Japan is the next sub-prime flashpoint Up to $500bn has been lost worldwide but only $130bn admitted to - and soon Tokyo's banks must come clean There is still $300bn of bad debt out there, and Japan could be hiding most of it.
Just as battered investors had begun to glimpse signs of recovery in America, the next shoe has dropped with an almighty thud in Japan. Echoes are rumbling across the Far East.
The Tokyo bourse has crumbled, suffering the worst start to the year since the Second World War. The Nikkei index is down 17 per cent since Christmas, and the shares of Japanese banks are leading the slide. Mizuho Financial, Mitsubishi UFJ and Sumitomo Mitsui have all been punished as hard or even harder than those US banks at the epicentre of the sub-prime debacle.
Goldman Sachs's Global Alpha Hedge Fund Declined 40% in 2007
Katherine Burton Last Updated: January 29, 2008 17:19 EST
Goldman Sachs Group Inc's Global Alpha hedge fund, once the firm's biggest, fell about 40% last year because of wrong-way bets on currencies, equities and bonds worldwide, according to a report sent to investors.
The loss erased about US$4 billion ($5.66 billion) from the fund, which started 2007 with US$10 billion. The report didn't list year-end assets. Investors pulled about US$3 billions from Global Alpha and the New York-based firm's other quantitative funds in 4Q ended Nov 30, Chief Financial Officer David Viniar said on a conference call last month.
Global Alpha won’t be able to charge most clients the 20% fee on investment profits until it makes up losses from its March 2006 peak. That would require managers Mark Carhart and Raymond Iwanowski to post a 100% gain. Global Alpha generated US$700 million in fees in 2006 after increasing more than 40% in the previous year.
“It does not make sense for investors to keep their money in Global Alpha” after the losses, says Michael Corcelli, managing member of Alexander Alternative Capital LP, a hedge fund based in Miami.
Quant-fund managers like Carhart and Iwanowski, both 41, use computers to select trades. Highbridge Capital Management LLC’s Highbridge Statistical Opportunities Fund declined 14%. James Simons’s Renaissance Institutional Equities Fund fell almost 1% last year. Hedge funds returned an average of 10%, according to Chicago-based Hedge Fund Research Inc, which tracks industry returns and flows.
Global Alpha was down 37% at the end of November, investors said in December. While Global Alpha has been losing assets, Goldman is pulling in cash for other hedge funds. Goldman Sachs Investment Partners started this month with US$7 billion, the largest hedge-funds startup ever. Global Alpha lost money in December by buying European and Canadian bonds and global stocks, according to the report, a copy of which was obtained by Bloomberg. The fund profits on bets that agricultural commodities would rise and the Korean won and South African stocks would decline.
Hedge funds globally declined 3.1% in the month of Jan 24, their worst performance since 1998, the London-based Times reported, citing the most recent indexes published by Hedge Fund Research, of Chicago. There may be a shakeout in the hedge-fund business this year, with some funds that have less than US$10 billion under management collapsing, the newspaper added, citing unidentified industry experts. – Bloomberg LP
In Unforgiven Margin Call, Bear Funds Failed on Merrill CDOs
By Yalman Onaran Last Updated: January 3, 2008 00:18 EST
From 2005 through the middle of '07, two of Wall Street's oldest firms were locked in an embrace that proved damaging to both.
Merrill Lynch, founded in 1914, sold hundreds of millions of dollars worth of collateralized debt obligations to hedge funds run by Bear Stearns, started in 1923.
Some 90 percent of the face value of the CDOs was loaned to Bear by Merrill, as is normal in such transactions. When the prices of the funds' CDO holdings started to fall in June, Merrill demanded that the firm increase collateral in what's known in the debt markets as a margin call.
Bear Stearns executives pleaded for time, arguing that the forced sale of their assets would push down all CDO prices. Merrill Lynch officials brushed off the entreaty, according to people involved in the discussions.
In June, the hedge funds, run by Ralph Cioffi, sold $3.8 billion of CDOs to meet margin calls by Merrill and other lenders that were following its lead. The fire sale led to a further drop in CDO prices.
Among those that lost value: $23 billion of CDOs Merrill held on its own books. In October, Merrill wrote down the value of all of its mortgage-backed holdings, including CDOs, by $7.9 billion and declared a loss for the third quarter.
``It was in Merrill's interest to wait it out and allow the Bear Stearns funds to recapitalize, so they wouldn't have to re- price their assets,'' says William Fitzpatrick, a financial services analyst at Racine, Wisconsin-based Optique Capital Management, which oversees $1.7 billion. Optique held both Bear and Merrill shares; it sold all of its Merrill shares in 2006 and dumped its remaining Bear shares in July, Fitzpatrick says.
$850 Million Seized
Both Bear Stearns and Merrill Lynch declined to comment on the matter. Merrill is a passive, minority investor in Bloomberg LP, parent of Bloomberg News.
On June 15, Merrill Lynch seized $850 million of the CDOs from Cioffi's funds -- as lenders are allowed to do when their margin calls aren't met -- and tried to sell them in the market. When the firm received bids of 20 cents on the dollar, it abandoned the effort. In July, Cioffi's funds declared bankruptcy, losing $1.6 billion of investors' money and triggering the repricing of CDOs around the world.
Giving Bear Stearns a chance to shore up the hedge funds might have allowed time for Merrill Lynch to reduce its CDO portfolio or buy hedges against it, Fitzpatrick says. In June, before the funds' problems became public, there were market players who were still willing to underwrite credit default swaps on CDOs. That opportunity disappeared after the Bear funds' failure.
``The end was inevitable,'' Fitzpatrick says. ``But Merrill could maybe have bought some time if it hadn't blown the whistle on the Bear funds.'' Divorce might have been in order. Merrill filed its petition too soon. – Bloomberg LP
CDO Market Stays Shut for Fourth Week, JPMorgan Says
By Jody Shenn Last Updated: January 29, 2008 17:53 EST
Jan. 29 (Bloomberg) -- The market for U.S. collateralized debt obligations remained shut for a fourth week, according to JPMorgan Chase & Co., on concern that ratings companies haven't adequately assessed the securities.
Demand for debt created by slicing pools of assets into securities stalled as some top-rated classes of mortgage-linked CDOs lost all their value amid surging U.S. foreclosures and as bondholders faced unprecedented downgrades on home-loan bonds.
``People lost faith in the ratings agencies a little bit, and you don't blame them,'' IndyMac Bancorp Inc. Chief Executive Officer Michael Perry, said in a telephone interview last week from the Pasadena, California, headquarters of the second-biggest independent U.S. home lender.
Diminished interest in CDOs and other securitized debt, such as bonds backed by credit-card receivables or equipment leases, threatens to push the U.S. into a recession by cutting the credit available to borrowers, according to Gregory Peters, the head of credit strategy at Morgan Stanley in New York.
Last week, one CDO was issued in Asia, the Arlo IX 2007 Pascal CDO tied to investment-grade corporate and country credit, according to the JPMorgan report yesterday from New York-based analysts Christopher Flanagan and Kedran Garrison Panageas. One $25 million class of the CDO was issued, the report said.
CDOs repackage assets into new securities with varying degrees of risk, from AAA grade to unrated classes. Investors are hesitant to buy them because of volatility in the stock and debt markets, Ms. Panageas said in a telephone interview.
``They're looking for a little bit more stability before committing to a strategy,'' she said.
CDO Downgrades
Moody's Investors Service, based in New York, last year downgraded $76 billion of CDOs comprised of other bonds backed by assets, such as subprime-mortgage securities. Ratings companies downgraded a record 4,389 CDO classes last year, including some cuts on the same securities, according to Morgan Stanley.
The creation of CDOs dipped about 10 percent last year to $494.7 billion, and probably will slide 65 percent this year, according to previous JPMorgan reports. The figures include only issuance for which investor money was collected upfront. The decline was the first since 2003, according to Morgan Stanley.
Last year, more than $1.1 trillion of CDOs were created, about the same as in 2006, according to JPMorgan data. The figures include so-called unfunded issuance in which buyers of senior classes don't need to put up money upfront. Funded CDO issuance fell from a record $551.9 billion in 2006.
