High unemployment expected to continue to drive up delinquency rates.
Fitch Ratings says 60+ day delinquency levels on U.S. prime auto loan ABS rose over 10% to 0.85% in August as consumers continue to struggle with rising unemployment and reduced access to credit.
‘With loss frequency remaining the biggest driver of loss rates on auto ABS, Fitch expects losses to rise further in coming months,’ said Senior Director Hylton Heard. ‘That being said, rising losses should remain in check as the resilient wholesale vehicle market should help mitigate loss severity.’
Prime auto ABS delinquencies of 60+ days posted a 10.4% jump in August over July’s level. The 0.85% rate recorded in August is just below the 10-year record high of 0.87%, recorded in first quarter earlier this year.
As result of rising frequency, default levels are increasing in tandem. Prime annualized net losses (ANL) rose 6.3% in August to 1.85%, vs. July. This was the third consecutive monthly increase for the index. In the historically weak fall months, Fitch expects ANL will approach the 2% level.
Loss severity is currently moderated by rising used vehicle values, helping to slow the rate of increase in loss rates in 2009.
Despite declining asset performance, most senior level bonds continue to perform as expected.
Technorati Tags: asset-backed-securities, auto loan ABS, Auto-Industry, structured-finance, unemployment
The UK Takeover Panel’s decision to require Kraft (KFT) to make a firm bid for Cadbury (CBRY) by Nov 9 or walk away appears to give the UK company the upper hand, at least for now.
Reuters reports that Credit Suisse estimated Kraft’s proposal was worth about 12.5 times Cadbury’s 2009 earnings before interest, tax, depreciation and amortization (EBITDA), but some analysts believe an offer closer to 14 times 2009 EBITDA — or about 850 pence — could lead to an agreed deal.
“We think Kraft will come in with an offer starting with an ‘8′ so maybe (it will make a bid) at around 850 pence plus or minus a few pennies,” said analyst Clive Black at brokerage Shore Capital. “We’re not convinced that in the absence of clear evidence of a counter bid that we’re looking at something beginning with a ‘9′ or a ‘10′.”
That would be consistent with the 870p Research Recap earlier reported was the most Kraft could pay without jeopardizing its credit rating. That would also be close to valuations based on comparable recent takeovers and Cadbury’s 2008 results. But valuation could exceed 900p based on higher cost savings or better 2009 projected results for Cadbury.
On Sep 17 Jefferies International put Cadbury a buy rating with a price target of 900p. JP Morgan the next day calculated that achievable cost savings three times higher than assumed in the original proposal could make it possible for Kraft to raise its bid well into the high 800s or above. However, sharing half the cost savings with Cadbury shareholders would suggest a price of 820p. The firm on Sep 22 expressed greater conviction about its estimated $1.6B in potential cost synergies, based on a comparison with Wrigley’s last reported cost structure.
At the Financial Times points out, recent weakness in sterling against the US dollar helps to strengthen Kraft’s negotiating position as its share price weakens. When Kraft announced its indicative offer on September 7, sterling was valued at about $1.64. But the value of the British currency has since dropped to $1.59.
If sterling continues to weaken, Kraft will want to to delay before making a firm offer, but the Takeover Panel ruling puts a time limit on that.
Doug McIntyre at 24/7 Wall St writes that “The British regulators have conveniently made a decision that could allow Cadbury to stay independent, whether it is good for the company’s shareholders or not.”
For latest analyst comment on the deal, see Alacra Street Pulse.
Technorati Tags: (KFT), food industry, Hain Celestial, Kraft Foods, M&A, mergers and acquisitions
The IMF says that while the worst may be over, banks have recognized less than half of expected writedowns.
Excerpts from the IMF’s latest Global Financial Stability Report. (Emphasis added)
For both banks and other financial institutions, the IMF calculates that actual and potential writedowns from bad assets such as loans and securities have fallen by some $600 billion over the past six months—from about $4 trillion to $3.4 trillion, as a lessening in financial stress has narrowed spreads. Although writedown estimates are subject to considerable uncertainty, the analysis shows that the financial system is on the mend.
Nevertheless, banks still confront substantial challenges. The GFSR estimates that commercial banks have already recognized $1.3 trillion through the first half of 2009, but face another $1.5 trillion of potential asset writedowns ahead. Hence, overall, banks have recognized slightly less than half of their expected losses. U.S. banks have recognized slightly more than have those in the United Kingdom and euro area.
