So what do we think about the AIG bailout. First, this is definitely good news as it avoids a systemic meltdown in the financial system. However there are a few things that we find terribly disconcerting. To begin with, the Federal Reserve announced it was lending AIG up to U$85 B as a disorderly failure of AIG would create too much turmoil in the financial system. The facility has a two-year term and will allow for the orderly sale of assets. The proceeds from the asset sales will be used to repay the loan. The interest rate on the loan is punitive at LIBOR plus 850 basis points. In exchange for providing the loan, the U.S. government will receive an 80% equity interest in the company. The fact the government ultimately stepped in is not surprising, however the amount of money they are pumping into AIG is staggering. Our understanding was last week the company needed U$20 B, then on Monday we were hearing they needed U$40 B, then U$75 B yesterday morning, only to find they may need U$85 B. To frame this number, over the last year major banks globally have collectively raised approximately U$330 B. What's interesting is that only when these firms go to confessional (The Fed) do we get a clear picture of just how dire things are. The size of the credit facility will require significant assets sales, beyond their aircraft leasing and other non-core businesses to its core insurance operations. The world's largest global insurance company is about to be unwound. There will be lots of buyers for their core insurance assets. Credit Suisse estimates a considerable amount of the total value of AIG may not go to current debt or equity holders, but rather to repay the loan to the Fed. So there is a risk debtholders may not be made whole. How will that effect the ratings on the company's debt. Credit Suisse believes the stock should trade in a range of U$1 to U$4 per share, based on pro-forma EPS of 30-40 cents.
Collateral damage from Lehman's demise is beginning to surface. First, the oldest U.S. money market fund "broke the buck" yesterday. The Reserve Primary Fund has halted redemptions as it was forced to write down U$785 million of debt issued by Lehman and shareholders withdrew 60% of its U$64.8 B in assets in the last two days. Shares of power marketing company Constellation Energy Group (CEG) lost almost half their value in two days on concerns Wall St. turmoil could create problems for its energy trading business. CEG is counterparties with Lehman Brothers through its commodity trading business.
Other news in the financial sector. The Federal Reserve is apparently actively shopping Washington Mutual (WM). Morgan Stanley (MS) pre-announced earnings last night and beat expectations. Numbers were better than those reported yesterday by Goldman Sachs (GS), but Morgan remains highly levered. CNBC is reporting Morgan is considering partnering with a bank. In the U.K., Lloyds TSB Group (LLOY-LN) is in advanced talks to buy Britain's largest mortgage lender HBOS (HBOS-LN).
Other news items today include:
1. Russia halted trading in its equity market for a second day after emergency funding by the government failed to stop massive selling pressure. Russia's RTS Index is down 37% this month. Russia's financial markets are facing their biggest test since the 1998 crisis that pushed the government to default on U$40 B of debt.
2. Barclays Plc, the U.K.'s third largest bank, will acquire the North American investment banking business of Lehman Brothers for $1.75 billion, two days after abandoning pans to buy the entire firm.
3. Nortel Networks (NT) has cut its forecasts for sales and profit margins, saying customers are curbing spending amid an economic slump. Sales will fall 2% to 4% in 2008 compared with an earlier target of growth in the low single-digit range. Third quarter revenue will be about $2.3 billion, short of the $2.66 billion Consensus estimate.
4. The Bank of Japan did as expected and left rates unchanged, accompanied by a fairly balanced assessment of growth and inflation risks. The BoJ doesn't view downside risks to the economy as having intensified because softer global growth gets traded off against a terms of trade shift via lower commodity prices. It continues to view inflation expectations as a risk.
5. Cameco Corp. has resolved the leak problem at its Port Hope nuclear conversion plant and hopes to restart it at a reduced rate within the next few days. The plant has been shut down since July 2007. Cameco expects total remediation costs at the facility to be between C$50 million and C$55 million. The company still has to resolve a fight with its sole supplier of hydrofluoric acid, a key input in the production of uranium hexafluoride, but Cameco says it has enough supply to keep operating at a reduced rate for about a month.
