expected core tier 1 ratio of ~6.5%, includes ~30bps of regulatory
deductions, which we prefer to ignore, giving a year end core tier 1 ratio of ~6.2%
on our basis. Given the capital position of European peer group banks (sector
average 7.2%), we think that Barclays’ relative position looks less comfortable
than before this announcement. In addition, any further GBP weakness could
cause capital ratios to suffer further, owing to the lack of hedging in the capital
base.
deductions, which we prefer to ignore, giving a year end core tier 1 ratio of ~6.2%
on our basis. Given the capital position of European peer group banks (sector
average 7.2%), we think that Barclays’ relative position looks less comfortable
than before this announcement. In addition, any further GBP weakness could
cause capital ratios to suffer further, owing to the lack of hedging in the capital
base.
NH:
and here’s Dresdner
NH:
this is pretty bearish
NH:
We are concerned that the profit update is insufficient to bring investor
concerns down. A possible future shortage of capital following further
asset deterioration could eventually push the bank into the arms of the
government if existing shareholders are unwilling or unable to provide yet
further support and share price weakness persists. The support terms
offered by the UK government may not be as favourable as given to its
domestic peers. We reiterate our Underweight recommendation on
Barclays. Barclays 5yr senior CDS is currently trading at 155/175bps.
concerns down. A possible future shortage of capital following further
asset deterioration could eventually push the bank into the arms of the
government if existing shareholders are unwilling or unable to provide yet
further support and share price weakness persists. The support terms
offered by the UK government may not be as favourable as given to its
domestic peers. We reiterate our Underweight recommendation on
Barclays. Barclays 5yr senior CDS is currently trading at 155/175bps.
NH:
Barclays’ expectation of a pre-tax profit of at least £5.3bn for FY2008 is not bad
in an environment where many major competitors report multi-billion losses.
However, we doubt whether this pre-announcement of the results that are to be
fully disclosed on 17 February is sufficient to calm down investor fears and
prevent the share price from dropping even further. Ongoing share price
weakness could trigger a self-fulling prophecy whereby the decreasing ability to
recapitalise the bank in the market and any subsequent negative rating actions
could ultimately trigger government intervention.
in an environment where many major competitors report multi-billion losses.
However, we doubt whether this pre-announcement of the results that are to be
fully disclosed on 17 February is sufficient to calm down investor fears and
prevent the share price from dropping even further. Ongoing share price
weakness could trigger a self-fulling prophecy whereby the decreasing ability to
recapitalise the bank in the market and any subsequent negative rating actions
could ultimately trigger government intervention.
NH:
We relate the 27% drop in the share price last Friday to several factors;
concerns about FY08 results after the horrifying 4Q08 results reported by US
peers, and about Barclays’ ability to withstand quickly deteriorating
macroeconomic market conditions. The risk that Barclays eventually may have
to turn to the government for capital injections triggers the concern that Barclays’
support terms could be less favourable and may ultimately lead to full
nationalisation and leave shareholders empty handed. Also, we suspect existing
shareholders to be reluctant to support the group after the most recent
recapitalisation effort, uncertainty about how much capital is ulitimately needed,
and heavily incurred investment losses on existing Barclays exposure.The ability
to short sell stocks again in the UK may have exacerbated to drop in the share
price.
concerns about FY08 results after the horrifying 4Q08 results reported by US
peers, and about Barclays’ ability to withstand quickly deteriorating
macroeconomic market conditions. The risk that Barclays eventually may have
to turn to the government for capital injections triggers the concern that Barclays’
support terms could be less favourable and may ultimately lead to full
nationalisation and leave shareholders empty handed. Also, we suspect existing
shareholders to be reluctant to support the group after the most recent
recapitalisation effort, uncertainty about how much capital is ulitimately needed,
and heavily incurred investment losses on existing Barclays exposure.The ability
to short sell stocks again in the UK may have exacerbated to drop in the share
price.