Even though bank earnings are recovering, they are not expected to be big enough to offset fully the anticipated writedowns over the next 18 months. The insufficient earnings, combined with continuing deleveraging pressure, means banks will have to raise more capital. Additionally, banks must refinance a massive amount of maturing debt over the next two to three years.
An unprecedented $1.5 trillion in bank borrowing is due to mature in the euro area, the United Kingdom, and the United States by 2012.
The GFSR suggests that although their balance sheets have been stabilized, some of it because governments have injected capital, banks are not yet in a strong position to lend support to the economic recovery.
With pressures on financial institutions’ balance sheets and a dormant private securitization market, the GFSR projects that a “financing gap” could arise—that is, projected credit capacity will be insufficient relative to the demands of sovereign borrowers and the private nonfinancial sector. Such a situation constitutes a downside risk to the recovery and the IMF report suggests that continued policy intervention may be needed to keep credit flowing.
Technorati Tags: banks, credit-outlook, financial crisis, macroeconomics, writedowns
A new working paper suggests that the combination of rising home prices, declining interest rates, and especially the near-frictionless refinancing opportunities available to homeowners virtually guaranteed a major systemic meltdown of the financial system. The paper concludes that an independent organization similar to the National Transportation safety Board is needed to help avert a recurrence.
Excerpts from Systemic Risk and the Refinancing Ratchet Effect
Amir E. Khandani, Andrew W. Lo, and Robert C. Merton
In order to measure the systemic impact of the ratchet effect of cash-out refinancings, the authors simulated the U.S. housing market with and without equity extractions, and estimate the losses absorbed by mortgage lenders by valuing the embedded put-option in non-recourse mortgages.
… during periods of falling interest rates and rising house prices, most homeowners will have an incentive to refinance. If the refinancing market is so competitive and efficient that homeowners refinance frequently, this pattern of behavior has a similar effect on systemic risk as if these homeowners all purchased their homes at the same time, at peak prices, with newly issued mortgages at the highest allowable loan-to-value ratios. A coordinated increase in leverage among homeowners during good times will lead to sharply higher correlations in defaults among those same homeowners in bad times. Our simulations show that this effect alone is enough to generate $1.5 trillion in losses for mortgage-lending institutions since June 2006.
These observations have important implications for risk management practices and regulatory reform. The fact that the refinancing ratchet effect arises only when three market conditions are simultaneously satisfied demonstrates that the current financial crisis is subtle, and may not be attributable to a single cause. Moreover, a number of the activities that gave rise to these three conditions are likely to be ones that we would not want to sharply curtail or outright ban because they are individually beneficial.
The complexities illustrated by our simulation underscores the need for an independent organization devoted solely to the study, measurement, and public notification of systemic risk, not unlike the role that the National Transportation Safety Board plays with respect to airplane crashes, train wrecks, and highway accidents.
Currently, no single regulatory body is responsible for monitoring the three refinancing- ratchet conditions; in fact, on occasion, each of these conditions has been associated with the policy objectives of one part of government or another. Therefore, it is difficult to imagine any existing regulatory agency raising red flags over any of these conditions.
Technorati Tags: financial crisis, financial-regulation, housing crisis, mortgage, refinancing
Rising unemployment does not augur well for consumer loan performance.
Growing unemployment across Europe, which is a key driver for consumer loan performance, has had a negative impact on the collateral performance of consumer loan asset-backed securities (ABS), according to Moody’s. And based on Moody’s Annual European Consumer Loan ABS Sector Review, the outlook is especially discouraging in Spain.
Selected Highlights:
“To date, the large majority of consumer loan ABS downgrades have occurred in the Spanish market where unemployment is expected to rise to an average of 18.4% in 2009 and 20.7% in 2010, from an average of 11.4% in 2008.”
Moody’s says that it is in the process of re-evaluating its portfolio default expectations for eight Spanish consumer loan ABS transactions where notes were placed under review for downgrade in July 2009. The review process takes into account unemployment growth (experience and expected) as well as current and expected levels of portfolio delinquencies.
Moody’s also anticipates potential further increases in delinquencies, and hence defaults, from unemployed borrowers who currently benefit from state unemployment benefits provided by the Spanish Government for up to two years following job loss.