IndyMac's Perry said that it's hard to find buyers for even the AAA rated classes of bonds backed by top-quality mortgages larger than $417,000 because of concern that credit ratings aren't accurate. Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, can't buy loans, called jumbo mortgages, larger than that amount.
Prime-jumbo mortgage-bond creation plunged 78 percent from a year earlier to about $3.89 billion in December, according to Arlington, Virginia-based FBR Investment Management. – Bloomberg LP
Allco Commercial REIT (Allco)reported FY07 results. Allco reported gross revenue of S$75.2 million (+116% YoY) and net property income of S$61.4 million (+114% YoY). Full year distributable income amounts $47.5 million, translating to a DPU of 6.73 cents.
Acquisitions adding to top-line growth. FY07 result is better than the manager’s own forecast. Out-performance can be attributed to the better than expected contributions from 55 Market Street, Central Park, the capital distribution from AWPF as well as contributions from the Japan properties and Keypoint.
Better than our estimates. We were pleasantly surprised that Allco achieved much better results than our estimates (gross revenue +11%, NPI +5%, DPU +24%). The disparity is because we have incorporated much more conservative assumptions in our projections.
Asset growth. Allco grew its initial portfolio of 2 properties to 9 currently, with presence in Singapore, Australia and Japan. Revaluation gains of S$302.8 million boosted asset value from S$880 million to S$1.95 billion. NAV grew from $1.17 to $1.49 (+27% YoY).
Funding concern. As the acquisitions have been funded with debt, gearing is now 43.6%, well within the 60% regulatory limit. Allco has almost S$620 million of debt maturing this year and we note that Moody has recently downgraded Allco credit rating 1 level from Baa2 to Ba1 on refinancing concern as well as a weakened credit profile. In response, Management has mentioned they are on course to obtaining refinancing before the debt maturity date and Allco is well within the covenants set out in the regulatory guidelines.
Management plans. Management has indicated the key focus for 2008 will be on consolidating the property portfolio. Attention will be on driving organic growth and redeploying capital to higher growth assets. We believe that would mean more attention on managing the properties and slowing the pace of acquisition, which we feel is a timely move given the current market condition where acquisitions may be tight.
Valuation and recommendations. Refinancing risk is our top concern amid the volatile credit market. However, we remain very much positive on the outlook of Allco. Asset value more than doubled in the past year driven by acquisitions and revaluation gains in the strong property market. We believe management effort on active portfolio management comes well suited after a trail of acquisitions. In view of the volatile market conditions, we raised our assumptions for beta and risk premium in our DCF model. Fair value is lowered from $1.60 to $1.21. Fundamentally, we see no reason for the falling share price and recognise great value at the current price which is at a 50% discount to NAV and offers an attractive yield of 12%.
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11 February 2008
Insider Moves
Capital Group trims stake in Allco Commercial REIT
By Nova Theresianto
The steep fall in Allco Commercial REIT’s share price over the last few months isn’t stopping the Capital Group of Companies Inc from trimming its holdings.
According to filings with the Singapore Exchange, the US-based fund management giant sold 8.3 million units in the beleaguered real estate investment trust (REIT) on Jan 30 and Feb 1. Following the sale, The Capital Group holds 69.7 million units, or 9.9%, of Allco Commercial, according to the filings. Its last purchase of units in the REIT was on Jan 18, when it bought 1.8 million units.
Amid the turmoil in financial markets over the last few months, many REITs have had difficulty raising money to expand their investment portfolios and distributions per unit (DPUs). In November, Allco Commercial called off a rights issue. The month before, it had acquired KeyPoint, an office building on Beach Road, for $370 million. The acquisition had pushed its gearing up to 46%. According to analyst reports, the REIT has borrowings of $882.2 million, of which $615.9 million has to be repaid within a year.
To make matters worse, Allco Commercial’s parent in Australia, Allco Finance Group, which holds a 15.8% stake in the REIT, is also heavily leveraged and has been facing trouble getting refinancing. Shares in Australia-listed Allco Finance have fallen dramatically in recent weeks, triggering margin calls that have forced the sales of shares in Allco Finance owned by a key shareholder Allco Principals Investments. In the past 12 months, shares in Allco Finance are down nearly 80% to A$2.96 ($3.80) last week.
Meanwhile, rating agency Moody’s downgraded Allco Commercial’s corporate family rating by one level last month, from Baa3 to Ba1, which is “junk” status. That leaves Allco Commercial facing the risk of having to refinance its debt on less favourable terms in the future, or raising fresh equity at the current depressed prices. It could also force it into selling its portfolio of nine office and retail properties in Singapore, Japan and Australia.
Units in Allco Commercial were down 32% over the past year. At current levels, they are trading at a distribution yield of over 12%, and a discount to net asset value of more than 50%, according to analysts’ reports.
Doctor struck off for having sex with patient, improper conduct
Feb 11, 2008
A DOCTOR has been suspended from practice for two years and censured by the Singapore Medical Council which convicted him of professional misconduct, including having sex with a patient, after a disciplinary inquiry last month. Dr Yeong Cheng Toh, a consultant gynaecologist, admitted to four charges while he was practising at the KK Women's and Children's Hospital between April 2003 and March 2005, said a statement from the Singapore Medical Council on Monday.
He was represented by a lawyer at the inquiry, held on Jan 7 and 8.
The disciplinary committee (DC) convicted him of improper conduct 'which brings disrepute to the medical profession' by engaging in a sexual relationship with a patient and failing to preserve the absolute confidence and trust of a doctor-patient relationship. This is in breach of the SMC's ethical code and guidelines.
Dr Yeong also tampered with and made inaccurate changes to the patient's biodata of the patient, and failed to keep proper and accurate records.
He also committed professional misconduct by failing to record or properly document details of the patient's visits, medical condition and results on medical examinations during the treatment period, and failing to properly maintain patient confidentiality 'in improperly disclosing to the patient, confidential information relating to the treatment and care of two other patients of the hospital', said the SMC.
However, the committee took into account the mitigating factors that the patient was not 'physically or psychologically vulnerable' and there was no exploitation of the patient.
'The DC also noted that Dr Yeong had no previous offences and had pleaded guilty, instead of contesting the charges. Based on the evidence presented, the DC was of the view that there was a low risk of Dr Yeong repeating the offence and also considered the favourable testimonies from Dr Yeong's patients and colleagues,' said the SMC statement.
Nonetheless, the DC was of the view that Dr Yeong's conduct transgressed the professional boundary between a doctor and patient and a clear signal had to be sent to the medical profession that gross improper behaviour between a doctor and patient cannot be tolerated. The DC also viewed the three other charges as 'serious offences.'
Besides the 24-month suspension and censure, Dr Yeong was also ordered to give a written undertaking to the SMC that he will not engage in the conduct which gave rise to the charges against him or any similar conduct in the future and to pay the costs of the disciplinary proceedings.
IKB tumbles after report it needs another $2.9 bln
German banks reluctant to provide further capital injection
By Simon Kennedy Feb. 11, 2008
LONDON (MarketWatch) -- Shares in Germany's IKB Deutsche Industriebank tumbled over 20% Monday after weekend reports that the struggling bank needs a further 2 billion euros ($2.9 billion) in capital to cover its subprime mortgage risks.
IKB had to be bailed out by state-owned KfW and a consortium of German banks during the summer after revealing massive exposure to risky U.S. mortgages.
But German newspaper Frankfurter Allgemeine Sonntagszeitung reported Sunday that KfW, which holds around 40% of IKB, cannot afford to provide any further capital and the other banks that participated in the rescue have so far refused to increase credit lines.
Shares in IKB, which specializes in providing loans to small and medium companies, slumped 20.8% in midmorning trading. The stock has fallen around 85% from its peak in early 2007.
The newspaper said the additional capital is needed after IKB increased its view of the risk from assets on its balance sheet to 3.3 billion euros from 1.35 billion euros.
The bank also has around 8.1 billion euros of exposure through its off-balance-sheet Rhineland Funding investment vehicle. Rhineland borrowed money by issuing short-term commercial paper and invested in longer-term debt, including subprime mortgages. Like other conduits and structured investment vehicles, Rhineland struggled to find buyers for its commercial paper after the credit crisis hit in the summer.