PM:
that’s pretty bearish
NH:
and here’s Cazenove
NH:
who are house broker
NH:
and a bit more positive
NH:
although they have cut forecasts
NH:
Barclays issued a statement on Friday evening, 16 January, in which it stated that it knows of no justification for the fall in the share price (25%). Further that it plans to report the full year results on the 17 February as expected and the results will include:
Profit before tax “well ahead” of consensus of £5,300m
Equity tier 1 of approximately 6.5% including the benefit of the Mandatorily Convertible Notes
(MCN)
NH:
Tier 1 of approximately 9.5% on the same basis
We expect that the statement will eradicate the wilder speculation that hurt the share price late on Friday. Though the revised capital ratios will feed the anticipation of another round of government
intervention, a growing probability for all the domestic banks, the operating performance at Barclays continues to compare favourably against its peers in our view.
We expect that the statement will eradicate the wilder speculation that hurt the share price late on Friday. Though the revised capital ratios will feed the anticipation of another round of government
intervention, a growing probability for all the domestic banks, the operating performance at Barclays continues to compare favourably against its peers in our view.
NH:
As detailed further in the note, we reduce our underlying pre tax profits by £1.3bn and EPS by 29%. We believe the reduction largely arises at Barclays Capital.
More importantly we have lowered our equity tier 1 and tier 1 ratios by 90bp and 130bp respectively. The main driver of the reduction in the capital ratios is currency translation. We estimate that year end exchange rates caused a 13% increase in risk weighted assets.
More importantly we have lowered our equity tier 1 and tier 1 ratios by 90bp and 130bp respectively. The main driver of the reduction in the capital ratios is currency translation. We estimate that year end exchange rates caused a 13% increase in risk weighted assets.
NH:
so big downgrades in there
NH:
here’s some more from the note
NH:
On an underlying basis, we estimate that it implies credit market writedowns total c. £3.0bn in the second half and higher than our prior estimate of £2.0bn.
Since we struck our estimates, the fiveyear credit default swaps of Barclays widened out to end the year at 159bp compared to 112bp at 31 October. We estimate that this generated a fair value gain on own debt of £0.3bn.
NH:
Therefore we assume underlying profits of £7.8bn, £0.5bn lower than previously and we expect the majority of the shortfall arises at Barclays Capital consistent with the challenging trading conditions in the final weeks of last year.
A number of banks have reported worse than expected results from investment banking for the final quarter of 2008. There were a high number of lower credit ratings against a background of a general marked weakening of credit conditions. While we have yet to see all banks report, it appears that Barclays Capital will once again have performed at least as well as the industry.
NH:
We
expect that Barclays Capital was profitable in 2008 (c. £1.5bn including £1.2bn fair value gains on own debt and £5bn credit writedowns).
At the time of the trading statement on 31 October Barclays expected the equity tier 1 ratio “to be broadly in line” with the 30 June 2008 proforma ratio of 6.3%. The guidance was prior to the benefit of the £3.75bn MCNs which we estimate add c. 90bp.
expect that Barclays Capital was profitable in 2008 (c. £1.5bn including £1.2bn fair value gains on own debt and £5bn credit writedowns).
At the time of the trading statement on 31 October Barclays expected the equity tier 1 ratio “to be broadly in line” with the 30 June 2008 proforma ratio of 6.3%. The guidance was prior to the benefit of the £3.75bn MCNs which we estimate add c. 90bp.
NH:
Therefore, with the MCNs, the equity tier 1 guidance was 7.2% at 31 October. Barclays now expects the equity tier 1 to be some 70bp lower at 6.5%
PM:
Remember the mandatory prefs convert at 153p
PM:
That will be an irritating cheque for investors to write
NH:
it will
NH:
if Barc have to raise more capital
NH:
and I am not saying they will
NH:
HMT might be the only port of call
NH:
and that would be an interesting conversation
NH:
as would the terms of the deal
NH:
talking of banks in other countries
NH:
KBC has taken a thump this morning
NH:
and it is all down to the Moody’s statement on CDO’s which came out Friday
NH:
here’s some comment from RBS On this
NH:
KBC share price down 16%, likely on the back of Moody’s announcement that it has revised assumptions on corporate synthetic CDOs (including 30% increase in default probability for corporate credits + higher correlations). The stock was off significantly last week as well, giving rise to a number of unfounded rumours including large exposures to Irish real estate (following Anlgo Irish nationalisation), Russia, as well as a forced stake sale by majority shareholder, Ancora. Seems that the driver was in fact the imminent downgrade by Moody’s of a large swathe of KBC’s corporate CDO book.
