Markets live chat transcript for the chat ending at 12:15 on 20 Feb 2009. Participants in this chat were: Paul Murphy, FT (PM) Neil Hume, FT (NH)
Euro zone economy slumps further in February
UK home repossession orders up 14% yon y
GM unit Saab says to file for creditor protection
Oil falls below 39 dollars
US shares dive after US widens tax-dodge probe
A City banker ran up a £43,000 bill on champagne at a London nightclub, including a £5,000 tip for the waitress.
Copy of the £43,000 bar bill
The astonishing bar bill included two methuselah of Dom Perignon champagne at £9,000 each, and four jeroboam of Crystal champagne costing £4,500 each. A methuselah is eight times the normal bottle size, and a jeroboam four times.
His bill came to £43,067.50. A 15 per cent service charge, which amounted to £5,617.50, all went to the lucky waitress, who was called Anna.
The banker’s group, which included men and women, drank until 1.30am before he picked up the tab for his friends on a credit card.
Maya was hosting a party after the Brit Awards and is a venue popular with soap stars and Premiership footballers.
Other visitors have included actress Sienna Miller and singer Rihanna and the club operates a New York-style door policy where only those who the management deem “connected, fashionable and interesting enough” are allowed in. The club motto is: “If you’re not inside you’re outside.”
A club source said: “The guy comes here regularly. He and his guests were clearly not taking any notice of the recession.”
5 x bottle of Louis Roederer Cristal 99 Champagne – £350 each
3 x Magnum of Cristal Rose Champagne – £1,900 each
2 x Methusalem of Dom Perignon Champagne – £9,000 each
4 x Jeroboam of Belvedere Vodka – £750 each
2 x Jeroboam of Crystal Champagne – £4,500 each
15% service charge – £5,617.50
Total – £43,067.50
Preparation: The orange juice and apricot puree are mixed and poured into the custom champagne glass. The champagne glass and Black Pearl cognac (served in its own custom-designed glass) are presented on a crystal tray along with a bottle of Charles Heidsieck 1981 Champagne Charlie. The XS pearl necklace and cufflinks also are presented on the tray in their respective boxes. While the guests are “ooohing and aaahing” over their treasures, the server opens the champagne and finishes building the drink by pouring the Black Pearl cognac and 4 ounces of champagne into the glass with the juice mixture.
No word on tax or tip, or if they ordered a second round! C’est la vie in Las Vegas!
JOHANNESBURG, Feb 20 (Reuters) – The world’s largest diamond group, De
Beers, said its three shareholders have agreed to loan the company $500 million
to help it weather the economic downturn, following muted sales in 2008.
De Beers Managing Director Gareth Penny said on Friday the global
economic crisis was having a negative impact on sales of retail diamond
jewellery, liquidity and demand for rough diamonds, which had hurt the group’s
sales of rough diamonds.
“We expect trading conditions to remain challenging throughout 2009,”
said Penny.
“Last year had two very distinct halves, there was tremendous growth in
production and sales and increased prices, then sales slowed down
significantly,” Penny told a media teleconference from London.
the $500 million in loans from the company’s three shareholders.
“In light of the weak outlook for diamond sales, the shareholders of De
Beers have agreed to provide loans to De Beers, proportionate to their
shareholdings,” Anglo said.
De Beers’ two other shareholders are Central Holdings, representing the
Oppenheimer family, with a 40 percent stake, and the government of Botswana,
which has a 15 percent stake.
Finance Director Stuart Brown told a presentation that the cash would be
a buffer, but that De Beers was not cash-strapped.
“The additional funds will help De Beers withstand any shocks that may
come through during the year in these uncertain economic times,” Brown said.
Anglo said De Beers’ net interest bearing debt fell to $3.55 billion from
$4.06 billion in 2007 as a result of the benefits of a stronger dollar,
repayment of debt and shareholder support.
De Beers said total sales for 2008 rose 1 percent to $6.9 billion after
demand collapsed in the last quarter of the year.
Production fell 6 percent to 48.1 million carats, with production sharply
lower in South Africa after it sold its Cullinan mine and closed The Oaks mine,
the company said.