The latest capital shortfall will come as a serious blow to hopes for a sale of IKB, the newspaper reported. KfW began a sale process to offload its stake in January and potential bidders have until the middle of February to register their interest.
The reports of further exposure at IKB came as France's Societe Generale revealed roughly 600 million euros in previously undisclosed write-downs alongside its plans to raise $8 billion in a rights issue.
Macquarie Group is in talks with Allco Finance to buy out the troubled billion dollar infrastructure and investment group whose shares have been battered by the fallout from its exposure to debt markets.
Allco, led by the chairman David Coe, put its shares in a trading halt as the market opened yesterday, sparking rumours over its future ahead of its results later this week. It emerged later in the day that Macquarie had approached Allco about a possible buyout in a move to take advantage of a 75 per cent slump in its shares over the last year.
Since its castratrophic fall last month to $1.70, the company has staged a minor recovery, closing at $3.05 last week.
Allco and Macquarie declined to comment on the rumours. "The company doesn't want to add anything to the announcement," said an Allco spokesman, Ian Brown.
Macquarie said it did not comment on market speculation.
Allco also put the hybrid securities (AHUGA) in a trading halt, fuelling speculation the pending announcement would relate to a David Coe- and Allco senior management-owned investment vehicle, Allco Principals Trust, which had its stake in Allco Finance and Allco HIT subjected to margin calls last month.
There was also speculation during the day of a management buyout, later discounted given the volatility in the company's share price, which has also affected the executive team's own shareholdings via margin calls on the value of their stakes.
It has been rumoured that Allco management is keen to ensure the company's share price does not fall further, after Allco Principals Trust won a reprieve from its two remaining margin lenders.
The speculation has been fuelled by the recent re-emergence of the Allco founder John Kinghorn, who raided the company's share register for a 6.8 per cent stake at a bargain price last month. A management buyout proposal, one observer said, could a help put a floor under Allco Finance's share price and keep the margin lenders at bay.
"They need some circuit-breaker to stop the stock from going into freefall," he said.
Mr Kinghorn left Allco a decade ago to build up his RAMS home loan business. Some market watchers believe the $650 million Mr Kinghorn earned from the float of RAMS last July could help fund the buyout of Allco. His remaining 20 per cent stake in RAMS has lost about 88 per cent of its value since the company's listing on the stock exchange.
Some market watchers were circumspect on the talk of a buyout. "Given the issues the company has got, if they can fund $1 billion to purchase the firm I'd be very surprised," one said.
There are fears a planned announcement by the firm when the trading halt is lifted could contain nasty surprises before its half-year results briefing on Friday.
These fears were reflected in the trading of other Allco-related stocks, such as Rubicon American Trust which slumped 8.5c to 27c, Rubicon European Trust, which fell 5c to 27.5c, and Allco HIT, which fell 1c to 56c.
THE survival prospects of the Macquarie Group-managed Fortress Investments fund worsened yesterday after it revealed that another dramatic fall in the value of its core securities had resulted in a breach of its banking covenants.
In a further blow to investors' confidence that the beleaguered fund can pull itself out of the decline induced by the global credit crisis, its managers disclosed that it had, in effect, been the subject of a "margin call" by lenders concerned at the latest drop in its net asset value.
With its asset backing having fallen to 35 cents per note - representing a 13 cents drop in just three days to last Friday - Fortress was forced to sell even more of the loans that made up the core of its investments to satisfy its lenders' demands to meet the cash call.
The fund offloaded yet another chunk of its portfolio, amounting to a face value of $US164 million ($181 million), in an effort to reduce the debt burden that it had previously used to gear up against the equity it had raised from high-net worth investors.
Fortress was launched by Macquarie in May 2005 and issued over the next 12 months a series of listed and unlisted investments, each with a face value of $1 and backed by syndicated loans taken out by corporate borrowers.
The intention by the fund's managers, the Macquarie Group-owned Four Corners Capital Management, was to pay regular dividends out of the interest earned on the debt. However, the notes have dropped steadily in price following the credit crisis.
The situation has only got worse for Fortress as it has been forced to sell its loans into a buyers' market, with the latest disposal causing it to book a $US25.5 million loss, equal to 17 cents per note.
That has left the fund with an investment holding at the face value of $US420 million and net debt of $US320 million. However, the actual current market value is just $US372 million, leaving investors nursing significant losses.
All told, the accumulated losses per note stand at 32c since the fund first ran into difficulties last July, when the worldwide liquidity crunch began to squeeze debt markets and the specialist funds that invested in them.
But while the latest sales of loans alleviated the immediate concerns raised by Fortress's bankers, its managers revealed that it was unlikely to be able to use the same option again. That has increased pressure on the fund to find a way of refinancing its package of investments.
Fortress's director, Peter Lucas, said yesterday: "Given current market conditions, the investment manager believes that a sale of the remaining portfolio would be unlikely to realise the current market value, and also believes that a meaningful portion of it would not be able to be sold."
Mr Lucas also said in his statement to the ASX that there was no guarantee that the fund would be able to secure a re-financing deal - which itself would require the very cause of the credit crisis to ease.
IT HAS been almost a week since investors greeted the appointment of Nicholas Moore as the new head of Macquarie Group by wiping 9 per cent from the investment bank's market value. There was a slight reversal late last week, but yesterday it was on again.
Macquarie slumped by almost 4 per cent - admittedly on a day when all the banks were hit - as its share price plumbed $60.
Speculation it was involved in a bid for the troubled Allco Finance didn't help, neither did concerns surrounding the performance of its Fortress funds in the US.
In June last year the share price was looking to burst through $100. That's a huge slump in just eight months. But the re-rating of the group is on in earnest and much of it has to do with the chief executive elect and his ability to cope with a bear market.
Change is always unsettling. Add to that unsettled times, and the nervousness surrounding Macquarie's future is understandable.
There were similar reservations in August 1993 when the then Macquarie chief executive, Tony Berg, unexpectedly threw in the towel to try his hand at running Boral.
In terms of personality, the contrast between Berg and his successor, Allan Moss, couldn't have been more stark. As they stood side by side in their old office, 21 floors above the stock exchange in Bond Street, to announce the official handover, Berg looked every inch the investment banker.
Urbane and gregarious, he exuded charm and held the audience captive as chairman David Clarke heaped praise upon the man who had helped him build the bank virtually from scratch. Moss stood close by, shuffling awkwardly. When questioned about his vision for the future, he gave little away.
But it was Moss who has presided over the great growth phase in Macquarie's history, catapulting it from a smart but relatively niche player on the local scene into a fiercely competitive global player and a banking force to be reckoned with.
Timing is everything in business, and Moss timed it perfectly. His ascent to the top job coincided with the turnaround in the Australian economy and a golden period on global stockmarkets, and there's no doubt he's going out on a high.
Macquarie is due to turn in a profit of more than $1.8 billion this year, streets ahead of the $60 million in earnings when Moss first took the job.
The question is: has Moss seen the future and decided it looked ugly? The supplementary question must be: is Moore the right man for the times?
Domestic interest rates are rising, global credit is tightening, stockmarkets are entering a period of almost unprecedented volatility and the US and European economies look headed for trouble.
Moore has played more than a bit part in the rapid growth of the bank's earnings. He drove the group's plunge into infrastructure.
On its first high-profile deal - the purchase of Sydney Airport - Macquarie initially was in league with several other banks, including the Commonwealth, but Moore contacted his counterpart at CBA to tell him Macquarie was going it alone with a $5.6 billion bid. It ended up being at least $1 billion more than expected and, at that time, the most expensive airport purchase in the world.
It initially backfired, sending Macquarie's shares plummeting, but the purchase paid off handsomely. Macquarie shuffled the airport off into a listed trust (thereby retrieving its money), paid itself a handsome commission and pocketed lucrative management fees for running the show. It was a model repeated over and over again.
Suddenly, that's no longer possible. You can still buy assets if you can access cash, but it's mighty hard to sell them, and without sales Macquarie can't generate the fees. Without that constant deal flow, earnings stagnate.
A year ago Macquarie appeared to be buying billions of dollars of infrastructure assets daily - a water company in Britain, a toll road in the US, an airport in Europe - but in the past few months there's been precious little in the way of deals.
