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Goldman Leads Slumping Merger Market as Buffett Deal Boosts Hopes for 2010

by on March 4, 2010

By Zachary R. Mider March 4 (Bloomberg) — A pair of takeovers by billionaire investor Warren Buffett and oil giant Exxon Mobil Corp. late last year were all the encouragement that investment bankers needed, Bloomberg Markets reports in its April issue. The ink hadn’t dried on railroad Burlington Northern Santa Fe Corp. ’s $35.8 billion November sale to Buffett’s Berkshire Hathaway Inc., or on Exxon Mobil Corp.’s $41.4 billion buyout of XTO Energy Inc. a month later, before mergers-and­acquisitions specialists were telling clients to act before they missed out on the next great M&A wave. Companies that have already cut production and slashed jobs to control costs now need to find other ways to fatten the bottom line, says Paul Parker , head of M&A advice at Barclays Capital. “M&A may be a more compelling catalyst for growth than a stand-alone strategy,” he says. Merger activity fell to $1.8 trillion last year, its lowest level since 2003, as companies guarded their cash and shunned risky initiatives. That was a 27 percent drop from $2.5 trillion in 2008. Even as bankers sharpen their sales pitches, they aren’t betting on a return anytime soon to the dealmaking that pushed M&A to a record $4 trillion in 2007. Goldman Sachs led the way in M&A in 2009, reaping $1.74 billion in fees, according to estimates compiled by Bloomberg Markets. Goldman has led the category since the ranking began in 2004. Goldman Advises Burlington The firm took in a record $3.93 billion in 2007 and $2.25 billion in 2008. Goldman advised Fort Worth, Texas-based Burlington Northern in the Buffett deal as well as Uxbridge, England-based Cadbury Plc in its $21.4 billion hostile takeover by Kraft Foods Inc. , which was completed in February. Kraft Chief Executive Officer Irene Rosenfeld pursued Cadbury for its leading position in the confectionary markets of emerging regions such as South Asia, South America and southern Africa. The Exxon Mobil and Buffett deals led a revival in the merger market in the fourth quarter, boosting the value of transactions 58 percent to $556 billion from the third quarter. It was Exxon Mobil’s first acquisition of more than $2 billion in a decade and Buffett’s biggest in his 44 years at Berkshire. “We’ve got a pipeline, and that’s different from last year,” says George Bason Jr ., an M&A partner at law firm Davis Polk & Wardwell LLP in New York, who’s advising Exxon Mobil. 2010 Uncertain Corporate executives and directors are still wary about the outlook for the economy, and that’s hindering deals, Bason says. “I don’t think anyone feels like they have a handle on how 2010 is going to go,” he says. Some 60 percent of bankers, lawyers and investors in a year-end Bloomberg survey said they expected only a “small increase” in M&A activity this year. Energy and financial companies will be among the most active, the respondents said. Sanford C. Bernstein analyst Brad Hintz is more optimistic. He predicts M&A will jump 35 percent this year by dollar value and will continue to increase for the next three years. That still won’t be enough to return to 2007 levels. Mergers are recovering as the U.S. economy picks up speed. The Standard & Poor’s 500 Index advanced 23 percent in 2009. Economists surveyed by Bloomberg estimate that the U.S. economy will grow 3 percent this year compared with a 2.4 percent decline in 2009. The Conference Board’s Measure of CEO Confidence advanced to 64 in the fourth quarter, the fourth straight quarterly increase after the index hit a record low of 24 in 2008. Dyal, Kindler Rivalry No. 1 Goldman’s M&A team is led by Gordon Dyal , 48, an American based in London. No. 2 in the ranking is Goldman’s perennial rival Morgan Stanley, whose M&A business is led by Robert Kindler in New York. Kindler, 56, was a mergers lawyer for New York firm Cravath Swaine & Moore LLP before becoming a banker in 2000. “The biggest issue facing companies now is the ability to get growth in a slow-growth or no-growth environment,” Kindler says. “And if you can’t get organic growth, you seek it through acquisition.” In a research note in October, Goldman said that the firms that stand to gain the most from the revival of M&A are investment banks that earn the biggest portion of their revenue from merger advice, including Hamilton, Bermuda-based Lazard Ltd. and New York-based Evercore Partners Inc. The note said private-equity giant Blackstone Group LP would also benefit, since a rebound would allow it to put its cash to work on new deals. Private Equity Rivival Goldman had “buy” recommendations on all three stocks as of mid-February. The private-equity revival was already underway by the end of last year. Fort Worth-based TPG Inc. and Toronto-based Canada Pension Plan Investment Board’s $5 billion leveraged buyout of Norwalk, Connecticut-based health data provider IMS Health Inc. was the biggest LBO of a public company since 2007. One damper on takeover activity this year may be the Obama administration’s pledge to scrutinize the antitrust implications of mergers more closely than did President George W. Bush . Companies considering mergers must now decide how far they’re willing to pursue a combination if they get resistance from regulators. “Antitrust is a much bigger issue today than under the previous administration,” says Lee Lebrun , co-head of Americas M&A at Zurich-based UBS AG . “It makes it harder to do a deal because you’ve got to figure out who’s going to wear that risk.” Antitrust Worries In the biggest case to date, the U.S. Department of Justice in January challenged the proposed merger of Ticketmaster Entertainment Inc. with Live Nation Inc. , the world’s largest concert promoter. After Ticketmaster agreed to concessions, including the licensing of ticket-selling software to its biggest customer, the companies completed the merger. The bankers aren’t backing off. “We still have clients that are thinking about deals in concentrated sectors,” says Michael Boublik , chairman of Americas M&A at Morgan Stanley. “Those plans aren’t being mothballed.” To contact the reporter on this story: Zachary R. Mider in New York at mider1@bloomberg.net .

