The Great Debate UK

Barclays shouldn’t vendor-finance iShares

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REUTERS– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –

Barclays’ hasty deal to sell iShares in April served its purpose. The $4.4 billion price-tag boosted the bank’s capital, thereby allowing it to dodge the government’s insurance scheme. Barclays should now seek better terms on the deal.

A month is a long time in the markets. Barclays sensibly agreed with the purchaser, the private equity firm CVC Capital Partners, a “go shop” clause, allowing it to seek higher bids before June 18.
Several other parties have now entered the fray. With the markets storming higher, it should be possible for Barclays to improve on the CVC deal.

One way to do this would be to get a higher price, and this should be possible. But Barclays should also negotiate better financing terms. The current terms hark back to the “cov-lite” days of private equity, where banks extended credit without strict covenants.

RBS and Barclays: not monolithic on monolines

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REUTERS– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –
Barclays thinks the insurance it has against its “impaired assets” is worth twice as much as RBS seems to believe. It’s hard to see how both could be right.
On May 7, Barclays said that it expects to get 76 percent of any claim made against its “monoline” insurers. The following day, RBS said fat chance — we think it’s 35 percent. They may not have the same insurers, but they are also coming from the problem from different angles.
Unlike Barclays, RBS is already attached to the government teat. Because RBS has taken a huge capital injection from the state, chief executive Stephen Hester had much less to lose than his counterpart at Barclays John Varley in admitting that things are looking grim.
For Barclays, it makes more sense to take losses only as fast as you earn enough to cover them.
Moreover, RBS has also already agreed to join the government insurance scheme. RBS said that around 75 or 85 percent of the 4.9 billion pound headline hit in the first quarter was to assets that will end up in the government’s Asset Protection Scheme (APS). RBS has to take 19.5 billion in losses before it calls on the government purse. These numbers show that it has already chalked up around 4 billion of that first loss.
Moreover, that huge figure excludes 755 million pounds of trading asset write-downs. That means the bank’s total losses for the quarter were 5.6 billion pounds.
RBS’s 51-page report also reveals the details of another banking farce. It has 31 billion pounds-worth of bonds outstanding. The market is sceptical about RBS’s ability to repay this, and has marked the bonds down accordingly. In this quarter alone, that market write-down equates to more than 1 billion pounds. RBS has taken this as a “profit”.
Hester himself rightly flags up that there are more headwinds to come. There will be further losses as the recession deepens.
Net interest margins are likely to remain compressed. While the banks may get away with what they term asset pricing (higher interest charges on our loans), it will be a while — if ever — before their funding costs return to pre-crunch levels.
Longer term, regulators will demand that banks set aside more capital against the loans that they make, thus depressing equity returns.
Hester may think there is mileage in being frank. But he should be careful. After all, RBS has not agreed final terms on the APS with the government. Having seen these numbers, it may decide that RBS should be forced to pay harsher terms.

Credit Suisse shows Swiss banking lives

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REUTERS– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –

LONDON, April 23 (Reuters) – Swiss banking is not dead after all. Just a week after UBS admitted that it would lose 2 billion Swiss francs ($1.71 billion) in the first quarter, its smaller rival Credit Suisse unveils a profit of the same magnitude.
UBS’s entanglements with the Feds suggested Swiss banks, with their confidentiality, fancy products and high fees, were done for. But CS has shown that there is life in the old dog yet.
Some of the outperformance was illusory, as so often the case with investment banks. CS took a 365 million franc gain thanks to the further deterioration in value of its own debt. And there was a further benefit of an estimated 1.3 billion francs thanks to the “market rebound”.
However, the underlying performance was still much better than anyone had expected. CS has won share across many businesses thanks to the forced exit of much of the competition.
In the core private banking division, CS enjoyed a net inflow of 11.4 billion francs. Wealthy Americans seem to recognise that an Obama administration will not turn a blind eye to tax evasion or even avoidance: the U.S. is not high on the source list of funds. UBS clients withdrew 23 billion francs over the same period, so there has been a net loss to the Swiss system, even if not as severe as feared a week ago.
It appears that the rich around the world still value the “geographical diversification” (perhaps political too) and confidentiality that Swiss banks try to offer. Indeed, CS is on a hiring spree in Asia at a time when HSBC, Citigroup, Societe Generale and Barclays have all been shedding private bankers.
Like Goldman Sachs, CS also benefited from more trading and a bigger market share across a range of investment banking markets. CS shone in interest rates, American residential mortgage-backed securities and investment-grade underwriting, among others.
This result looks even more impressive when you consider that it comes at a time when CS has shrunk its balance sheet and also cut the amount of risk it is taking. Quarterly revenues more than tripled against the same period in 2008. However, investors should not read too much into this result. Trading volumes arising from the “market rebound” will surely tumble as some semblance of normality returns.
Moreover, there are signs that the world’s wealthy have learned some hard lessons from the crisis. Customers of investment banks everywhere now know that they were sold complex products simply to generate high fees for the banks.
CS revealed that clients had shifted out of securities into cash. Moreover, within their securities portfolios, its rich customers had reduced their holdings of “managed investment products”. Their holdings of structured derivatives products are languishing at half their peak levels and are unlikely to rise.
All of this translates into lower recurring commissions and fees. CS has responded with “more transparent, liquid and efficient solutions” — probably code for higher management fees. Making these stick if the products and pricing really are transparent may however be as tough a sell as a CDO these days.