Ambitious, aggressive and arrogant, Moore has been the perfect creature to run a predatory operation in a bull market, and he's had the wise old heads who started the operation to keep him in check.
However, the recent reorganisation of the group - splitting it into an investment group and a banking operation - has included the departure of a swag of key people besides Allan Moss.
Moore saw off his potential rival for the top job, Bill Moss, who cashed out last year. Mark Johnson, a founding member, deputy chairman and head of corporate advisory, also quit recently. David Clarke, Macquarie's architect and chairman, has moved from an executive role to non-executive chairman.
Will Moore be able to curb his own ambitions and his volatile temper? Running a deal-making operation at a time when there are precious few deals to be done can either be extremely character-forming or soul-destroying.
His predecessor rose to the occasion. Moore may yet surprise everyone.
Domestic interest rates are rising, global credit is tightening, stockmarkets are entering a period of almost unprecedented volatility and the US and European economies look headed for trouble.
Moore has played more than a bit part in the rapid growth of the bank's earnings. He drove the group's plunge into infrastructure.
On its first high-profile deal - the purchase of Sydney Airport - Macquarie initially was in league with several other banks, including the Commonwealth, but Moore contacted his counterpart at CBA to tell him Macquarie was going it alone with a $5.6 billion bid. It ended up being at least $1 billion more than expected and, at that time, the most expensive airport purchase in the world.
It initially backfired, sending Macquarie's shares plummeting, but the purchase paid off handsomely. Macquarie shuffled the airport off into a listed trust (thereby retrieving its money), paid itself a handsome commission and pocketed lucrative management fees for running the show. It was a model repeated over and over again.
Suddenly, that's no longer possible. You can still buy assets if you can access cash, but it's mighty hard to sell them, and without sales Macquarie can't generate the fees. Without that constant deal flow, earnings stagnate.
A year ago Macquarie appeared to be buying billions of dollars of infrastructure assets daily - a water company in Britain, a toll road in the US, an airport in Europe - but in the past few months there's been precious little in the way of deals.
Ambitious, aggressive and arrogant, Moore has been the perfect creature to run a predatory operation in a bull market, and he's had the wise old heads who started the operation to keep him in check.
However, the recent reorganisation of the group - splitting it into an investment group and a banking operation - has included the departure of a swag of key people besides Allan Moss.
Moore saw off his potential rival for the top job, Bill Moss, who cashed out last year. Mark Johnson, a founding member, deputy chairman and head of corporate advisory, also quit recently. David Clarke, Macquarie's architect and chairman, has moved from an executive role to non-executive chairman.
Will Moore be able to curb his own ambitions and his volatile temper? Running a deal-making operation at a time when there are precious few deals to be done can either be extremely character-forming or soul-destroying.
His predecessor rose to the occasion. Moore may yet surprise everyone.
Auditor questions valuation of derivatives; ratings agency eyes downgrade
By Alistair Barr Last update: 5:05 p.m. EST Feb. 11, 2008
SAN FRANCISCO (MarketWatch) -- American International Group shares fell 12% to their lowest level in almost five years on Monday after the insurer's auditor questioned how the company values some of its derivatives.
PricewaterhouseCoopers LLC said AIG had a material weakness in its internal control over financial reporting and oversight related to the valuation of a derivatives portfolio owned by AIG Financial Products Corp., a unit of AIG, the company said in a regulatory filing.
AIG disagreed, saying it has appropriate controls and procedures in place to value such exposures. But Fitch Ratings said it may cut AIG's AA ratings in light of the disclosure.
The problems are centered on collateralized debt obligations, complex securities that are partly backed by mortgage securities. As house prices have fallen and delinquencies and foreclosures surge, the market value on these securities have dropped sharply.
AIG Financial Products has a large exposure to these securities. The unit's credit derivatives portfolio had a net notional exposure of $505 billion at the end of September. More than $62 billion of that was related to CDOs, mainly backed by subprime U.S. residential mortgage-backed securities, Fitch said.
"The announcement highlights the greater risk associated with AIG, and also has increased investors skepticism," Alain Karaoglan, an analyst at Banc of America Securities, wrote in a note to investors.
AIG shares, a component of the Dow Jones Industrial Average, fell 12% to close at $44.74, nearly a five-year low.
AIG is the latest financial-services giant to become swept up in CDO problems. Merrill Lynch & Co. and Citigroup Inc. have written down the value of CDO exposures by billions of dollars in recent months, forcing them to raise new capital from government-run funds in the Middle East and Asia.
Bond insurers like MBIA Inc. and Ambac Financial Group have also been hit hard by guarantees they sold on CDOs.
AIG's Financial Products unit sold similar guarantees on CDOs, using credit-default swaps (CDS), which are a type of derivative-based insurance that pays out in the event of a default. It sold "super senior" CDS that guaranteed higher quality parts of CDOs.
But as the credit crunch widened, the market value of even the best parts of some CDOs have declined. The complexity of these securities and a slump in trading activity has made them tricky to value, adding to concerns.
Late last year, AIG said that the fair value of its portfolio of super-senior CDS on CDOs had dropped by $1.6 billion in 2007 through Nov. 30.
That estimate included some benefits from the structure of these derivatives that can trigger increased cash flow to the higher quality parts of the CDOs AIG guaranteed, the insurer explained in its Monday filing. That bolstered the estimated market value of its super senior CDS portfolio by $732 million.
It also included an adjustment related to the difference between the value of CDOs implied by trading in the cash market and valuations implied by trading in the derivatives market. That so-called negative basis adjustment was worth an estimated $3.6 billion.
But AIG said on Monday that it won't include that adjustment when it estimates the fair value of its super senior CDS portfolio at the end of December. That's because, in current "difficult" market conditions, the insurer said it wasn't able to reliably quantify this negative basis adjustment.
Without that, the market value of AIG's super senior CDS portfolio would have dropped by $5.2 billion in 2007 through Nov. 30, the insurer estimated.
Excluding the estimated $732 million from the structural benefits, the portfolio would have dropped by $6 billion during the same period, AIG said in its Monday filing.
Ultimate losses
AIG could end up paying out as much as $10 billion from the CDS it has sold on CDOs, which is about 10% of the insurer's net worth and roughly three quarters of earnings, Matt Nellans, an equity analyst at Morningstar, wrote in a note to clients on Monday.
Still, market-based valuation changes within this portfolio don't necessarily mean AIG will end up paying the same amount to settle its obligations, the analyst added. Ultimate losses depend on the number and severity of defaults on the assets that back the CDOs the insurer has guaranteed, he explained.
AIG's exposure to riskier securities known as mezzanine CDOs are more worrying, Nellans said, noting that the company had roughly $19 billion of such exposure at the end of September.
AIG again guaranteed the highest-rated parts of these securities, but they are backed by riskier underlying assets, he explained.
"In the event the underlying securities fail a cash-flow test or are downgraded, the remaining cash flows will be diverted from the lower-rated AIG insured tranches to the higher-rated tranches," Nellans wrote.
"AIG could withstand a total loss on this $19 billion of exposure, but it would wipe out 19% of the firm's equity and about 15 months of earnings," he added.
"We are so narrow minded that we show war, murder, rape, etc. on TV, but we do not allow to show one of the most wonderful creations (the human body) in its natural form." - Mario Roman
14 comments:
Japan is the next sub-prime flashpoint Up to $500bn has been lost worldwide but only $130bn admitted to - and soon Tokyo's banks must come clean There is still $300bn of bad debt out there, and Japan could be hiding most of it.
Just as battered investors had begun to glimpse signs of recovery in America, the next shoe has dropped with an almighty thud in Japan. Echoes are rumbling across the Far East.
The Tokyo bourse has crumbled, suffering the worst start to the year since the Second World War. The Nikkei index is down 17 per cent since Christmas, and the shares of Japanese banks are leading the slide. Mizuho Financial, Mitsubishi UFJ and Sumitomo Mitsui have all been punished as hard or even harder than those US banks at the epicentre of the sub-prime debacle.
Goldman Sachs's Global Alpha Hedge Fund Declined 40% in 2007
Katherine Burton
Last Updated: January 29, 2008 17:19 EST
Goldman Sachs Group Inc's Global Alpha hedge fund, once the firm's biggest, fell about 40% last year because of wrong-way bets on currencies, equities and bonds worldwide, according to a report sent to investors.
