Markets live chat transcript for the chat ending at 12:03 on 29 Jan 2009. Participants in this chat were: Neil Hume, FT (NH) Bryce Elder, FT (BE)
NH:
Good morning and welcome to Markets Live
NH:
Alphaville’s Daily discussion of what’s happening and why in the markets
NH:
joining me again is Bryce Elder from the London’s markets desk
BE:
Hello
NH:
lots to get through this morning
NH:
so there will be no opening preamble of feeble gag
NH:
in honour of our absent editor
BE:
You’ll be surprised to learn we have some technical troubles
BE:
Neil’s currently locked out
NH:
I’m back
NH:
before we get down tobusiness a bit of housekeeping
NH:
Prometheus
NH:
Gareth Evans
NH:
media analyst at Collins Stewart
NH:
is no more
NH:
he has gone
NH:
ceased to be etc
NH:
that’s why there was no note from Mr Evans on BSkyB yesterday
NH:
apparently he hasjoined the buy side
NH:
so with that out of the way
NH:
let’s get straight to the market
NH:
and look at Xstrata which has announced a huge rights issues
NH:
which I suspect could trigger a big corporate governance backlash
11:06AM
BE:
I think you are probably right
BE:
I also think we need to explain the details of the cash call
BE:
So Xstrata are going to raise $5.9bn
BE:
via a 2 for 1 rights issue pitched at 210p
BE:
so a massive discount
NH:
yep
NH:
but still underwritten
NH:
why’s that?
NH:
really odd
NH:
why pay all those fees to underwriters
NH:
and still have a huge discount
NH:
In fact given that Glencore, which owns 35% of Xstrata, are taking up their rights
NH:
makes it even stranger
BE:
(Daddy – rights issue rumours. We’ll get to that.)
BE:
Xstrata have plenty of questions they’re going to have to answer
BE:
because the fees on this are going to be big
NH:
yep, the net proceeds of the cash call are what ?
BE:
we don’t know
BE:
but they will be big
NH:
oh and we should also mention here the final dividend has been scrapped
NH:
and the outlook for future payments is unclear
BE:
now, the most interesting and controversial bit of this deal involves Glencore
BE:
as we know rumours have been swirling for months about the commodities trader
BE:
their CDS has spiked to levels which indicated distress
BE:
but the company has been very robust in saying it did not have a liquidity problem
BE:
yet
BE:
it looks as if Xstrata has had to loan them $2bn to take up their rights
NH:
it does
NH:
what’s happening here is that Glencore are selling a Columbian coal business to Xstrata
NH:
for $2bn
BE:
so of the $5.9bn being raised from shareholders
BE:
a chunk goes on fees for a deeply discounted rights issues that’s backed by their biggest shareholder
BE:
and $2bn goes out of the door immediately to their biggest shareholders
NH:
yep
NH:
and get this
NH:
Glencore then have an option to buy it back for $2.25bn
NH:
now by my caluculations this basically means
NH:
Glencore is borrowing $2bn from Xstrata at 10%
NH:
to take up its rights
BE:
nice
BE:
actually, here’s the detail of this side deal
BE:
In addition, the planned Rights Issue, together with Glencore’s ongoing support for Xstrata, have provided Xstrata with an opportunity to acquire Glencore’s world-class, cash generative Prodeco coal operations in Colombia for a consideration of $2 billion. These low-cost, premier quality operations benefit from significant growth potential and will consolidate Xstrata Coal’s global leadership in thermal coal and strengthen our strategic position in Colombia, to supply both the European and US markets.
BE:
However, Xstrata and Glencore failed to reach full agreement on an appropriate valuation of the Prodeco assets and as a result the transaction includes a Call Option, under which Glencore may buy back the Prodeco assets from Xstrata at any point up to the first anniversary of the closing date, for a total cash consideration of $2.25 billion, plus the net balance of any cash invested by Xstrata and any profits accrued but not distributed to Xstrata. The Call Option Agreement ensures that, should the option be exercised, Glencore will pay a repurchase price that adequately compensates Xstrata’s Shareholders for the option granted. In my view, these arrangements are fair to both parties and at the same time facilitate an orderly Rights Issue process, which is to the benefit of all of Xstrata’s Shareholders.
NH:
I love that bit
NH:
Xstrata and Glencore failed to reach full agreement on an appropriate valuation of the Prodeco assets and as a result the transaction includes a Call Option
NH:
yeah, right
BE:
of course, the other point to make here
BE:
is that because of this side deal with Glencore
BE:
Xstrata has not raised enough cash IMO to finally lay to rest concerns about its debt levels
NH:
So one of the justifications for these huge cash call
NH:
just does not stack up
NH:
and Lemmy – shareholders have a gun to their head. they aren’t going to vote this down.
BE:
indeed
BE:
what is remarkable thought is the performance of Xstrata shares
BE:
I reckon they and their advisers will be thinking
BE:
phew, we got away with this one
BE:
Price?
