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Markets live transcript – US Bad Bank edition, 10 Feb 2009

Posted by Neil Hume on Feb 10 16:02.

Markets live chat transcript for the chat ending at 17:09 on 10 Feb 2009. Participants in this chat were: Neil Hume, FT (NH) Stacy-Marie Ishmael, FT (SMI)

NH:

Good morning (or afternoon)

NH:

Welcome to another NY/LON edition of Markets Live

NH:

Stacy is just logging in

SMI:

Brilliant

SMI:

Wouldn’t be a ML without tech issues

SMI:

Good morning (or afternoon) all

NH:

oh, we have a 2 minute warning

NH:

from the US Treasury

NH:

does that mean a nuclear attack is imminent?

SMI:

hope not

SMI:

either way

NH:

yep, tin hat on

SMI:

Two minute warning – but already been shamelessly leaked to the press

SMI:

Or at least, bits of it

NH:

yes I saw Krishna’s story earlier

NH:

here it is

NH:

By Krishna Guha in Washington
Tim Geithner will today make efforts to unblock securitised markets for credit one of the key planks of the Obama administration’s financial rescue plan.
In a speech scheduled for 11am Eastern Standard Time, the US Treasury Secretary will say fixing the securitisation markets is as critical as fixing the nations banks.
He will say “In our financial system, 40 percent of consumer lending has historically been available because people buy loans, put them together and sell them. “
“Because this vital source of lending has frozen up, no plan will be successful unless it helps restart securitization markets for sound loans made to consumers and businesses – large and small.”

NH:

Mr Geithner is expected to unveil a dramatic expansion of Federal Reserve financing for securitised markets – including financing for commercial real estate bonds and private label (jumbo large denomination and subprime) residential mortgage backed securities.

NH:

There will also be measures to support the municipal bond market and possible support for monoline insurance companies.
He is also expected to announce guarantees on portfolios of problem assets and a joint public-private scheme to buy toxic assets in the banking system, alongside plans for further capital injections in the form of convertible prefered shares and subsidies for anti-foreclosure programmes.
The Treasury Secretary will warn against assuming that the new plan will produce a rapid turnaround in the markets and the economy.
He will say “this comprehensive strategy will cost money, involve risk, and take time.

NH:

He will add “We will make mistakes. We will go through periods in which things get worse and progress is uneven or interrupted.“
Mr Geithner will describe efforts taken to combat the deepening crisis under the Bush administration as “absolutely essential” but “inadequate” and he will fault his predecessors for failing to demonstrate to the public that bailout money was being used in their interest.
He will say “The force of government support was not comprehensive or quick enough to withstand the deepening pressure brought on by the financial crisis.”
He will add “The spectacle of huge amounts of taxpayer money being provided to the same institutions that help caused the crisis, with limited transparency and oversight added to public distrust.”
Mr Geithner will promise “transparency and accountability.” But he will admit that the challenge is “much greater today because the American people have lost faith in the leaders of our financial institutions, and are skeptical that their government has – to this point — used taxpayers’ money in ways that will benefit them.”

4:07PM

SMI:

Here at least BNP Paribas is expecting

SMI:

In line with speculation over the past few days, the plan will reportedly have four main components: fresh equity injections with tougher terms, new programmes to help struggling homeowners, an expansion of the Fed’s Term ABS Loan Facility and a mechanism to allow banks to get rid of bad assets.

NH:

Do you have any extracts from the speech?

SMI:

Coming right up

NH:

Without credit, economies cannot grow, and right now, critical parts of our financial system are damaged.

It is essential for every American to understand that the battle for economic recovery must be fought on two fronts. We have to both jumpstart

job creation and private investment, and we must get credit flowing again
to businesses and families.

Last fall, as the global crisis intensified, Congress acted quickly and
courageously to provide emergency authority to help contain the damage.

That vote gave the Administration the authority to act to pull the financial system back from the edge of catastrophic failure.

The actions we took were absolutely essential, but they were inadequate.

The force of government support was not comprehensive or quick enough to
withstand the deepening pressure brought on by the financial crisis.