The loss erased about US$4 billion ($5.66 billion) from the fund, which started 2007 with US$10 billion. The report didn't list year-end assets. Investors pulled about US$3 billions from Global Alpha and the New York-based firm's other quantitative funds in 4Q ended Nov 30, Chief Financial Officer David Viniar said on a conference call last month.
Global Alpha won’t be able to charge most clients the 20% fee on investment profits until it makes up losses from its March 2006 peak. That would require managers Mark Carhart and Raymond Iwanowski to post a 100% gain. Global Alpha generated US$700 million in fees in 2006 after increasing more than 40% in the previous year.
“It does not make sense for investors to keep their money in Global Alpha” after the losses, says Michael Corcelli, managing member of Alexander Alternative Capital LP, a hedge fund based in Miami.
Quant-fund managers like Carhart and Iwanowski, both 41, use computers to select trades. Highbridge Capital Management LLC’s Highbridge Statistical Opportunities Fund declined 14%. James Simons’s Renaissance Institutional Equities Fund fell almost 1% last year. Hedge funds returned an average of 10%, according to Chicago-based Hedge Fund Research Inc, which tracks industry returns and flows.
Global Alpha was down 37% at the end of November, investors said in December. While Global Alpha has been losing assets, Goldman is pulling in cash for other hedge funds. Goldman Sachs Investment Partners started this month with US$7 billion, the largest hedge-funds startup ever. Global Alpha lost money in December by buying European and Canadian bonds and global stocks, according to the report, a copy of which was obtained by Bloomberg. The fund profits on bets that agricultural commodities would rise and the Korean won and South African stocks would decline.
Hedge funds globally declined 3.1% in the month of Jan 24, their worst performance since 1998, the London-based Times reported, citing the most recent indexes published by Hedge Fund Research, of Chicago. There may be a shakeout in the hedge-fund business this year, with some funds that have less than US$10 billion under management collapsing, the newspaper added, citing unidentified industry experts. – Bloomberg LP
In Unforgiven Margin Call, Bear Funds Failed on Merrill CDOs
By Yalman Onaran
Last Updated: January 3, 2008 00:18 EST
From 2005 through the middle of '07, two of Wall Street's oldest firms were locked in an embrace that proved damaging to both.
Merrill Lynch, founded in 1914, sold hundreds of millions of dollars worth of collateralized debt obligations to hedge funds run by Bear Stearns, started in 1923.
Some 90 percent of the face value of the CDOs was loaned to Bear by Merrill, as is normal in such transactions. When the prices of the funds' CDO holdings started to fall in June, Merrill demanded that the firm increase collateral in what's known in the debt markets as a margin call.
Bear Stearns executives pleaded for time, arguing that the forced sale of their assets would push down all CDO prices. Merrill Lynch officials brushed off the entreaty, according to people involved in the discussions.
In June, the hedge funds, run by Ralph Cioffi, sold $3.8 billion of CDOs to meet margin calls by Merrill and other lenders that were following its lead. The fire sale led to a further drop in CDO prices.
Among those that lost value: $23 billion of CDOs Merrill held on its own books. In October, Merrill wrote down the value of all of its mortgage-backed holdings, including CDOs, by $7.9 billion and declared a loss for the third quarter.
``It was in Merrill's interest to wait it out and allow the Bear Stearns funds to recapitalize, so they wouldn't have to re- price their assets,'' says William Fitzpatrick, a financial services analyst at Racine, Wisconsin-based Optique Capital Management, which oversees $1.7 billion. Optique held both Bear and Merrill shares; it sold all of its Merrill shares in 2006 and dumped its remaining Bear shares in July, Fitzpatrick says.
$850 Million Seized
Both Bear Stearns and Merrill Lynch declined to comment on the matter. Merrill is a passive, minority investor in Bloomberg LP, parent of Bloomberg News.
On June 15, Merrill Lynch seized $850 million of the CDOs from Cioffi's funds -- as lenders are allowed to do when their margin calls aren't met -- and tried to sell them in the market. When the firm received bids of 20 cents on the dollar, it abandoned the effort. In July, Cioffi's funds declared bankruptcy, losing $1.6 billion of investors' money and triggering the repricing of CDOs around the world.
Giving Bear Stearns a chance to shore up the hedge funds might have allowed time for Merrill Lynch to reduce its CDO portfolio or buy hedges against it, Fitzpatrick says. In June, before the funds' problems became public, there were market players who were still willing to underwrite credit default swaps on CDOs. That opportunity disappeared after the Bear funds' failure.
``The end was inevitable,'' Fitzpatrick says. ``But Merrill could maybe have bought some time if it hadn't blown the whistle on the Bear funds.'' Divorce might have been in order. Merrill filed its petition too soon. – Bloomberg LP
CDO Market Stays Shut for Fourth Week, JPMorgan Says
By Jody Shenn
Last Updated: January 29, 2008 17:53 EST
Jan. 29 (Bloomberg) -- The market for U.S. collateralized debt obligations remained shut for a fourth week, according to JPMorgan Chase & Co., on concern that ratings companies haven't adequately assessed the securities.
Demand for debt created by slicing pools of assets into securities stalled as some top-rated classes of mortgage-linked CDOs lost all their value amid surging U.S. foreclosures and as bondholders faced unprecedented downgrades on home-loan bonds.
``People lost faith in the ratings agencies a little bit, and you don't blame them,'' IndyMac Bancorp Inc. Chief Executive Officer Michael Perry, said in a telephone interview last week from the Pasadena, California, headquarters of the second-biggest independent U.S. home lender.
Diminished interest in CDOs and other securitized debt, such as bonds backed by credit-card receivables or equipment leases, threatens to push the U.S. into a recession by cutting the credit available to borrowers, according to Gregory Peters, the head of credit strategy at Morgan Stanley in New York.
Last week, one CDO was issued in Asia, the Arlo IX 2007 Pascal CDO tied to investment-grade corporate and country credit, according to the JPMorgan report yesterday from New York-based analysts Christopher Flanagan and Kedran Garrison Panageas. One $25 million class of the CDO was issued, the report said.
CDOs repackage assets into new securities with varying degrees of risk, from AAA grade to unrated classes. Investors are hesitant to buy them because of volatility in the stock and debt markets, Ms. Panageas said in a telephone interview.
``They're looking for a little bit more stability before committing to a strategy,'' she said.
CDO Downgrades
Moody's Investors Service, based in New York, last year downgraded $76 billion of CDOs comprised of other bonds backed by assets, such as subprime-mortgage securities. Ratings companies downgraded a record 4,389 CDO classes last year, including some cuts on the same securities, according to Morgan Stanley.
The creation of CDOs dipped about 10 percent last year to $494.7 billion, and probably will slide 65 percent this year, according to previous JPMorgan reports. The figures include only issuance for which investor money was collected upfront. The decline was the first since 2003, according to Morgan Stanley.
Last year, more than $1.1 trillion of CDOs were created, about the same as in 2006, according to JPMorgan data. The figures include so-called unfunded issuance in which buyers of senior classes don't need to put up money upfront. Funded CDO issuance fell from a record $551.9 billion in 2006.
IndyMac's Perry said that it's hard to find buyers for even the AAA rated classes of bonds backed by top-quality mortgages larger than $417,000 because of concern that credit ratings aren't accurate. Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, can't buy loans, called jumbo mortgages, larger than that amount.
Prime-jumbo mortgage-bond creation plunged 78 percent from a year earlier to about $3.89 billion in December, according to Arlington, Virginia-based FBR Investment Management. – Bloomberg LP
4 February 2008
Broker's Call
Allco Commercial REIT (Feb 4: 75.5 cents)
Maintain BUY.
Allco Commercial REIT (Allco)reported FY07 results. Allco reported gross revenue of S$75.2 million (+116% YoY) and net property income of S$61.4 million (+114% YoY). Full year distributable income amounts $47.5 million, translating to a DPU of 6.73 cents.
Acquisitions adding to top-line growth. FY07 result is better than the manager’s own forecast. Out-performance can be attributed to the better than expected contributions from 55 Market Street, Central Park, the capital distribution from AWPF as well as contributions from the Japan properties and Keypoint.