NH:
hang on the Reuters machine has just crashed
BE:
Hang on – down 55p at 567p
NH:
hmmm. but they have come back a long way I guess
NH:
of course
NH:
short covering could be propping the share price up
NH:
were lots and lots of people slotting this over the past week
NH:
actually I have talked to more than one broker this morning who thinks this share price is now heading to 400p
NH:
in fact
NH:
here’s a few things I have picked up from the market place today
NH:
why should xta shareholders bailout glencore? corp gov at XTA has just taken a nosedive from an already low level. the company should trade on 0.1x book
BE:
Wow
BE:
0.1 times book
NH:
OK, have a look at this
NH:
Current net debt is $16.3bn. BUT Glencore, , are not contributing cash, they are contributing their coal assets. So cash in for XTA will be only $3.3bn. Net debt post this will be still c. $12.6bn on the back of our envelope
BE:
so, this won’t put the debt fears to bed
NH:
nope
11:17AM
NH:
OK, what have the analysts being saying?
BE:
they are none too impressed
BE:
here’s Citigroup
BE:
Xstrata rights issue — Xstrata announced today a 2 for 1 fully underwritten
rights issue of approximately 1.96 billion new shares at £2.10 per share to
raise approximately $5.9 billion, to repay debt. The company is also cutting
its dividend and capex in response to the challenging operating conditions.
The rights issue should reduce net debt to approximately $12.6 billion, from
a reported 2008 net debt of $16.3bn.
rights issue of approximately 1.96 billion new shares at £2.10 per share to
raise approximately $5.9 billion, to repay debt. The company is also cutting
its dividend and capex in response to the challenging operating conditions.
The rights issue should reduce net debt to approximately $12.6 billion, from
a reported 2008 net debt of $16.3bn.
BE:
It may not be big enough — We forecast EBITDA in 2009 of just $3.3bn,
with debt covenants based on 3x gross debt, so on this basis XTA would still
breach its covenants. We therefore think XTA may still need to renegotiate its
debt covenants at the end of this year. The rights issue is probably as big as
it could do, in our view. The one benefit is that it has come to the market early.
with debt covenants based on 3x gross debt, so on this basis XTA would still
breach its covenants. We therefore think XTA may still need to renegotiate its
debt covenants at the end of this year. The rights issue is probably as big as
it could do, in our view. The one benefit is that it has come to the market early.
BE:
Borrowing a coal asset — XTA will also purchase the Prodeco thermal coal
asset from Glencore, for a cash consideration of $2bn. However, Glencore
has a call option to buy those coal assets back for $2.25bn at any time. The
acquisition is likely to be accounted for as an asset held for sale by XTA, so
in essence it could be viewed as loan to Glencore.
asset from Glencore, for a cash consideration of $2bn. However, Glencore
has a call option to buy those coal assets back for $2.25bn at any time. The
acquisition is likely to be accounted for as an asset held for sale by XTA, so
in essence it could be viewed as loan to Glencore.
BE:
Discount to the current price — The issue price of £2.10 per new share
represents a discount of approximately 40% to the theoretical ex-rights price
(TERP) of £3.48 per Ordinary Share and a discount of approximately 66% to
the Closing Price of £6.23 on 28 January 2009. Glencore, with an interest of
approximately 34.5%, has been fully underwritten.
represents a discount of approximately 40% to the theoretical ex-rights price
(TERP) of £3.48 per Ordinary Share and a discount of approximately 66% to
the Closing Price of £6.23 on 28 January 2009. Glencore, with an interest of
approximately 34.5%, has been fully underwritten.
BE:
Maintain our Sell — We calculate the rights issue will be c.40% earnings
dilutive, resulting in XTA trading at 213x 09E PE. The implied decline in our
NPV is from £14.6 to £8.6. We maintain our Sell rating and £6.35 target price.
dilutive, resulting in XTA trading at 213x 09E PE. The implied decline in our
NPV is from £14.6 to £8.6. We maintain our Sell rating and £6.35 target price.
BE:
And this is from Evolutions Securities
BE:
Independence is an interesting word and Xstrata is engaging a sweetheart deal with its majority shareholder, Glencore, to enable it to take up its rights. The market rumour that Xstrata might try to raise a little more cash than it needs to look for cheap acquisitions of bombed-out stocks was clearly wide of the mark .
NH:
Sweetheart deal – nicely put
BE:
Xstrata has announced a heavily dilutive rights issue (2 for 1 at 210p/share) and brought forward the release of its earnings for 2008. For the record, the company generated net continuing earnings of US$4.7bn in 2008 compared with US$5.4bn in 2007. This move is intriguing given the strength of commodity prices in 2008 but shows the negative effects of Xstrata’s exposure to nickel and ferrochrome together with what we presume to be negative provisional pricing adjustments at its copper operations. Of significantly more concern is the lack of independence exhibited by the sweetheart deal with Glencore whereby Xstrata provides Glencore with the funding to maintain its approximate 35% stake in Xstrata. We find it difficult to understand how a coal mine that generated peak earnings of about US$50m could be worth US$2bn (a whopping 40 times peak earnings) except that the deal provides the cash that Glencore needs to take up its rights.
BE:
We are in the process of reviewing our valuation and target price for Xstrata, however, with a theoretical ex-rights price of about 348p we see only downside for the shares. Sell.
