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Markets News Tuesday; AIB suspends bond coupon payments at EU request; European shares rise after news of Dubai World's planned restructuring
By Finfacts Team
Dec 1, 2009 - 10:21:07 AM
AIB announcement on hybrid coupons in context of restructuring plan.
AIB has suspended coupon payments on part of its corporate debt, at the request of the European Commission.
Goodbody analyst Anna Lalor commented today: "AIB has announced this morning that the European Commission (EC) “has indicated that, in line with its policy and pending its assessment of the AIB restructuring plan, AIB should not make coupon payments on its Tier 1 and Tier 2 capital instruments unless under a binding legal obligation to do so”. This applies to a number of AIB’s capital instruments, with the first affected being the AIB UK 3 LP Stg£350m Guaranteed non-voting perpetual preferred securities. The EC has highlighted the requirement to consult it prior to making announcements to the market on tier 1 and tier 2 capital requirements for banks subject to state aid investigations, so such an announcement has probably been factored into the prices of these instruments. However, the implications for instruments on a par or subordinate to these securities, namely the Government’s preference shares, is a more significant event.
Non-payment of coupons on the AIB UK 3 LP triggers a “dividend stopper” provision, which means that AIB cannot pay dividends on the preference shares and some other junior and parity securities over the period that it does not pay coupons on. However, non-payment of the Government‘s preference share coupon in cash, entitles it to receive a coupon in ordinary shares. At yesterday’s closing price, the €280m coupon would give the Government a 17% holding of the total number of new shares in issue, which alongside its warrants would bring its holding to 42% and would increase equity tier 1 at end 2011f by 27bps. AIB highlights, however, that “consistent with the stated objective of the Minister for Finance of not taking majority stakes in the banks (including AIB) the preference of each of the Minister for Finance, and AIB is for AIB to pay the dividends normally on the Preference Shares”. As a result the Department of Finance and AIB are in “continuing discussions” with the EC about AIB’s restructuring plan, “one element of which would allow AIB to resume declaration and payment of dividend and distributions as normal”. This would allow retrospective payment of the coupon that AIB has announced today that it cannot pay.
With Bank of Ireland’s coupon on the Government preference shares due in March ahead of AIB’s (May) and the possibility of capital instruments (potentially towards the end of this year or early February - we haven’t looked at the legal technicalities of these in detail) including similar provisions, this is also potentially an issue for it. Were the Government preference coupon to be paid in equity as of yesterday’s closing price, the dilutive impact could potentially be 15% (which alongside the warrants would bring the Government stake to 40%).
So uncertainty remains over whether the discussions with the EC will lead to a conclusion that is dilutive or not for equity-holders (although presumably the EC will need to look at this on an EU-wide basis as it could set a precedent for banks and Government in other countries). Should cash payment of the coupon on the Government preference shares be permitted by the EC, the likelihood of payment of other hybrid capital securities while the Government preference shares remain outstanding could increase the price of these instruments, reducing the potential profit from any future buyback of these instrument or exchange for equity."
The Dubai debt delay has given bond holders a shock because they thought buying Dubai’s corporate bonds would be low risk, Mark Tinker from Axa Framlington told CNBC Tuesday. They assumed the bonds would be backed by the government, but they aren't, Tinker added:
Dubai World
Dubai World, the state project company of the Gulf emirate of Dubai, announced after midnight on Tuesday morning local time, that it was seeking to restructure $26 billion in debt and expected a deal quickly.
The group has liabilities of $59 billion.
In a statement, Dubai World said about $6 billion of the debt involved sukuk, or Islamic bonds, issued by the state company and it asked holders of the sukuk to appoint representatives as a first step in a restructuring effort.
Dubai’s government said on Monday, that it hasn’t guaranteed the debt of Dubai World, the state-controlled holding company struggling with $59 billion in liabilities, and that creditors must help it restructure.
“It is correct that the government owns Dubai World, but the decision when it was set up was that it should receive financing based on the viability of its projects, not on government guarantees,” Abdulrahman Al Saleh, director general of the emirate’s Department of Finance, said in an interview with Dubai TV, when asked whether the government was backing the debt. “The lenders should bear part of the responsibility.”