With the final 2008 dividend scrapped, the total payment for 2008 will consist of the interim dividend of 44 cents per share, down 65 percent from the total of $1.24 in 2007. Payments will resume as soon as possible, Anglo said.
Carroll told a conference call that although the firm was keeping an eye out for possible takeover opportunities, its planned mine expansions were the priority.
Overall a mixed set of results, with earnings coming in below CazE and consensus and the full year dividend suspended. Operating profit of $10,085m, 6% below consensus and EPS of 436c/sh 8% below consensus. On
a more positive note, net debt came in below our estimate and at the bottom end of guidance. The company also has over $7bn of available undrawn debt facilities as of the end of the year ($4bn net of 2009 maturities).
IN-LINE
8% below consensus and 9% below our numbers. The company had already reported on c.30% of its earnings. The miss at operating profit level came primarily from the base metals division, where sales volumes were lower than expected and
provisional pricing was a significant drain, with ferrous metals the only division to beat our estimates, although we note diamonds came in slightly ahead of consensus. EBITDA margin of 36% up from 34%.
130c/share.
Balance sheet & cashflow: balance sheet still relatively comfortable, with net debt at $11.0bn (38% gearing to total capital) from $5.4bn at the interim stage, with the second stage of the MMX acquisition making the biggest dent
($5.5bn). Committed facilities >$7bn at year end ($4bn net of 2009 maturities). Net debt has come in at the bottom of guidance of $11-12bn. We also note the company sold down c.$500m of its AngloGold stake over the past few days;
selling the remainder as Anglo has committed to do would raise c.$1.3bn at current prices.
Costs up 11% YoY at the group level.
experience volatility and downward pressure on commodity prices. The world economy faces an unprecedented level of
uncertainty and the outlook remains poor in the near term.”
special items of $10.1bn was in line with forecast but slightly below consensus.
Special items relating to impairments and re-measurements of $1.4bn resulted
in Group EBIT of $9bn, a miss of 18%. Reported EPS of $4.34/sh was 18%
below our forecast of $5.29/sh as a result.
Divisional performance — Anglo Platinum and Kumba iron ore reported last
week. Anglo Plat came in ahead of forecast due to higher sales volumes, lower
costs than forecast and a disposal gain on investments. Kumba was below
expectations due to lower sales volumes and cost pressures. Base metals was
also below expectations due to cost pressures and provisional pricing
adjustments.
Dividend — The final dividend was cut completely in order to preserve cash.
We believe this was expected by the market but may be taken as a sign of cash
flow weakness. Net debt was slightly higher than forecast of $10.3bn at $11bn.
2009. No changes have been made to this, however the company has provided
official cost saving guidance of $2bn by 2011 and is targeting headcount
reduction of 19,000.
Summary — Although operating performance was in line with forecast, overall
results were below Citi and consensus expectations. Against its peers the
valuation of AAL does not look compelling, trading on a spot 2009E PE of 13x
and we see a lack of catalysts in the near term. Maintain HOLD rating
Poor results released this morning form Anglo American, underlying earnings down 10% and underlying EPS coming in 11% below consensus. The shares were down 7% in Johanesburg, as the company also announced the suspension of dividend and share buyback plans until market conditions improve. Less concerning is the net debt of $11bn (as expected) with the company having undrawn bank facilities and cash of $7bn. The negative performance was offset by strong performances in coal (23% of operating profit) and ferrous metals (29%) – two areas with the negative outlook for 2009. Hardest hit was the base metyals division (26%), with operating profit down 42%YoY due lower prices and higher costs, and platinum (23%) down 17%. Anglo American has been a relative safe haven compared to the volatility seen in Xstata and Rio Tinto, but this may see the relative premium awarded to the miner reverse.
Prudential – Pru solvency figure helped by sale of troubled Taiwan business, sales in line [PRU.L, PRU LN,268p] IN LINE, sector – neutral
The Pru has reported FY08 new business (APE basis) of £3,024m, 1% above the consensus and 5% higher than 2007. UK sales were £947m, 1% better than consensus, representing an increase of 6% compared to FY07. US sales of £716m were 7% up year on year and 2% above consensus. Asian sales of £1,362m were in line with consensus and up 4% year on year.