BE:
and in the interests of balance
BE:
here is a Xstrata bull
BE:
Cazenove
BE:
and it’s coincidental that JP Morgan Caz handed the fund raising
BE:
Rights issue and acquisition of Prodeco
Xstrata has also announced a $5.9bn rights issue and acquisition, from Glencore, of Prodeco comprising a 9mtpa coal mine and associated port and rail infrastructure. Shareholders will have the right to buy 2 shares at a price of £2.10/share
for every 1 they own. Xstrata has agreed to buy Prodeco for $2bn the proceeds from which Glencore will use to irrevocably subscribe for their rights in full from their 34% shareholding. Xstrata will use their net proceeds to pay down debt.
BE:
This, in our view, is a move by Xstrata which potentially in one stroke could substantially alleviate balance sheet concerns and adds a tier 1, cash generative coal assets at or near the bottom of the coal price cycle on attractive terms. It also
gives them flexibility to either withstand the onset from further deteriorating commodity conditions or move quickly to leverage off a recovery. The earnings dilution from the rights issue is offset by the Prodeco acquisition with overall EPS
dilution of 18% and 27% for 2009E and 2010E respectively. On our forecasts it leaves the company’s share price trading on a PER and EV/EBITDA multiples of 5.6x and 3.9x 2009E respectively.
BE:
On spot these multiples change to 7.6x and 4.1x.
The valuation discount is c.40% to the large diversified peer group. Our P/NPV stands at just 0.38x – see tables at end of note.
BE:
P&L effect. The potential overall effect of these transactions on our forecasts are in the table above. The acquisition of
Prodeco by itself increases our EBITDA forecast by 11% and is 12% EPS accretive for 2009E. The rights issue then
dilutes EPS down 30% to a final forecast of 62.3pps for 2009 and 89.6pps for 2010.
BE:
Balance Sheet Effect. The potential net effect on the balance sheet is to reduce net debt to $12.7bn leaving gearing of
c.30% (ND/ND+E or 43% ND/shareholders funds) which is at the lowest end of the company’s LT target range and
should leave investment grade rating intact. Along with the refinancing in October last year it leaves the company with no
significant refinancing until 2011 (see fig 5.). Debt covenants have not been changed – the company remains relaxed
about these and we see no reason why they will be tested now notwithstanding the fact that they can be renegotiated
anyway. On our numbers and spot the company looks comfortable with a gross debt/EBITDA ratio in 2009E of 1.6x and
2.0x respectively versus the 3x covenant.
BE:
Prodeco, situated in Colombia, produced 9mt of high quality thermal coal in 2008 at our estimated cash cost
of $41/t – the company reports a similar cost structure and coal quality to Cerrejon, and in our view is arguably the best
thermal coal mine in the world in which XTA has a 33% stake. It comes with dedicated rail and port facilities in which the
company stake is 40%. The mine has initiated a brownfield expansion to 17mt by 2013 for an estimated capex of
$500m over two years.
BE:
The company is paying $2bn for the asset equivalent to 3.8x EV/EBITDA multiples or PE of 6.9x both on our 2009
forecasts (see fig 6). This compares with coal sector average multiples of 4.1x and 6.0x respectively (see Fig . Our NPV
is $2.34bn. It also compares reasonably favourably with the $1.7bn paid for Glencore’s 33% stake in Cerrejon in March
2006. It is understandable, in our view, that Glencore has insisted on an option to buy back the assets for $2.25bn plus
any spent capex or cash accrued but not distributed. If exercised this will give Xstrata a c.30% cash return on its
investment. In our view, it is the premier asset within the Glencore suite and one that XTA has been after for some time.
Xstrata personnel are familiar with the asset and conditions in Colombia. The mine adds geographic diversity and greatly
increases the company’s presence in the Atlantic seaboard thereby consolidating the company’s leadership in global
seaborne coal production
NH:
Some very interesting stuff on the coal assets in there
NH:
no one else has had anywhere that level of detail
NH:
will have to take a closer look at that
NH:
although here is a counter point from another broker
NH:
Prodeco made consol profit of $46m for fy07 it is not a greatly profitable business with 9mt of colombian coal but it has an option to double production and it is a nice asset to have.
NH:
However the the $2bn price is crazy and is a premium to the $1.7bn they paid for cerrejon in 2006. cerrejon was delivering 10mt of thermal coal production in 2006 (xta share) and had the ability to 2x production as well. They paid around 9x EBITDA versus other coal assets trading aournd 3x EBITDA.
NH:
XTA have paid a premium to cerrejon deal to buy lower quality assets, in a bear market (infinitly worse than 2006) with the Vendor having the option to buy back if the market recovers. So therefore I am buying an asset, which if there is any upside then Glencore will buy it back. Where is my upside as an XTA shareholder. If the marke gets worse then Glencore will keep the cash. They could have bought a lot of distressed asset from Rio’s at that price
NH:
and before we move on
NH:
someone has just mailed me something very funny from the
NH:
from the Xstrata conference call
NH:
Mick, the miner, Davis
NH:
told invest and analysts too
NH:
and I quote
NH:
“keep the faith”
BE:
NH:
OK, let’s move on from Xstrata
BE:
before we do
BE:
Paul Davies on the cap markets desk
BE:
has sent over some reaction from the CDS market on Xstrata and Glencore
BE:
Interestingly both Glencore and Xstrata are tighter by 2pts (up-front)
toady. I can see why for Xstrata in that they are palnning to reduce
debt/gearing so credit quality should increase for bondholders.
toady. I can see why for Xstrata in that they are palnning to reduce
debt/gearing so credit quality should increase for bondholders.