Dubai’s government said last Wednesday that Dubai World would seek a standstill agreement with creditors and an extension of loan maturities until at least May 30th, 2010
The Abu Dhabi-based central bank of the UAE, a federation of seven Gulf states on Monday announced lending supports for the country's local and foreign banks.
The events in Dubai could hurt international investor sentiment towards emerging markets, says Matt Robinson, economist at Moody's Economy.com. He speaks with CNBC's Oriel Morrison:
German retail sales
German retail sales rose 0.5% in October from the previous month, ending two months of falls, the federal statistics office reported today
In August, retail sales had fallen by 1.5% and there was a further decline of 0.2% in September.
Compared with the corresponding period of the previous year, retail turnover was in the first ten months of 2009 in nominal terms 2.5% and in real terms 1.8% below 2008 10-month levels.
Tiger Woods as commercial product
When a packet is earned from companies such as sports goods firm Nike and management consultants Accenture, partly on a reputation as Joe Cool, then there should not be surprise that there is interest beyond the usual tabloid and gossip media, in news that conveys a contrary image.
Tiger's $100m Car Crash? - - Discussing Tiger Wood's relationship with another woman, with Gerald Posner, Citizen Perot; Mike Paul, MGP & Associates PR; Kim Searfin, In Touch Magazine and CNBC's Darren Rovell:
UK house prices
UK house prices rose 0.5% in November, the same level as in October, according to home loans lender, Nationwide, today.
The monthly house price growth was above 1% in mid-year but three-month growth in prices has eased since September, indicating a slow recovery in the sector.
House prices rose 2.8% in the three months to November, compared with the 3.5% increase in the three months to October. The average UK property value is £162,764 sterling - - about the early 2006 level and 2.7% more than last November.
Last month Nationwide reported the first annual rise in house prices since March 2008.
UK mortgage approvals remain mired at low levels
Davy chief economist Rossa White commented today: "The UK housing market has recovered its poise, but for how long? There is something that does not feel right about mortgage approvals languishing at current levels. And although house prices are rising again, the main reason looks to be a short-term supply squeeze and the massive monetary response. Valuation hardly looks attractive. The banking system's capacity is reduced and mortgage criteria will be tighter than before. When mortgage rates begin to rise again (perhaps in H2 2010), a relapse will become a strong possibility.
UK mortgage approvals inched up in October. The total of 57,345 was some 110% up on the record low of November 2008. Yet the long-run average is 93,000. Yes, capacity is gone, which implies a lower level of approvals. The likes of Northern Rock and Bradford and Bingley are shadows of their former selves. But criteria are also tighter than before. Both factors will lead to reduced end-demand which does not seem compatible with rising prices.
Valuation is not attractive. Average net rental yields in England languish below 4%. That does incorporate much of a risk premium for residential property above risk-free rates. Rents are rising at an annual rate of only 1%. The UK's monetary policy response — bigger per capita than in the US — has no doubt helped to cause prices to rise again in recent months. But supply was tight, as new housing completions plunged and existing owners had withdrawn property from a falling market. That supply situation will normalise at a time when mortgage rates will be about to climb. The standard variable mortgage rate has dropped below 4%; as it rises those stretched valuations will come into focus once more."
US
The Wall Street Journal reports that highway-construction companies around the country, having completed the mostly small projects paid for by the federal economic-stimulus package, are starting to see their business run aground, an ominous sign for the nation's weak employment picture.
Tim Word, vice president of Dean Word Co., a heavy-construction company in New Braunfels, Texas, said his income is now coming mostly from projects that are winding up. He said that in normal times he has about $100 million of signed contracts in hand. But that number has fallen to $30 million, and the pipeline is empty. In the past two years, his work force has shrunk nearly 40% to 260 from 420.
"Having something to bid on is the lifeblood of the industry, and it's running out,"said Mr. Word. He isn't sure what will happen next year without new projects."There's no pavement fairy that's going to help."
