Thursday, 26 February 2009

S&P Conference Call on Downgrade on Banks' Hybrid Securities

This is the text of a Standard and Poor's press release about a conference call to discuss the recent downgrades of banks' hybrid capital securities.


Standard & Poor's Ratings Services will hold a telephone conference call on Friday, March 6, 2009, at 10 a.m. EST/3 p.m. GMT. Speakers will discuss the recent downgrades of financial institution hybrid capital securities and explain how Standard & Poor's assesses the risk of payment deferral on these instruments. The speakers will also discuss how Standard & Poor's assesses capitalization (Adjusted Total Equity vs. Tangible Common Equity vs. Tier 1) and comment on the "equity credit" that is attributed to preferred stock that banks and insurers are issuing to governments under capital-strengthening programs.

The call will be hosted by members of the Standard & Poor's New Instruments Committee (NIC): Gail I. Hessol, Scott Bugie, Michelle Brennan, and Scott Sprinzen. Upon conclusion of the prepared remarks, NIC members and financial institution analysts from Standard & Poor's U.S. and European ratings teams will join our presenters to address your questions.

Relevant articles are available on our public website: To access them from that Web site, select Teleconferences from the drop-down menu for Type, and click on the link for this teleconference.

Please note that Standard & Poor's offers all of its broadcast teleconference calls to all interested participants on a complimentary basis. The call will begin promptly at the time indicated. Please call at least 15 minutes before the scheduled start of the call to complete the pre-call registration process.

Live Dial-in Numbers:

U.S./All Others: 1-210-839-8781

U.K.: 44-20-7108-6390

Conference ID#: 5478954

Passcode: SANDP

Replays: Recorded replays of the call are made available about an hour after the call concludes and are available until Friday, March 13, 2009.

Replay number: 1-402-220-9685

Indonesia Launches Bond: $3 Billion, Two Tranches (Five-, Ten-Year); Yields Per Tranche at 10.5%, 11.75%

Here is the data on a bond sale just launched by the Republic of Indonesia:

Issuer: Republic of Indonesia
Ratings: Ba3/BB-/BB
Format: Reg S/144A

Total Size: US$ 3 Billion

Tranche Size: $ 1 Billion | $ 2 Billion

Coupon: Fixed Rate | Fixed Rate

Maturity : Long 5y - May 2014 | 10y - March 2019

Launched Yield: 10.50% | 11.75%

Leads: Barclays Capital Plc. / UBS AG
Settlement: March 4, 2009

The Global Medium-Term Note programme of bond sales was launched by Indonesia on Jan. 29 for up to $4 billion in bond issuances. In recent weeks, especially in the November-through-January period, the decline in international reserves in Southeast Asia has been acute. In emerging market Asia (ex-China) the drop in reserves has been equivalent to 2.2 percent of gross domestic product, twice as much the decline posted in Latin America and Eastern Europe.

In the case of Indonesia, portfolio outflows were the equivalent of 5 percent of GDP in the fourth quarter. Consequently the price of five-year credit default swaps (CDS) on government dollar bonds rose by about 300 basis points in the same period.
In light of the tumble in exports and the heavy foreign debt repayment schedule, more emerging market countries are being forced to tap the international bond markets in spite of higher borrowing costs. As we saw in the past two months, Mexico sold $1.5 billion of five-year debt (a weird transaction, given the fact that Mexico and state company Pemex have flooded the market this year with a total $6 billion in issuances.)

Basically, my point here is that Mexico's decision provided us with some clues about the situation of the sovereign debt asset class. That there is still appetite for short-duration investment-grade paper seems to be one of the main conclusions. The maturities for the Indonesian bonds are five- and ten-years. And borrowing costs are quite high, though -- between 10.5 percent and almost 12 percent! Indonesia explored the MTN market because it was either ready to pay high borrowing costs for the money or it feared its external account and debt positions may put reserves further under pressure. Summarising, Indonesia needed the money.