The solvency position will increase a further £800m to £2.5bn upon completion of the disposal of the Taiwanese operation to Taiwan’s China Life for a nominal sum, and will result in an EV profit of £90m, although Pru have agreed to invest £45m in China Life equity.
This sale removes a serious guarantee problem: off balance sheet guarantee liabilities amounted to c£700m, and the disposal means that the eventual transition to MCEV (which would recognise these obligations) will be significantly less onerous. Pru Taiwan generated £24m of H108 IFRS pretax profit, equivalent to 4% of the global total. It generated H108 sales of £97m in H1, 6% of the global total and 13% of Pru Asia. The H108 EV of Pru Taiwan was negative £128m, even though the mark to market value of £700m of guarantees was off balance sheet. Although its sale makes sense from a risk management perspective, we expect the group to continue to expand in Asia both organically, and inorganically.
We have yet to see any explicit comment on the dividend but the solvency figure is so strong that we very much doubt this will be an issue today. Although the Taiwan disposal statement says it will have no impact on dividend paying ability it does not say what that ability actually is.
capital, and announced the disposal of its business in Taiwan. Firstly and most importantly on capital, the group IGD position at the end of 2008
was £1.7bn or £2.5bn including the impact of the sale of the Taiwanese business.
The end September figure was £1.2bn and our model was pointing to a year end
figure of £800-900m, mainly due to the reduction in bond yields in Q4. Pru was
allowed to include an additional £0.3bn in respect of future shareholder profits
from the with profits funds – the company has indicated that it may get further
relief up to £1.4bn. Equity markets -40% would reduce the IGD by £350m.
Sensitivity to a 150bp reduction in interest rates has reduced to £300m.
around 80bp pa of assumed defaults over the lifetime of the assets, which
equates to the default experience from the great depression occurring every year
for the lifetime of the book.
China Life (Taiwan) will buy Prudential’s Taiwanese business for a nominal sum.
The Taiwanese business is not liked by investors due to the high guarantees on
the back book and sensitivity to falling bond yields. Due to the high capital
requirements of the business, there is an £800m positive impact on Prudential’s
IGD position. The impact on the group EV will be +£90m (the impact on our fair
value will be much higher). There will be a one off IFRS hit of £595m, but this will
not affect the dividend paying capacity.
On sales, new annualised premiums (APE) came in at £3,024m (+5% YoY),
indicating a slowing trend towards the end of the year – the 9m run rate was
+16% YoY. This was in line with expectations. Within the split, Asian APE was
£1,362m (+6% YoY); UK APE was £947m (+4% YoY); and the US APE was
£716m (+7% YoY). Both the UK and Asian asset management businesses saw
positive net inflows (£3.4bn and £0.9bn respectively).
Prudential is one of our very few buy recommendations in the life sector. This
has been painful – as a pure life company and high beta, Prudential has been hit
hard by the market weakness and generally very poor sentiment this year, falling
more than 30% YTD. The shares closed last night at 5.5x 2010 EPS and 60% of
our EV. We see the announcements today as a major pressure release valve
and reiterate our buy rating.
considering disclosed capacity to release further capital from the UK with-profit
fund, very positively. This includes a £0.8bn release from the sale of its
problematic Taiwanese back book, which should increase embedded value by
£90mn. Sales were 1% ahead of consensus, and there should also be a small
positive mix impact on margins.
Management disclosed that December involved a
surge in Asian sales vs. the previous two months, and that US VA sales were
ahead of KBW expectations; both positives for the outlook and the franchise
value of the group. With a price to MCFV of 23%, at the bottom of the peer
group range and well below the c60% sector average, we see the stock as
incorrectly factoring in a capital event (we do not expect one to happen). We see
the dividend growing positively from 2008 onwards. Prudential’s unique agency
distribution and unit-linked/protection product focus are likely to lead to sales
outperformance and put the group in a unique position to bid for AIG ex-Japan
Asian operations, because it is the only other company that shares the same
business focus.