The rating agency believes that this dynamic may be allowing borrowers to continue making payments following a loss of income, thus delaying arrears from increasing immediately in line with unemployment trends. However, if unemployment growth were to rise well above current projections, it is likely that portfolios will suffer higher defaults than then anticipated and this could also lead to further ratings volatility in the sector.
Consumer loan transactions within other European jurisdictions are broadly performing inline with our expectations.
Technorati Tags: ABS, asset-backed-securities, consumer loans, defaults, Europe, Spain
Forrester believes that while the vision holds promise, it’s no slam dunk.
Excerpts from Adobe’s Acquisition Of Omniture Rocks Online Marketing
A
dobe’s (ADBE) acquisition of Omniture (OMTR) for $1.8 billion looks set to shake up the online marketing world, according to Forrester Research analysts Suresh Vittal and John Lovett.
In their analysis of the deal, they write that “We think the agreement has promise although we bet neither Adobe nor Omniture quite knows what they’ve gotten themselves into.”
Whether this acquisition succeeds or fails, the deal itself will catalyze change for the customer intelligence and interactive marketing disciplines.
- Optimization will become an even bigger deal.We expect vendors to scramble to start optimizing yet-unoptimized parts of the online advertising value chain. So far, vendors like Invite Media, MediaMath, Tumri, and [x+1] are leading this charge by optimizing ad buying and serving.
- Marketers will race to add customer intelligence skills. This Adobe/Omniture deal will launch a swarm of new analytical and optimization technologies.
- Omniture’s online marketing suite vision will take a back seat.But rest assured, we don’t see overall market progress toward the online marketing suite slowing. Many different vendors like Aprimo, Coremetrics, Lyris, Responsys, Sitecore, and Unica are already integrating technologies for the online marketer.
- Web analytics competitors will steal customers. We expect Coremetrics, Unica, and Webtrends to aggressively pursue Omniture’s customers.
- Web content management (WCM) vendors will redefine themselves.… we think content management vendors like Autonomy, EMC, and Open Text will acquire marketing automation, Web analytics, or social media monitoring vendors to improve analytics, optimization, and execution.
For the latest analyst comments, see Alacra Street Pulse.
Technorati Tags: (OMTR), ADBE, Adobe Systems, Autonomy, EMC, mergers and acquisitions, Omniture, online-marketing
Further signs of trouble in the “not-quite-prime” Alt-A sector are apparent in S &P’s latest round of RMBS dowgrades.
Excerpts from 770 Ratings Lowered On 705 U.S. RMBS Deals From 2001-2007; 183 Ratings On 21 Deals Placed On Watch Negative
Standard & Poor’s has lowered its ratings on 770 classes of mortgage pass-through certificates from 705 U.S. residential mortgage-backed securities (RMBS) transactions. We downgraded 768 of these classes to ‘D’ and downgraded the remaining two to ‘CCC’. We removed 20 of the lowered ratings from CreditWatch with negative implications.
In addition, we placed 183 other ratings from 21 of the affected transactions on CreditWatch with negative implications. The ratings on 158 additional classes from 19 of these transactions remain on CreditWatch with negative implications.
The complete rating list is available in U.S. RMBS Classes Affected By Sept. 24, 2009, Rating Actions
Approximately 83.72% of the defaulted classes were from Alternative-A (Alt-A) or subprime transactions.
The 768 defaulted classes consisted of the following:
- 386 classes from Alt-A transactions (50.26% of all defaults);
- 257 from subprime transactions (33.46% of all defaults);
- 88 from prime jumbo transactions;
- 12 from reperforming transactions;
- Nine from outside-the-guidelines transactions;
- Eight from closed-end second-lien transactions;
- Four from document-deficient transactions;
- Two from a first-lien high loan-to-value (LTV) transaction;
- One from a risk-transfer transaction; and
- One from an RMBS other transaction.
We downgraded 768 of the 770 classes to ‘D’ to reflect our assessment of principal write-downs on the affected classes during recent remittance periods. The remaining two downgraded classes reflect interest-only classes that are tied to classes with defaulted ratings.
Technorati Tags: Alt-A, downgrades, mortgage-backed-securities, RMBS, structured-finance, subprime-mortgage
Prime Jumbo and Alt-A sectors also see deterioration in August.