Glencore is more surprising except for the fact that they intend to use
$2bn to buy some coal assets from Glencore.
Current prices (up-front +500bps) Glencore 20-22 Xstrata 16-19
Yesterday Glencore 22-24 Xstrata 18-21
11:24AM
NH:
right, where shall we go
NH:
questions about the AstraZeneca figures
NH:
Bryce?
BE:
Looked ok to me at the headline
BE:
Haven’t seen any proper comment yet
NH:
shares were trading higher ahead of the announcement but no more – down 137p at £27.20
NH:
and remember, AZN has had a good run due to defensive buying. probably needed a decent set of numbers not to spark some profit taking
BE:
A few brokers were pushing them on the M&A theme as well
BE:
Which is debatable
NH:
I agree
11:26AM
NH:
Right, wider market or more on rights issues
NH:
which is the topic du jour
NH:
well, Xstrata is not the only company that’s unveiled a very big, dilutive, deeply discounted cash call
BE:
Ah. Cookson
BE:
FTSE 250 engineering company
NH:
Now we were chasing this story last night
NH:
and for reasons best known to the subs my name was left off the story
NH:
(Driss – I had a breakfast meeting before, hence last of post on site today)
NH:
in any case
NH:
we heard it was going to be 5 for 1 at 20p
NH:
to raise around £210m
NH:
against a market cap of £187m
BE:
Ouch.
BE:
Serious dilution.
NH:
anyway, we eventually got some confirmation that a cash call was happening
NH:
but shareholders obviously put their foot down
NH:
because the terms changed
NH:
to create even more dilution
NH:
check this
NH:
12 for 1 at 10p
BE:
Wow.
BE:
that is so desperate
NH:
Yep
NH:
but again, the share price has held up really well
NH:
collapsed first thing
NH:
got all the way down to 45p
Cookson Group (CKSN:LSE): Last: 74.75, down 10.25 (-12.06%), High: 77.00, Low: 44.00, Volume: 15.40m
BE:
so, the market is rewarding companies that bite the bullet and sort of their finances
NH:
well that remains to be seen
NH:
this is day one for Cookson and XTA
NH:
there will be shorts closing their bears
NH:
especially because they won’t want to be short of the rights as well
BE:
actually has either this or the Xstrata cash call been called ex today
NH:
er not sure
NH:
in the case of Xstrata I am pretty sure it hasn’t been
BE:
OK
BE:
here’s a little bit of analyst comment
BE:
this is from Evolution Securities
BE:
Big Issue!
BE:
12 for 1 raises £240m and essentially ensures that Cookson will not breach is 3x net debt/ebitda covenant in 2009. The pluses are that it is proactive and means that the debate surrounding the balance sheet is knocked on the head. However, the 08 guidance is a 5% miss on our numbers, divi is passed as expected and it is 12 for 1. The proposition is 3.7p of 09 earnings on a 15.8p theoretical ex rights price so 4.3x trough and on our Doomsday scenario, the covenant is 2.4x. Very interesting in the nil paid and will a potential bidder use the nil paids to build a stake. The rights issue takes the debate onto the next stage and one where there is value to be had.
BE:
We need to cut £10m off our 09 number for the miss on trading but we can add back for the issue so we stay at £147.5m and the new eps number is 3.7p xr, net debt falls to £400m and net debt/ebitda to 1.7x. On doomsday it rises 2.4x so decent headroom.
BE:
Nil paids should start at 5.8p. Assume that Cookson trades at 6x trough of 3.7p equals 22p so the nil paid jumps to 12.2p which is attractive. Who is next, GKN made clear yesterday it’s not them. People will suggest Morgan but we are convinced that it does not need one and also Melrose, but it is a very different model so unlikely in our view.
BE:
this is from Pali
BE:
Cookson’s announcement that it is raising £240m with a 12 for 1 rights issue reduces our 2009 forecast by 91% to 2.2p. My calculations shows that consensus EPS for 2009 will fall to 3.8p. If you believe that 2009 is a cyclical trough then shares should stabilise at around 45p, equivalent to 20x 2009 Pali EPS forecast. This theoretical average per share price post rights is 15.2p.
BE:
and finally
BE:
here’s Merrill
BE:
FY08 trading statement and rights issue announcement
Today Cookson has announced its FY08 trading statement together with its
intention to do a rights issue on a 12 for 1 basis at 10p per new share.
Today Cookson has announced its FY08 trading statement together with its
intention to do a rights issue on a 12 for 1 basis at 10p per new share.
BE:
Covenant concerns had led to 40% underperform vs sector
Over the last six months Cookson’s share price has underperformed the sector by 40%, falling some 85% in absolute terms, as a sharp slowdown in their key steel end market led to market concerns over possible debt covenant breach.
