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Market News Roundup: Week Ending 25th October

Contributed by Martin Mitchell of The Corporate Training Group (CTG)

Most people are so busy working at their day jobs to stay on top of the masses of news that is out there. We aim to bring you a quick press digest every Monday morning so you can enjoy your weekend and ensure that you didn’t miss a beat from the international financial and corporate news the week before. Start the week off right, and arm yourself with some great watercooler conversation.

The week that was:

Monday 20th Oct 2008

  • Private equity group CVC is in pole position to acquire a 51% stake in Direct Line, the insurance business owned by troubled UK bank the Royal Bank of Scotland. It is competing against Allstate, the US insurer. The deal is expected to value Direct Line at £6.3bn.
  • The Dutch banking and insurance group, ING accepted a €10bn injection from the Netherlands government. The government will buy a new class of securities that do not have voting rights, but pay an 8.5% coupon with a step up guarantee to match ordinary dividends and a buy back option at 150% of the face value. The securities are unsecured bonds that will count towards ING’s tier one capital. The injection was negotiated just after ING announced a quarterly loss of €500m. The loss was due to impairments on equity, bond and real estate investments plus losses due to the collapse of other banks and higher loan provisions.

  • South Korea announced a $130bn rescue package for banks and companies as it suffers a foreign currency liquidity crunch.
  • Russia’s richest man on paper, Oleg Deripaska needs to refinance $2bn of financing by the end of October or he will have to hand over 25% of the world’s biggest nickel mining company. The stake in Norilsk Nickel has been pledged as collateral against the loan. He is rumoured to be discussing the possibility of raising the finance from VEB, the state-owned Russian development bank. The lending banks include BNP Paribas, Merrill Lynch, Credit Suisse and RBS.

Tuesday 21st Oct 2008

  • The French government is to inject €10.5bn into the country’s six largest banks. Credit Agricole will receive €3bn, BNP Paribas €2.55bn, Societe Generale €1.7bn, Credit Mutuel €1.2bn, Caisse d’Epargne €1.1bn and Banque Populaire €0.95bn.
  • Merrill Lynch CEO John Thain warned that ‘thousands’ of employees will be laid off after the takeover by Bank of America.
  • The UK government announced that the first half of the fiscal year saw borrowing of £37.6bn, against a March prediction by the Chancellor of the Exchequer of just £43bn for the whole year. Despite this, the UK Prime Minister still insisted the government will accelerate capital programmes to give the economy a Keynesian boost.
  • Money market rates began to shows signs of easing, with the 3 month $ Libor fixing at 4.06%, a drop of 36 bps from Friday. Sterling and Euro 3-month Libor rates also fell to 6.11% and 4.99% respectively.
  • The credit market also showed some signs of life, but only at a cost. Last week, the State of California was able to raise $5bn enticing retail investors with a 4.25% yield for debt that will be repaid next June. Earlier in the month, IBM issued bonds in three tranches, it raised a total of $4bn – $1.4bn in 5 year bonds yielding 6.584% (a spread of 387.5bps over US Treasuries), $1.6bn 10 year yielding 7.679% (a spread of 387.5bps over US Treasuries) and $1bn 30 year yielding 8.099% (a spread of 400bps over US Treasuries).
  • Iceland is poised to announce a $6bn IMF-led rescue package, which will also include contributions from central banks from the Nordic region and Japan.

Wednesday 22nd Oct 2008

  • UK stockbroker, Evolution Group, sealed the deal to purchase the investment management arm of Kaupthing Singer and Friedlander. The price was not disclosed, but is thought to be mid single-digit millions of pounds.
  • Billionaire investor Kirk Kerkorian has decided to sell his stake in Ford Motor Company, saying he saw more value in his gambling assets. He spent around $1bn building a 6% holding, and based on current prices is looking at a loss of more than $700m.
  • Barclays Bank announced plans to issue the first public bond using the UK government guarantee. The bond issue is expected to raise around €1bn with a 3 year maturity. The UK government guarantee charges a fee based on the bank’s average premium in the credit derivatives market in the year between October 2007 and 2008, plus a further 50 basis points. The bond is expected to carry a triple-A credit rating.
  • BayernLB, the German bank, has announced that it will request a €5.4bn capital injection from the government to shore up its balance sheet. The money will be the first from the German government’s €500bn rescue fund.
  • The UK Treasury is planning a loan of around £3bn to Iceland, so that Iceland can repay the UK depositors in Icesave, the online banking unit of Landsbanki, the collapsed Icelandic bank.
    Europe’s Airbus plans to use €1bn of vendor financing to assist the sale of aircraft as airlines struggle to raise finance from traditional sources.
  • Nokia has become one of the first European corporates to link the price of its loans to its credit default swaps, rather than a margin above Libor. Similar deals have been reached with several US borrowers already this year.