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Italy’s Treasury Earned $10.9 Billion in Eight-Year Winning Swaps Streak

by on February 23, 2010

By Flavia Krause-Jackson Feb. 23 (Bloomberg) — Italy’s Treasury earned 8.1 billion euros ($10.9 billion) from interest-rate and currency swap operations since 1998 in an eight-year winning streak. The Rome-based Finance Ministry lost 392 million euros in 2008 and 337 million euros in 2007 in the transactions, according to 1998-2008 figures supplied by Eurostat, the European Union’s statistics office. Until then, the government had made money on the operations. Recent losses are linked to a sudden switch in monetary policy and declines in the euro, the worst performer against the dollar this year. The single currency fell 22 percent from a record high of almost $1.60 in April 2008 to $1.25 in November of the same year. The euro, which began circulation in 2002, is currently trading at $1.36. “Used well, swaps can be helpful and important to protect one from risks,” said Attilio Di Mattia , a money manager at Aurelius Capital Management in Vienna, who helps oversee 4.5 billion euros of assets including European and U.S. securitizations. “Right now rates are low, once they rise, we’ll have to see what happens.” The European Central Bank slashed borrowing costs from a record-high of 4.25 percent in September 2008 to an all-time low of 1 percent within eight months. Policy makers had steadily doubled borrowing costs from 2 percent in November 2005 to 4 percent in June 2007. Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in interest rates or weather. Interest-rate and currency swaps are derivatives used to hedge against sudden changes in rates and excessive exchange-rate volatility. EU Inquiry EU regulators are scrutinizing the use of derivatives to try to determine if governments used swaps to temporarily reduce their deficits to qualify for the single currency or help keep their shortfall within EU limits after entry. An inquiry by the Greek Finance Ministry has highlighted a series of derivative agreements with banks that helped conceal mounting debts by deferring interest payments. Italian Finance Minister Giulio Tremonti has a “firm hand” over public finances , limiting the increase in the deficit and managing the euro area’s second-highest debt even as the economy contracted last year, Goldman Sachs Corp. said in a research note on Feb. 18 to investors. Italy has avoided the fate of some of the euro zone’s smaller economies — Portugal, Ireland, Greece and Spain — that have drawn investor concern about their ability to control deficits and debt. Italian Prime Minister Silvio Berlusconi said on Feb. 10 that those nations were doing “much worse” than Italy and that the “markets have given us their faith.” The premium investors demand to buy 10-year Italian bonds over comparable German bonds has risen 8 basis points this year to 83 basis points. The same spread on Greek debt has widened 84 basis points this year to 323 basis points. Debt interest payments cost Italy the equivalent of 4.8 percent of GDP, according to Goldman. The country has benefited from lower borrowing costs. To contact the reporter on this story: Flavia Krause-Jackson in Rome at fjackson@bloomberg.net ;

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Roche Says Experimental Diabetes Drug Meets Key Target in Patient Study

