Good morning all !
Good to be back on ML
Very excited to be joined today by both Ben Harrington and Frances Coppola
I’m four coffees in already
So…dare I ask, where do we start?
Only had one coffee this morning – coconut milk Cappuccino
Yeah but my day started at 4.45 this morning
How come Frances?
I was on Wake Up to Money at 5.05
@Frances – ah I see …
@Frances – yes this seems to be the main story of the weekend
“Is there going to be a 2008-style crisis”
What do you think Frances?
I don’t think so. Lehman was a disorderly collapse not an orderly resolution
But the AT1 thing is going to cause some ripples
(Just for the few people who aren’t reading newspapers / wires all weekend – UBS bought Credit Suisse in takeunder Swiss government-backed bail out)
that’s from: AndreasStenoLarsen
Which banks have large AT1 issuances? Barclays, Santander and Deutsche worth mentioning.
(FT led the reporting of the UBS takeover talks with a series of top exclusives)
Ok so what went wrong at CS?
I think it was all about credibility
@Frances – wasn’t it the culmination all the screw ups over the last few years? Greensill, Mozambique etc
On AT1s fine print
Third, AT1 coupons can be halted by regulators. Under a rule known as the Maximum Distributable Amount, or MDA, regulators can restrict a bank’s distributions (including AT1 coupons) if its CET1 capital ratio falls below a certain level, although just as with AT1 trigger levels, European banks generally maintain large buffers above the individual MDA thresholds they are given. Regulators can also halt distributions to trap capital in the banking system as a prudential measure in times of stress or when losses are building up. However, history has shown regulators prefer to halt other distributions such as share dividends and bonus pools before they resort to halting AT1 coupons, just as they did in response to the COVID crisis in 2020.
What is the Point of Non-Viability?
There is another important regulatory element investors need to consider, which is that a bank’s solvency is ultimately at the discretion of its national regulator (or the European Central Bank for EU banks). If a bank runs into serious trouble, regulators can declare a Point of Non-Viability to try to protect depositors, stem the losses and prevent contagion.
We have seen that European banks generally have CET1 ratios in the mid-teens; we think it is highly unlikely any regulator would let a bad situation carry on long enough for a bank’s CET1 ratio to fall to 7%, let alone 5.125%, so in practice it is likely that a bank’s Point of Non-Viability would occur with capital levels higher than the trigger levels embedded into AT1 securities. This is why it is important for investors to pay attention to the individual capital requirements set by national regulators for each bank, and to scrutinise annual stress tests very carefully.
So the regulator can simply opt to wipe AT1s. And FINMA has opted to do exactly that.
Presumably there will now be a repricing of AT1s as a class, with negative effects on bank capitalization.
Everyone on Twitter has now become an expert on AT1s
US-based Signature Bank has just been sold to the New York Community Bank
on the tape
(on Friday Bill Ackman of Pershing Square was touting about rumours Bank of America were about to buy Signature Bank).
There’s been chatter in crypto circles that Signature Bank was sound and it was seized by regulators as part of a nefarious plot to cut crypto off from dollars
NYCB has only bought a third of the assets and has refused to take on crypto-related deposits
Sorry meant @Frances – interesting!
For those who have missed Izzy’s take :
So, was this a failure of regulation?
I’d say AT1 investors should read the term sheet
It seems absurd, also given the Sunday trading that happened yesterday – was this a bunch of clueless traders?
11:13But given the shock, and the knock-on effect for other banks , how could the regulators not forsee this
(Some interesting lines to come out the FT coverage of the Credit Suisse situation was around BlackRock, who clearly were sniffing around CS. Deutsche Bank also were reported to be interested in bits.)
I’m not wholly convinced by the “no-one could have known” argument re AT1s. I suspect it is like the uninsured depositors in the US banks. People didn’t think regulators would actually wipe them.
Basically, they can’t believe they did it…
Anyway, if AT1s now reprice to take account of the (now known) risk of being wiped, a lot of banks will suddenly have a lot less Tier 1 capital. That strikes me as… not good.
Anyone follow Boaz Weinstein ?
made a ton during the 2020 sell off
There’s always a winner
It may surprise you but I’ve never once invested in AT1 or Perps because I could never figure out what they’re worth. When you see other bank AT1’s down tomorrow my two cents are to not be tempted to buy. If you must, buy half senior and half actual equity for a better profile.
That’s Boaz from Saba Capital Management
SO, Frances – how significant is the mass coordinated use of dollar swap lines ?
It seems to be a precautionary measure, and the value is (as ever with central bank precautionary actions) in the signalling. Sends an important message that the Fed has the back of the global financial system.
But even that doesn’t seem to have been enough
It’s the old problem – liquidity doesn’t solve solvency problems.
We may see a shakeout among banks whose capital is, shall we say, on the fictional side.
I like that Frances “fictional side”
@Frances – so who do you think might be next?