NH:
Based on initial assessment, Moody’s expects to downgrade the large majority of corporate synthetic CDO ratings across 900 global transactions by 3-7 notches. KBC has so far announced €4bn of markdown impact on its €8.7bn CDO portfolio. With each notch representing €0.2bn additional mark = upto €1.4bn of further marks from here.
NH:
Readthrough: As we highlighted in our ‘Hook, Monoline and Sinker’ report (18 December, attached), although 1/3 of monoline notional exposures related to US RMBS (over $120bn for banks globally), some 2/3 (over $230bn) related to other asset classes including corporate CDOs, CMBS and CLOs. In our estimates, these contagion risks represent north of $30bn of potential further monoline charges with banks most exposed being Deutsche Bank (estimated $44bn notional to contagion areas), Barclays ($32bn), Natixis ($24bn), SocGen ($21bn) and BNP Paribas/CASA ($20bn). Reiterate Sell ratings on Deutsche Bank/Barclays and cautious stance on French banks given relatively low starting point core T1 ratios, notably BNP Paribas (downgraded to Hold on 27 November 2008, Sailing close to the wind).
PM:
Hmm — thanks for that
PM:
last par should have been in quote box, obviously
11:55AM
PM:
Situation — so so so fluid
PM:
Lloyds getting thumped now — down 22.5p at 76p
NH:
wow
PM:
23% drop
NH:
and they put out what seemed to be a decent-ish trading statement
NH:
The Board confirms that Lloyds TSB has traded satisfactorily since its update to the market in its Interim Management Statement on 3 November 2008 and its subsequent market update on 12 December 2008. On 12 December 2008, HBOS issued a trading update which highlighted increasingly difficult market conditions, an acceleration in the deterioration in credit quality, further sharp falls in estimated asset values and pressure on net interest margins due to significant reductions in UK base rates. The Board understands from HBOS that although the trends announced by HBOS continue there has been no significant change in HBOS’s trading position from that announced by HBOS in its trading update.
PM:
And how about HSBC — former Smug Bank?
NH:
they are down
NH:
off 22.7p at 513.5p
NH:
but they are Smug again
PM:
How so??
NH:
well, check this statement
NH:
HSBC has not sought capital support from the UK government and cannot envisage circumstances where such action would be necessary.
HSBC has long been one of the world’s most strongly capitalised banks and is committed to maintaining this position.
NH:
how Smug is that?
PM:
NH:
but I guess it does not rule out a capital raise from other sources
PM:
Been metioned below — complete capitulation amongst Irish banks
PM:
AIB off 45%
NH:
jeepers
PM:
Bank of Ireland down 33%
PM:
Is the Irish economy big enough to nationalise these two?
PM:
Im not sure sure
12:00PM
NH:
looks like we have got anothe big profits warning on our hands – from BASF
NH:
BASF SAYS ITS BUSINESS DECLINED `SIGNIFICANTLY’ IN DECEMBER
NH:
and the market is starting to come off now
NH:
ow up just 45 points at 4,192
NH:
mind you, with the US shut for President’s Day
NH:
it is possible we might be able to hold some sort of gain
NH:
Barc down on the day now
PM:
PM:
97.5p — so Friday’s fall wasn’t ludicrous at all
PM:
it was clarvoyant
12:02PM
NH:
right a few things to finish up on
NH:
Wolseley
NH:
rumours around at the weekend of a rights issue on the way from the building materials company
NH:
THE building-materials giant Wolseley is in detailed talks with investors and private-equity groups to raise between £200m and £400m in a rescue fundraising.
The company is one of dozens of quoted groups that are preparing to raise hundreds of millions of pounds in the coming weeks to reduce ballooning corporate borrowings.
Chip Hornsby, chief executive of the £2.2 billion company, has been in talks with investors. He is also negotiating with private-equity groups about raising additional capital in a private placement. A final decision on how much is required and whether to proceed will be made in the next three weeks at the end of its financial half-year.