February 11, 2010

By Angela Cullen Feb. 11 (Bloomberg) — Roche Holding AG said results from five late-stage clinical trials show that its experimental diabetes drug taspoglutide reduced blood sugar levels when compared with or added to widely prescribed treatments. The drug met the main goals of studies comparing its effectiveness against Sanofi-Aventis SA’s Lantus, Eli Lilly & Co. and Amylin Inc.’s Byetta, and Merck & Co.’s Januvia as well as in tests looking at its use in combination with the generic treatment metformin and against placebo, Basel, Switzerland- based Roche said in an e-mailed statement today. Taspoglutide, licensed to Roche by French biotechnology company Ipsen SA in 2006, belongs to a newer class of diabetes medicines that imitate a hormone called GLP-1 and stimulate the pancreas to produce more insulin after meals. The once-weekly injection may compete with the twice-daily Byetta shot as Lilly and Amylin also work on a once-a-week version of their drug. “We already see a high probability that taspoglutide, while not the first in class, may emerge as the best in its class,” analysts at Zuercher Kantonalbank wrote in a research note to clients today. “We also welcome the fact that Roche is building an increasingly diversified product portfolio in growing disease areas and will no longer be so dependent on the cancer market.” Roche gained 2.60 Swiss francs, or 1.5 percent, to 177.6 francs at 9:48 a.m. in Zurich trading. Ipsen fell 16 cents, or 0.4 percent, to 36.56 euros in Paris. Diabetes Market Roche is seeking to expand beyond its best-selling cancer drugs and take a share of the growing diabetes market. Diabetes treatments were the fourth-best selling medications in 2008, with $27 billion in global sales, according to IMS Health Inc., a Norwalk, Connecticut-based company that tracks prescription trends. More than 20 million Americans have diabetes, which occurs when a patient doesn’t have enough of the hormone insulin used to convert blood sugar to energy. Fatty diets and sedentary lifestyles are contributing to an increase in the condition, which raises the risk of heart disease and metabolic disease. The number of people with diabetes in the U.S. is expected to almost double to 44 million in the next quarter century as obesity rates skyrocket, according to a study published in Diabetes Care in December. Novo Nordisk A/S won U.S. approval last month for Victoza, also a so-called GLP-1 analogue. The drugs are among the first facing tougher Food and Drug Administration standards for cardiovascular safety in new diabetes treatments. The standards were implemented in December 2008 after GlaxoSmithKline Plc’s Avandia was linked to heart attacks after eight years on the market. To contact the reporter on this story: Angela Cullen in Frankfurt at acullen8@bloomberg.net ;

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Roche Says Experimental Diabetes Drug Meets Key Target in Patient Study

February 11, 2010

By Angela Cullen Feb. 11 (Bloomberg) — Roche Holding AG said results from five late-stage clinical trials show that its experimental diabetes drug taspoglutide reduced blood sugar levels when compared with or added to widely prescribed treatments. The drug met the main goals of studies comparing its effectiveness against Sanofi-Aventis SA’s Lantus, Eli Lilly & Co. and Amylin Inc.’s Byetta, and Merck & Co.’s Januvia as well as in tests looking at its use in combination with the generic treatment metformin and against placebo, Basel, Switzerland- based Roche said in an e-mailed statement today. Taspoglutide, licensed to Roche by French biotechnology company Ipsen SA in 2006, belongs to a newer class of diabetes medicines that imitate a hormone called GLP-1 and stimulate the pancreas to produce more insulin after meals. The once-weekly injection may compete with the twice-daily Byetta shot as Lilly and Amylin also work on a once-a-week version of their drug. “We already see a high probability that taspoglutide, while not the first in class, may emerge as the best in its class,” analysts at Zuercher Kantonalbank wrote in a research note to clients today. “We also welcome the fact that Roche is building an increasingly diversified product portfolio in growing disease areas and will no longer be so dependent on the cancer market.” Roche gained 2.60 Swiss francs, or 1.5 percent, to 177.6 francs at 9:48 a.m. in Zurich trading. Ipsen fell 16 cents, or 0.4 percent, to 36.56 euros in Paris. Diabetes Market Roche is seeking to expand beyond its best-selling cancer drugs and take a share of the growing diabetes market. Diabetes treatments were the fourth-best selling medications in 2008, with $27 billion in global sales, according to IMS Health Inc., a Norwalk, Connecticut-based company that tracks prescription trends. More than 20 million Americans have diabetes, which occurs when a patient doesn’t have enough of the hormone insulin used to convert blood sugar to energy. Fatty diets and sedentary lifestyles are contributing to an increase in the condition, which raises the risk of heart disease and metabolic disease. The number of people with diabetes in the U.S. is expected to almost double to 44 million in the next quarter century as obesity rates skyrocket, according to a study published in Diabetes Care in December. Novo Nordisk A/S won U.S. approval last month for Victoza, also a so-called GLP-1 analogue. The drugs are among the first facing tougher Food and Drug Administration standards for cardiovascular safety in new diabetes treatments. The standards were implemented in December 2008 after GlaxoSmithKline Plc’s Avandia was linked to heart attacks after eight years on the market. To contact the reporter on this story: Angela Cullen in Frankfurt at acullen8@bloomberg.net ;