BE:
Stressed scenario could envisage covenant breach
While Cookson does not breach its covenants in our base case (where global
steel production falls 10% in FY09) we could envisage a possible worst case
scenario in which Cookson goes through its covenant limits, for example if steel
production fell 20% this year.
BE:
Rights issue removes a risk of expensive covenant waiver
Given the risks to the base case as the world slows, and the probable cost of a
covenant renegotiation , management have instead opted for a pre-emptive rights
issue to remove the risk. If the group successfully raises £240m of cash we
expect them to remain within their covenants even in the stressed scenario
considered above.
BE:
Restructuring, FX and Foseco synergies support earnings
While our forecasts remain broadly unchanged, they are underpinned by £58m of
earnings tailwinds by 2010e (30% of 2010e EBIT). The stem from restructuring
(£40m), beneficial FX moves (£12m) and additional Foseco synergies (£6m)
BE:
Looks good value once debt risk is removed
On our revised forecasts Cookson would trade on 09e EV/EBIT of 5x (a 40%
sector discount) and PE of 2x. Assuming there is a full take of the announced
rights issue by shareholders the PE would become 5x (on a headline EPS of
4.1p). In our view this is an excellent entry point into a strong fundamental story.
NH:
thanks for that
11:33AM
NH:
of course the knock on effect from both of these fund raisings
NH:
is that is has started a guessing game among traders and investors
NH:
whose next?
NH:
and anyonewith a a lot of debt, stretched balance sheet or looming refinancing is being hit this morning
NH:
So 3i
NH:
well, they have had 25% lopped off their already bombed out market cap this morning
NH:
although they have recovered a bit now
3i Group (III:LSE): Last: 204.75, down 46.5 (-18.51%), High: 244.50, Low: 183.10, Volume: 6.99m
NH:
on fears that they are about to tap shareholders for cash
BE:
The press reports this morning say new CEO Michael Queen refused to rule out a cash call.
BE:
He’s due to deliver a strategic review in the next few weeks.
BE:
But he also said the company does not need additional capital.
NH:
Hm. Doesn’t look the market believes him.
BE:
Plus we should note the very negative reaction to yesterday’s Q3 update.
BE:
Which all got a bit overshadowed by Philip Yea being pushed onto his sword.
BE:
Merrill Lynch downgaded to “neutral”. Target 232p, from 620p.
BE:
In a rather brief note from Philip Middleton.
BE:
This move really deserves a more detailed commentary, but our summary view is that the difficult macro environment means that shareholders may have to wait a while for the returns we are convinced the business will ultimately deliver.
BE:
We have cut our estimates by around 10% for this year and 22% for next, reflecting in part the Q3 IMS, but more materially a view that the cycle will grind on for longer, postponing the inflection point in 3i’s NAV.
BE:
3i is, we think, an excellent company and a lowly valued share. However, we believe that it will be subject to considerable uncertainty over the next few months. Whilst we believe that it will navigate any challenges it faces well, especially given its strong position in the low leverage growth business, we believe it is prudent to turn neutral on the shares until visibility improves somewhat. Hence, we reduce our rating to neutral from Buy. We have changed our theoretical fair value to 290p, representing around 0.5x trough book. Our price objective is now 232p, representing a 20% discount to this, to reflect continuing uncertainty.
BE:
Would also note that S&P has cut 3i yesterday.
BE:
There was also an interesting line in the FT report about 3i possibly selling listed investments to raise cash.
BE:
Those include 3i Infrastructure and 3i Quoted Private Equity.
BE:
Bit of comment from Oriel on that angle
BE:
3i Infrastructure is due to publish its Interim Management Statement tomorrow and we expect the tone to be relatively upbeat given the recent disposal of I2, which provided an uplift of £47.8m on a cost of £118.9m allied to its reserves of cash on the balance sheet. That having been said, 3i Group’s obvious need to raise cash and its large stake in 3IN, means there may soon be a stock overhang affecting the price. Conversely any potential requirement of 3i Group to extract cash from 3i Quoted Private Equity could be seen as positive for QPE investors.
NH:
actually I was thinking about 3i before we came on air
NH:
don’t they have a lot of quoted company assets they could sell?
NH:
a big chunk of Venture Production for example
BE:
Venture Production (VPC:LSE): Last: 513.00, down 3.5 (-0.68%), High: 519.50, Low: 506.50, Volume: 254.36k
NH:
and a couple of other oil companies
BE:
Yeah, I think you may be right on that
NH:
actually we will have to dust down a list of 3i holdings. i suspect a few might hit the market soon
NH:
great time to be an ECM banker at the moment
NH:
NH:
and one more thing on 3i
NH:
actually PE in general
NH:
did you seen the comments by Nassim Taleb
BE:
No. Go on.
NH:
prolly spelt that wrong
NH:
he reckons it is the next big accident
NH:
Nassim Nicholas Taleb of Black Swan fame predicts that a stock market decline of 20% would take down a lot of private equity firms along with it. Note that Nouriel Roubini predicted a fall of that level when stocks were a tad lower than today.