IGD very strong. The company disclosed an IGD surplus for 2008 of £1.7bn, helped
by the £0.3bn release from the with-profit fund. We were expecting £0.8bn before
management pulling any levers. Management flagged a further potential £1.4bn of
capacity to release capital from the with-profit fund. We believe there are even more
levers available to it here, e.g. Fin Re and converting £0.7bn of senior debt to
qualifying hybrid. The Taiwanese sale will add a further £0.8bn to the IGD surplus.
We estimate that a “1929″ style event would cost the group around £1bn in
impairments over the next four years.
Taiwan sale to remove the negative spread issue. Management announced the sale
of its Taiwanese agency sales force and traditional product back book. This will
increase embedded value by £90mn. A £0.6bn loss on IFRS NAV will occur from this
transaction, but we expect the £0.8bn release into the IGD surplus to offset any
negative sentiment from the IFRS impact. Management will retain its bancassurance
distribution channels in this market after the sale.
The bank is also hoping to sell its Mid-West US commercial banking business but to keep its retail banking operations on the East Coast.
Sir Fred added the Mid-West activities in 2004 when he spent $10.5bn (£7.3bn) on Charter One – a deal that set alarm bells ringing about his appetite for acquisitions.
RBS is understood to have sounded out Standard Chartered, the London-based Asian specialist, and Australia’s ANZ about the Asian operations, which include prized assets in India.
management business for £5bn.
Barclays bought BGI in 1995 for $440m. We anticipate Barclays
paying minimal taxable gain, therefore core tier 1 could rise from
6.7% (including cash raised from convertible instruments) to 7.9%.
A disposal would likely be eps dilutive. In 2008, underlying BGI
profits were 30% of group PBT (ex acquisition, disposal gains). BGI
has contributed significant growth (BGI operating PBT increased
from £71m FY 2001 to £858m FY 08).
Barclays could be thinking of this transaction as a way to raise capital to
pay for the UK Govt asset guarantee scheme. We expect the details of this
scheme to be announced next week. However it is possible that banks will be
allowed to defer payment, or pay in bonds or tax assets.
incentivise BGI staff in the new “no bonus” environment. Historically a
BGI scheme allowed for 20% of BGI to be optioned to key employees. When the
options converted to shares, which were then bought back to prevent dilution,
this was treated as an investment with no p&l impact. In part this explains the
42% CAGR BGI profit growth noted above.
Either way, although we think £5bn is a good price in the current
environment, we are unconvinced that a disposal plugs much of a hole in the £2
trillion Barclays balance sheet. Though Barclays won’t thank us for the
comparison, Lehman’s were attempting to sell their investment management
Neuberger Berman in August 2008. We rate BARC Reduce.
If sold at this price it could improve the capital position by c£4.5bn adding 100bp to the Equity Tier 1 ratio – our stress test (peak loan impairments of 3%, 35% write off of structured credit and 35% reduction in GOP) suggests that the company may need an additional £6.6bn of capital so this would go a long way to filling the gap but still leave Barclays short of c£2bn capital with a stressed equity tier 1 ratio of 3.5% compared to the FSAs floor level of 4%
The Department of Justice filed a suit seeking to force UBS to disclose the holders of accounts with about $14.8bn (£10bn) in assets. It alleged UBS, Switzerland’s biggest bank, engaged in cross-border securities transactions in the US that it knew violated security laws and helped US taxpayers set up dummy offshore companies.
The Department of Justice filed a suit seeking to force UBS to disclose the holders of accounts with about $14.8bn (£10bn) in assets. It alleged UBS, Switzerland’s biggest bank, engaged in cross-border securities transactions in the US that it knew violated security laws and helped US taxpayers set up dummy offshore companies.
“UBS believes it has substantial defences to the enforcement of the John Doe summons and intends to vigorously contest the enforcement of the summons in the civil proceeding,” the bank said in a statement.
We have heard that the govt may release details of the APS on Thursday, also – so, as usual, expect it to be leaked to this weekend’s press ahead of a regulatory announcement. RBS is likely to be a key winner if the scheme is sensibly constructed and priced.