Since the recession began in 2007, employment in the construction industry has fallen by 1.6 million, the Labor Department says. Though the housing sector accounts for many of those job losses, road builders have also suffered, and executives in the industry expect layoffs to rise next year.
In New York Monday, the Dow rose 35 points to 10,345.
The S&P 500 advanced 0.38% and the Nasdaq gained 0.29%.
Regional reports of business activity in the Dallas and Chicago areas were published on Monday and provided positive news of business levels.
In retail, while more consumers shopped in stores and online than 2008, over the four-day Thanksgiving holiday weekend, according to the National Retail Federation, average spending dropped. Online shopping Monday was boosted by deep discounts.
Although India's GDP came in better-than-expected, Rajeev Malik, head of India & ASEAN economics at Macquarie Securities Group, says the growth is not self-sustaining. CNBC's Oriel Morrison and Anichya Shah find out more:
Asia
The Bank of Japan (BOJ) today announced new steps geared towards easing monetary policy, including the provision of a new ¥10 trillion (€77 billion) lending facility.
The central bank held a special meeting, after intense pressure from the new government of Prime Minister Yukio Hatoyama, to respond to persistent deflationary trends.
The BOJ also announced that council members voted unanimously to leave the unsecured overnight call loan rate at 0.1%, where it's been since December 2008.
Earlier on Tuesday, the Reserve Bank of Australia raised its benchmark interest rate for a third month in a row, to 3.75% to dampen demand stoked by the recovery in Asian countries.
The Nikkei 225 rose over 2%; in Sydney, the S&P/ASX 200 added 0.38% and the Shanghai Composite climbed 1.25%.
The MSCI Asia Pacific Index added 1.1%.
Robust manufacturing PMI data for China and India was reported today -- see link to story, in Box below.
The BDI slid 41% in the third quarter and rose 40% in October.
Following 16 straight days of rises, the index dipped for the sixth straight session on Friday.
It fell 11.8% last the week to 3974 points as the global benchmark for freight costs extended its correction after hitting a 2009 high in the previous week.
On Monday, the index fell 2.2% to 3,887 - - the lowest in almost three weeks.
Goodbody chief economist comments: Economic View; Two notable credit trends in Ireland - - "A detailed analysis of the Central Bank’s monthly statistics for October can be found in the Financials piece below, but two major trends stand out for us from an economic point of view. The first relates to mortgage credit. Unsurprisingly, the growth rate continues to decline, with the annual rate reaching only 0.2%. The most surprising thing though is how net lending growth is not already significantly in negative territory given the trends in gross lending. In Q3 for example, gross lending fell by 62% yoy. Assuming a similar monthly profile to Q3 gross lending in October, this implies that the redemption rate on the mortgage stock (not including writedowns by the banks that would actually reduce the redemption rate further) has fallen to 6%, down from a peak of 17% in 2006 and 10% one year ago. This backs up recent comments from all of the major domestic banks and signifies that mortgage holders in difficulty are being allowed to restructure their loans and that early repayments of balances have probably ground to a halt. The former partly explains why loan losses on mortgages thus far have been lower than one might expect given the increase in the unemployment rate from below 5% to 12.5% over the last two years.
The second notable was within the credit card statistics. Due to the lack of timely data on consumer spending on services, credit card spending provides a decent proxy. It suggests that while the decline has stabilised, spending levels still remain about 20% below their mid-2007 peak. On an annual basis, new spending on credit cards fell by 14.9% in October, matching the decline in September. A 29% reduction in the average spend per card can be blamed for this decline, as the number of credit cards in issue is essentially flat over the period. Again, this confirms reports from retailers that while foot-fall is down slightly, consumers are a lot more cautious about spending, and is, in turn, a reflection of a higher savings ratio. From a macro-economic perspective, stress on credit card debt does not pose a significant problem, as it only accounts for c.3% of disposable income. However, we will watch developments closely to spot any changes in Irish consumers’ spending trends."