Better than our estimates. We were pleasantly surprised that Allco achieved much better results than our estimates (gross revenue +11%, NPI +5%, DPU +24%). The disparity is because we have incorporated much more conservative assumptions in our projections.
Asset growth. Allco grew its initial portfolio of 2 properties to 9 currently, with presence in Singapore, Australia and Japan. Revaluation gains of S$302.8 million boosted asset value from S$880 million to S$1.95 billion. NAV grew from $1.17 to $1.49 (+27% YoY).
Funding concern. As the acquisitions have been funded with debt, gearing is now 43.6%, well within the 60% regulatory limit. Allco has almost S$620 million of debt maturing this year and we note that Moody has recently downgraded Allco credit rating 1 level from Baa2 to Ba1 on refinancing concern as well as a weakened credit profile. In response, Management has mentioned they are on course to obtaining
refinancing before the debt maturity date and Allco is well within the covenants set out in the regulatory guidelines.
Management plans. Management has indicated the key focus for 2008 will be on consolidating the property portfolio. Attention will be on driving organic growth and
redeploying capital to higher growth assets. We believe that would mean more attention on managing the properties and slowing the pace of acquisition, which we feel is a timely move given the current market condition where acquisitions may be tight.
Valuation and recommendations. Refinancing risk is our top concern amid the volatile credit market. However, we remain very much positive on the outlook of Allco. Asset value more than doubled in the past year driven by acquisitions and revaluation gains in the strong property market. We believe management effort on active portfolio management comes well suited after a trail of acquisitions. In view of the volatile market conditions, we raised our assumptions for beta and risk premium in our DCF model. Fair value is lowered from $1.60 to $1.21. Fundamentally, we see
no reason for the falling share price and recognise great value at the current price which is at a 50% discount to NAV and offers an attractive yield of 12%.
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11 February 2008
Insider Moves
Capital Group trims stake in Allco Commercial REIT
By Nova Theresianto
The steep fall in Allco Commercial REIT’s share price over the last few months isn’t stopping the Capital Group of Companies Inc from trimming its holdings.
According to filings with the Singapore Exchange, the US-based fund management giant sold 8.3 million units in the beleaguered real estate investment trust (REIT) on Jan 30 and Feb 1. Following the sale, The Capital Group holds 69.7 million units, or 9.9%, of Allco Commercial, according to the filings. Its last purchase of units in the REIT was on Jan 18, when it bought 1.8 million units.
Amid the turmoil in financial markets over the last few months, many REITs have had difficulty raising money to expand their investment portfolios and distributions per unit (DPUs). In November, Allco Commercial called off a rights issue. The month before, it had acquired KeyPoint, an office building on Beach Road, for $370 million. The acquisition had pushed its gearing up to 46%. According to analyst reports, the REIT has borrowings of $882.2 million, of which $615.9 million has to be repaid within a year.
To make matters worse, Allco Commercial’s parent in Australia, Allco Finance Group, which holds a 15.8% stake in the REIT, is also heavily leveraged and has been facing trouble getting refinancing. Shares in Australia-listed Allco Finance have fallen dramatically in recent weeks, triggering margin calls that have forced the sales of shares in Allco Finance owned by a key shareholder Allco Principals Investments. In the past 12 months, shares in Allco Finance are down nearly 80% to A$2.96 ($3.80) last week.
Meanwhile, rating agency Moody’s downgraded Allco Commercial’s corporate family rating by one level last month, from Baa3 to Ba1, which is “junk” status. That leaves Allco Commercial facing the risk of having to refinance its debt on less favourable terms in the future, or raising fresh equity at the current depressed prices. It could also force it into selling its portfolio of nine office and retail properties in Singapore, Japan and Australia.
Units in Allco Commercial were down 32% over the past year. At current levels, they are trading at a distribution yield of over 12%, and a discount to net asset value of more than 50%, according to analysts’ reports.
Doctor struck off for having sex with patient, improper conduct
Feb 11, 2008
A DOCTOR has been suspended from practice for two years and censured by the Singapore Medical Council which convicted him of professional misconduct, including having sex with a patient, after a disciplinary inquiry last month.
Dr Yeong Cheng Toh, a consultant gynaecologist, admitted to four charges while he was practising at the KK Women's and Children's Hospital between April 2003 and March 2005, said a statement from the Singapore Medical Council on Monday.
He was represented by a lawyer at the inquiry, held on Jan 7 and 8.
The disciplinary committee (DC) convicted him of improper conduct 'which brings disrepute to the medical profession' by engaging in a sexual relationship with a patient and failing to preserve the absolute confidence and trust of a doctor-patient relationship. This is in breach of the SMC's ethical code and guidelines.
Dr Yeong also tampered with and made inaccurate changes to the patient's biodata of the patient, and failed to keep proper and accurate records.
He also committed professional misconduct by failing to record or properly document details of the patient's visits, medical condition and results on medical examinations during the treatment period, and failing to properly maintain patient confidentiality 'in improperly disclosing to the patient, confidential information relating to the treatment and care of two other patients of the hospital', said the SMC.
However, the committee took into account the mitigating factors that the patient was not 'physically or psychologically vulnerable' and there was no exploitation of the patient.
'The DC also noted that Dr Yeong had no previous offences and had pleaded guilty, instead of contesting the charges. Based on the evidence presented, the DC was of the view that there was a low risk of Dr Yeong repeating the offence and also considered the favourable testimonies from Dr Yeong's patients and colleagues,' said the SMC statement.
Nonetheless, the DC was of the view that Dr Yeong's conduct transgressed the professional boundary between a doctor and patient and a clear signal had to be sent to the medical profession that gross improper behaviour between a doctor and patient cannot be tolerated. The DC also viewed the three other charges as 'serious offences.'
Besides the 24-month suspension and censure, Dr Yeong was also ordered to give a written undertaking to the SMC that he will not engage in the conduct which gave rise to the charges against him or any similar conduct in the future and to pay the costs of the disciplinary proceedings.
IKB tumbles after report it needs another $2.9 bln
German banks reluctant to provide further capital injection
By Simon Kennedy
Feb. 11, 2008
LONDON (MarketWatch) -- Shares in Germany's IKB Deutsche Industriebank tumbled over 20% Monday after weekend reports that the struggling bank needs a further 2 billion euros ($2.9 billion) in capital to cover its subprime mortgage risks.
IKB had to be bailed out by state-owned KfW and a consortium of German banks during the summer after revealing massive exposure to risky U.S. mortgages.
But German newspaper Frankfurter Allgemeine Sonntagszeitung reported Sunday that KfW, which holds around 40% of IKB, cannot afford to provide any further capital and the other banks that participated in the rescue have so far refused to increase credit lines.
Shares in IKB, which specializes in providing loans to small and medium companies, slumped 20.8% in midmorning trading. The stock has fallen around 85% from its peak in early 2007.
The newspaper said the additional capital is needed after IKB increased its view of the risk from assets on its balance sheet to 3.3 billion euros from 1.35 billion euros.
The bank also has around 8.1 billion euros of exposure through its off-balance-sheet Rhineland Funding investment vehicle. Rhineland borrowed money by issuing short-term commercial paper and invested in longer-term debt, including subprime mortgages. Like other conduits and structured investment vehicles, Rhineland struggled to find buyers for its commercial paper after the credit crisis hit in the summer.
The latest capital shortfall will come as a serious blow to hopes for a sale of IKB, the newspaper reported. KfW began a sale process to offload its stake in January and potential bidders have until the middle of February to register their interest.
The reports of further exposure at IKB came as France's Societe Generale revealed roughly 600 million euros in previously undisclosed write-downs alongside its plans to raise $8 billion in a rights issue.