¦ Asset sales to be a feature through 2009 – tough to benefit from
Much as bull markets draw mgmt teams into M&A, the opposite is true now. Barclays was rumoured to be selling BGI for up to £5bn yesterday, this would be a c.80bp addition to equity Tier 1 but BGI is a jewel in the Barclays crown. The Independent is now reporting RBS as looking to sell ABN’s Asian assets (little surprise) and Charter One (difficult). The Asian assets cost c.£10bn but would likely be sold for little better than book value i.e. little capital gain. Charter One cost $10.5bn in 2004 – a very different market. It is fully integrated into Citizens, we believe, which means a carve-out and sale likely to be logistically tough. Easier would be a sale of the whole of Citizens but this represents £114bn of loans with book value likely to be £5-8bn. Not only is the appetite for US banking assets weak but this would be a relatively large transaction – a sale would streamline RBS but appears rather desperate action with limited capital accretion likely.
Following last Friday’s profit warning, we now know that equity Tier 1 will be 6.0-6.5% – we estimate near the bottom of that range. That makes Lloyds relatively weakly capitalised but the fair-valuing of the HBoS balance sheet does mean that this is a capital ratio partially incomparable with peers and calculated conservatively. Asset quality is key – Barclays alluded to a “sharp downturn” in commercial quality in its recent results (9 Feb) and last week’s profit warning was due to this as well as the private equity-style business. Flow of new NPLs will determine just how loss-making the group is in 2009 and therefore the nadir of the capital ratios. With capital already optically weak and with few assets to sell (Insight could generate 50-80-bps of equity Tier 1 gain but is only capital-generative sale that is at all possible, in our view), Lloyds is most at-risk of requiring more capital in 2009, we estimate.
regarding the possibility of the UK government being more generous in
the terms of the asset protection scheme, which we expect to see
unveiled over the coming week. From the underlying tone we conclude a
couple of things (i) the UK government is considering all possible ways
to be lenient on the banks; (ii) given the emphasis on RBS (and the fact
we expect the details of the scheme to be announced on the same day as
their FY results (26th Feb)) it is increasingly clear, that at least this
initial announcement is being tailored to RBS. We believe the emphasis
will initially be predominantly on commercial real estate of which RBS
has £115bn (UK and international). This will also be applicable to
Lloyds (mainly through HBOS, where combined exposure to commercial
real estate is £70bn) and less so to Barclays (note at FY presentation
Barclays mentioned it would consider the financials of the scheme and
decide whether they would get involved.
government has to consider;
• (i) Size/type of assets covered – In the original announcement qualifying
assets were commercial and residential mortgage loans, structured credit
assets including certain ABS and certain other corporate and leveraged
loans (UK and international) and their hedges. In our base case, we
assume £100bn of loans at RBS, £90bn at Lloyds Banking Group, £63bn
at Barclays and £55bn at HSBC. Note our estimates of ‘bad’ assets only
take loans (not treasury assets) into account so the number is likely to
differ from this. Note the smaller the assets protected, the less likelihood
of success and hence less trust on remaining NAV figures;
• (ii) Fee or premium charged – In both articles there seems to be an
emphasis on the size of the fee. In previous similar deals the fee has
tended to be 3-4%. The question is whether this fee is taken on an annual
basis or spread throughout the life of the scheme. Note that by spreading
this it is simply the time-money value, but it can make a marginal
difference in helping the cashflow of the banks which is crucial, so it is a
likely area of government ‘generosity’. In the original announcement, the
government also mentioned that this fee does not necessarily have to be
paid in cash hence the mentioning of preference shares or other forms of
debt to pay for this;
will have to pay. It is unclear whether this will be 100% or 50% deducted
from Tier 1 capital – we suspect it will be 50%, similar to the 2012
insurance treatment. We could see the UK government being even more
generous and decide that the deduction will wait until 2012, applying the
‘double accounting’ treatment as insurance…
If there’s one thing our readers know, it’s that ChartingStocks.net has made some bold calls in the past which seemed controversial and highly unlikely at the time. Our January 2007 post warned of the coming stock market crash at a time when the market was making new all time highs. In February 2007 we warned about the breakdown of the brokerage stocks and singled out Bear Stearns (Trading at $160), Merrill Lynch (Trading at $87), and Morgan Stanley (Trading at 78).