The grim view is confirmed by a BCG study that said that many P/E firms could fail as their portfolio companies defaulted.
If this were to come to pass, it’s a no-brainer to think the firm’s principals would be in the dole queue for bailout money.
NH:
that is from Naked Capitalism
NH:
From Bloomberg:
Private-equity firms may follow banks into failure should U.S. stocks extend their worst rout since the Great Depression, said Nassim Nicholas Taleb, author of the best- selling finance book “The Black Swan.”…
The Standard & Poor’s 500 Index has dropped 4.7 percent this year following a 38 percent plunge in 2008 that was the worst in 71 years. Blackstone Group LP, manager of the world’s largest buyout fund, fell 78 percent since the end of 2007.
“Banks are being bailed out, and private-equity firms are going to go next,” Taleb said in an interview with Bloomberg Radio. “These people in a bull market look like geniuses. And now they don’t look that intelligent, and it’s going to get a lot worse for them. If the S&P goes down 20 percent from here, what will happen to private equity firms? They’re all under water.”
As many as 40 of the biggest 100 buyout firms may collapse by 2011 as their debt-strapped assets default, according to a 2008 report by Boston Consulting Group Inc., which didn’t identify the firms in its study.
BE:
Interesting stuff from Mr Black Swan
NH:
yep and explains the weakness in 3i
NH:
and I also agree that Man Group is tracking 3i at the moment
NH:
investors are steering well clear of anything opaque
11:40AM
NH:
back to these fund raisings
NH:
other comapnies being whacked on cash call fears include
NH:
the Toxic Pub Company
BE:
naturally
Punch Taverns (PUB:LSE): Last: 37.50, down 4.5 (-10.71%), High: 43.00, Low: 36.75, Volume: 805.11k
NH:
Wolseley too
BE:
Needless to say ….
NH:
no respite for them
Wolseley (WOS:LSE): Last: 181.90, down 6.1 (-3.24%), High: 183.80, Low: 177.90, Volume: 4.64m
NH:
Informa, that has loads of debt so they are under pressure as well
We don’t know what’s going on. The original source that detailed the Providence approach for Informa will not talk to us at present. If you own the shares and are worried that the bid will fail, sell the shares and stop worrying.
Informa (INF:LSE): Last: 243.75, down 24.75 (-9.22%), High: 269.50, Low: 243.75, Volume: 996.68k
NH:
oh, didn’t realise that was still in system
BE:
That’s a blast from the past.
NH:
sound advice as it turned out
NH:
also talk that Meggitt is sounding out shareholders about a cash call
NH:
and traders also think GKN might need one
NH:
and one last point here
NH:
PLC’s are lining up to raise cash
NH:
in fact one told us last night, there is a disorderly queue
NH:
lots of jostling
NH:
pushing
NH:
all very unenglish
NH:
but the message is clear
NH:
get in quick before the cash is gone
NH:
the window is not going to be open for long
NH:
so grab the cash while you can
NH:
even if you have to accept massive discounts
BE:
Exactly.
BE:
Had an interesting mail this morning from a reader
BE:
Wondering where it’ll all end.
NH:
(Lemmy – HBOS, RBS spring to mind.)
BE:
Argument is that nearly all the cash raised so far is going to pay down debt
BE:
And the banks are invariably achieving enhanced terms on the remaining debt and are most definitely not taking a haircut
BE:
And the window is destined to close when the underwriters/institutions run out of money
BE:
What happens then?
NH:
er, things go bust
NH:
get placed in admin
BE:
Exactly
BE:
So should the institutions have kept the window closed other than to companies where the banks (aka taxpayers) had agreed to take a haircut?
BE:
Saving a few (maybe the wrong few) at the expense of the many may do more damage to the portfolio value overall than holding out for a better distribution of the pain. That was his argument.
NH:
oh and I also missed Invensys off my list of indebted companies
11:46AM
NH:
On to the wider market
NH:
and
NH:
unsurprisingly after today’s cash calls
NH:
both real and imagined
NH:
the market is down
BE:
FTSE’s off 91 at 4204
NH:
a big chunk of recent gains being handed back
NH:
right, we must, because we always do
NH:
look at the banks
NH:
what’s happening?
BE:
Well, a bit of profit taking
BE:
after the recent big anti-nationalisation rally.
BE:
Caz, for what it’s worth, remains cautious on the theme.
BE:
Uncertainties still rife.
BE:
What a difference a week makes
By last Friday, consensus was clear that nationalisation was highly likely. In three days, share prices have risen substantially as repeated comments from the authorities have raised hopes that nationalisation is not the grand plan but moreover the authorities will, through a variety of measures, work to strengthen the capital ratios of the banks. This signals a change in approach; October’s recapitalisation provided additional equity while now the focus is on curbing risk assets to lift the tier 1 ratio. If credible, this is a much more shareholder-friendly approach. Among the array of new measures introduced by the authorities on 19 January, investors’ hopes rest most on the Treasury’s asset protection scheme (APS). The Treasury is working on the details of the scheme but our expectation is that it will reduce capital ratios for the banks as the alternative fails to induce the new lending that lies behind the government introducing the scheme.