新加坡建成世界最高摩天輪
2008年02月11日 星期一
【大公報訊】據台灣媒體十日報道：由新加坡打造的世界最高摩天輪，今天正式裝上最後零件。這座摩天輪高一百六十五公尺，採用透明設計，每個觀景艙還可以容納三十五位遊客，預計完成後，將會成為新加坡的新地標。坐在摩天輪內，不但可以看到新加坡市中心方圓四十五公里的地區，還可遠望到印尼的巴淡島和大馬的柔佛州。
這座美輪美奐的摩天輪是新加坡的最新地標「新加坡摩天觀景輪」（Singapore Flyer），摩天輪相當於四十二層樓高，透明美麗，被當地認為是「新加坡之眼」。新加坡政府斥資二億四千萬新加坡元（約十二億三千五百萬港幣），打造出這個與眾不同的摩天輪，有意與馬來西亞號稱東南亞最大的摩天輪一較高下。
新加坡摩天輪最特殊的地方不只是它的高大，而是在於它與眾不同的觀景艙。它的一個觀景艙可以乘坐三十五名遊客，整座摩天輪共可以搭載九百八十名乘客。建設公司董事長彼得帕歇爾指出：「這個二億四千萬新加坡元的項目，載客量是一般摩天輪的十倍，人們甚至可以在觀景艙裡面走動。」
馬來西亞的大馬摩天輪完工之後，替當地帶來了觀光人潮，新加坡這次完成的「新加坡摩天觀景輪」不但高度打敗了目前世界最高的「倫敦之眼」摩天輪，更有望替新加坡的觀光事業帶來新刺激，增加觀光人潮。
Allco in talks on buyout
Scott Rochfort
February 12, 2008
Macquarie Group is in talks with Allco Finance to buy out the troubled billion dollar infrastructure and investment group whose shares have been battered by the fallout from its exposure to debt markets.
Allco, led by the chairman David Coe, put its shares in a trading halt as the market opened yesterday, sparking rumours over its future ahead of its results later this week. It emerged later in the day that Macquarie had approached Allco about a possible buyout in a move to take advantage of a 75 per cent slump in its shares over the last year.
Since its castratrophic fall last month to $1.70, the company has staged a minor recovery, closing at $3.05 last week.
Allco and Macquarie declined to comment on the rumours. "The company doesn't want to add anything to the announcement," said an Allco spokesman, Ian Brown.
Macquarie said it did not comment on market speculation.
Allco also put the hybrid securities (AHUGA) in a trading halt, fuelling speculation the pending announcement would relate to a David Coe- and Allco senior management-owned investment vehicle, Allco Principals Trust, which had its stake in Allco Finance and Allco HIT subjected to margin calls last month.
There was also speculation during the day of a management buyout, later discounted given the volatility in the company's share price, which has also affected the executive team's own shareholdings via margin calls on the value of their stakes.
It has been rumoured that Allco management is keen to ensure the company's share price does not fall further, after Allco Principals Trust won a reprieve from its two remaining margin lenders.
The speculation has been fuelled by the recent re-emergence of the Allco founder John Kinghorn, who raided the company's share register for a 6.8 per cent stake at a bargain price last month. A management buyout proposal, one observer said, could a help put a floor under Allco Finance's share price and keep the margin lenders at bay.
"They need some circuit-breaker to stop the stock from going into freefall," he said.
Mr Kinghorn left Allco a decade ago to build up his RAMS home loan business. Some market watchers believe the $650 million Mr Kinghorn earned from the float of RAMS last July could help fund the buyout of Allco. His remaining 20 per cent stake in RAMS has lost about 88 per cent of its value since the company's listing on the stock exchange.
Some market watchers were circumspect on the talk of a buyout. "Given the issues the company has got, if they can fund $1 billion to purchase the firm I'd be very surprised," one said.
There are fears a planned announcement by the firm when the trading halt is lifted could contain nasty surprises before its half-year results briefing on Friday.
These fears were reflected in the trading of other Allco-related stocks, such as Rubicon American Trust which slumped 8.5c to 27c, Rubicon European Trust, which fell 5c to 27.5c, and Allco HIT, which fell 1c to 56c.
Macquarie's Fortress under siege as notes dive
Danny John
February 12, 2008
THE survival prospects of the Macquarie Group-managed Fortress Investments fund worsened yesterday after it revealed that another dramatic fall in the value of its core securities had resulted in a breach of its banking covenants.
In a further blow to investors' confidence that the beleaguered fund can pull itself out of the decline induced by the global credit crisis, its managers disclosed that it had, in effect, been the subject of a "margin call" by lenders concerned at the latest drop in its net asset value.
With its asset backing having fallen to 35 cents per note - representing a 13 cents drop in just three days to last Friday - Fortress was forced to sell even more of the loans that made up the core of its investments to satisfy its lenders' demands to meet the cash call.
The fund offloaded yet another chunk of its portfolio, amounting to a face value of $US164 million ($181 million), in an effort to reduce the debt burden that it had previously used to gear up against the equity it had raised from high-net worth investors.
Fortress was launched by Macquarie in May 2005 and issued over the next 12 months a series of listed and unlisted investments, each with a face value of $1 and backed by syndicated loans taken out by corporate borrowers.
The intention by the fund's managers, the Macquarie Group-owned Four Corners Capital Management, was to pay regular dividends out of the interest earned on the debt. However, the notes have dropped steadily in price following the credit crisis.
The situation has only got worse for Fortress as it has been forced to sell its loans into a buyers' market, with the latest disposal causing it to book a $US25.5 million loss, equal to 17 cents per note.
That has left the fund with an investment holding at the face value of $US420 million and net debt of $US320 million. However, the actual current market value is just $US372 million, leaving investors nursing significant losses.
All told, the accumulated losses per note stand at 32c since the fund first ran into difficulties last July, when the worldwide liquidity crunch began to squeeze debt markets and the specialist funds that invested in them.
But while the latest sales of loans alleviated the immediate concerns raised by Fortress's bankers, its managers revealed that it was unlikely to be able to use the same option again. That has increased pressure on the fund to find a way of refinancing its package of investments.
Fortress's director, Peter Lucas, said yesterday: "Given current market conditions, the investment manager believes that a sale of the remaining portfolio would be unlikely to realise the current market value, and also believes that a meaningful portion of it would not be able to be sold."
Mr Lucas also said in his statement to the ASX that there was no guarantee that the fund would be able to secure a re-financing deal - which itself would require the very cause of the credit crisis to ease.
Moore: a man for all seasons?
Ian Verrender
February 12, 2008
IT HAS been almost a week since investors greeted the appointment of Nicholas Moore as the new head of Macquarie Group by wiping 9 per cent from the investment bank's market value. There was a slight reversal late last week, but yesterday it was on again.
Macquarie slumped by almost 4 per cent - admittedly on a day when all the banks were hit - as its share price plumbed $60.
Speculation it was involved in a bid for the troubled Allco Finance didn't help, neither did concerns surrounding the performance of its Fortress funds in the US.
In June last year the share price was looking to burst through $100. That's a huge slump in just eight months. But the re-rating of the group is on in earnest and much of it has to do with the chief executive elect and his ability to cope with a bear market.
Change is always unsettling. Add to that unsettled times, and the nervousness surrounding Macquarie's future is understandable.
There were similar reservations in August 1993 when the then Macquarie chief executive, Tony Berg, unexpectedly threw in the towel to try his hand at running Boral.
In terms of personality, the contrast between Berg and his successor, Allan Moss, couldn't have been more stark. As they stood side by side in their old office, 21 floors above the stock exchange in Bond Street, to announce the official handover, Berg looked every inch the investment banker.
Urbane and gregarious, he exuded charm and held the audience captive as chairman David Clarke heaped praise upon the man who had helped him build the bank virtually from scratch. Moss stood close by, shuffling awkwardly. When questioned about his vision for the future, he gave little away.
But it was Moss who has presided over the great growth phase in Macquarie's history, catapulting it from a smart but relatively niche player on the local scene into a fiercely competitive global player and a banking force to be reckoned with.
Timing is everything in business, and Moss timed it perfectly. His ascent to the top job coincided with the turnaround in the Australian economy and a golden period on global stockmarkets, and there's no doubt he's going out on a high.
Macquarie is due to turn in a profit of more than $1.8 billion this year, streets ahead of the $60 million in earnings when Moss first took the job.
The question is: has Moss seen the future and decided it looked ugly? The supplementary question must be: is Moore the right man for the times?
Domestic interest rates are rising, global credit is tightening, stockmarkets are entering a period of almost unprecedented volatility and the US and European economies look headed for trouble.