Metrofinanciera Cut to CC by S&P After Debt Restructuring Announcement

Metrofinanciera, the Mexican non bank-bank (or SOFOM), yesterday announced it would carry out a debt restructuring after reporting losses of 3.05 billion Mexican pesos in 2008. Standard and Poor's lowered the long-term counterparty credit rating on Metrofinanciera SA, to CC from CCC- following the announcement. The ratings company also trimmed its long- and short-term national scale counterparty credit, senior unsecured debt and asset-backed debt ratings on Metrofinanciera. The company has 4 billion Mexican pesos of tradable debt, 5.03 billion pesos in bank obligations and 9.35 billion pesos of deb backed by a collateral (ABS or MBS and all that.) We had information that about 335 million pesos were to come due today, Feb. 26.

S&P and Fitch, another ratings company, warned for months about the likelihood of a restructuring and that such situation could eventually take the form of a distressed debt exchange, basically a coercive restructuring, not a negotiated one. Often, distressed debt exchanges take place when terms of the restructured debt are different and more damaging to debt holders than the original terms; it can also be considered a DDE when the step is ''de facto necessary even if technically voluntary,´´ according to Fitch. Watered-down terms of the debt can stem from a reduction in the principal or interest the company will pay debt holders, an extension of maturity dates, or the imposition of a ''stand-still´´ arrangement with creditors.

The construction industry in Mexico has been facing serious problems over the past 18 months. The slowdown experienced in the sector has affected certain regions of Mexico more than others. Flattening home prices over the past year, especially for the low-income segment, have created stress for some mortgage lenders ( like Metrofinanciera.) Loan concessions, albeit increasing, are slowing drastically. Housing demand may not react to the lower prices anytime soon, as unemployment climbs and exports to the U.S. decline in the back of that nation's recession.

Metrofinanciera's limited liquidity position, deteriorating cash-flow generation, and high debt burden led to this. Investors saw this thing coming -- analysts have been warning that the amount of assets on hand for additional financing would be insufficient to cover Metrofinanciera's unsecured and bank debt. Assets were 24.5 billion pesos at the end of 2008, liabilities 24.7 billion pesos and equity was a negative 194.5 million pesos. The negative patrimony stems from the heavy losses posted last year -- which compared with earnings of 363 million pesos in 2007. Provisions for bad loans rose 435 percent last year to 2.2 billion pesos, also helping widen the losses.

Paul Volcker Speaks. Raise From Your Seats. Shut Up and Listen. Reflect. Integrity Still Exists in the Financial World

This post comes as courtesy of IncaKolaNews. I am copy-pasting the post, as Otto Rock kindly asked us to. This Paul Volcker speech is an excellent piece -- all about sincerity and experience, two things that policy makers are required to have in this very difficult market moment. Dear reader, enjoy. And Otto, thanks a lot.

This recent Paul Volcker speech has reached me via this post at BiiWii. If it were possible to agree more than 100%, I would. This is one of the smartest and most integral finance guys out there and once Geithner is done he'll get his turn at bat. When he does, things will get better.

Read it. Proof that to be finance doesn't involve selling your soul to greed. Thanks Gary for passing it on. I hope somebody else copypastes this speech in their blog.

I really feel a sense of profound disappointment coming up here. We are having a great financial problem around the world. And finance doesn't work without some sense of trust and confidence and people meaning what they say. You take their oral word and their written word as a sign that their intentions will be carried out. The letter of invitation I had to this affair indicated that there would be about 40 people here, people with whom I could have an intimate conversation. So I feel a bit betrayed this evening. Forty has swelled to I don't know how many, and I don't know how intimate our conversation can be. But I will, at the very least, be informal. There is a certain interest in what's going on in the financial world. And I will disappoint you by saying I don't know all the answers. But I know something about the problem.