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Euro Falls Toward Eight-Month Low Versus Dollar on European Budget Concern

February 7, 2010

By Yoshiaki Nohara and Ron Harui Feb. 8 (Bloomberg) — The euro fell toward the lowest level in eight months against the dollar on speculation mounting budget deficits in some European nations will keep policymakers from raising interest rates. The euro approached a one-year low against the yen as concern about sovereign risk remain elevated even as Group of Seven finance ministers meeting on the weekend pledged to press ahead with economic stimulus measures. The Australian and New dollars weakened as Asian stocks fell, reducing demand for higher-yielding assets. “As sovereign risks spread in the euro-zone, risk aversion will continue in the market,” said Susumu Kato , chief economist for Japan in Tokyo at Calyon Securities, a unit of France’s Credit Agricole SA. “Investors are wondering how financial issues in those small nations may affect bigger ones.” The euro fell to $1.3647 as of 9:01 a.m. in Tokyo from $1.3678 in New York on Feb. 5, when it declined to $1.3586, the lowest since May 20. The euro dropped to 121.84 yen from 122.09, after touching 120.71 on Feb. 5, the weakest since Feb. 24. The dollar was at 89.27 yen from 89.25 yen. G-7 finance chiefs met in Iqaluit, Canada, as governments try to secure economic recoveries, while widening budget deficits threaten to hamper future expansion. “We need to continue to deliver the stimulus to which we are mutually committed and begin looking at exit strategies to move to a more sustainable fiscal track,” Canada’s Finance Minister Jim Flaherty told reporters on Feb. 6. ECB Rates The European Central Bank left its benchmark rate at a record low of 1 percent on Feb. 4, and ECB President Jean-Claude Trichet signaled he is in no rush to raise borrowing costs. Nikkei 225 Stock Average fell 0.9 percent today after declined for the past three weeks. The euro also weakened for a fourth day against the dollar as futures traders raised bets to the highest level in more than a decade that Europe’s currency will fall against the greenback, data from the Washington-based Commodity Futures Trading Commission showed on Feb. 5. “The euro continues to feel the impact of escalating concerns over sovereign credit risk,” Gareth Berry , a currency strategist in Singapore at UBS AG, wrote in a research note today. “Short euro positions held by futures traders have now reached record levels.” The difference in the number of wagers by hedge funds and other large speculators on a drop in the euro compared with those on a gain — so-called net shorts — was 43,741, on Feb. 2, the most since the euro’s debut in 1999, compared with net shorts of 39,539 a week earlier. Credit-default swaps on five-year sovereign bonds of Greece, Spain and Portugal rose to record levels last week. The cost of insuring against a Greece debt default advanced to 428.3. Credit swaps tied to Spain climbed to 170.8 and those on Portugal increased to 229.6, according to CMA DataVision prices. To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net ; Ron Harui in Singapore at rharui@bloomberg.net .

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Build America Bonds Subsidy Shift May Fuel $130 Billion Race to Sell Debt

