Archive for February, 2009
Crisis Video by Frontline
Excellent video on the whole crisis (source):
SBI’s "Teaser" rates
SBI offers home loans for a year at 8%:
In a move that may trigger a rate war, State Bank of India [Get Quote] on Sunday said it would charge 8 per cent interest on new loans for home buyers and small and medium enterprises for a year. The loans disbursed till the end of April will be eligible for this rate.What happens after a year? The loan will reset, linked to whatever SBI decides their SBAR (benchmark lending rate) will be. Currently, the scheme offers around 2%-2.25% below SBAR for 5 to 25 year loans.
See the SBI loan offer here. The deal is: 8% p.a. frozen for a year, and then it will be reset to "contracted rate at the time of sanction of loan". Does that mean you get to work with an SBAR of 12.25%, even if the rates go down? It's unclear - and yes, banks have taken advantage of non-clarity so one must be careful.
Still, this is a "teaser loan". Obviously checks will be done on income to work with an EMI based on 8%, not 10.5% - the borderline folks will simply be unable to pay next year.
Teasers will trigger more teasers, if they are successful. But home prices are only going south, so it's likely there's not much demand - either for houses, or for teaser home loans. Let's see.
Tata Capital NCDs: High "Construction Equipment" Loans
Tata Capital is advertising its new issue of Non Convertible Debentures heavily. Basic data:
Issue size: 500 cr. (lower end) to 1500 cr. (upper end).
Dates: Feb 2 to Feb 24, 2009
Funda: 1 lakh per unit for monthly interest (11%) . 10K per unit for quarterly, annual or cumulative interest bearing NCDs (11.25%, 12% and 12% comp.annually, respectively).
Min. Investment: 1 lakh for monthly interest, 10K for the others.
Tax: No TDS, but you still gotta pay tax on it. Cumulative interest option may carry tax implications, I don't know.
Call Option/Put option: At the end of 36 months (42 for the quarterly) you can decide to take all (and not partially) your money back. And conversely, at the same time, Tata Capital can decide to redeem all the NCDs. So it's a put/call. ["All" means all under one type of NCD - monthly, quarterly, annual or cumulative]
I thought I'd be the devil's advocate and check out what is wrong. We've all got numerous mails about how Tata comes after god in terms of creditworthiness, how this is the deal of the century etc. But let's look at some worrying aspects, based on the public prospectus.
Already heavily indebted
As of Dec 31, 08, Tata Capital had 6947 cr of debt or thereabouts. Of which they have liabilities 472 cr. in debentures paying out between 12.2 to 14%. Technically, anything below that is better - so they can retire the debentures. But the large part of the loans they've taken are commercial paper and bank loans, and from my basic calcualtions, they have about 2000 to 3000 cr. to pay back in 2009 alone. (and renew, I imagine)
This additional NCD issue will take on more debt, and take total debt to 8800 cr. if the full 1500 crore is subscribed.
Dangerously leveraged on construction equipment
They've lent a total of 6938 cr. of which 3625 cr. is to "Construction Equipment". Think of all the cranes, the JCBs, the diggers etc. that are out there. If the real estate situation gets worse, as it seems to be every passing day, this part of the loan book will get hit with defaults - not definite, but I can't imagine that Tata Capital will not be impacted. Just this item is more than 50% of their entire loans.
They also have given 923 cr to secured SME loans, 960 cr. secured against receivables, and about 1300 cr. of unsecured loans.
At this point the revealed part of the NPAs is only 34 cr. I do not believe this number, as impairment can be a subjective assessment, and it's entirely likely loans are yet to go bad.
To me this is the one big danger. The weightage of construction equipment is just too much.
Very low interest earning?
For a loan book of 5613 cr. (as of Sep 30, 08) they earned an interest of 311 cr. only, in six months. That seems too little, but it's likely that a large part of the loans were given towards the end of the half-year.
Still, their operating expenses, as per the records are 40 cr. in salaries and 90 cr. in other expenses. For a debt size of 8800 cr. that's about 1.5% a year in expenses. That means they have to make a spread of 1.5%, greater than the interest they pay out, to break even, after all the defaults and all that.
Other smaller concerns
They have negative cash flow - very marginally, but negative all the same. That's a little scary, for a large company. Their balance sheet has 76 cr. of "goodwill" - but that shouldn't impact debt holders, only equity. By some RBI directive, they seem to have an asset liability mismatch of 2743 cr. : I don't claim to understand what that means, but it is common to have large mismatches in NBFCs that lend long term and borrow short term. The put/call option ensures that if interest rates are higher after three years, you will redeem, but if they are lower, Tata will redeem; so technically it's only a three year NCD.
My take: I won't subscribe, I'd wait for listing, and a few months more.
A number of parameters here are "unknowns" - and it's likely that the market understands this better. When it lists, there should be some of them out there for sale on the NSE - we can use that as a reference point. There is too much emphasis on construction equipment; especially when the entire real estate and construction industries are in the beginning of a serious downturn. Give a few months and let the RE situation work itself out - that will be a better point to get in. (plus, if there's a crisis by then, people will be desperate to sell, and one may get a much better deal)
Disclaimer: These are my notes, not investment advise, and I'm not a distributor, reseller or otherwise involved with the company or the promoters (though I use Tata Salt extensively). Please use this opinion with a pinch of the aforementioned Tata Salt.
