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Markets News Tuesday: Irish Life & Permanent issues restructuring document ahead of EGM; Lloyds prices rights issue; Shares fall following China slide
By Finfacts Team
Nov 24, 2009 - 11:18:52 AM
President Obama launches "Educate to Innovate," a campaign to get students excited about pursuing careers in science, technology, engineering and mathematics. A demonstration of the "Cougar Cannon" at the White House, Mon Nov 23, 2009.
Irish Life & Permanent announced today that it had mailed a document to shareholders outlining plans to create a new holding company which is expected to list on the stock exchange in mid-January.
The publication of the document and prospectus precedes an extraordinary general meeting (EGM) due to be held on December 17th.
IL&P said that the main disadvantage of its current status is that it is both a holding company for life assurance and investment management as well as being a licensed bank.
"A more desirable structure would see a new listed holding company whose sole function would be to act as the group's holding company," IL&P said.
"This proposed new structure will do that and offers the further opportunity, as appropriate, to restructure the life assurance, investment management and/or the banking businesses in a prompt and flexible manner in response to possible changes in the financial services environment," it added.
Lloyds Banking Group
Lloyds Banking Group, in which the UK has a a 42% stake, today launched the UK’s biggest rights issue to raise £13.5bn, via offering investors new shares at 37p each, a discount of nearly 40%, ahead of a shareholder vote on Thursday.
The rights issue is part of a programme to raise £22.5bn in new capital after its disastrous 2008 takeover of mortgage lender HBOS, in 2008, following pressure from Gordon Brown.
Lloyds on Tuesday priced the new shares at 37p, allocating 1.34 shares for every share that investors currently own. The prospectus had pledged a discount ranging from 38 to 42%.
At that price, the rights issue represents a discount of 59.5% to Monday’s closing price of 91½p and a discount of 38.6% to the theoretical ex-rights price, Lloyds said in a statement.
Bondholders had offered to exchange £12.5bn of existing debt and Lloyds has agreed a £9bn debt swap, its maximum target.
With 2.8m small investors, Lloyds has one of the biggest registers of private shareholders, making the rights issue a complicated operation.
In a separate development, the bank plans to cut 800 jobs after losing a contract with life assurer Equitable Life.
The share price is up 1.1% in London.
Madoff' trustee seeking $22.1m in fees for five months of work
The FT reports that Bernard Madoff's bankruptcy trustee and his law firm have asked a federal judge to approve more than $22.1m in fees for five months of work trying to recover money for the victims of the fraudster's $65bn Ponzi scheme.
Irving Picard is the court-appointed trustee liquidating Mr Madoff's former business for Securities Investor Protection Corporation, the non-government agency that helps customers of failed brokerages.
He was appointed in mid-December last year, just days after Mr Madoff was arrested. If the latest fees are approved, the total bill for Mr Picard and his law firm, Baker & Hostetler, since then would amount to more than $37.5m.
US mortgages
The Wall Street Journal reports that the proportion of US homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%, threatening prospects for a sustained housing recovery.
Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic, a real-estate information company based in Santa Ana, Calif.
These so-called underwater mortgages pose a roadblock to a housing recovery because the properties are more likely to fall into bank foreclosure and get dumped into an already saturated market. Economists from J.P. Morgan Chase & Co. said Monday they didn't expect US home prices to hit bottom until early 2011, citing the prospect of oversupply.
Home prices have fallen so far that 5.3 million US households are tied to mortgages that are at least 20% higher than their home's value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American.
Most US homeowners still have some equity, and nearly 24 million owner-occupied homes don't have any mortgage, according to the Census Bureau.
Discussing President Obama's concern over unemployment, with James Pethokoukis, Reuters Money & Politics columnist; David Goodfriend former Clinton White House staffer; Robert Reich, former Labor Secretary and Stephen Moore, The Wall Street Journal advisory board:
US markets
In New York Monday, sentiment was boosted by positive second-hand house sales data.
The Dow rose 133 points or 1.3% to 10,451.