Thursday 23rd Oct 2008

  • The US government’s planned $125bn capital injection into nine financial groups is expected to result in further consolidation. In particular, JPMorgan and Citigroup are expected to use the aid to fund cut-price deals in smaller regional banks.
  • The Depository Trust and Clearing Corporation (DTCC) of the US and Europe’s LCH-Clearnet signed a preliminary agreement to combine their businesses. The combination will create the world’s largest, and the first transatlantic clearing house. DTCC will acquire over a three-year period, all of LCH-Clearnet’s shares The price paid will be determined by LCH-Clearnet’s revenues over the period, and will be up to €10 per share.
  • The sale of the business information division of European publisher and information provider Reed Elsevier looks to be in difficulty. Valuations for Reed Business Information have fallen substantially, as its owner Reed Elsevier considers the third round of bids. Initially valued at £1.25bn, the expected proceeds are now less than £1bn, and potentially as low as £750m. However, analysts feel that Reed Elsevier will accept a lower price, to assist in repaying other short term bank facilities. The third round bidders are Bain Capital, TPG and a former non-executive director of Reed Elsevier, Strauss Zelnick.
  • The Belgian government is furious that Fortis paid its CFO a bonus of around €4m when he was demoted in August. Fortis is now 49% owned by the Belgian government, and the Belgian Prime Minister said the government would seek to have the pay-off reversed.
  • The Chinese securities regulator has ordered a state-owned power group to cancel it oil derivatives contract. The contract involves a Goldman Sachs subsidiary in Singapore that entered into a derivatives contract with the Shenzhen Nanshan Power. The deal requires the Goldman subsidiary to make payments to Nanshan of $300,000 per month as long as the price of a barrel of oil remains above $63.50. However, if oil drops below $62 per barrel, Nanshan have to make payments to the Goldman subsidiary based on a formula that could amount to $4.8m per month. The Goldman subsidiary has been making payments since March, and the regulator has only made its statement as the oil price has tumbled and approaches the point at which Nanshan could lose out.
  • Russian gas company Gazprom warned that the financial crisis could make it difficult to obtain new borrowings and refinance its existing debt.
  • The FSA, the UK financial services regulator, announced that the ban on short selling 32 financial stocks (including the biggest UK banks) will continue until January 2009. The announcement was the result of the regulator’s 30 day review of the rule.

Friday 24th Oct 2008

  • The Prudential, the UK insurer, is considering acquiring a number of assets from AIG, the stricken US insurer. It was initially thought that the Prudential would only be interested in the Asian operations, but its CEO indicated the interest was wider. People familiar with the Prudential speculated this could include the US life business.
  • Goldman Sachs plans to cut 10% of its workforce, in response to the financial slowdown. The bank’s headcount is currently around 32,000.

Saturday 25th Oct 2008

  • Pennsylvania’s largest bank, PNC Financial, made use of the US government’s recapitalization program to merge with weaker rival National City. The $5.58bn deal will see PNC pay $2.23 per share, plus $384m in cash to certain National City warrant holders. PNC will tap the US Treasury by selling $7.7bn of preferred stock and warrants. The deal marks the first of what is expected to be a number of deals financed under the Treasury’s program.
  • Hot on the heels of the announcement of the decision to cut around 10% of the global workforce, Goldman Sachs is set to announce its admission to ‘partnership’ status. In order to hold the number of partners at 320, and accommodate around 100 new partners, 100 existing partners will be ‘de-partnered’. Most of the ‘de-partnered’ tend to leave the firm.
  • RBS is expected to make between £4bn and £5bn of writedowns in its second half. The first half year saw £5.9bn of writedowns and details of further writedowns are expected as RBS publishes its prospectus next week. The prospectus relates to a £20bn capital raising, £15bn in ordinary shares underwritten by the UK government, and £5bn from the government in the form of 12% preference shares.
  • General Motors financing arm, GMAC, is facing a big test repaying its maturing debt. As conditions in the credit markets continue to be difficult, questions are being asked as to whether GMAC will be able to find replacement finance to repay $1bn of debt due on January 14th.
  • Private equity firm Terra Firma has admitted there will be no quick fix for EMI, the record company it bought in a £4bn deal just before the credit markets turned. Plans to securitize the royalty receipts from the back catalogue are difficult to execute in the prevailing credit markets, so Terra Firma are trying to improve performance by cost cutting. Apparently, EMI spent £700,000 on London taxis in the last year and some 88% of its artists make a loss.
  • Retail giant Tesco has issued a plea to all its non-food suppliers to wait an additional 30 days for their money. The timing of the change will free up millions of pounds in additional working capital in the run up to Christmas.
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