We’re going to make another bold prediction. Bank of America and Citigroup won’t live to see May. The two banks will be nationalized in the coming weeks, and we think that the announcement can come as soon as tomorrow evening (Friday evenings are when major bank announcements and failures occur).
The US government has already committed half a trillion dollars to these two firms which is more than 10 times the amount it would cost to buy and control both companies. The market doesn’t believe that $500 billion is enough to save these companies.
Today both banks made fresh new lows with Citi closing at $2.51 and Bank of America closing at $3.93. The 1 year charts below show the short term price movements. You should understand that when a bank stock’s chart looks like this, even a HEALTHY bank would be in trouble. Nobody wants their deposits tied up in a company that trades at $2. The outflows of deposits from Bank of America and Citi must be catastrophic.
Cattles has announced an undisclosed delay to its full year results (previously due Thursday 26 February) “pending completion of a review of the adequacy of its impairment provisions”. The exact outcome is unknown at this stage but “it is expected to result in profit before tax being substantially lower than current market expectations”.
On 7 January the company had announced that “credit quality remains within reasonable tolerances” and “had no bearing” on its announcement that day that it would be curtailing lending. On 26 January the company officially withdrew its application for a banking licence.
While we believe that Cattles will survive – it makes more sense for the lending banks to renew facilities at punitive rates than to withdraw funding completely in our view – that is quite different to believing that there is value in the equity. We expect a dilutive recapitalisation of the business in due course.
We retain our UNDERPERFORM recommendation.
Cattles statement this morning makes it almost impossible for us to ascribe a
current value to Cattles, in our view. Reflecting this, we have moved the stock to
no rating. We will review our estimates, but it is likely once we get clarity from the
company, that we will need to cut our estimates significantly.
FY 08 results delayed; higher provisioning
The company has this morning announced that it will delay the publication of its
FY 08 results, pending a review of its impairment provisions. The company
comments that PBT will be “substantially lower than current market expectations”.
Likely to complicated refinancing
This announcement is likely, we think, to complicate the company’s negotiations
with its banks; we understand it is aiming to refinance a significant amount of debt
in H1. In addition, the company has debt covenants. Such a restatement could
presumably bring the company closer to these levels
pending completion of a review of the adequacy of impairment provisions. We
expect this could result in PBT substantially lower than market expectations.
Debt Covenant Concerns — Reuters consensus is for ￡170m PBT. Our
immediate concern is that substantially lower PBT could mean breach of the
1.75x interest cover covenant associated with bank debt and private placement
notes.
What’s the Buffer? — We forecast ￡172m interest expense in 2008, meaning
that if PBT was less than ￡129m, it would breach 1.75x EBIT/interest expense.
￡41m is equivalent to an 11% increase in our forecast of ￡376m loan loss
impairment charges – unfortunately quite possible, in our view.
Debt Restructuring? — Risk of covenant breach overshadows our previous
concern over ￡500m re-financing in July. With the market cap currently at
￡70m, we believe that any sort of debt restructuring would likely be highly
dilutive, leaving little excess cashflow or business value to existing equity
holders.
book of ￡3.2bn. If Cattles liquidated this loan book at an impairment loss ratio
of 20% (realising ￡2.56bn) at annual cost of ￡53m p.a. (15% of the 2007 run
rate), there would be zero value left for equity holders after repaying debt.
New target price — With the risk of debt covenant breach now looking
significant, we set a new price target half way between our previous price target
of 18p (based on an ‘orderly run off’ of the company at 14% bad debt charge,
already 2% higher than the 2007 run rate) and our new 0p estimate of value
where the bad debt charge rises to 20%.
Read Through — Whether fair or not, we expect the market to read through
negatively to the other consumer credit play in the sector: Provident Financial
Senior German official says 35 institutions worldwide would come underssupervision in G20 plan.
Hello??????????????
of the Group of G20 nations should send a clear message against
protectionism at a meeting on Sunday, a senior German government
official said on Friday.
