Trust is one of those touchy-feely words that gets thrown around a lot, but whose true value isn’t felt until it’s lost.
Banks and insurers are looking for ways to bolster their capital, while having the flexibility to strike if there are acquisitions to be had on the cheap. To achieve these twin goals, Spain’s Santander and now British insurer Aviva intend to float minority stakes in subsidiaries.
UBS has always looked down its nose at its cross-town rival, but Credit Suisse under Brady Dougan has turned the tables on the blue-bloods. As UBS remains mired in a potentially catastrophic legal tussle with America’s tax collectors, CS is winning market share across the board.
from Neil Unmack:
Banks holding European commercial mortgage-backed securities at par on the basis that they stand at the top of the pecking order when it comes to repayment should think again.
Even some of the most senior-ranking bonds backed by commercial property loans will have to be written down as the downturn bites. And with about 120 billion euros of European CMBS outstanding, the numbers are big.
Many of the underlying loans are underwater. But companies who manage the debt have refrained from taking aggressive action and enforcing on the loans on the basis that prices may recover, rents are still being paid and borrowers are still up to date on their interest payments.
Their approach is simple enough. Why risk losses from a fire sale if the market may recover by the time the debt comes due five or so years down the line? In fact, of the 1,100 loans packaged in European CMBS, only 39 are classified as being in "special servicing" -- shorthand for having a problem -- according to Standard & Poor's.
One deal where the servicer isn't taking this wait and see approach is a 487 million pound deal called Epic Industrious by Royal Bank of Scotland for now-defunct property firm Dunedin, which was placed in administrative receivership last year.
Ernst & Young is set to sell the properties to vulture fund Max Property, after a smaller auction last week. This is likely to mean losses for senior creditors -- a first for CMBS bondholders in this cycle.
As well as a ridiculous name, Epic Industrious has other peculiarities which suggest a wider fire sale of properties from other transactions isn't likely in the near term.
Firstly the borrower is in administration, necessitating a more speedy resolution than in situations where a loan is simply in default and can be worked out over time.
Another complexity is the fact that the deal is a so-called synthetic CMBS, in which RBS used credit default swaps to shift the risk of the loan to bondholders. In these deals banks may be incentivised to work out the debt speedily, whatever the losses, and claim on the insurance policy provided by bondholders.
Epic Industrious shows how severe losses will be in some CMBS deals. While some loans are still backed by strong properties worth more than their debt, and generating more than enough cash to service the debt, it is clear that property markets won't have recovered enough by the time many loans come to be refinanced.
Declining rents will tip more loans into default and many will fail to refinance at maturity.
Moody's noted in a recent report on a deal created by Credit Suisse that originally parcelled 10 loans that it expects "a very large portion'' of the portfolio to default, suggesting that the benefits investors thought they would get by diversifying their risk across a pool of loans is worth little in practice.
Tackling problem loans now, and selling some or all of the assets, may yield better recoveries than simply hoping for a market revival.
Much of this pain is already priced into CMBS, with senior bonds trading at about 70 cents in the euro or less. While some banks will hold at market levels, others may have only partially written them down after last year reclassifying fair value assets into loans and receivables.
Anecdotal evidence suggests some banks are still holding senior tranches at par. This looks hopelessly optimistic. A raft of recent and looming rating agency downgrades will force them to increase capital reserves and prompt them to sell, even if it means taking a loss.
Prepare for a rocky ride in bricks and mortar.
from Margaret Doyle:
LONDON, July 16 (Reuters) – As befits a former senior civil servant, David Walker has produced a review of governance of British financial institutions that is acutely tuned to political sensitivities. His proposals would make banks more bureaucratic and more regulated, while bankers’ pay will be more open. In short, they will be treated more like the arms of the state that they have become.
Bankers will groan at the 39 draft recommendations for improving their performance, but they have received, one way and another, 1.3 trillion pounds of taxpayer support, or over 20,000 pounds for every man, woman and child in the land.
This alone justifies Walker’s proposals of a more intrusive and prescriptive approach to pay, even though he admits that pay was the least of the many causes of the financial crisis.
Less emotive, but more important, are his proposals on boards and shareholders, whom he clearly feels are the unspoken villains of the piece. Chairmen would become serious figures in financial institutions, responsible for holding dominant chief executives to account. With the enhanced scope of this role, it is unlikely they could do much else, even to chair another (non bank) company.
Non-executives, too, should expect the job to become part-time employment, with training, support and external advice. This would mean the end of the politically-correct drive towards diversity. Conveniently for him, Walker says he has no interest in such agendas. He prefers to push for proper risk committees, taking a view on the macroeconomic environment as described, for example, in Bank of England reports,.
Walker is scathing about shareholders, whom he views as complicit at best and responsible, at worst, for the excesses of the boom- as he asks, who demanded all those share buybacks? He wants fund managers to commit to “principles of stewardship”, with a requirement to “engage” with managers at the companies they own.
He’d also like to see a change in board culture, whatever that may mean. This, like his other proposals, sounds sensible, but is mostly wishful thinking. That there is something rotten in the way we do banking in the early 21st century is beyond doubt, but this report, however well-meaning, doesn’t take us any nearer to curing the disease.
Lots of posts and articles are circulating about the Department of Justice’s investigation into the derivatives market and specifically the dealers that own Markit – the administrator of popular credit default swaps indexes and aggregator of CDS prices.
John Kingman has finally stated the obvious. After nine months of near-silence, the civil servant responsible for managing the UK government’s bank shareholdings has piped up to say Britain must be patient in recovering the 35 billion pounds it has so far injected into Royal Bank of Scotland and Lloyds Banking Group.