Excerpts from U.S. Subprime RMBS Performance Update: August 2009 Distribution Date,
Total delinquencies have continued to increase among U.S. subprime residential mortgage-backed securities (RMBS) transactions originally rated in 2005, 2006, and 2007.
As of the August 2009 distribution date, total delinquencies were 43.69%, 52.49%, and 49.90% of the current aggregate pool balances for the 2005, 2006, and 2007 vintages, respectively.
Serious delinquencies (90-plus days, foreclosures, and real estate owned {REO}) also increased for the 2005, 2006, and 2007 vintages. As of the most recent reporting period, serious delinquencies for the 2005, 2006, and 2007 vintages were approximately 32.35%, 42.02%, and 39.66% of the current aggregate pool balances, respectively. Serious delinquencies increased by 0.90% for 2005, 1.06% for 2006, and 1.77% for 2007 compared with the prior distribution date.
For the 2005 vintage, the three-month growth rate in serious delinquencies averaged 1.47% a month. From July to August, the rate of growth in severe delinquencies in the 2005 vintage exceeded this average by 13.95%. For the 2006 vintage, the three-month growth rate in serious delinquencies was 0.47% per month. However, there was a 25.99% increase in the rate of growth compared with this average from July to August. For 2007, the three-month growth rate in serious delinquencies was 1.21% a month. From July to August, there was a 3.44% decrease in the rate of growth compared with this average.
Cumulative losses continued to increase for all three vintages. As of the August 2009 distribution date, cumulative losses totaled 6.74%, 13.08%, and 10.19% of the original aggregate pool balances for the 2005, 2006, and 2007 vintages, respectively. Losses were up approximately 4.05% for 2005, 5.56% for 2006, and 8.39% for 2007 compared with the July distribution date.
From July to August, the rate of cumulative loss growth for the 2005 vintage decreased by 9.51% compared with the rate of growth from June to July. For the 2006 vintage, the rate of cumulative loss growth from July to August decreased by 8.13% compared with the rate of growth from June to July. For 2007, the growth of cumulative losses decreased by 7.69% from July to August compared with the growth from June to July.
Delinquencies also continued to increase among U.S. prime jumbo and Alt-A transactions originally rated in 2005, 2006, and 2007. For details in these sectors, see:
U.S. Prime Jumbo RMBS Performance Update: August 2009 Distribution Date
U.S. Alternative-A RMBS Performance Update: August 2009 Distribution Date
Technorati Tags: Alt-A, jumbo mortgages, mortgage-backed-securities, RMBS, structured-finance, subprime-mortgage
The prospect for Lloyds Banking Group (LLOY) escaping the UK Goverment’s bank bailout scheme have gotten a boost from a new research report on the UK banking sector from Execution analyst Joseph Dickerson.
The Independent reports that Dickerson issued a “buy” recommendation on Lloyds, arguing that the bank would be better off without the asset protection scheme (APS), which he said was a “sub-optimal way to recapitalise the sector and should be reconsidered”.
He hopes that the group opts for a rights issue instead, suggesting that “banks with substantial government ownership have a higher cost of capital than those that do not”. Reduced funding costs would benefit the net interest margin, which in turn would boost earnings, Mr Dickerson explained.
“Lloyds has an opportunity to change this by not participating at all,” he said. “£15bn of net (we forecast £16bn including a £1bn termination fee to [the Treasury]) non-Government capital is likely to reduce Lloyds’s cost of funding substantially.”
For those worried about whether Lloyds could raise the amount required, he added that a “£16bn capital raise is not a big ask because, if [the Treasury] takes up its rights, the amount of capital needed from the market is [around] £9bn”. ”
FT Alphaville offers further analysis, adding that based on Dickerson’s calculations “Lloyds would emerge with a fortress balance sheet and a leverage multiple in-line with the major US banks.”
The FT’s Lex was skeptical on Sep 18 about LLoyd’s chances of pulling off such a deal:
“Lloyds is thought to need at least £15bn-£20bn to avoid the APS altogether, maybe more. But that is a tall order. Even if it raised £6bn by selling Scottish Widows and Clerical Medical, that would leave a shortfall of £14bn – more than HSBC’s record rights issue. A small cash call might be feasible. Yet it is fanciful to believe that Lloyds could raise any equity without the APS, let alone any of the other alternatives Mr Daniels seems so keen to pursue.”
The Scotsman reported that most analysts think Lloyds will have to raise money to reduce the amount of assets in the APS, and hence the government’s stake in the bank, but not exit it altogether.