Wolseley runs an international network of 5,000 branches in 27 countries, including the Plumb Center chain in Britain. Its debts have soared to £2.7 billion due to currency fluctuations. In recent months, the company has drastically scaled back its US arm, laid off more than 5,300 workers and reported a 50% drop in its most recent quarterly profits.
NH:
that was from the Sunday Times
NH:
anyway no statement yet from the company which is surprising
NH:
and analysts are none too impressed
NH:
here’s Liberum
NH:
Wolseley – Sunday Times and FT (Monday) both report that Wolseley is considering raising £200m to £400m from investors – assuming that money were raised at 275p (20% discount) – you’d get dilution of 6.5%-11.2% (EPS 30.1-28.5p – Jul09 pro-forma), and net debt EBITDA would be 2.65x-3.0x, new shares raised would be 11%-22% of existing shares.
Expected market reaction – the amount speculated is not enough to get out of the woods definitively, in terms of getting away from covenants AND giving co enough balance sheet to become acquisitive again – so the re-rating you would get on an issue may not be as big as you would see with a bigger issue (at least £600m) – full recovery PER is around 16x, and this size of issue may only get you to 12-13x – which implies a share price of 360p-370p
- I’d expect to see shares drift from here (345p) towards 300p ahead of trading update next week, but 300p would be a good buying level again
NH:
and this is Oriel Securities
NH:
Rumours of a Wolseley rights issue have been circulating the City since December.
They’ve now hit the press
• Management has done everything it can to avoid this scenario – brutal restructuring,
dividend cuts, capex reined in. If a rights issue is required trading conditions must have
lurched downwards yet again (weak sterling doesn’t help either)
• £400m is the figure being bandied around – that’s unlikely to be enough to ensure
covenants are banished as an issue as we enter the most difficult trading environment in
the company’s history – we’d expect the figure to be higher in order to ensure no
embarrassing second bite at the cherry is required
They’ve now hit the press
• Management has done everything it can to avoid this scenario – brutal restructuring,
dividend cuts, capex reined in. If a rights issue is required trading conditions must have
lurched downwards yet again (weak sterling doesn’t help either)
• £400m is the figure being bandied around – that’s unlikely to be enough to ensure
covenants are banished as an issue as we enter the most difficult trading environment in
the company’s history – we’d expect the figure to be higher in order to ensure no
embarrassing second bite at the cherry is required
NH:
• There is also a capital raising to private equity being suggested. PE won’t be happy to
simply own shares – more likely may be sale of a business (Stock? North America?)
• Go early, go large is the mantra and the fact that Wolseley’s covenant test is at the end
of this month may necessitate it being first out of the blocks…
• Trading update next Monday and interims due 23rd March.
simply own shares – more likely may be sale of a business (Stock? North America?)
• Go early, go large is the mantra and the fact that Wolseley’s covenant test is at the end
of this month may necessitate it being first out of the blocks…
• Trading update next Monday and interims due 23rd March.
NH:
And Deutsche Bank
NH:
The Sunday Times has reported that Wolseley is talking to investors about
raising £300-£500m in new funds. The paper reports that the co. will make
a final decision on how much to raise at the end of its financial half year (end
Jan). This suggests to us that there has been a further deterioration in trading
and that the company is getting closer to its debt covenants. We recently
downgraded our forecasts and modelled a peak net debt/EBITDA of 3.9x vs
the covenants at 3.5x. Using an arbitrary -20% discount on new equity then
it implies16% to 27% new shares and -8% to -12% EPS dilution. The peak
Net Debt/EBITDA would fall to between 3.3x and 3.0x vs the 3.5x covenant.
Given the level of risk on the earnings number, this suggests to us that the
£300m to £500m level might actually be too low.
raising £300-£500m in new funds. The paper reports that the co. will make
a final decision on how much to raise at the end of its financial half year (end
Jan). This suggests to us that there has been a further deterioration in trading
and that the company is getting closer to its debt covenants. We recently
downgraded our forecasts and modelled a peak net debt/EBITDA of 3.9x vs
the covenants at 3.5x. Using an arbitrary -20% discount on new equity then
it implies16% to 27% new shares and -8% to -12% EPS dilution. The peak
Net Debt/EBITDA would fall to between 3.3x and 3.0x vs the 3.5x covenant.