Look to deal numbers for M&A green shoots

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alex-smithLONDON, April 23 (Reuters) – Volumes may be down, but there are green shoots appearing in the M&A market after the frozen winter of financial distress.
This doesn’t mean a return to the boom years of a few years ago. It could take years for deal values to reach the dizzy heights of the second quarter of 2007, given falls in asset prices. But the number of deals is recovering fast. This fell off a cliff in Q1 of 2009 and at just over 8,000 deals was the lowest global tally since Q3 2004.
The week starting March 29 was the busiest of the year in terms of deals announced, with 821 transactions, and the 5th busiest since Sept. 2008, according to Thomson Reuters data.
There are still some complications (the disappearance of loan-funding, equity market volatility to name just two), but investors seem to be back on the hunt for bargains.
M&A deals may tend to be pretty hit and miss (indeed the failure rate is high) but historically the best returns from deals have been achieved on those struck during economic downturns, when activity is low.
True, M&A has been fuelled so far this year by a spate of large deals in the pharmaceuticals sector, an area that has been least affected by the crunch, with healthcare accounting for 27 percent of the total of $472 billion of announced deals during Q1. Pfizer’s <PFE.N> $68 billion acquisition of Wyeth <WYE.N> and Merck’s <MRK.N> $41 billion takeover of Schering-Plough <SGP.N> were the blockbusters.
But this was only just ahead of the distressed financials sector at 25 percent. And it is this area of activity which will grab a significant share of deals (by volume if not by value) as banks, insurers and fund management companies rejig their portfolios and vulture investors pick off the walking wounded.
The restructurings resulting from the meltdown in financial services are just getting underway. Look at the businesses UBS <UBSN.VX> isĀ  selling, Barclays’ <BARC.L> disposal of iShares, or indeed the auctions of Citigroup <C.N> and Royal Bank of Scotland <RBS.L> units in Asia.
Banking groups are under pressure to offload non-core businesses to strengthen weakened balance sheets and therefore are less sensitive to value. Add the assets which governments will have to repackage or offload once they have feel confident they have stabilised the sector and the deal pipeline starts to look positively healthy.
No wonder some investment bankers — especially those in boutiques and which thus have no conflicts with mainstream financial businesses — are rubbing their hands.
The main constraint on buyers (other than those lucky or sensible enough to still be sitting on cash) is obtaining financing. It is possible for companies to raise money for deals that seem to investors to make strategic sense. Roche <ROG.VX> of Switzerland, for instance, tapped the bond markets for a whopping $39 billion to fund its Genentech buy-out.
But stock market investors aren’t flush with cash and are wary of giving companies a free hand. UK’s Pearson <PSON.L> recently had to pull a small share issue that was designed to give it a cash pile from which to make opportunistic acquisitions. Meanwhile, it is still difficult to obtain loan finance from banks, and the bond markets are only really available to larger companies.
Even so, with debt-strapped companies being forced to sell off assets to meet covenants and prices relatively low, there should be plenty of action this year.
– At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.
(Edited by David Evans)

Barclays’ conjuring trick

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– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –

REUTERSAbracadabra! Yet again, Barclays has pulled another rabbit out of its hat. With just days to go before the end-March deadline for the bank to apply for a government guarantee of its dodgier loans, it may again wriggle out of state control.

from The Great Debate:

Nationalization: Terrible but inevitable

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James Saft Great Debate -- James Saft is a Reuters columnist. The opinions expressed are his own --

Nationalization of weak banks in Britain and the United States may be preferable to current plans for insurance and soft "bad banks" schemes which risk being swamped by future losses as assets, especially real estate, continue to crater.

An insurance program, getting banks to identify their riskiest assets to the government which will insure them for a fee, is one of the main planks of a UK plan to bail out banks unveiled this week.

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