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In Case You Missed It: News Round-Up

martin.jpgContributed by Martin Mitchell of the Corporate Training Group

In case you were too busy to have kept up with all the news, contributor Martin Mitchell has gathered some important market events from last week to help you start this week well informed:

Mergers and Acquisitions

  • As had been rumoured last week, mining group Rio Tinto announced a $19.5bn cash injection from Chinese state-owned Chinalco. The deal involves Chinalco buying $7.2bn of convertible bonds, plus spending $12.3bn talking minority stakes in some of Rio Tinto’s best mining assets. The bonds consist of two tranches that will pay 9% and 9.5% coupons and mature in 7 years. If converted, they will increase Chinalco’s stake from 9% to 18%.

  • Again in China, Bank of China has emerged as Beijing’s preferred choice of bidder for AIG’s Asian life assurance unit. The unit is expected to sell for about $20bn.

  • Three more inter-dealer brokers have approached the consortium that is considering bidding for LCH.Clearnet. Tullett-Prebon, GFI Group and Tradition want to join Icap and 10 banks in a counterbid against the non-binding offer from the US Depository Trust and Clearing Corporation.

Financial Institutions

  • Chinese insurer Ping An, the biggest shareholder in Fortis with 5% of the shares, and others blocked the planned sale of most of the Belgian bank’s domestic operations to BNP Paribas. The deal has been supported by the Belgian government that bailed out Fortis last year.
  • Goldman Sachs chief executive, Lloyd Blankfein wrote an opinion piece in the Financial Times in which he identified the following as giving rise to the credit crunch and ensuing financial crisis

  1. Risk management was entirely predicated on historical data.

  2. Too many financial institutions outsourced their risk management to the credit agencies. This overdependence resulted in the dilution of the coveted triple A rating. In January 2008 there were 12 triple A rated companies in the world and 64,000 structured finance instruments rated triple A.

  3. Size matters – although the likelihood of loss on a larger portfolio is the same as a smaller one consisting of the same assets, the consequences of miscalculation are much greater.

  4. Many risk models incorrectly assumed that positions could be fully hedged.

  5. Risk models failed to capture the risk inherent in off balance sheet activities, like structured investment vehicles.

  6. Complexity – the growth in new instruments outstripped the operational capacity to manage them.

  7. Financial institutions failed to account for asset values accurately enough.The lessons learned should see managing operational risk becoming more important, with risk and control functions completely independent from the business units. Furthermore, the percentage of discretionary bonuses awarded in equity should increase significantly.

  • The new US Treasury Secretary, Tim Geithner announced the eagerly awaited Obama stimulus plan that broadly consists of four planks:

  1. Further capital injections to financial institutions based on ‘stress testing’ to ensure banks can withstand a worsening of the economy.
  2. Unfreezing of the credit markets by an expansion of the existing $200bn Term Asset-backed securities Loan Facility (TALF) that could cost up to $1,000bn and should kick start the financing of student, auto, credit card loans, commercial mortgages and some residential mortgages.
  3. A public-private investment vehicle, with government finance and private capital to purchase ‘toxic debt’ from banks that could amount to $1,000bn.
  4. Foreclosure relief to keep people in their homes, reducing their monthly mortgage payments and establishing loan modification guidelines to curb the housing crisis. The cost is estimated at $50bn. The stimulus plan also includes a provision on executive bonuses – limiting the bonuses to those financial groups that have received government aid to one third of their total compensation and force the bonus to be paid in shares. Moreover, for those banks that have received more than $500m in federal funding (including Citigroup, Morgan Stanley and Goldman Sachs), the new measures will apply to not just the top five executives, but also the next 20 most highly paid employees.

  • At the start of the week, the brokerage arm of UBS in the US was reported as having started an aggressive hiring spree for financial advisers. It is offering large pay packets to lure them away from rivals such as Merrill Lynch, Morgan Stanley and Citigroup.

  • Later on in the same week, UBS reported the biggest loss in Swiss corporate history of SwFr20bn (£11.9bn) for 2008. It also announced further job cuts in investment banking of 1,500 to 2,000, and reductions in cash bonuses of 95% compared to the previous year. However, UBS did signal that it will retain its investment banking operations.