The spectacle of huge amounts of taxpayer money being provided to the same
institutions that help caused the crisis, with limited transparency and
oversight added to public distrust.

Our challenge is much greater today because the American people have lost
faith in the leaders of our financial institutions, and are skeptical that

their government has – to this point — used taxpayers’ money in ways that

will benefit them.

SMI:

Thanks for that, computer issues

SMI:

Here’s the bit about securitization

SMI:

In our financial system, 40 percent of consumer lending has historicallybeen available because people buy loans, put them together and sell them.

Because this vital source of lending has frozen up, no plan will be successful unless it helps restart securitization markets for sound loansmade to consumers and businesses – large and small.

NH:

right, the speech has started

NH:

but first the scores on the doors

NH:

FTSE 100 off 80 points at 4,233

SMI:

Dow down 2.2 per cent at 8092.06

NH:

who is the warm act for Geithner??

SMI:

Chris Dodd

SMI:

Wouldn’t you be nervous?

NH:

Jeepers, Dodd is going on a bit

NH:

if anyone wants to follow the speech

NH:

you can get it here

NH:

http://financialstability.gov/

NH:

Here we go

4:12PM

NH:

how much do u think this is all going to cost?

SMI:

Estimates I’ve seen range from $1,000bn to $2,000bn

SMI:

Imaginary numbers, frankly

SMI:

This via Reuters and Tracy

SMI:

* $50 billion for foreclosure mitigation and loan modifications
* $100 billion for a “bad bank” public-private partnership that will buy distressed assets.
* $100 billion to expand the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF).
* $100 billion for bank capital injections following stress-testing by government regulators.
* The money will be spent from the Treasury Department’s Troubled Asset Relief Program (TARP), which currently has about $350 billion in it.

NH:

I have a copy of the financial stability plan I can put up

SMI:

Stick that up then

NH:

Financial Stability Plan

NH:

1. Financial Stability Trust

• A Comprehensive Stress Test for Major Banks
• Increased Balance Sheet Transparency and Disclosure
• Capital Assistance Program

NH:

2. Public-Private Investment Fund ($500 Billion – $1 Trillion)

NH:

3. Consumer and Business Lending Initiative (Up to $1 trillion)

NH:

4. Transparency and Accountability Agenda – Including Dividend Limitation

NH:

5. Affordable Housing Support and Foreclosure Prevention Plan

NH:

6. A Small Business and Community Lending Initiative

SMI:

UP TO ONE TRILLION

NH:

TG, is saying this is a war

SMI:

Gosh

SMI:

Bad analogy – look how well the last one turned out

NH:

right TG is going to outline the key elements of the plan, which we have here

SMI:

Yep – anyone interested just scroll up

SMI:

But Neil you promised me something more forward looking

NH:

oh, yes some 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:

actually I have one very good bit

NH:

so I hope you are listening FKA

NH:

this one is especially for you

SMI:

Go on

NH:

well, I don’t know if you tuned in this morning

SMI:

At 6am – of course I did

NH:

well, there was a rumour going around that ArcelorMittal was planning a rights issue

NH:

the company has figures tomorrow

SMI:

Q4 and full year right?

NH:

that’s right

NH:

now that speculation has hit the shares hard today

NH:

were recently down 8%

NH:

at just over EUR20 a share

NH:

AM trades on Euronext

SMI:

NH:

well, this is one company that is not going for a rights issue

NH:

in fact we are hearing that the numbers will beat expectations

NH:

and the company has made real progress in paying down debt and securing new facilities to roll over debt

SMI:

Really? Upside surprise!