Moore has played more than a bit part in the rapid growth of the bank's earnings. He drove the group's plunge into infrastructure.
On its first high-profile deal - the purchase of Sydney Airport - Macquarie initially was in league with several other banks, including the Commonwealth, but Moore contacted his counterpart at CBA to tell him Macquarie was going it alone with a $5.6 billion bid. It ended up being at least $1 billion more than expected and, at that time, the most expensive airport purchase in the world.
It initially backfired, sending Macquarie's shares plummeting, but the purchase paid off handsomely. Macquarie shuffled the airport off into a listed trust (thereby retrieving its money), paid itself a handsome commission and pocketed lucrative management fees for running the show. It was a model repeated over and over again.
Suddenly, that's no longer possible. You can still buy assets if you can access cash, but it's mighty hard to sell them, and without sales Macquarie can't generate the fees. Without that constant deal flow, earnings stagnate.
A year ago Macquarie appeared to be buying billions of dollars of infrastructure assets daily - a water company in Britain, a toll road in the US, an airport in Europe - but in the past few months there's been precious little in the way of deals.
Ambitious, aggressive and arrogant, Moore has been the perfect creature to run a predatory operation in a bull market, and he's had the wise old heads who started the operation to keep him in check.
However, the recent reorganisation of the group - splitting it into an investment group and a banking operation - has included the departure of a swag of key people besides Allan Moss.
Moore saw off his potential rival for the top job, Bill Moss, who cashed out last year. Mark Johnson, a founding member, deputy chairman and head of corporate advisory, also quit recently. David Clarke, Macquarie's architect and chairman, has moved from an executive role to non-executive chairman.
Will Moore be able to curb his own ambitions and his volatile temper? Running a deal-making operation at a time when there are precious few deals to be done can either be extremely character-forming or soul-destroying.
His predecessor rose to the occasion. Moore may yet surprise everyone.
Domestic interest rates are rising, global credit is tightening, stockmarkets are entering a period of almost unprecedented volatility and the US and European economies look headed for trouble.
Moore has played more than a bit part in the rapid growth of the bank's earnings. He drove the group's plunge into infrastructure.
On its first high-profile deal - the purchase of Sydney Airport - Macquarie initially was in league with several other banks, including the Commonwealth, but Moore contacted his counterpart at CBA to tell him Macquarie was going it alone with a $5.6 billion bid. It ended up being at least $1 billion more than expected and, at that time, the most expensive airport purchase in the world.
It initially backfired, sending Macquarie's shares plummeting, but the purchase paid off handsomely. Macquarie shuffled the airport off into a listed trust (thereby retrieving its money), paid itself a handsome commission and pocketed lucrative management fees for running the show. It was a model repeated over and over again.
Suddenly, that's no longer possible. You can still buy assets if you can access cash, but it's mighty hard to sell them, and without sales Macquarie can't generate the fees. Without that constant deal flow, earnings stagnate.
A year ago Macquarie appeared to be buying billions of dollars of infrastructure assets daily - a water company in Britain, a toll road in the US, an airport in Europe - but in the past few months there's been precious little in the way of deals.
Ambitious, aggressive and arrogant, Moore has been the perfect creature to run a predatory operation in a bull market, and he's had the wise old heads who started the operation to keep him in check.
However, the recent reorganisation of the group - splitting it into an investment group and a banking operation - has included the departure of a swag of key people besides Allan Moss.
Moore saw off his potential rival for the top job, Bill Moss, who cashed out last year. Mark Johnson, a founding member, deputy chairman and head of corporate advisory, also quit recently. David Clarke, Macquarie's architect and chairman, has moved from an executive role to non-executive chairman.
Will Moore be able to curb his own ambitions and his volatile temper? Running a deal-making operation at a time when there are precious few deals to be done can either be extremely character-forming or soul-destroying.
His predecessor rose to the occasion. Moore may yet surprise everyone.
AIG stock tumbles on heightened CDO concerns
Auditor questions valuation of derivatives; ratings agency eyes downgrade
By Alistair Barr
Last update: 5:05 p.m. EST Feb. 11, 2008
SAN FRANCISCO (MarketWatch) -- American International Group shares fell 12% to their lowest level in almost five years on Monday after the insurer's auditor questioned how the company values some of its derivatives.
PricewaterhouseCoopers LLC said AIG had a material weakness in its internal control over financial reporting and oversight related to the valuation of a derivatives portfolio owned by AIG Financial Products Corp., a unit of AIG, the company said in a regulatory filing.
AIG disagreed, saying it has appropriate controls and procedures in place to value such exposures. But Fitch Ratings said it may cut AIG's AA ratings in light of the disclosure.
The problems are centered on collateralized debt obligations, complex securities that are partly backed by mortgage securities. As house prices have fallen and delinquencies and foreclosures surge, the market value on these securities have dropped sharply.
AIG Financial Products has a large exposure to these securities. The unit's credit derivatives portfolio had a net notional exposure of $505 billion at the end of September. More than $62 billion of that was related to CDOs, mainly backed by subprime U.S. residential mortgage-backed securities, Fitch said.
"The announcement highlights the greater risk associated with AIG, and also has increased investors skepticism," Alain Karaoglan, an analyst at Banc of America Securities, wrote in a note to investors.
AIG shares, a component of the Dow Jones Industrial Average, fell 12% to close at $44.74, nearly a five-year low.
AIG is the latest financial-services giant to become swept up in CDO problems. Merrill Lynch & Co. and Citigroup Inc. have written down the value of CDO exposures by billions of dollars in recent months, forcing them to raise new capital from government-run funds in the Middle East and Asia.
Bond insurers like MBIA Inc. and Ambac Financial Group have also been hit hard by guarantees they sold on CDOs.
AIG's Financial Products unit sold similar guarantees on CDOs, using credit-default swaps (CDS), which are a type of derivative-based insurance that pays out in the event of a default. It sold "super senior" CDS that guaranteed higher quality parts of CDOs.
But as the credit crunch widened, the market value of even the best parts of some CDOs have declined. The complexity of these securities and a slump in trading activity has made them tricky to value, adding to concerns.
Late last year, AIG said that the fair value of its portfolio of super-senior CDS on CDOs had dropped by $1.6 billion in 2007 through Nov. 30.
That estimate included some benefits from the structure of these derivatives that can trigger increased cash flow to the higher quality parts of the CDOs AIG guaranteed, the insurer explained in its Monday filing. That bolstered the estimated market value of its super senior CDS portfolio by $732 million.
It also included an adjustment related to the difference between the value of CDOs implied by trading in the cash market and valuations implied by trading in the derivatives market. That so-called negative basis adjustment was worth an estimated $3.6 billion.
But AIG said on Monday that it won't include that adjustment when it estimates the fair value of its super senior CDS portfolio at the end of December. That's because, in current "difficult" market conditions, the insurer said it wasn't able to reliably quantify this negative basis adjustment.
Without that, the market value of AIG's super senior CDS portfolio would have dropped by $5.2 billion in 2007 through Nov. 30, the insurer estimated.
Excluding the estimated $732 million from the structural benefits, the portfolio would have dropped by $6 billion during the same period, AIG said in its Monday filing.
Ultimate losses
AIG could end up paying out as much as $10 billion from the CDS it has sold on CDOs, which is about 10% of the insurer's net worth and roughly three quarters of earnings, Matt Nellans, an equity analyst at Morningstar, wrote in a note to clients on Monday.
Still, market-based valuation changes within this portfolio don't necessarily mean AIG will end up paying the same amount to settle its obligations, the analyst added. Ultimate losses depend on the number and severity of defaults on the assets that back the CDOs the insurer has guaranteed, he explained.
AIG's exposure to riskier securities known as mezzanine CDOs are more worrying, Nellans said, noting that the company had roughly $19 billion of such exposure at the end of September.
AIG again guaranteed the highest-rated parts of these securities, but they are backed by riskier underlying assets, he explained.
"In the event the underlying securities fail a cash-flow test or are downgraded, the remaining cash flows will be diverted from the lower-rated AIG insured tranches to the higher-rated tranches," Nellans wrote.
"AIG could withstand a total loss on this $19 billion of exposure, but it would wipe out 19% of the firm's equity and about 15 months of earnings," he added.
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