Manhattan-New York

In Case You Missed It: Business News Round-up

Martin Mitchel of CTGContributed 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:

Economic Backdrop

  • Chairman of the Federal Reserve Ben Bernanke made his biannual speech to the House financial services committee. As he considers when to implement an increase in interest rates, he stated that the current low rates will persist for an ‘extended period’. If interest rates are increased too soon, the nascent recovery could peter out. If they are raised too late, inflation could take hold.
  • Figures released on the manufacturing industry in the UK suggested that it remains deep in recession. The latest CBI quarterly survey reported that companies’ order books fell at their fastest rate in 17 years.
  • This was further underlined by GDP figures for the UK that showed a 5.6% contraction in the economy in the year to June.

Mergers and Acquisitions

  • US power producer Exelon withdrew its hostile $7.5bn bid for rival NRG Energy after it was unsuccessful in its attempt to install its own nominees onto the NRG board.
  • The families that own Porsche decided to dismiss their chief executive and chief financial officer and agree to merge with Volkswagen. To end the long running saga that has seen Porsche build up a 50.8% stake in VW and saddle itself with €10bn of debt, the architects of the strategy were removed and an agreement was reached that will see the two companies merge in 2011. However the Porsche chief executive Wendelin Wiedeking will walk away with a pay off of €50bn, the biggest ever in Germany.
  • The search for a successful link–up between UK insurers Resolution and Friends Provident continued. Last week Resolution, a £600m London-listed vehicle with ambitions to restructure parts of the UK life and pensions industry, launched an all-share offer for Friends Provident. Friends Provident rejected the initial approach as ‘wholly inadequate’. Then Friends suggested a ‘pac-man’ defence – that a takeover of Resolution by Friends Provident was more appropriate. The chief executives of the two sides have now started discussions to see whether they can agree a way forward.
  • Citadel Securities, a unit of the Chicago-based hedge fund and trading firm, is taking a majority stake in Equiduct, one of Europe’s alternative share trading platforms. The move is aimed at replicating Citadel’s US success with its Direct Edge trading system that is aimed at retail investors.
  • UK travel company FirstGroup decided to withdraw its initial bid for National Express due to uncertainties surrounding its rival’s business. The withdrawal came after National Express requested the Takeover Panel to issue a ‘put up or shut up’ deadline to FirstGroup. However, National Express revealed that it has received a second takeover approach. The new bidder is a combination of Spain’s Cosmen family that already holds 18.5% of National Express’ shares and private equity group CVC.

Financial Institutions

  • Iceland announced a $1.5bn recapitalisation of its banking sector, as well as unveiling a deal that will hand control of two of the country’s healthy new banks to foreign creditors. The Icelandic parliament is also considering whether to ratify a deal to reimburse British and Dutch savers who lost money on the collapse of ‘Icesave’, the offshore savings arm of the collapsed Landsbankinn.
  • Credit Suisse is launching a joint venture with Reservoir Capital Group, a $4bn US alternative investment management firm. The JV will provide liquidity to the troubled hedge fund industry by either making loans or buying troubled assets. The venture will also be offered as a separate investment opportunity to Credit Suisse’s asset management clients.
    An interview with the chief executive of middle market investment bank RW Baird revealed who he thought was responsible for the current downturn – ‘It’s all about the greed of fixed-income people….. Go back and look at the history of Wall Street – Drexel Burnham, Salomon Brothers, Kidder Peabody, Bear Stearns, Long Term Capital Management, Lehman Brothers, Merrill Lynch – the fixed-income guys blow up every firm.’
  • The two largest pension funds in the US recorded steep losses in the year to 30 June. The California Public Employees’ Retirement System (CalPERS) saw the market value of its assets fall 23.4% over the year, from $237.1bn to $180.9bn. The California State Teachers’ Retirement System (CalSTRS) saw its investments fall 26.7% to $118.8bn from $162.2bn a year earlier.
  • Figures from Hedge Fund Research showed total assets under management by the world’s hedge funds rose more than $142bn in the second quarter of 2009. The hedge fund industry manages assets worth $1,430bn according to HFR.
  • HSBC, Britain’s biggest bank was fined £3m by the Financial Services Authority for failing to protect customers’ confidential details. In 2007 and 2008, two insurance divisions of the bank lost customer details when they were sent by post.
  • Morgan Stanley and Wells Fargo reported second quarter results. Morgan Stanley reported a $159m loss, mainly due to a $700m property writedown. The bank also repaid $10bn of Tarp funds crystallising an $850m dividend charge to the US government. Wells Fargo reported net income up to $3.17bn from £3.05bn in the first quarter, suggested it is building successfully on its acquisition of Wachovia Bank in 2008.
  • In contrast to the publicity that was given to the stress testing of US banks given government aid, the European Union plans to stress test all banks behind closed doors. All EU banks that have received government support will be tested when they seek approval under EU state aid rules. Furthermore, under the rules, organisations that receive government support for longer than 6 months are usually required to restructure their operations to offset the competitive distortions resulting from the aid. So it is likely that the aided banks like RBS and Lloyds Banking Group will have sell off branches and other assets.
  • JPMorgan Chase is going to raise the salaries for about 12,000 of its bankers and reduce their bonuses in a move that is hoped to both defuse public anger at excessive bonuses and avoid an exodus of talent. The changes will come into effect from January 2010.
  • In the Hong Kong legal case in relation to alleged insider dealing by a former managing director at Morgan Stanley, the bank’s local compliance systems at the time were described as ‘haphazard’, ‘inefficient’ and ‘hopelessly inadequate’. The accused was granted permission by compliance to deal in the shares of Citic Resources, whilst it is alleged he was in possession of material non-public information.