Given the level of risk on the earnings number, this suggests to us that the
£300m to £500m level might actually be too low.
NH:
To bring the net debt/
EBITDA down to 2.5x would in our opinion require an £800m rights issue
which at a -20% discount we believe would be -16% dilutive. At Friday’s
close, on our current forecasts Wolseley traded on 13.0x calendarised floor
09e earnings. At a 20% discount a £300m to £500m capital raising would
imply 14.1 to 14.7x adjusted floor earnings. Whilst we believe the market
would be happy to pay a higher multiple on floor earnings if the balance
sheet was fully repaired (i.e. net debt/EBITDA of 2.5x), we are not sure that
the balance sheet risk would completely disappear with a £300m to £500m
raising and downside risk to our EBITA forecasts is of course not eliminated.
That said we expect there will be many that will want to participate given
the “first in, first out” possibility that surrounds Wolseley,although we caution
that the upside from the level at which new capital might be raised may
be limited, especially vs Friday’s close. Expect negative reaction this morning
EBITDA down to 2.5x would in our opinion require an £800m rights issue
which at a -20% discount we believe would be -16% dilutive. At Friday’s
close, on our current forecasts Wolseley traded on 13.0x calendarised floor
09e earnings. At a 20% discount a £300m to £500m capital raising would
imply 14.1 to 14.7x adjusted floor earnings. Whilst we believe the market
would be happy to pay a higher multiple on floor earnings if the balance
sheet was fully repaired (i.e. net debt/EBITDA of 2.5x), we are not sure that
the balance sheet risk would completely disappear with a £300m to £500m
raising and downside risk to our EBITA forecasts is of course not eliminated.
That said we expect there will be many that will want to participate given
the “first in, first out” possibility that surrounds Wolseley,although we caution
that the upside from the level at which new capital might be raised may
be limited, especially vs Friday’s close. Expect negative reaction this morning
PM:
Cheers for that
12:06PM
PM:
Right — should round things up now
PM:
barclays trying to fight back — but failing — at 97.8
Royal Bank of Scotland Group (RBS:LSE): Last: 20.40, down 14.3 (-41.21%), High: 34.90, Low: 18.90, Volume: 223.16m
Lloyds TSB Group (LLOY:LSE): Last: 79.60, down 18.8 (-19.11%), High: 105.70, Low: 78.00, Volume: 46.53m
NH:
what a debut for the Lloyds Banking Group
PM:
ha
PM:
have to get the ticker name changed
PM:
Should be Lloyds Banking Group
NH:
and finally
Pearson (PSON:LSE): Last: 628.50, up 30.5 (+5.10%), High: 633.50, Low: 610.00, Volume: 3.53m
NH:
right, that’s it from me
NH:
cept to put up this note on RBS from Alex Potter at Collins Stewart
NH:
: RBS issued a further profit warning – £7-8bn FY08 attributable loss
RBS’s 1H08 attributable loss was £761m so 2H08 (especially Q4) were responsible. The retail and commercial banks appear to be trading reasonably steadily (albeit in the face of a global recession) though this is more than offset by the markets businesses and credit market write-downs. With the industry now bringing asset marks further down, we feel Barclays’ level of write-downs likely to increase materially and retain our SELL call on Barclays. RBS is also looking at £10-15bn of goodwill writedowns on ABN; happily, these have no cash or regulatory capital effects.
RBS’s 1H08 attributable loss was £761m so 2H08 (especially Q4) were responsible. The retail and commercial banks appear to be trading reasonably steadily (albeit in the face of a global recession) though this is more than offset by the markets businesses and credit market write-downs. With the industry now bringing asset marks further down, we feel Barclays’ level of write-downs likely to increase materially and retain our SELL call on Barclays. RBS is also looking at £10-15bn of goodwill writedowns on ABN; happily, these have no cash or regulatory capital effects.
