m22au's journal

I did some analysis in late 2008 or early 2009 regarding the idea of "TARP overhang", whereby I looked at the size of US government equity injections into banks versus their market cap.

A lot of that analysis is now irrelevant because many banks have bought back the securities owned by the US govt.

It is important to note that some banks still have not repurchased their TARP securities. I won't bother listing some of the smaller banks. However 4 biggish banks look like interesting candidates on the short side:

RF ZION SNV BPOP

Currently these banks pay a 5% dividend on the preferred stock held by the Treasury. In late 2013, this dividend rises to 9%.

***

"Some Banks Hang On to Bailout Billions"

http://dealbook.nytimes.com/2011/09/14/some-banks-hang-on-to-bailout-billions/

This article has a link to a very useful monthly report from the Treasury:

August 2011 105(a) Report Final.pdf

http://www.treasury.gov/initiatives...uments105/August 2011 105(a) Report Final.pdf
 
Page 9 of that PDF lists the "top 25 remaining CPP investments"

RF ZION SNV BPOP (as mentioned above)

the rest are sub-500 million dollars.
 
A Bloomberg terminal would be useful, especially given market conditions in the last few months where investors are demanding higher yields on corporate debt.

Case in point: AMR.

The 7.875% unsecured bond (symbol AAR) sold off like crazy after midday today. It did recover from its low of the day, from 10.55 to 13.05.
http://finance.yahoo.com/q?s=AAR

However at a coupon of 7.875% per annum ($1.96875 coupon on $25 face value), this gives a yield of 15.08%, ignoring the possibility of the bond going back to $25 by maturity. (Yes I know my calculations are very rough).

Some useful links for analysing various "non-common stock" securities, ranging from bonds to preferred stock and everything in between:

http://online.wsj.com/mdc/public/page/2_3024-Preferreds.html

http://www.quantumonline.com/

also ADVFN has some content that appears to be coped from Quantumonline, for example:
http://investorshub.advfn.com/boards/board.aspx?board_id=20815
 
Not a prediction, just an interesting observation from Zero Hedge:

http://www.zerohedge.com/news/some-fun-analogies-rhyming-history-and-repeating-futures

Oct 3, 2008: SPX=1099.23; VIX=45.14
is to Oct 3, 2011: SPX=1099.23; VIX=45.45

as

Oct. 10, 2008: SPX=899.22; VIX = 69.95
is to ....

*******************************************

Looking at the charts from September to October 2008, once the SPX broke below 1,200 on September 15, it crashed to 840 (intraday low) on Friday 10 October.

On Tuesday 14 October (2 trading days later) the SPX reached an intraday high of 1,044. Before making a new low of 741 (intraday) on November 21.

I remember those times - when the Fed Funds rate was still at 1.00%, and there was no QE and the Bernanke put wasn't as strong as it is now. Those were the days.

In fact looking at the historical Fed funds rate http://www.federalreserve.gov/monetarypolicy/openmarket.htm

I see that it took until 7 October 2008 for the Fed to hold an unscheduled meeting to cut from 2.00% to 1.50%. The reductions to 1.00% and then near-zero only took place at the regularly scheduled late-October and mid-December meetings.
 
Corporate bonds have performed poorly in the last week or so.

One way of demonstrating this is by looking at the JNK etf.

The most obvious way to "play" a tightening in credit standards / debt deflation is to short financials.

However there are a growing number of non-financials that are starting to look like good short candidates.

EK (restructuring needed; possible bankruptcy in the next year or two)

AMR (heavy debt burden; underfunded pension liability)

CX (heavy debt burden)

S (heavy debt burden)
"Sprint Slumps, Says It Needs to Raise Capital"
http://www.bloomberg.com/news/2011-...to-be-one-of-its-most-profitable-devices.html

"Sprint has $19.8 billion in outstanding debt, more than half of which is due in the next five years, according to data compiled by Bloomberg. Sprint said it has about $5.3 billion in cash and credit available. "

“Sometime between now and 2013 we will need to raise funding,” Euteneuer said in an interview at the event."

"Sprint has more debt coming due over the next two years than any other speculative-grade company, Moody’s Investors Service analysts led by Kevin Cassidy wrote in a Sept. 23 note to clients"

"The company faces $2 billion of bonds and a $250 million term loan maturing in 2012 as well as $1.77 billion of notes and a $2.1 billion revolving credit line coming due in 2013, according to data compiled by Bloomberg. It had borrowed $1.2 billion against the credit facility as of June 30, it said a filing with the Securities and Exchange Commission. "

"Sprint is rated B1 by Moody’s and BB-, one step lower, by Standard & Poor’s."

"Contracts protecting against the company’s default for five years increased 1.4 percentage points to 11.8 percent upfront, according to data provider CMA."
 
There have been various estimates of capital required by European banks.

Here is one:

http://www.zerohedge.com/news/credi...bank-and-65-other-bank-failing-latest-stress-

To wit: "In our estimation of what could be the “new EBA stress test” there would be 66 failures, with RBS, Deutsche Bank, and BNP needing the most capital – at €19bn, €14bn and €14bn respectively. Among the banks with the highest capital shortfalls, SocGen and Barclays would need roughly €13bn with Unicredit and Commerzbank respectively at €12bn and €11bn.

***********

Comment:

In terms of capital required (as per above figures) versus market cap, Unicredit and Commerzbank and SocGen look dicey.

At a later date I'll review the figures for the other four banks.

Unicredit Commerzbank SocGen
RBS Barclays Deutsche Bank BNP Paribas
 
Some more articles on capital requirements of European banks:

http://globaleconomicanalysis.blogspot.com/2011/10/capital-shortfall-estimates-of-european.html
"Capital Shortfall Estimates of European Banks Range from 8 to 413 Billion Euros; EU to Offer Additional Extend-and-Pretend Time"

http://www.reuters.com/article/2011/10/13/us-deutschebank-idUSTRE79C3QZ20111013
"EU may offer banks time to hit new capital target"

http://online.wsj.com/article/SB10001424052970204002304576628761001448224.html
"European Banks Face New Scrutiny Over Capital Needs "
 
More information on the next batch of stress tests, from Reuters:

www.reuters.com/article/2011/10/14/banks-recap-idUSL5E7LD2L020111014

"Q+A: Europe's banks on verge of big recapitalisation"

WHAT'S THE TIME FRAME?

Banks are expected to be given about 6 months to raise the capital, EU officials said.

Proposals are expected to be agreed by EU ministers at a meeting on Oct. 23.

{snip}

The leaders of Germany and France have promised the bank recap will be part of a package of measures set out by a Nov. 3-4 meeting of G20 countries.
 
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