“The idea of Lloyds exiting the APS is unlikely primarily because raising £15bn to £20bn isn’t a viable option,” said Exane BNP Paribas analyst Ian Gordon.
Also bullish on Lloyds is UBS, which reiterated its “buy” rating on Sep 8. Analyst John-Paul Crutchley argues that the bank is” fundamentally an undervalued company. ”
“On the basis of normalised earnings, around two years out, we see Lloyds as worth around 180p-200p/share, making the company worth around £80bn. In our view, the debate around the APS comes down to how this value is carved up between the
UK Government and private shareholders.”
West LB’s Neil Smith see the bank as a “valuable UK franchise, if not spoiled by state aid disposals,” but maintains a Neutral rating pending resolution of the APS issue.
ING’s Andreas Mavrikakis also is taking a wait-and-see approach, maintaining a Hold status. “On normalised EPS we see up to 100% upside in the long term and more limited downside. However, we believe LLOY will underperform short term especially if the plan works, despite management’s signal that impairments peaked in 1H09.”
CreditSights on Sep 18 said “we felt the most likely alternatives for Lloyds would be a renegotiation of the terms of GAPS and/or a reduction in the assets to be covered by GAPS, in conjunction with a capital raising exercise, rather than a full withdrawal from the scheme.”
For the latest analyst comment on Lloyds, see Alacra Street Pulse.
Technorati Tags: (lloy), APS, bank bailout, Lloyds, UK banks
Guest Post by Oxford Analytica
A majority of observers today accepts the necessity of the political intervention in the financial sector in autumn 2008, when recession hit Europe and the rest of the world. The timing of the withdrawal of such support as well as the scale of future fiscal consolidation is now being debated within individual states, their mass media and the European Commission.
Premature exit considerations. The popular debate in the last two months has focused on indicators of economic improvement in Germany, France and the United States, suggesting the onset of a sustainable recovery; and on the urgent need to reduce the high levels of state debt generated by banking support measures, stimulus packages, welfare commitments and falling revenues:
- Slow recovery. While second quarter results from the United States, Germany and France suggested that a fierce recession had bottomed out, there is very little evidence that recovery from this unprecedented crisis will accelerate noticeably in the next 18 months.
- Bad judgments. While the European Commission and ECB acknowledge the uncertainty of any significant recovery, they ignore the sheer severity of the current crisis, its structural as well as cyclical character and the contribution of their own fiscal agenda to the weak growth of recent years.
- Spending cuts. Accordingly, the ECB urges the case for “expenditure-based consolidations” as being “growth-friendlier”; it suggests “expenditure cuts in the area of public employment” leading to “a reduction in overall wage pressures” that “may induce firms to hire more workers and raise investment spending”.
Demand-driven economies. This represents a policy agenda that, in the current context, is not very convincing. It ignores the absolutely central feature of the European political economy, in which critical asymmetries of demand persist: weak domestic demand has made Europe chronically dependent on exports as a motor of growth:
- Car industry. In July, capacity utilisation across the euro-area had slumped to 69.5% (against a long-term average of 81.6%); in the capital goods sector it was 67.6%; in the basic metals industry and in motor-vehicle manufacturing, levels stood at around 60%. These last figures include the effects of car manufacturers’ scrappage schemes, financed by the German, French, Belgian and Italian governments, among others. These and other support schemes are due to end in the near future and it is difficult to envisage any subsequent and sizeable increase in private car purchases that might encourage car companies or enterprises in other sectors to expand production and investment in line with ECB expectations.
- Risk of deeper recession. Where all of the standard growth vehicles of demand — net exports, private consumption, business investment — are malfunctioning, and where financial markets are unable to lubricate that demand, the governments of advanced economies have been obliged to intervene to compensate counter-cyclically for the absence of that demand. The lesson of the 1930s is that the withdrawal of fiscal and monetary growth stimuli before the consolidation of conventional growth patterns threatens a further downturn, as in 1937.
Outlook. The fiscal and economic positions of advanced European economies are of great concern, but could be even worse if the withdrawal of compensatory state demand comes before the full recovery of other demand factors. A recasting of the relationship between public sector and private sector in terms of both regulation and higher state ratios is unavoidable in the medium term.
Technorati Tags: bailout, economic-policy, Europe