December 29, 2009

By Ryan J. Donmoyer and Jeremy R. Cooke Dec. 29 (Bloomberg) — Sales of Build America Bonds, the fastest-growing part of the U.S. municipal debt market, may double to $130 billion in 2010 as states and cities rush to borrow before Congress can change federal subsidies. Lawmakers might retool the program to treat transportation debt more generously than other issues, Ron Wyden , the Oregon Democratic senator who proposed the bonds as an “experiment” six years ago, said in an interview. The U.S. government pays 35 percent of interest costs on taxable borrowing for local public works. “There’s going to be some discussion of whether there ought to be different flavors of Build America Bonds,” said Wyden, who originally estimated the measure, authorized this year as part of President Barack Obama’s economic-stimulus program, would create $4 billion to $5 billion in securities. “There will inevitably be a debate about cost.” After reaching $64.3 billion since offerings began in April, new issues of Build America Bonds will more than double to $130 billion in 2010, equivalent to 30 percent of next year’s total sales of municipal debt, according to Loop Capital Markets, a Chicago-based investment bank and municipal underwriter. The surge may be fueled by state and local governments racing to borrow “if it seems likely that the level of the BAB subsidy will be reduced” after the current program expires on Dec. 31, 2010, George Friedlander , a Morgan Stanley Smith Barney strategist, said in a research note Dec. 18. $1.38 Billion Congress will probably focus on adjusting the 35 percent subsidy as part of a broader debate over closing a federal deficit that will exceed $1 trillion, Wyden said. Build America Bonds issued in 2009 will cost the U.S. about $1.38 billion in gross subsidies each year the debt is outstanding, based on data compiled by Bloomberg. The expense would be reduced by taxes investors may pay. The congressional Joint Committee on Taxation initially estimated the program would cost U.S. taxpayers $53 million in the fiscal year ended Sept. 30, $323 million in fiscal 2010 and $506 million over the next 12 months before starting to decline, according to a document dated Feb. 12. States and municipalities opt to sell Build America Bonds to fund roads, schools and sewers when their after-subsidy cost of capital is lower than what they would get from issuing tax- exempt debt. ‘We’re Delighted’ Washington state’s first Build America sale on Oct. 15 produced what Treasurer James McIntire called a record-low effective yield of 3.52 percent on $503.4 million of bonds. The estimated savings of $62.4 million over the life of the securities would be enough to buy a passenger ferry, McIntire said. “We’re delighted.” The BofA Merrill Lynch Build America Bond Index has increased 1.3 percent, including reinvested interest, since its inception April 30. Build America Bond issues have become a “one-for-one transfer” of sales from the tax-exempt market, Loop Capital strategist Chris Mier and analyst Ivan Gulich said in their Dec. 22 forecast. The relative scarcity of long-term, tax-free securities helped to push the Bond Buyer 20 index of yields on 20-year general obligation bonds to 4.21 percent last week from 5 percent at the end of March. A 42-year low of 3.94 percent was reached Oct. 1. Extra Yield Even with the decline in municipal borrowing costs, the extra yields that investors demand to buy some Build America Bonds have been higher than those on corporate debt with similar ratings and maturities. The so-called spread between taxable municipal issues and corporate bonds rated BBB rose to more than 125 basis points from less than 80 basis points three months ago, according to a Dec. 23 research note from JPMorgan Chase & Co. A basis point is 0.01 percentage point. Spreads between Build America and corporate bonds are about 25 basis points for AAA borrowers, less than 10 basis points for those rated AA and about 45 basis points for issuers ranked A, based on an analysis by the New York-based bank. The gap over Treasuries for municipal debt rated AAA to A has been little changed from three months ago, the note shows. Among the first public borrowers planning to sell Build America Bonds in 2010 will be New York’s Metropolitan Transportation Authority, which is trying to plug a $383 million budget deficit by shutting two subway lines and dozens of bus routes. The country’s biggest mass-transit network wants to raise $350 million for capital projects through underwriters led by JPMorgan. Higher Yields Higher relative yields on the taxable debt are attracting buyers who otherwise wouldn’t purchase municipal securities, said Stephen Horan, head of professional education content and private wealth at the CFA Institute, an investor association in Charlottesville, Virginia. “You really have to be in a high-tax bracket” to gain the most benefit from tax-free securities, he said. “More attractive now in the municipal bond space are Build America Bonds.” While changes to the Build America Bonds program wouldn’t take effect unless it’s reauthorized, varying subsidy levels “might not be healthy” for the market, said Peter Coffin , president of Boston-based Breckinridge Capital Advisors, which manages about $11.5 billion in municipal debt, including $500 million in the taxable instruments. “There’s potentially more supply in one sector than the other,” he said. Efficient Borrowing Varying subsidies would also lead to less-efficient borrowing by making it harder to bundle projects, Utah Treasurer Richard Ellis , whose state sold $491.8 million of Build America Bonds on Sept. 16, said in an interview. “It complicates the process,” said Ellis, who said officials always seek a “crossover point” to determine their long-term costs when trying to decide between issuing tax-exempt bonds or taxable ones. “If the subsidy changes, it would push the crossover point further out.” Among industry groups lobbying for renewal of Build America Bonds are the National Association of Manufacturers, the American Society of Civil Engineers and securities firms such as San Diego-based Greystone Group . Deutsche Bank AG, based in Frankfurt, in August sent a list of recommendations to the Internal Revenue Service that it said would boost participation in the market. ‘Too Successful’ Michael Mundaca , Obama’s nominee to be assistant secretary for tax policy at the Treasury Department, told the Senate Finance Committee considering his nomination in November that Build America Bonds are “too successful to allow to go away.” Legislators included an expansion of subsidies for school construction bonds in a jobs bill this month. The measure was adopted by the House and may be voted on by the Senate in early 2010. “We’re going to try to reauthorize this at every opportunity,” Senator Wyden said of the bond program he helped create. “I believe we will get it reauthorized.” To contact the reporters on this story: Jeremy R. Cooke in New York at jcooke8@bloomberg.net ; Ryan Donmoyer in Washington at rdonmoyer@bloomberg.net .