Goodbody's Anna Lalor comments: Irish Financials; Liability side of Irish financials balance sheet stable in October - -"The Central Bank released its monthly statistics for October yesterday. Our economics team cover mortgage lending and credit card trends in detail above. Overall Private Sector Credit (PSC) fell 3.7% yoy in October, following a 3.4% decline in September, with 90% of the decline due to valuation effects such as bad debt provisions and write-offs and currency movements and underlying PSC marginally lower yoy. Non-mortgage credit was unchanged yoy, while lending to non-financial corporates (NFCs) was down 1.2% during the month (mainly due to write-downs and provisions) and about 1/10th of the decline was due to a fall in the underlying stock of credit falling as repayments exceeded drawdowns of loans. Lending to NFCs was 9% lower yoy, with about 75% of the fall due to valuation effects.
In addition to the lending figures, the Central Bank yesterday also provided details of the aggregate balance sheet of banks operating in Ireland. We have focused on the movements in ECB borrowing, deposits and wholesale funding over the past year. Recent months have seen the swings in these liability components ease, while the banks have begun to reduce their use of ECB lending facilities from peak levels over the last few months. The level of borrowing by Irish banks from the ECB stabilised in October which is at similar levels to those in Dec-08/Jan-09 for the aggregate of banks covered by the Irish Central Bank statistics, excluding non-clearing foreign banks. Borrowing by mortgage banks ex retail clearing banks rose c€1bn in October, but remains below Feb-09 levels, while retail clearing banks reduced borrowing levels by €3bn and remain between Jan/Feb 2009 levels. Deposit and wholesale funding flows overall were relatively stable month on month. So, overall the stress on the funding side of the Irish bank balance sheets appears to be continuing to ease."
Goodbody's Eamonn Hughes comments: Irish Financials; Nudging up our NAMA haircuts, pushing down fair values - - "In mid-September, the Minister for Finance indicated a NAMA gross haircut of c.30% for the €77bn of loans to be acquired from the financial system. Back then, AIB anticipated its average discount to be “below” this figure, with BOI indicating it would be “significantly less” than the average. In its mid-November IMS, AIB indicated that there is no reason to believe that the average discount applicable to AIB’s NAMA assets “will fall significantly outside” the Minister’s guidance of 30% (for the industry) and it reiterated this comment in yesterday’s RNS on the NAMA process.
On the other hand, BOI in its RNS statement yesterday on the NAMA process (and follow-up conference call) indicated that the discount applicable to its eligible assets “should not be greater than the estimated average discount for all participating institutions of 30% as indicated in the Minister’s speech”. We originally applied an 18% haircut to BOI’s NAMA loans (less development exposure and more outside Ireland), but we are uncomfortable with this estimate after the RNS and conference call, so are now moving it to 26.5%. We are also taking the opportunity to revise our AIB haircut from 28% to 33%. Revising our figures for the new haircut estimates now sees AIB require €2bn of equity at the bottom of the cycle to fall no lower than a 4% core equity ratio and €4.1bn in total (from €3.3bn previously) to get to our target 8% core equity ratio over the medium term. BOI needs an estimated €1.5bn at the bottom (for 4%) and €3.3bn (from €2.4bn previously) over the medium term.
These medium term targets equate to a very challenging 3x AIB’s current market cap and 2x for BOI, though AIB could reduce its requirement by €1.1bn through a disposal of BZWBK (we already model a sale of its M&T stake). Feeding the adjustments through to our fair values sees AIB cut from €2.55 to €1.60 (Add, unchanged) and BOI from €2.10 to €1.20 (from Add to Reduce). Since July, the share prices of AIB and BOI have moved in tandem, with generally no more than a 5-10 cent differential each day, which tells us that the market hasn’t grasped the capital requirements and normalised earnings at either bank.
The huge volatility in capital levels and fair values from even modest tweaks to our NAMA haircut assumption means it is clear that the share prices of both banks (betas of c.2.5x to the E300 index) and our fair values (and possibly our recommendations) are likely to remain highly volatile until we get full clarity on the final NAMA haircut and any EU state aid ruling, which are months away (note to follow). Also, the announcement from AIB this morning on its hybrid coupon (see below) will add to the uncertainty, highlighting risks of further dilution."