There is already talk about a French and/or Italian banks potentially running into “issues”
All the European bank stocks are getting pummelled this morning
and the insurers
11:25Standard Chartered is one of the worst performing shares this morning
Assume the Abu Dhabi lot are pleased they had to park their £20 billion takeover bid (as revealed by Bloomberg)
Isn’t it the insurers and pension funds chasing yield in negative interest rate environment
and private wealth managers
We’ve got SNB and FED decisions this week
Fed has already said it is considering a pause
Fed may pause but inflation won’t…
But if banks tighten credit conditions then that is the equivalent of raising rates, Ben
this is interesting
So central banks need to take into account passive tightening from nervous banks
Is it true that only CS and UBS have this permanent writedown mechanism?
@Frances – perhaps you are correct … didn’t think about it like that
11:32Amazing the shift in sentiment … it was just a couple of weeks ago that markets were pricing in 50 basis point hike
There’s a bloodbath for macro hedge funds
Shall we move to Credit Suisse’s investment bank?
Is it going to survive?
What is Michael Klein going to do next?
He was paid massive amounts to take on the resurrected First Boston brand
Reuters was plush with stories about how it forecast revenues of $3.5 billion
But then came stories about how it was struggling to find investors…
@Frances – you have to assume the best people are going to leave the investment bank if they haven’t already
Colm Kelleher was asked on the press conference about the IB and he clearly stated it was not a priority, even for UBS
11:40And yet I read that CS would honour their bonus payments…
@Helmholtz – re Dubai … what are you suggesting?
Credit Suisse staff will still be paid their bonuses despite its £2.7bn takeover by rival UBS in a deal designed to avert a global banking crisis.
Workers were reassured in an internal memo that there would be no changes to payroll arrangements and bonuses would still be paid on March 24.
@Helmholtz – yeah but the Saudis just seen their recent “investment” in CS get almost wiped out
Pay their bonuses then lay them off?
CS was already slated for 9,000 job losses and there are now surely going to be whole lot more.
@Helmholtz – wonder what the Saudis think of Klein now?
Is there anything worth selling in the IB ? Could it be picked apart
@Helmholtz – I concur
Ok, so we have 15 minutes left and Ben has some UNCOOKED news for us
What else was around in the Sunday newspapers Ben?
Well, you might have noticed over the weekend I teamed up with friends at The Sunday Times to write a story about Sparta Capital building a stake in THG, formerly known as The Hut Group.
Any THG followers among the rabble?
tell us more
Who is Sparta Capital ?
They are a relatively new activist fund set up by Franck Tuil, a former senior PM at Elliott Advisers.
Recently took a stake in Wood Group and argued last year it should be buying back shares or it will become a takeover target
An activist hedge fund, founded by a former executive of the fearsome US firm Elliott Advisors, has taken a stake in THG, leaving the troubled online retailer contending with two activists on its shareholder register.
and then … Wood Group actually became a takeover target … receiving an indicative offer from Apollo at a 60pc premium
So what’s the angle here for Sparta?
From my understanding there a lot of angry and annoyed traditional shareholders in THG. So the fact that Sparta have turned up alongside Kelso is interesting. One assumes they are attempting to be the catalyst for some serious change at THG. And who knows … perhaps that change might involve corporate activity.
Isn’t Moulding supposed to be giving up his golden share this summer?
Yes Matt Moulding, the founder of THG, has previously made noises about doing that so the company can get onto the main market
but whether he will now that there are two activists on the register…?
Anything going on in the water sector Ben?
yes there was an Ofwat announcement
about owners of water companies
The regulators said this morning it will take new powers to prevent the payment of dividends to shareholders if there is a risk to the company’s “financial resilience”, and to take enforcement action against companies that don’t link payments to performance. See the link:
Anyway, this comes amid rumours about an infrastructure fund weighing an offer for Pennon
Whether this announcement puts the kibosh on that potential deal remains to be seen …
A share price in the green !
Yes but I suspect that’s because there is a flight to safety this morning … all the other water companies are up, too.
True, the miners as well
Any other small cap news?
Premier African Minerals might be worth keeping an eye on. There could be some news soon about the mine in Zimbabwe producing serious amounts Lithium.
Interesting… any decent UNCOOKED rumours about European companies?
there has been talk around a couple of Italian companies. One UNCOOKED bid rumour involves Saras S.p.A, an Italian oil refining group controlled by the Moratti family. The rumour is a Gulf-based company, possibly from Qatar, is looking to buy the Moratti family’s shareholding with a view to then buying the rest of the company
oooh that’s a bit left field
The ever ongoing issue of Italian families ceding control
And there is also some UNCOOKED gossip about a Infrastructure Wireless Italiane, the Italian wireless network operator. The rumour is the group behind Vantage Towers, which includes KKR and Global Infrastructure Partners are looking to buying the remainder of the company they don’t own.
Ok, wwe’ve got 3 more minutes, what have you got for us?
Last but not least
There is some UNCOOKED takeover talk around DFDS, a shipping and logistics company.
The mutter is that a trade buyer could be interested in merging with / buying DFDS.
Sharp suited types also suggest private equity firms have been studying the business.
that’s a wrap from us, but Frances will be here all week !
and I am sure we will be talking about banks all week…
I’m sure you will!
Au revoir mes amis… time for dejeuner…
A domani, rabble!