Let me just sketch it out a little bit and suggest where we may be going. There is a lot of talk about how we get out of this, but I think it's worth remembering, or analyzing, how this all started. This is not an ordinary recession. I have never, in my lifetime, seen a financial problem of this sort. It has the makings of something much more serious than an ordinary recession where you go down for a while and then you bounce up and it's partly a monetary - but a self-correcting - phenomenon. The ordinary recession does not bring into question the stability and the solidity of the whole financial system. Why is it that this is so much more profound a crisis? I'm not saying it's going to get anywhere as serious as the Great Depression, but that was not an ordinary business cycle either. This phenomenon can be traced back at least five or six years. We had, at that time, a major underlying imbalance in the world economy. The American proclivity to consume was in full force. Our consumption rate was about 5% higher, relative to our GNP or what our production normally is. Our spending -- consumption, investment, government -- was running about 5% or more above our production, even though we were more or less at full employment. You had the opposite in China and Asia, generally, where the Chinese were consuming maybe 40% of their GNP -- we consumed 70% of our GNP. They had a lot of surplus dollars because they had a lot of exports. Their exports were feeding our consumption and they were financing it very nicely with very cheap money. That was a very convenient but unsustainable situation.

The money was so easy, funds were so easily available that there was, in effect, a kind of incentive to finding ways to spend it. When we finished with the ordinary ways of spending it -- with the help of our new profession of financial engineering - we developed ways of making weaker and weaker mortgages. The biggest investment in the economy was residential housing. And we developed a technique of manufacturing class D mortgages but putting them in packages which the financial engineers said were class A. So there was an enormous incentive to take advantage of this bit of arbitrage - cheap money, poor mortgages but saleable mortgages. A lot of people made money through this process. I won't go over all the details, but you had then a normal business cycle on top of it. It was a period of enthusiasm. Everybody was feeling exuberant. They wanted to invest and spend. You had a bubble first in the stock market and then in the housing market. You had a big increase in housing prices in the United States, held up by these new mortgages. It was true in other countries as well, but particularly in the United States. It was all fine for a while, but of course, eventually, the house prices levelled off and began going down.

At some point people began getting nervous and the whole process stopped because they realized these mortgages were no good. You might ask how it went on as long as it did. The grading agencies didn't do their job and the banks didn't do their job and the accountants went haywire. I have my own take on this. There were two things that were particularly contributory and very simple. Compensation practices had gotten totally out of hand and spurred financial people to aim for a lot of short-term money without worrying about the eventual consequences.

And then there was this obscure financial engineering that none of them understood, but all their mathematical experts were telling them to trust. These two things carried us over the brink. One of the saddest days of my life was when my grandson - and he's a particularly brilliant grandson - went to college. He was good at mathematics. And after he had been at college for a year or two I asked him what he wanted to do when he grew up. He said, "I want to be a financial engineer." My heart sank. Why was he going to waste his life on this profession? A year or so ago, my daughter had seen something in the paper, some disparaging remarks I had made about financial engineering. She sent it to my grandson, who normally didn't communicate with me very much. He sent me an email, "Grandpa, don't blame it on us! We were just following the orders we were getting from our bosses." The only thing I could do was send him back an email, "I will not accept the Nuremberg excuse." There was so much opaqueness, so many complications and misunderstandings involved in very complex financial engineering by people who, in my opinion, did not know financial markets. They knew mathematics. They thought financial markets obeyed mathematical laws. They have found out differently now. You know, they all said these events only happen once every hundred years. But we have "once every hundred years" events happening every year or two, which tells me something is the matter with the analysis. So I think we have a problem which is not an ordinary business cycle problem. It is much more difficult to get out of and it has shaken the foundations of our financial institutions.