6. Teck Cominco (20% interest) and its partners (PCA-60% and UTS 20%) in the Fort Hills Energy Ltd. Partnership announced that the estimated costs for the Fort Hills Project have risen by approximately 50% from those announced in June 2007. The major increases are costs associated with construction materials, labour, project management, and engineering. The June 2007 cost estimate was $14.1 billion , implying an increase of approximately $7 billion of which Tecks share would be $1.4 billion. The interest in the project represents approximately 10% of $45 NAV on Teck and the higher capex would significantly reduce this value. The partners are considering options to reduce or defer capital costs, including the phasing of various aspects of the project. A final investment decision is planned by the Fort Hills partners for Q4 2008 and will depend on the results of the definitive cost estimate
Collateral damage from Lehman's demise is beginning to surface. First, the oldest U.S. money market fund "broke the buck" yesterday. The Reserve Primary Fund has halted redemptions as it was forced to write down U$785 million of debt issued by Lehman and shareholders withdrew 60% of its U$64.8 B in assets in the last two days. Shares of power marketing company Constellation Energy Group (CEG) lost almost half their value in two days on concerns Wall St. turmoil could create problems for its energy trading business. CEG is counterparties with Lehman Brothers through its commodity trading business.
Other news in the financial sector. The Federal Reserve is apparently actively shopping Washington Mutual (WM). Morgan Stanley (MS) pre-announced earnings last night and beat expectations. Numbers were better than those reported yesterday by Goldman Sachs (GS), but Morgan remains highly levered. CNBC is reporting Morgan is considering partnering with a bank. In the U.K., Lloyds TSB Group (LLOY-LN) is in advanced talks to buy Britain's largest mortgage lender HBOS (HBOS-LN).
Other news items today include:
1. Russia halted trading in its equity market for a second day after emergency funding by the government failed to stop massive selling pressure. Russia's RTS Index is down 37% this month. Russia's financial markets are facing their biggest test since the 1998 crisis that pushed the government to default on U$40 B of debt.
2. Barclays Plc, the U.K.'s third largest bank, will acquire the North American investment banking business of Lehman Brothers for $1.75 billion, two days after abandoning pans to buy the entire firm.
3. Nortel Networks (NT) has cut its forecasts for sales and profit margins, saying customers are curbing spending amid an economic slump. Sales will fall 2% to 4% in 2008 compared with an earlier target of growth in the low single-digit range. Third quarter revenue will be about $2.3 billion, short of the $2.66 billion Consensus estimate.
4. The Bank of Japan did as expected and left rates unchanged, accompanied by a fairly balanced assessment of growth and inflation risks. The BoJ doesn't view downside risks to the economy as having intensified because softer global growth gets traded off against a terms of trade shift via lower commodity prices. It continues to view inflation expectations as a risk.
5. Cameco Corp. has resolved the leak problem at its Port Hope nuclear conversion plant and hopes to restart it at a reduced rate within the next few days. The plant has been shut down since July 2007. Cameco expects total remediation costs at the facility to be between C$50 million and C$55 million. The company still has to resolve a fight with its sole supplier of hydrofluoric acid, a key input in the production of uranium hexafluoride, but Cameco says it has enough supply to keep operating at a reduced rate for about a month.
6. Teck Cominco (20% interest) and its partners (PCA-60% and UTS 20%) in the Fort Hills Energy Ltd. Partnership announced that the estimated costs for the Fort Hills Project have risen by approximately 50% from those announced in June 2007. The major increases are costs associated with construction materials, labour, project management, and engineering. The June 2007 cost estimate was $14.1 billion , implying an increase of approximately $7 billion of which Tecks share would be $1.4 billion. The interest in the project represents approximately 10% of $45 NAV on Teck and the higher capex would significantly reduce this value. The partners are considering options to reduce or defer capital costs, including the phasing of various aspects of the project. A final investment decision is planned by the Fort Hills partners for Q4 2008 and will depend on the results of the definitive cost estimate
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