By last Friday, consensus was clear that nationalisation was highly likely. In three days, share prices have risen substantially as repeated comments from the authorities have raised hopes that nationalisation is not the grand plan but moreover the authorities will, through a variety of measures, work to strengthen the capital ratios of the banks. This signals a change in approach; October’s recapitalisation provided additional equity while now the focus is on curbing risk assets to lift the tier 1 ratio. If credible, this is a much more shareholder-friendly approach. Among the array of new measures introduced by the authorities on 19 January, investors’ hopes rest most on the Treasury’s asset protection scheme (APS). The Treasury is working on the details of the scheme but our expectation is that it will reduce capital ratios for the banks as the alternative fails to induce the new lending that lies behind the government introducing the scheme.
BE:
Valuations can rise further
Positive news has been a rarity in the sector for some time. Potentially the collection of measures from Treasury and FSA can add over 100bp to our current estimates of equity tier 1 capital. Prima facie, such an adjustment is positive. We refrain from changing estimates as the details are absent on the initiatives and we have yet to get the full details of how the year end capital ratios fell materially short of our prior estimates.
Positive news has been a rarity in the sector for some time. Potentially the collection of measures from Treasury and FSA can add over 100bp to our current estimates of equity tier 1 capital. Prima facie, such an adjustment is positive. We refrain from changing estimates as the details are absent on the initiatives and we have yet to get the full details of how the year end capital ratios fell materially short of our prior estimates.
BE:
Also there is support from a better tone in the credit market with corporate debt spreads narrowing amid record levels of issuance this month. The new administration in the US has raised hopes with its package of economic stimuli. The more extreme levels of fear that pervaded in markets have receded.
With hope now a consideration for investors, and given the extreme starting position, the discount to book value has narrowed. On our current estimates Barclays and Lloyds are trading at close to 50% of tangible book value and Royal Bank of Scotland 37%.
BE:
Share prices can go higher. Since the start of the year, the share prices of the three domestic banks are down between 20% for Lloyds and 57% for RBS even after rising substantially from their lows. If confidence grows that the actions of the authorities will have a meaningful impact on capital ratios we expect share prices to trade closer to the 70-80% of tangible book that was typical in the early stages of the 1990s recession.
BE:
Given the strength of the negative sentiment on domestic banks of both analysts and investors, share prices can react to positive news. We are reluctant to change recommendations with so many unknowns, from the details of the schemes to the shape of year end balance sheets. We are still in the early stages of the recession and we continue to expect loan impairment will not reach a peak until 2010E, in keeping with the trend in unemployment. All the signs are that impairment on some loan books will exceed previous peaks.
BE:
Further, with so much unknown, it is hard to identify the relative winners but our sense is that Lloyds will be the politicians’ favourite, as the largest retail and commercial bank in the UK. If true, such a position is a double-edged sword for Lloyds but we sense the near-term capital benefit may hold sway over the longer-term concerns of interference.
Further, with so much unknown, it is hard to identify the relative winners but our sense is that Lloyds will be the politicians’ favourite, as the largest retail and commercial bank in the UK. If true, such a position is a double-edged sword for Lloyds but we sense the near-term capital benefit may hold sway over the longer-term concerns of interference.
BE:
That’s all from Simon Pilkington at Caz.
NH:
thanks for that
NH:
I’ll dedicate that to Bored With Banks
NH:
NH:
especially for you
NH:
right, time for a bit of gossip
NH:
and 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:
this is not really RAW
NH:
but a tad concerning
NH:
TESCO’S LEAHY SAYS TRADE IS BECOMING TOUGHER
BE:
Interesting
NH:
Trade is getting tougher and shoppers are
focusing more than ever on the lowest prices, according to the chief executive
of Tesco, Britain’s biggest retailer.
Terry Leahy said in a speech published on Thursday that sales of Tesco’s
discount and budget ranges are up 65 percent on the year and a quarter of
customers are now buying something from the ranges.
“Trade is becoming tougher,” he said in the speech, which was delivered
on Wednesday evening.
focusing more than ever on the lowest prices, according to the chief executive
of Tesco, Britain’s biggest retailer.
Terry Leahy said in a speech published on Thursday that sales of Tesco’s
discount and budget ranges are up 65 percent on the year and a quarter of
customers are now buying something from the ranges.
“Trade is becoming tougher,” he said in the speech, which was delivered
on Wednesday evening.
NH:
“With unemployment rising, and people concerned about their incomes
falling, obviously the pressure is on price more than ever.”
Leahy urged suppliers to pass on lower commodity prices as quickly as
possible.
“We want to ensure that all our suppliers understand this, which is why
we are going to great lengths to talk to them about the new pressures that
consumers are under.”
He also repeated his call for the government to freeze business rates
this year to ease the burden on companies and his opposition to the Competition
Commission’s planned competition test, which could limit the expansion of
supermarkets.
falling, obviously the pressure is on price more than ever.”
Leahy urged suppliers to pass on lower commodity prices as quickly as
possible.
“We want to ensure that all our suppliers understand this, which is why
we are going to great lengths to talk to them about the new pressures that
consumers are under.”