SMI:

What’s consensus

NH:

well, guidance from the company is

NH:

Q408 EBITDA guidance to be in the range of $2.5 – $3. 0 billion
On track to deliver full year EBITDA of $24.2 – $24.7 billion compared with 2007 full year EBITDA of $19.4 billion

The Company also announces initiatives in response to the current economic environment:

Adaptation of existing growth plan to reflect market conditions
Increased management gains target from $4 billion to $5 billion through additional selling, general and administrative (SG&A) savings over the next five years

Increase of temporary production cuts to accelerate inventory reduction

Targeting $10 billon net debt reduction by end of 2009 to increase financial flexibility

NH:

but most analysts are much, much more bearish than that

NH:

take a look at this note from Commerzbank

NH:

Q4 due 11 February – Outlook set to weigh on consensus
We forecast 2008 results below guidance and market expectation due to deeper cuts
to production and steel prices. We believe that Arcelor Mittal could catch the market
on the wrong foot with a Q1 2009 guidance for break-even results which would trigger further negative revisions to 2009 consensus. Any re-stocking-driven recovery could be short-lived once lower contract prices come into force. Despite compelling
valuation our rating remains Hold due to negative fundamental momentum.

NH:

2008 guidance a challenge Due to accelerated production cuts and steeper declines in
steel prices we forecast Q4 2008 EBITDA of $2.15bn which is below guidance of $2.5bn- $3.0bn and consensus of $2.44bn.

2009 outlook probably bleak The negative trend for capacity utilisation, and further
deterioration in both spot steel prices and, particularly, order intake lead us to believe that Arcelor Mittal will prepare the market for break-even results in Q1 2009 whereas the latest available consensus still expects EBITDA to rise quarter on quarter to $2.7bn.

NH:

Pressure on 2009 consensus to prevail Our 2009 EBITDA of $9.1bn sits c. 30% below
consensus. We believe that the market misjudges: 1) the very weak start into 2009, 2) the magnitude of the re-stocking cycle and 3) steel price declines in the 2009 contracts.

Momentum remains adverse Despite low valuation we believe that momentum factors will prevent the shares from unlocking its value, near term. Hold and €19 target price confirmed.

NH:

and take a look at this note from Deutsche

NH:

also pretty bearish

NH:

Expect weak & ‘noisy’ result
MT will report its 4Q on Feb 11 and the market expects a disappointing result. We
maintain our Hold rating with our primary concerns being MT’s high fixed-cost
structure and exposure to lower steel prices. Also, MT remains among the most
financially leveraged in our coverage and we see better value elsewhere in the
sector.

NH:

Market Cap (USDm) 36,806.7
Shares outstanding (m) 1,388.5
Free float (%) –
Volume (5 Feb 2009) 7,449,100
Option volume (und. shrs., 1M avg.) 367,153

NH:

4Q EPS of $0.46 (E0.35) expected
This forecast compares to Street consensus of $0.44 and prior results of $3.84 in
3Q08 and $1.71 in 4Q07. Additionally, our EBITDA forecast of $2.3B compares to
guidance of $2.5-3.0B for the quarter. Lower prices and volumes (-28% & -20%
q/q) are to pressure margins; we estimate an EBITDA margin of $111/t vs $335/t in
3Q08.

Focus on CF & balance sheet
We expect asset impairments in the quarter, but we are squaredly focus on MT’s
ability to reach its ‘cash from working capital ($5B)’ and $10B debt reduction
targets. MT has significant liquidity but net debt of $32B and 09/10 maturities of
$12B make it susceptible to a prolonged downturn. Our EBITDA and FCF
estimates for ’09 are $9.7B and $2.7B, respectively. Additional moves (reduce
capex & dividends) to preserve cash are possible.

NH:

Market confusion; still under pressure
Steel prices remain under pressure in North America, Europe and other key
regions. However, market attention has turned to rising steel prices in China (since
November up as much as 25%) which has been mainly driven by higher global
prices, market participant restocking and some improved consumption. It is
unclear whether this trend is sustainable and whether China can drive a global
recovery given the demand/price trends elsewhere and falling input costs.

SMI:

Alright – but what’s your take?

NH:

well all of the above is WELL OFF the mark

NH:

we hear that Q4 EBITDA is going to top $3bn

SMI:

That would be a BIG beat

NH:

yep, it would but that is not all

NH:

we are hearing the dividend will not be cut

NH:

but more important the company is making some real progress on debt

NH:

debts stand around $30bn I think

NH:

not much below the market cap

NH:

and AM has said they want to cut this by $10bn this year

NH:

well, it would seem that those debt reduction plans are running well ahead of expectations

NH:

in fact AM could be as much as half way there already

SMI:

How could they have managed that?!