He also said the leaders should set criteria for state aid
and that the countries aimed to discuss common critieria for
risky securities.
services group ING Groep NV
their lowest level ever following a newspaper report that the
company might miss coupon payments on its tier 1 obligations.
Paul Beijsens, analyst at Theodoor Gilissen, pointed to
comments in Dutch daily Het Financieele Dagblad by the smaller
Dutch Kas Bank
coupon payments on its hybrid tier 1 obligations.
“A lot of investors are just getting anxious and are walking
away from the stock,” he said.
payments, then we would do that by giving a notice to the market
immediately, and we have not done so at this moment”.
His comments came as the builders’ merchant and owner of DIY chain Wickes reported a 44 per cent slump in annual profits to £146.3m and said that the challenging trading conditions would continue until 2011.
Chief executive Geoff Cooper said: ‘We want to make it clear to short sellers that we will not be meeting with them. They are working against us, they’re not interested in investing in us for the long term. Why would we want to give them any insight into our business? They don’t help the situation.’
However Cooper believes short sellers are to blame for what he called a ‘disproportionate movement’ in the share price.
company indicates potentially considerably higher
risks – ALERT
• Sibir Energy share trading on AIM was suspended on Thursday at
the request of the company. Sibir’s nominated advisor Strand Partners
Limited was informed late on February 18 that two circulars published
by Sibir (related to real estate deals) were not correct.
$115 mn, as was stated in the latest circular, the company disclosed
on Thursday. A full statement detailing all the facts will be made once
the company has all information. In the meantime the EGM arranged for
February 27 (related to canceling all real estate deals with Mr.
Tchigirinski) is postponed until further notice.
• Tchigirinski’s debt might have been transferred to the company.
There are no details in Sibir Energy’s current disclosure. However in the
circular posted on December 3 the company proposed the second real
estate deal (worth $340 mn) by paying in cash and assuming certain
existing debt of Mr. Tchigirinski at $213 mn. We suppose that the
increase in Mr. Tchigirniski’s debt to the company from $115 mn to
$325 mn might be explained by possible transference of this debt to Sibir
Energy.
was transferred to the company, then Sibir Energy’s financial position
could be considerably riskier than anticipated before. First of all, its
current net debt might be $444 mn, or almost two times higher than it
was expected before. The second issue is that the company’s exposure to
real estate assets owned by Mr Tchigirinski might amount to $446 mn
rather than the $236 mn estimate based on all previously disclosed
information. So refinancing risk and exposure to real estate business
might be significantly underestimated in this case.
• Significant corporate governance risks. Low transparency and absence
of disclosure imply significant corporate governance risks for the
company in our view. Moreover a core shareholder getting funds from
the company and possible transference of his debt to it indicates
significant potential risks related to refinancing and exposure to real
estate.
Topic: Trading in Sibir Energy shares was suspended yesterday at the company’s requestafter it was revealed that the company had severely underestimated the key shareholder’s debt to it. After the suspension, the company reported that it now believes Tchigirinsky owes USD 325mn to the firm, instead of the previously disclosed USD 115mn. Nofurther explanation of the error was given, prompting wild market speculations. In addition, Sibir stated that the upcoming February 27, 2009 shareholders meeting will be delayed indefinitelywhile the company studies its ability to recover the debt and the reasons for the material errors posted in the circular to shareholders on 11 February 2009.
Our view: While we await official disclosure on the course of events that have led to the emergence of the additional debt, we note that the amount due to the company falls in line with the total debt owed by Tchigirinsky to Sberbank. We continue to think that the debt pertains to his non-oil-related activities, although we cannot rule out that new circumstanceshave emerged, complicating the situation even further.
Our estimates show that the company’s value estimates would decline by 21% if the firm is unable to recover the money borrowed by the shareholder. In our opinion, a strong share price correction is unavoidable, and we believe the stock may lose over 30% in value once trading resumes, as the markets tend to overreact to negative surprises of this kind. In addition, we believe the story will remain unattractive to all but the most adventurous investors, hampering performance even if the company manages to recover the debt. We reiterate our view that only a change in shareholder structure will unlock the value of Sibir’s core assets.