Both the Nasdaq and S&P 500 rose 1.4%.
Japanese cabinet ministers are putting pressure on the Bank of Japan urging it to respond to deflation. "We've had a very contractionary fiscal policy combined with a contractionary monetary policy and that's really beginning to show now," Lisa Fox from Japaninvest said Tuesday:
Asia
Japan's finance minister today urged the Bank of Japan to take on a more aggressive role in fighting deflation.
Hirohisa Fujii said the government would "exchange views" and find a solution with the Bank of Japan.
Japanese consumer prices fell more than 2% in the year to September but the central bank expects the global economy to trigger a rise in import prices.
The MSCI Asia Pacific Index lost 0.9% Tuesday as the Nikkei 225 Stock Average fell 1%.
The Shanghai Composite Index fell 3.5% - - its biggest loss in almost three months,
The BDI slid 41% in the third quarter and rose 40% in October.
The index is down 61% from a record in May 2008 but has more than tripled since the start of 2009, boosted by Chinese demand.
Following 16 straight days of rises,the index dipped for the second straight session. Following a 3.3% decline Friday, the index fell 1.9% overnight to 4,423.
Gold prices are set to slide back to $1,120/oz based on technical analysis, says Brandon Wendell, instructor at the Online Trading Academy. He charts gold, oil and the dollar index, with CNBC's Sri Jegarajah and Oriel Morrison:
Goodbody economist Deirdre Ryan comments: Spending cuts not an easy task, but a necessary one - -"With Budget 2010 fast approaching, unions and interest groups have begun lobbying the Government in earnest against cuts in their particular areas. To the forefront in this regard has been the public service, with the majority of workers in this area going on strike today in protest over Government plans to further cut public sector pay and spending. According to press reports, over 250,000 (13% of the workforce) are expected to be on strike today. In truth, nobody said it was going to be easy and reining in budget deficits from double digit levels was always going to involve unpalatable measures and public unrest. However, with the adjustments to date having largely concentrated on tax raising measures, the focus of Budget 2010 needs to be on adjusting spending. Gross current spending will amount to 45% of GNP this year, its highest level in over 25 years.
On the other hand, tax revenues will amount to just 23% of GNP this year and only slightly more next year. The need to reduce spending levels is thus very clear. Even with the €4bn of adjustments that are set to be implemented in the upcoming Budget, the General Government deficit will fall only slightly from 12% of GDP this year to 11.6% in 2010. As such, repeated assurances from Government quarters that the necessary cuts will be implemented in spite of days of protest such as today's are very welcome. The widening of the bond yield differential between Ireland and Germany over recent days is a reflection of this latest bout of uncertainty over the path of the Irish public finances. The measures taken in earlier months to reduce the deficit, which totalled over 5% of GDP, led to a marked reduction in Irish bond yields. From a peak of over 260bps last March, the spread versus Germany narrowed to a low of 134bps. However, this spread has widened out to 150bps over recent days. It is clear the markets are watching very closely all developments in relation to the Irish public finances and days like today cannot prevent the required action being taken on December 9th."
Davy chief economist Rossa White comments: Government likely to keep nerve on consolidation plan despite public sector strike - -"The Irish public sector largely shuts down today, apart from emergency services in those areas affected by recent floods. The strike is in response to planned cuts of up to €1.3bn in public service pay, as part of the €4bn budget consolidation for 2010. But today's move is unlikely to affect the government's plans to do the needful by cutting the cost of public expenditure in just over two weeks' time.
The rationale for cutting public pay in the upcoming Budget is three-fold in our view. First, budgetary consolidations that focus on cutting spending rather than raising tax have proved more successful in reducing budget deficits over time. Second, it keeps export competitiveness in mind. By reducing state outlays (e.g. pay), the cost burden should ease further for business. Third, public pay is high relative to the private sector or compared with other countries, and recent increases (in 2002-2008) were financed by windfall tax revenue from property that has evaporated.