NH:
¦ RBS is issuing £5bn additional equity, redeeming pref capital
The government pref capital is being refinanced in exchange for £5bn of equity via open offer, underwritten by the UK government. The offer is at 31.75p (less than half the 65.5p price of the last injection). It will take equity Tier 1 capital from c.7% to c.8%, we estimate. Barclays remains at 7.2% and Lloyds Banking is on 6.5% albeit including our £13.5bn estimated write-downs on fair value accounting the HBoS balance sheet.
The government pref capital is being refinanced in exchange for £5bn of equity via open offer, underwritten by the UK government. The offer is at 31.75p (less than half the 65.5p price of the last injection). It will take equity Tier 1 capital from c.7% to c.8%, we estimate. Barclays remains at 7.2% and Lloyds Banking is on 6.5% albeit including our £13.5bn estimated write-downs on fair value accounting the HBoS balance sheet.
NH:
¦ RBS remains cheap but government likely to own c.70%
RBS’s tangible book value will fall from 90p to 73p per share on this capital action, we estimate. However, the £600m of preference dividend will no longer be paid, improved cashflow to equity. The P/BV inflates from 0.39x to 0.47x (BARC: 0.53x, LLOY: 0.54x) leaving RBS appearing cheap (and heavily written-down already) though the high level of government ownership and involvement mean this stock is the “restructuring/recovery option” in the sector and we cannot be more excited than a HOLD call.
RBS’s tangible book value will fall from 90p to 73p per share on this capital action, we estimate. However, the £600m of preference dividend will no longer be paid, improved cashflow to equity. The P/BV inflates from 0.39x to 0.47x (BARC: 0.53x, LLOY: 0.54x) leaving RBS appearing cheap (and heavily written-down already) though the high level of government ownership and involvement mean this stock is the “restructuring/recovery option” in the sector and we cannot be more excited than a HOLD call.
NH:
Does Lloyds Banking need the same treatment?
“New Lloyds” shows an equity Tier 1 ratio of 6.5% albeit this includes materially more write-downs (via acquisition accounting) than the peers. That said, the risk of further capital injections into the sector cannot be discounted. Assuming similar treatments, we could estimate an issue price of c.90p, raising the equity Tier 1 ratio to 7.4% and deflating the tangible BVps from 182p to 158p, leaving Lloyds on 0.62x tangible-and-recapitalised book value. We are HOLDers of Lloyds but remain cautious that further injections cannot be ruled out.
¦ Barclays not yet discounting more capital
We remain SELLers – the risk is that its level of conservatism toward write-downs has not been high enough. Today’s RBS outlook statement includes the phrase “more… credit losses seem certain”. Barclays is reasonably well capitalised (6.5-7% ET1 on today’s statement) though other banks have shown how fast this can be eroded. Finally, we would caution that government capital injections are becoming more expensive through time and that Barclays’ delay in raising capital could cost it dearly.
“New Lloyds” shows an equity Tier 1 ratio of 6.5% albeit this includes materially more write-downs (via acquisition accounting) than the peers. That said, the risk of further capital injections into the sector cannot be discounted. Assuming similar treatments, we could estimate an issue price of c.90p, raising the equity Tier 1 ratio to 7.4% and deflating the tangible BVps from 182p to 158p, leaving Lloyds on 0.62x tangible-and-recapitalised book value. We are HOLDers of Lloyds but remain cautious that further injections cannot be ruled out.
¦ Barclays not yet discounting more capital
We remain SELLers – the risk is that its level of conservatism toward write-downs has not been high enough. Today’s RBS outlook statement includes the phrase “more… credit losses seem certain”. Barclays is reasonably well capitalised (6.5-7% ET1 on today’s statement) though other banks have shown how fast this can be eroded. Finally, we would caution that government capital injections are becoming more expensive through time and that Barclays’ delay in raising capital could cost it dearly.