He also repeated his call for the government to freeze business rates
this year to ease the burden on companies and his opposition to the Competition
Commission’s planned competition test, which could limit the expansion of
supermarkets.
NH:
if Tesco is struggling, it can’t be good out there
Tesco (TSCO:LSE): Last: 360.70, down 1.2 (-0.33%), High: 363.70, Low: 352.10, Volume: 11.60m
BE:
Also, Waitrose basically gave a profit warning to analysts yesterday.
BE:
Had a big meeting over at Westfield
BE:
Not exactly a surprise I guess, but they were still talking about taking share from M&S
BE:
Also, there was a bit of a bearish story going around about Misys this morning.
Strange software outfit, seemingly controlled by US investor ValueAct Capital.
NH:
oh yeah, what’s that?
BE:
Well this one carries a health warning, obvously, if you can excuse the pun.
BE:
But they have results tomorrow.
NH:
normally spells disaster
BE:
And the vibes are not good.
BE:
Again.
Misys (MSY:LSE): Last: 111.50, down 5.5 (-4.70%), High: 115.75, Low: 110.75, Volume: 1.01m
BE:
Theyre was recently a warning from one of its big US peers, Eclipsys
BE:
Saying US healthcare was the worst in 15 years
BE:
70% of hospitals expect to have a flat-to-lower operating budget next year
BE:
Temenos, another competitor, has also warned
BE:
That’s on the banking side rather than the healthcare bit
BE:
Quick comment from Teathers ahead of the numbers
BE:
With a potential further slowdown in both businesses we still think Misys’s earnings are at risk. It is especially a miss at AMH that would lead to a derating in our opinion. We note Eclipsys fell 30% in a day on its warning. If the situation in US healthcare is indeed the worst in 15 years as Eclipsys says then it may not be long before the Obama related US healthcare valuation bubble bursts.
11:56AM
NH:
Right a couple of bits and bobs for you small cap fans out there. Something called Deutsche Land has received a bid appriach this morning. Told it was pitched at 10p a share. stock is 5/6 at the moment
NH:
also tepnel life sciences
NH:
been in takeover talks for a few weeks
NH:
we hear a deal is close
NH:
at or above 25p a share
NH:
he bidder is a US company apparently and they are paying cash
Tepnel Life Sciences (TED:LSE): Last: 19.29, up 3.04 (+18.71%), High: 20.25, Low: 16.75, Volume: 1.68m
BE:
And there was something on UBS wasn’t there?
NH:
rumours of a 1bn SFR trading loss
NH:
but we are sceptical
NH:
here’s what one UBS watched told us
NH:
assume this “just” refers to trading. the bank has a built in – and already
discounted – loss of about SFr4bn in the forth quarter, based on about
SFr2bn revaluation of own debt and roughly the same as a write down on its
SFr6bn stake in the special purpose vehicle set up with the central bank to
take toxic paper of its books. Results on feb 10
discounted – loss of about SFr4bn in the forth quarter, based on about
SFr2bn revaluation of own debt and roughly the same as a write down on its
SFr6bn stake in the special purpose vehicle set up with the central bank to
take toxic paper of its books. Results on feb 10
NH:
rumours of a profits warning and BMW have been pretty much quashed
11:58AM
NH:
right, a little bit of LIBOR
NH:
DJ 3-Month USD Libor Fixed At 1.17%, Vs 1.17438% Weds
NH:
DJ 3-Month Sterling Libor Fixed At 2.16688%, Vs 2.17% Weds
NH:
*DJ 3-Month Euro Libor Fixed At 2.10375%, Vs 2.1175% Wednesday
NH:
right is that it?
NH:
coz I have a lunch to get to
BE:
Lucky you
BE:
Yeah, I’m done
NH:
one more thing
NH:
a couple of snippets from the Xstrata conference
NH:
Does the options structure you agreed with Glencore on Prodeco limit your ability to incorporate Prodeco’s EBITDA into XTA group EBITDA?
Yes, XTA will not be able to record earnings as EBITDA until option has exercised.
NH:
Will management participate in the rights issue?
Can’t speak for the rest of the management – would assume if they have the funds they would not want to be diluted.
NH:
Why did XTA not go for a larger rights issue.
XTA thinks it made a judgement of what market capacity is. This is an art not a science. This is a significant amount of money to raise vs XTA’s mkt cap. Sweet spot was here. We are very comfortable that level of cash we are raising puts us in strongest possible financial position. Not appropriate to plan capital raising with regards to one debt covenant – our covenants are quite tight compared to other mining companies especially one which has more debt than us. Don’t focus just on 3x ebitda cov.
NH:
At the EGM, will shareholders be allowed to propose different options – as in cancel the coal asset purchase?
XTA will give shareholders proposals – they will vote yes or no. those are the options.
BE:
(hedgehog – yes. I was watching. 12 penalties each. It was not pleasant.)
NH:
thanks everyone for joining us this morning. 0nly one more ML before the great editor is back with us.
BE:
Thankfully.
NH:
see u all tomorrow
BE:
Bye.
NH:
cya
BE:
(Hedgehog – guilty. But let’s not get on to that here.)
NH:
thanks you and goodnight