The system is broken. I'm not going to linger over what to do about it. It is very difficult. It is going to take a lot of money and a lot of losses in the banking system. It is not unique to the United States. It is probably worse in the UK and it is just about as bad in Europe and it has infected other economies as well. Canada is relatively less infected, for reasons that are consistent with the direction in which I think the financial markets and financial institutions should go. So I'll jump over the short-term process, which is how we get out of the mess, and consider what we should be aiming for when we get out of the mess. That, in turn, might help instruct the kind of action we should be taking in the interim to get out of it. In the United States, in the UK, as well - and potentially elsewhere - things are partly being held together by totally extraordinary actions by a central bank. In the United States, it's the Federal Reserve, in London, the Bank of England. They are providing direct credit to markets in massive volume, in a way that contradicts all the traditions and laws that have governed central banking behaviour for a hundred years.

So what are we aiming for? I mention this because I recently chaired a report on this. It was part of the so-called Group of 30, which has got some attention. It's a long and rather turgid report but let me simplify what the conclusion is, which I will state more boldly than the report itself does. In the future, we are going to need a financial system which is not going to be so prone to crisis and certainly will not be prone to the severity of a crisis of this sort. Financial systems always fluctuate and go up and down and have crises, but let's not have a big crisis that undermines the whole economy. And if that's the kind of financial system we want and should have, it's going to be different from the financial system that has developed in the last 20 years. What do I mean by different? I think a primary characteristic of the system ought to be a strong, traditional, commercial banking-type system.

Probably we ought to have some very large institutions - or at least that's the way the market is going - whose primary purpose is a kind of fiduciary responsibility to service consumers, individuals, businesses and governments by providing outlets for their money and by providing credit. They ought to be the core of the credit and financial system. This kind of system was in place in the United States thirty years ago and is still in place in Canada, and may have provided support for the Canadian system during this particularly difficult time. I'm not arguing that you need an oligopoly to the extent you have one in Canada, but you do know by experience that these big commercial banking institutions will be protected by the government, de facto. No government has been willing to permit these institutions, or the creditors and depositors to these institutions, to be damaged. They recognize that the damage to the economy would be too great. What has happened recently just underscores that. And I think we're at the point where we can no longer fool ourselves by saying that is not the case. The government will support these institutions, which in turn implies a closer supervision and regulation of those institutions, a more effective regulation than we've had, at least in the United States, in the recent past. And that may involve a lot of different agencies and so forth. I won't get into that.

But I think it does say that those institutions should not engage in highly risky entrepreneurial activity. That's not their job because it brings into question the stability of the institution. They may make a lot of money and they may have a lot of fun, in the short run. It may encourage pursuit of a profit in the short run. But it is not consistent with the stability that those institutions should be about. It's not consistent at all with avoiding conflict of interest.

These institutions that have arisen in the United States and the UK that combine hedge funds, equity funds, large proprietary trading with commercial banks, have enormous conflicts of interest. And I think the conflicts of interest contribute to their instability. So I would say let's get rid of that. Let's have big and small commercial banks and protect them - it's the service part of the financial system. And then we have the other part, which I'll call the capital market system, which by and large isn't directly dealing with customers. They're dealing with each other. They're trading. They're about hedge funds and equity funds. And they have a function in providing fluid markets and innovating and providing some flexibility, and I don't think they need to be so highly regulated. They're not at the core of the system, unless they get really big. If they get really big then you have to regulate them, too. But I don't think we need to have close regulation of every peewee hedge fund in the world. So you have this bifurcated - in a sense - financial system that implies a lot about regulation and national governments. If you're going to have an open system, you have got to get much more cooperation and coordination from different countries.

I think that's possible, given what we're going through. You've got to do something about the infrastructure of the system and you have to worry about the credit rating agencies. These banks were relying on credit rating agencies while putting these big packages of securities together and selling them. They had practically - they would never admit this - given up credit departments in their own institutions that were sophisticated and well-developed. That was a cost centre - why do we need it, they thought. Obviously that hasn't worked out very well. We have to look at the accounting system. We have to look at the system for dealing with derivatives and how they're settled. So there are a lot of systemic issues. The main point I'm making is that we want to emerge from this with a more stable system. It will be less exciting for many people, but it will not warrant - I don't think the present system does, either -- $50 million dollar paydays in that central part of the system. Or even $25 or $100 million dollar paydays. If somebody can go out and gamble and make that money, okay. But don't gamble with the public's money. And that's an important distinction.