NH:

not sure

SMI:

In this market

NH:

but also

NH:

over the next couple of years

NH:

$12bn of debt needs to be rolled over by AM

NH:

now there had been concerns that AM would struggle to get a new facility in place

NH:

and that it would need a rights issue

SMI:

Hence today’s rumour

NH:

yep

NH:

well, from what we are hearing a couple of facilities have been extended

NH:

to give the company some more breathing space

SMI:

Who’s doing the extending, do you know?

NH:

not sure at the moment, still trying to bottom that out

NH:

and just going back to the dividend stuff

NH:

there was a really good note out from Cazenove earlier this month

NH:

in which it predicted the divi would be held

NH:

and things were not as bleak as the market had expected

SMI:

Do you have it?

NH:

yep

NH:

and I think it is worth putting up

NH:

because it puts things in perspective

SMI:

Hang on – Geithner’s stressing

SMI:

Or at least, stress testing the banks

SMI:

And then giving them more money

NH:

just gonna put this Caz note up and then it is back to the TG speech

NH:

While uncertainty over the outlook for demand, volatile steel pricing and refinancing concerns are likely to weigh on the company in the near term, we believe that the sector’s recent derating has opened up an opportunistic entry point to a stock which offers a sustainable dividend at a 20%
discount to the market P/E multiple. Moreover, we expect that patient holders of the stock investing on a long-term horizon can also look forward to a rerating as debt is paid down and trading conditions recover. In tangible terms, using the longterm EBITDA implied by the company’s dividend policy in our NPV calculation (see later for details), we see the company’s fair value at €30 per share, implying upside of 67%. We have an IN-LINE recommendation on ArcelorMittal.

NH:

In the sections below, we present calculations aimed at answering two questions in relation to ArcelorMittal’s dividend policy: (i) is the dividend sustainable in the near term, given the uncertainty over market conditions?; and (ii) what can we infer about the longterm profitability and valuation of the group?

A brief reminder of Mittal’s dividend policy
ArcelorMittal’s dividend policy seeks to ensure shareholders receive a payout of 30% of net income through the cycle. This is calculated as a minimum dividend payment of $1.5/share, supplemented by a buyback if the cash dividend constitutes less than 30% of net income.

NH:

Recently, the policy was amended to suspend any buybacks until the group’s net debt is reduced by $10bn relative to the $32.5bn position reported at Q3 08, in response to an uncertain outlook.

The debt reduction is expected to be complete by the end of FY2009.
Payout ratio must expand beyond 30% to preserve dividend in FY09E
Our current expectations of ArcelorMittal’s near term earnings, payout, cash flow generation and financing requirements are presented in figure 3.

NH: Our current estimate for FY09E EPS implies that a payout greater than 30% is (temporarily) required for the company to deliver on its $1.5/share dividend, due to the deterioration of market conditions relative to the prior year, but we highlight that net earnings on our estimates is still sufficient to cover the outlay.

NH:

The cash flow statement is a similar story. While operating cash flow is by itself insufficient to fully absorb repayments and current capex plans (although we note that there is flexibility to cut a further $1.5bn if necessary), drawing down on its existing liquidity and debt facilities should help the group to manage its financing commitments and maintain its returns to shareholders.

4:24PM

SMI:

Financial Stability Trust aye

SMI:

Nice ring to it

SMI:

I have to say what’s interesting is the focus on ‘legacy’ assets

SMI:

Doesn’t consider the increasingly alarming outlooks for consumer credit (credit card ABS etc) and leveraged loans

SMI:

There is a very real sense that this is a bailout with no end in sight

SMI:

The Dow’s selling off a bit

SMI:

8079.48 -191.39 (-2.31%)

SMI:

And the S&P (our preferred index)

SMI:

is off 2.33 per cent

SMI:

Ir(c)eland – yes, that’s what I think too

SMI:

Here’s some comment from Marc Ostwald at Monument (via Tracy)

NH:

I am back

SMI:

Initial thoughts (details of the plan below):

1) a lot of this looks like a re-working of existing plans/programmes