  • Buy-out specialists are circling Lloyds Banking Group and Royal Bank of Scotland as they anticipate the impending sale of their buy-out portfolios. These secondary private equity sales are likely to involve the £4bn to £6bn portfolio that Lloyds inherited from HBOS integrated finance business, and the £500m of investments in private equity funds by RBS.

  • Embarrassing apologies were forthcoming from four key executives at UK banks that were being questioned by the Treasury-selected committee – the four were Sir Tom McKillop and Sir Fred Goodwin of Royal Bank of Scotland, and Lord Stephenson and Andy Crosby of HBOS.

  • Investment banks are expected to reduce graduate recruitment by around 28% in 2009 according to the Association of Graduate Recruiters.

  • GLG Partners, one of London’s biggest hedge funds, ended the year with net assets under management of $15bn, down from $24.6bn a year earlier. Figures were also released by Och-Ziff, another NYSE listed hedge fund, reporting $22.1bn of net assets under management, down from $33.4bn at the end of 2007.

  • Lloyds Banking Group warned investors that the newly acquired HBOS had suffered worse than expected losses of £10bn in 2008. The main cause was HBOS’s corporate division that wrote off £7bn in bad loans.

Credit

  • Corporate lending by banks is becoming the ‘sprat to catch a mackerel’. With liquidity scarce and demand high, banks with the ability to lend are making cold, hard decisions about which clients to help and which to purge. Those that are kept will be expected to deliver all of their future investment banking business to their lenders.
  • Securitisation markets may not return to normal until at least 2011, according to a survey of industry participants.
  • On a similar theme, analysts at Wachovia and Morgan Stanley estimated that almost half of all the complex credit products ever built out of ‘slices’ of other securitised bonds have now defaulted. The defaults on collateralised debt obligations built from asset-backed securities are estimated to total $300bn.
  • The French government agreed to give Renault and Peugeot-Citroen €3bn each in loans for maintaining jobs and sites in France.
  • The Bank of England is planning to boost the money supply in the UK in response to the worsening financial crisis. The bank will buy government bonds and other assets to pump money into the economy, a process referred to as ‘quantitative easing’.
  • Moody’s lowered the rating of British Airways from the lowest investment grade of Baa3 to sub-investment grade Ba1. The airline is also at risk of losing its investment grade rating at Standard and Poor’s, where it is on negative watch.
  • Moody’s also put its 18 triple A rated nations into three categories – those that are ‘resilient’ to a downgrade, those that are ‘resistant’ and those that are ‘vulnerable’. The UK and US are classed as resilient, Spain and Ireland are classed as vulnerable, and the remaining 14 countries including Germany, France, Australia and Canada are classed as resistant.
  • French electricity company EDF is putting €5bn of assets up for sale to reduce debt and provide ‘margin for manoeuvre’. After acquiring British Energy for €13.5bn and a 50% stake in the nuclear power assets of US partner Constellation Energy for $4.5bn, EDF’s net debt was €24.5bn at the end of 2008, 1.7x EBITDA. So far this year, only $2bn of asset-backed bonds have been issued. This compares starkly with a total of $836.6bn in 2007, and $159.8bn in 2008. It is hoped that the Term Asset-backed securities Loan Facility (TALF) will begin to reopen the asset-backed securities market for business.

Other

  • Mead Johnson, the world’s largest maker of baby milk formula, staged the first US initial public offering of the year. It raised $720m, priced at the top of its range. The shares rose 9.6% on their first trading day on the New York Stock Exchange.
  • It was revealed that Bernard Madoff’s wife Ruth pulled $15.5m from a Massachusetts brokerage firm in the three weeks before his arrest.
  • UK property company British Land has launched a fully underwritten rights issue for £740m. The issue is for 2 new shares at 225p each for every 3 shares – a 53% discount to the share price before the announcement.
  • Britain’s biggest supermarket chain, Tesco is adding another 100 lines to its discount range, as it tries to fight off the threat of Aldi and Lidl. Tesco has 3 ranges, the ‘standard’ range, the cheaper ‘value’ range, and in between the ‘discount’ range. Some commentators have criticised Tesco’s attempts to segment its customer base as over-complicated.

Note : The details contained in this article have been drawn from a daily review of the Financial Times.

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