NH:
oh and I have some feedback from the RBS conferenc call
NH:
which must have been real fun
NH:
There were a couple of questions regarding RBS’s losses within GBM and
the extent to which losses are now expanding from within credit markets
to the rest of the balance sheet. RBS said that a series of things that
happened in Q4 that they hope will be a off thing – eg Iceland,
Madoff…. Government support for economies, asset buying should gain
traction so some “left field” items should reduce in their magnitude and
occurrence. Admits it doubled up (in corporate loans) at the wrong time
with ABN purchase.
the extent to which losses are now expanding from within credit markets
to the rest of the balance sheet. RBS said that a series of things that
happened in Q4 that they hope will be a off thing – eg Iceland,
Madoff…. Government support for economies, asset buying should gain
traction so some “left field” items should reduce in their magnitude and
occurrence. Admits it doubled up (in corporate loans) at the wrong time
with ABN purchase.
NH:
Asked for more colour in the GBM losses – said these were due to a
number of factors, including losses on disposals, additional reserves
against counterparty risks/mkt spreads, losses in equity business,
principal strategy positions, correlation trading activities, carrying
value of assets in trading portfolio.
number of factors, including losses on disposals, additional reserves
against counterparty risks/mkt spreads, losses in equity business,
principal strategy positions, correlation trading activities, carrying
value of assets in trading portfolio.
NH:
RBS was asked about its thoughts on the government participation in
RBS to possibly around 70%. RBS responded that it thinks it appropriate
that the market is now focusing on core tier 1 – this is crucial and is
a penny that has yet to drop fully, particularly in the US. RBS says its
goal to be standalone with no govt involvement but at the moment they
have no hang ups over any particular percentage of any of its
shareholders.
RBS to possibly around 70%. RBS responded that it thinks it appropriate
that the market is now focusing on core tier 1 – this is crucial and is
a penny that has yet to drop fully, particularly in the US. RBS says its
goal to be standalone with no govt involvement but at the moment they
have no hang ups over any particular percentage of any of its
shareholders.
NH:
When asked about the ultimate cost to RBS of govt help – RBS replied
it had “Absolutely no clue”.
it had “Absolutely no clue”.
NH:
Views on concentration risk – Madoff/Lyondall – are they continuing?
Hester said that the negative surprise when joining RBS is that some of
the risk concentrations are inappropriate and RBS has to work its way
through that.
Asked how many single name exposures of similar/greater size to
Lyondell Chemical there were. RBS said that this is one of the issues
for more disclosures at year end – there are is not a vast number of
this scale (and credit stress) but there are not none either.
Hester said that the negative surprise when joining RBS is that some of
the risk concentrations are inappropriate and RBS has to work its way
through that.
Asked how many single name exposures of similar/greater size to
Lyondell Chemical there were. RBS said that this is one of the issues
for more disclosures at year end – there are is not a vast number of
this scale (and credit stress) but there are not none either.
NH:
Disposals were touched upon but there was little comment… won’t say
anything about Citizens.
anything about Citizens.
NH:
* Re capital ratios – says expects capital ratio will come down from
here but hopefully not to 4%.
here but hopefully not to 4%.
NH:
There was a question on what could trigger full nationalisation? RBS
said it was not aware of any technical risks. Nationalisation has been
discussed with the govt but only in the sense that the govt has made it
clear it would prefer not to nationalise RBS.
said it was not aware of any technical risks. Nationalisation has been
discussed with the govt but only in the sense that the govt has made it
clear it would prefer not to nationalise RBS.
NH:
Asked about AFS reserves – RBS said there would only be small
writedowns.
writedowns.
PM:
goodness me
12:11PM
PM:
On that cheery note
NH:
it is time to go
PM:
Yep – thanks for joining us today
PM:
back as usual tomorrow at 11am …
PM:
BUT….
PM:
There is also a special from Neil and Stacy tomorrow afternoon
PM:
Exact timing to be advertised — but probably 3/3.30
PM:
And thanks for all the comments
NH:
and also, Sam’s post on the new FSA plans on capital ratios is now up
NH:
well worth looking at
NH:
http://v2.ftalphaville.ft.com/blog/2009/01/19/51323/fsa-relaxes-bank-capital-rules/
PM:
Also worth reading this from Wolfgang Munchau — relating to discussion below
PM:
But we are off
PM:
Seeya