Credit

  • US online broker TD Ameritrade became the latest group to agree to repurchase auction-rate securities from investors. The deal is part of a settlement with regulators to compensate investors who lost out in the collapse of the market that was once worth $330bn. More than 20 companies, including Citi, JPMorgan and Morgan Stanley have already reached regulatory settlements resulting in more than $61bn of investor buy-back commitments. Charles Schwab is currently being pursued by the regulators claiming that it misrepresented the safety of auction-rated securities to its clients.
  • UK retail giant Tesco’s ambitions in financial services may require a separate credit rating. The financial services business plans to launch a current account facility within 18 months, and mortgages within 2 years. To allow the business to directly access the wholesale market for funding, it will need a separate credit rating to its parent.’
  • After being forced to write IOUs to creditors after running out of money, California suggested a budget deal to close a record deficit of $26.3bn. The deal will see the largest cut fall on education spending. However under Californian law education spending is protected, so the $6bn cut this year will be reimbursed over a 12 year period from 2012. In a further fudge, $1.2bn will be saved this year by moving the last pay day for state employees into the next fiscal year! However, cities and counties across California are preparing to sue the state to prevent it using their funds to close the $26.3bn deficit. The budget deal includes a measure to divert $4.7bn of funds earmarked for cities and counties.
  • A regulatory filing by troubled US lender CIT detailed the full terms of its $3bn rescue package from its creditors. $2bn will be available immediately and will incur a commitment fee of 5%, with a 1% fee applied to the undrawn balance. The book value of collateral is required to be 5 times the amount of the loan, and if CIT wants to retire the debt early it will incur a 2% exit fee. The interest on the borrowing is set at Libor plus 1000 basis points, and Libor has a floor of 3% under the deal.
  • UK property company Land Securities raised £360m through a securitisation of a London office let to the UK government. The deal was put together by HSBC and structured in a single tranche that was given a triple A rating by Moody’s.
  • The UK’s Debt Management Office successfully sold £5bn of index-linked gilts maturing in 2042 in what was the largest ever single transaction for a UK index-linked security. The gilts will pay 5/8th of a percentage point plus index linking and were sold in a syndicated offering with Barclays Capital, HSBC, JPMorgan and RBS as joint bookrunners.

Other

  • Research anticipates that the world’s next food and drink brands that will dominate the global markets will be from the emerging markets and Asia. The tipped top five brands are: (1)Juan Valdez Café, a Colombian coffee chain; (2) Almarai, a Saudi Arabian dairy and fruit juice company; (3) Patchi, a Lebanese boutique chocolate chain; (4) ChangYu, China’s biggest wine producer; and (5) United Spirits, India’s largest liquor group.
  • The Conservatives, the UK’s opposition political party, announced their plans for financial regulation if they win the next election. Responsibility for the prudential regulation of financial institutions will shift from the Financial Services Authority (FSA) to the Bank of England, and the remainder of the old FSA will become a consumer protection agency. Architect of the present regulatory regime Prime Minister Gordon Brown described the Conservatives’ plans as ‘unacceptable’ and ‘completely wrong’
  • Intel, the. recipient of the largest single penalty ever handed out by Europe’s competition authorities, launched a legal appeal against the fine. The €1.06bn fine was the result of a 10 year investigation and accuses the world’s largest chipmaker of abusing its dominant position and using illegal sales practices.
  • Two Chinese companies enjoyed successful IPOs. China State Construction’s Shanghai debut raised Rmb50.16bn ($7.34bn) and the retail tranche was nearly 48 times covered. BBMG, a Chinese construction materials maker raised HK$6.8bn in its Hong Kong IPO with retail investors applying for 775 times the number of shares available to them.
/by