It's interesting that what I'm arguing for looks more like the Canadian system than the American system. When we delivered this report in a press conference, people said, "Oh you mean, banks won't be able to have hedge funds? What are you talking about?" That same day, Citigroup announced, "We want to get rid of all that stuff. We now realize it was a mistake. We want to go back to our roots and be a real commercial bank." I don't know whether they'll do that or not. But the fact that one of the leading proponents of the other system basically said, "We give up. It's not the right system," is interesting. So let me just leave it at that. We've got more than 40 people here but they're permitted to ask questions, is that the deal?

Changes in IFRS Standards Likely to Change Covenant Terms for Some Brazilian Local Debt, According to Andima

Changes in accounting rules due to the implementation and standardisation of IFRS guidelines in Brazil may lead to modifications in bond covenants for domestic corporate debt instruments including notes, promissory notes and syndicated loans, according to market participant groups such as Apimec and Andima. The requirement to include derivatives into corporate balance sheets as well as changes in the way some asset prices will be reassessed will have effects on the valuing of liabilities and equity; the terms of some corporate debt sold in the local markets specify limits to the issuer's leverage ratios -- which may spike when the new rules begin to apply. Creditors and debtors will have to sit down and perhaps renegotiate terms, the two associations predicted.

Some companies are starting to renegotiate terms of their bond covenants with bondholders. Unidas, the car rental company, and bondholders met to discuss an increase in leverage metrics indicators included in the bonds' covenants to better reflect the current economic environment, according to a story by Brazilian newspaper Gazeta Mercantil. Bondholders approved the changes but, there's no free lunch, amigos: the spread that Unidas will pay for the debt is 1.5 percentage points more than before, at 4 points, versus 2.5 point previously. The bonds pay yields linked to the CDI rate, the benchmark interbank lending rate.

Fiscal Leeway Determines Whether Keynesian-Like Expansionary Policies Work During Recession Times, IADB Says

The Inter American Development Bank (IADB) yesterday published a study (''Dealing with an International Credit Crunch: Policy Responses to Sudden Stops in Latin America´´) in which it assesses lessons of past crises in Latin America and the role of multilateral agencies during such market moments. The crisis ''has brought Keynesianism back to the centre stage of the global policy debate,´´ the IADB says. As Latin American and Caribbean nations unveil their fiscal stimulus packages to fend off the global recession, those policy lessons can be useful to avoid mistakes of the past.

Lesson 1:
Recessions are far less severe in countries with room to adopt more flexible monetary and fiscal policies, or better, those that did their homework well during the boom years. Our observation: Two problems we see here -- see the contrast between Peru and Colombia. Both did their homework relatively well (Peru fared better than Colombia.) But Peru has good leeway, Colombia has a very limited one. The IADB defends its position: ''This is not something for all nations, as success depends on economic initial conditions at the time of the crisis.´´

Lesson 2:
The study alerts that countries in which governments have saved little during the commodity boom years will have limited scope to increase spending to alleviate the upcoming recession stemming from the current crisis. Any attempt to boost spending dramatically could erode confidence in the country’s ability to repay its debts in the future. Our observation: Is saving equivalent to repaying debt? or creating sovereign wealth funds? If so, Venezuela and Brazil have a an edge over the rest of Latin countries in pulling out of the crisis via fiscal packages. But for the case of Venezuela, no one is at all convinced of its ability to pull through; in fact, some people bet on a default (to us, rather exaggerated a concern.) The IADB defends its position: ''Some nations in Lain America will be forced to cut spending in the face of the current crisis because of insufficient savings. For others, the most feasible policy will be to maintain the current level of government spending but only a few such as Chile are in a position to increase spending.´´ It doesn't mention what countries are well suited for aggressive policy steps.