SEC finds another fraud: Sanford, $8 bn
Bloomberg:
U.S. regulators accused R. Allen Stanford of running a “massive, ongoing fraud” while selling about $8 billion in certificates of deposit through Antigua- based Stanford International Bank Ltd.$8 billion, not quite a Madoff but 4x Satyam. Fraud #2 is out?The bank made “improbable and unsubstantiated” claims about its ability to generate “safe” returns of more than 10 percent, and it misled investors about exposure to Bernard Madoff’s alleged Ponzi scheme, the Securities and Exchange Commission said today in a complaint against Stanford, firms he controls and two colleagues. The agency asked the Dallas federal court to freeze assets and appoint a receiver to return money to investors.
The SEC has been investigating Stanford’s Houston-based investment firm, Stanford Group, since at least last summer over sales of certificates by the Antigua-based affiliate. The inquiry intensified after the December arrest of New York money manager Madoff, who allegedly confessed to masterminding a $50 billion fraud in which early investors were promised steady returns and paid with money from later participants.
Gilt yields go to 6.48%, a new low [on Price]
The 10 year, 2018 bond ended at a yield of 6.48%, which is a new recent low in the price (111.6).
Reasons, they say, is that the government needs to borrow a lot, and the markets will be flooded. But put one more crisis - one bank, one real estate player, or an international credit situation - and people will rush to buy government bonds, regardless of any of these excuses. Yet, prices are going down daily, and it's a cause for worry.
Inflation at 4.39% is much lower and controlled - and if we go this way we're hitting deflation in the second week of April. Rate cuts are very likely, and quite interestingly, if we deflate, the government needn't borrow; it can simply print the money regardless. The deficit is about 45K cr. - which is nothing by most standards.
The fear is that rating agencies will de-rate India - but let me ask you this: Who the F cares about the rating agencies anymore? They were incompetent about Enron, they were incompetent with Lehman, and the fact the Indian government PRINTS our currency should give any Rupee Bond issues a AAA+++ rating, but they won't do it because they're so darn stupid (and of course, biased). At this point we're not even asking for foreign money (and it seems like should we ask, they're all lined up - right now they have a CAP on g-sec investments).
[Note: This might sound like a justification since I own gilt funds. And I'm wondering if it is too - but I'm convinced that within a year, we see 4% yields]
Gold touches $950 an ounce, Rs. 15,000 crossed
Gold prices touched 15,000 rupees in India for 10 grams and $950 abroad (for an ounce). GoldBEES, a Gold ETF I own, traded at 1500 on the NSE. This is a remarkable move, and now $1,000 an ounce (and Rs. 16,000) is close.
Supposedly its because of wedding season. How silly. It's the same funda that took Oil to 147, Sensex to 21K and bonds to record prices - investors piling on. Time will tell if it's real or not. For the time being, I'm sticking with it, like I'm sticking with bonds.
China: Loans diverted to stocks, but not real estate
Bloomberg: Chinese loans diverted to stocks
As much as 660 billion yuan ($97 billion) may have been converted by companies into term deposits or used to buy equities, Li Huiyong, Shanghai-based analyst at Shenyin Wanguo, said in a phone interview today, citing money supply figures.No demand, no production. You give us money, we trade stocks.China’s banks lent a record 1.62 trillion yuan in January as part of a government drive to stimulate the world’s third- largest economy, while M2, the broadest measure of money supply, climbed 18.8 percent from a year earlier. The Shanghai Composite has surged 29 percent since the start of 2009, compared with a 10 percent decline in the MSCI World Index.
“Part of the liquidity flowing into the stock market could be from companies using borrowed funds to invest in the stock market instead of working requirements,” said Li.
And: Home Prices on Hong Kong’s Peak Fall Most in Decade
Home prices on the Peak, Hong Kong’s most-expensive residential area, had their steepest decline since the Asian financial crisis a decade ago, real estate agency CB Richard Ellis Group Inc. said.So they're not using the loans to buy real estate? Wait, that's what caused the whole damn thing to crash in the first place.Prices slumped 30.5 percent in the fourth quarter of 2008 from a year earlier as the recession damaged demand, the biggest drop since the third quarter of 1998’s 45 percent, said Margaret Ng, senior director of Greater China at CB Richard Ellis.
CLO Defaults have "systemic risk"
FT: S&P sees new systemic risk in CLO defaults
Standard & Poor’s has highlighted that many collateralised loan obligations – which pool leveraged loans and sell differently rated investment notes with varying risk profiles – have exposure to the same group of borrowers. The default of just one of these widely held borrowers on their debt could have a negative effect on the credit quality of the portfolios of nearly 90 per cent of European CLOs, the agency said in a report.Companies can buy their own debt back - if you were paying 10% on a security of par value 100, a drop in price to 50 means you're literally paying 20% - but to buy it back you still need 50, something not easily found nowadays.In fact, the debt of just 35 different borrowers appears in nearly half of the 184 CLO portfolios that S&P rates. In total, those funds hold at least €90bn in assets.
For example the debt of Ineos, the UK chemicals group, which is trying to renegotiate its debts, is held by 84.2 per cent of CLOs. Debt of Télédiffusion de France, the French broadcaster, is held by 87.5 per cent of CLOs. Amadeus, the travel distribution and software company, is held by 82.6 per cent.
Defaults among a multiple of widely held borrowers could lead to rating downgrades for many CLOs and, in extreme cases, a fire sale of assets although analysts at S&P did not believe that was close.
“CLOs defaulting presents a potential systemic risk for leveraged loans. If rating agencies start downgrading ratings and shadow ratings for leveraged loans, then CLOs may suffer significantly as a result,” said Simon Davies, managing director in Blackstone’s debt restructuring team. He added this could lead to unwinding of CLOs which could further depress loan prices.
Is this credit crisis part 2? Or is $100 bn not quite a big deal?
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