The strike probably would not have gone ahead if the government was softening its stance on pay in behind-the-scenes negotiations with unions. The bond market expects the Irish government to deliver, so it cannot afford any last minute U-turn. Recent comments from government ministers do suggest that the determination to implement a consolidation comprising about €2.5bn in current expenditure reductions, a €750m cut in the capital budget and €750m in tax increases (mainly a carbon tax) still holds. It is ironic that the plan is to reduce the price (through pay and possibly social transfer rates) rather than the volume of current public services; yet only the unions themselves will cut the volume of public services by striking."
Goodbody analyst comments: Irish Financials; The 3rd Force - - Attack of the clones - - "At a conference yesterday (for the Association of Compliance Officers in Ireland), the EBS CEO indicated that merger discussions between the EBS and Irish Nationwide could begin this week. It appears that, under building society legislation, a transfer of engagements could be set up in which IN would be merged into EBS in a deal that could see the government injecting around €400m of capital, thereby giving it a possible stake of between 40-60% in the enlarged entity. The combined entities are earmarked to transfer a combined €9.1bn (mostly IN, with €8.3bn) of loans to NAMA. We would have thought that the first stage is that both banks enter negotiations and then the government conducts a due diligence process on the capital requirements, as it did with the larger banks.
This move represents the first step in what will likely become the much mooted 3rd banking force in the country (though to be fair to Ulster Bank, it is already and likely to remain the third banking force given its more diversified balance sheet). The various parties yesterday indicated that permanent tsb “was welcome” to join at any stage. We sense, the first steps here will be to merge EBS/IN and then to engage with ptsb. In this regard, the first step for pstb is the publication this morning of its circular, ahead of its EGM on December 17, to create a holding company structure above its current holding company which will allow it to swing out the life company from the bank under a new holding company and allow it to engage with any third parties on recapitalising the bank on a standalone basis. By our estimate, we recently indicated that we thought that IL&P needs to raise €540m from existing shareholders to recapitalise its bank to adequate levels to transfer it across to the 3F, which we reflect in our €4.50 fair value on the stock. A merger of the two building societies and ptsb (which used to be a building society) would leave the combined loan to deposit ratio at just over 180%, which is still far too high in our view. While the merged entity may push for consideration of term funding - and given the strong collateral backing of the mortgage asset class - as an important metric to consider in addition to the LDR ratio. Anyway, the announcement yesterday represents the first step in the much discussed third force, in what is likely to be an arduous process.
Goodbody's Anna Lalor comments: Irish Financials; Lloyds Banking rights at a 60% discount - - "Lloyds Banking has released details of the issue price and amount for its proposed rights issue this morning. It intends to issue a value of shares amounting to c50% of its closing market cap yesterday, at a 59.6% discount to closing price (37 cent issue price per new share), which translates into shares amounting to 134% of the current number in issue. To maintain a minimum 4% equity tier 1 capital target following the worst years of the credit cycle (which needs to be higher over the medium term) and at a 60% discount to yesterday’s closing price, AIB would need to issue 181% of its current number of shares in issue and 73% of its market cap. BOI would need to issue 89% of its current number of shares in issue and 36% of its market cap.
This would bring AIB’s post rights 2011f tNAV per share (assuming 100% provided by existing shareholders) to an estimated €1.52 (pre-rights and excluding rights contribution €3.00) and BOI’s 2012f tNAV post rights tNAV to €1.01 (€1.30 pre-rights and excluding rights contribution). Were the banks to target 5% minimum equity tier 1 ratios, they would need to raise 329% (AIB) and 198% (BOI) of their current number of shares in issue assuming a 60% discount on the rights, which would amount to 133% and 79% of their current market caps. This would translate into an estimated post rights 2011/12 forecast tNAV per share of €1.20 for AIB and €0.86 for BOI or a pre-rights (and excluding rights contribution) tNAV per share of €2.85 for AIB and €1.19 for BOI. So clearly tNAV per share is very sensitive to the pricing of any rights issue and the amount that needs to be raised."