Lesson 3:
Countries that were able to adopt fairly more flexible fiscal and monetary policies in the aftermath of a financial crisis had a loss in output of less than 5 percent, while nations with much less flexibility had output contractions above 10 percent. Our observation: Argentina was a case in 2002. But Brazil wasn't -- in the aftermath of the currency crisis of 2002, with little access to credit, the economy managed to grow 0.7 percent! The IADB defends its position: ''The study analyzed policy responses by 19 developing countries during the Tequila, Asian and Russian crisis in the 1990s, periods of broadening sovereign interest rate spreads and capital flow reductions that affected a large set of emerging countries at the same time.´´

Lesson 4:
Countries that adopted anti-cyclical policies definitely did better but that doesn’t mean that countries that didn’t adopt counter-cyclical policies would have performed better if they had done the opposite. Our observation: We believe aggressiveness and determination matter in these circumstances. Markets are watching that closely. Investors are endorsing Brazil and Chile packages, by betting on a rise in their currencies. Take a look at Colombia's currency and see it being smashed; Venezuela's bolivar fuerte isn't fuerte anymore. Mexico's anti-recession package is that little credible that the peso is testing new lows almost every day. The IADB defends its position: ''In some cases their economic conditions were so weak to begin with that any attempt to be a more aggressive could have made the situation worse by eroding confidence on their creditworthiness.´´

Lesson 5: Successful anti-cyclical policies during financial crises work when governments can
boost spending in a sustainable way and conduct looser monetary policy that does not fuel inflation or lead to balance-sheet problems in both public and private sectors when both have debts denominated in dollars.
To boost aggregate demand sustainably, governments need to ensure their actions won’t affect the country’s credibility and solvency. Therefore, countries need to have credible central banks that can keep inflation expectations at bay by using genuine resources to fight the crisis. Our observation: We agree. Financial stability is a condition sine qua non for a successful policy package. No matter what Brazilian Finance Minister Guido Mantega (our beloved Criswell) thinks. The IADB defends its position: Countries will need to have a reasonable level of reserves to cover payments of international obligations and provide financing for trade. Low levels of debt denominated in dollars will give central banks more flexibility to depreciate the country’s currency in order to make its products more competitive to global trade.

Lesson 6:
The IADB says Latin America and the Caribbean have improved their economic conditions since the Russian crisis, giving them some leeway, particularly regarding monetary policy, to implement measures to fight the crisis. Countries have ramped up international reserves by $400 billion since 1998 (I think it's too little in the wake of about $1 trillion in proceeds from exports of raw materials and all that in the past six-seven years.) Additionally, the countries have substantially reduced dollar-denominated debts, particularly within the banking system and the government. Our observation: Lower levels of external debt allowed Brazil to loosen monetary policy amid the credit crunch in ways that other countries were not able to do during the aftermath of Russian crisis. Moreover, loose monetary policy typically leads to currency depreciation, with a subsequent increase in exports (as it happened with Brazil in the wake of the 2002 crisis.) The IADB defends its position: The currency depreciation, which boost exports as a way out of the crisis for several emerging markets in the past, may not fully work this time because of the ongoing global recession, particularly in rich nations. Our observation: We agree 100 percent with the IADB assessment.

The Role of the Multilaterals, According to the IADB

For multilaterals, the current crisis offers an opportunity for a different approach when compared with the policy options taken during the Russian crisis, says the IADB. The prevailing view in 1998 was that emerging nations needed to reassure creditors about the solvency of their economies. As a result, emerging countries around the globe were asked to cut spending and raise interest rates, which deepened the recession. ''The bank's study of successful policy responses during past crises suggests multilaterals must take into account initial conditions from each country before supporting a certain type of policy. Countries with good initial conditions do not need to go over strong adjustment policies to signal credibility. The multilateral system can help governments by boosting their foreign currency reserves and provide financing for government with a sustainable fiscal position,´´ according to the study.