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Citigroup Stock Sale DELAYED By Treasury Department

December 16, 2009

The Treasury Department is backing off its plans to help Citigroup free itself from partial government ownership after the markets priced Citi’s shares below Treasury’s cost. Treasury was planning to sell up to $5 billion of its Citi shares at the same time the firm moved to repay some $20 billion in bailout funds. The key was issuing $17 billion of common stock. The troubled financial conglomerate felt confident that it could easily raise the funds from investors to start repaying taxpayers. But Citigroup raised that money by selling 5.4 billion shares at $3.15 apiece, according to Bloomberg News. That’s below the $3.25 price at which the government purchased its 34 percent stake. The below-cost offer spooked Treasury, according to published reports, leading the government to back off its planned sale. The bank told Bloomberg that Treasury won’t sell any of its shares for at least 90 days. Treasury had been planning on selling all of its stake in the next 6-12 months after its initial $5 billion sale. A leading bank analyst issued a report Tuesday questioning the bank’s move to begin repaying TARP funds. Citigroup was in a position to begin repaying taxpayers only because of the Federal Reserve’s extraordinary policies adopted in the wake of the bailout, Christopher Whalen of IRA Advisory Service wrote in a report to clients. It was those policies — not “any meaningful change or improvement in the financial condition” of the bank — that made it possible for the bank to begin raising new funds through the capital markets. Whalen said the same applied to Bank of America and Wells Fargo. Whalen also said the repayment would not improve Citi’s situation, as it is still facing steep losses thanks to a basket of troubled loans and higher credit losses that won’t fully hit the company’s books until next year. Citigroup has experienced $23.6 billion in credit losses through Sept. 30, nearly double the losses it had at this point last year, according to federal regulatory filings. It also has about $60 billion in delinquent loans on its books, about a 58 percent increase from the same period last year, regulatory filings with the Federal Reserve show. The percentage of assets so delinquent they’re no longer accruing interest is rising, suggesting that writeoffs are not far behind, further increasing the firm’s losses. UBS analysts told clients in a research note Monday that one of the “issues” with Citi’s move was the fact that, “Citi’s still losing money.” But perhaps most problematic for the firm is its dependence on foreign sources for funding. Foreign deposits make up 27 percent of total assets, or $510.4 billion, according to regulatory filings. Citigroup also has some $273 billion in foreign loans. Without the protective layer of explicit government guarantees, like TARP, “important foreign constituencies may accelerate their migration away from” large U.S. banks, like Citi, Whalen wrote. Already, two important backers have distanced themselves from the firm. The Abu Dhabi Investment Authority, one of the world’s largest sovereign wealth funds, is trying to get out of a commitment to invest $7.5 billion in the firm at an inflated share price, according to published reports this week. It filed an arbitration claim and is seeking more than $4 billion in damages. That news comes on the heels of the Kuwait Investment Authority selling its stake in Citigroup. The fund turned a profit on its sale, but it’s now no longer invested in the firm. Whalen views that as a negative sign for the bank. “The Kuwaitis know what they’re doing,” he said in a recent interview.

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Stocks in U.S. Recover From Global Equity Slump as Treasuries, Oil Retreat

December 9, 2009

By Nick Baker and Elizabeth Stanton Dec. 9 (Bloomberg) — U.S. stocks advanced, recovering from a worldwide equity market retreat, as analyst upgrades of 3M Co. and Sprint Nextel Corp. helped offset concern credit defaults will spread through the global economy. Treasuries fell after central banks bought the fewest securities since June. The Standard & Poor’s 500 Index added 0.4 percent at 4 p.m. in New York, reversing a 0.6 percent decline. The MSCI World Index of shares in 23 developed markets lost 0.2 percent after Spain’s credit outlook was reduced to “negative” at S&P. Benchmark equity indexes for Spain, Greece and Austria plunged more than 2 percent. Treasuries declined, sending yields on 10- year notes up to 3.42 percent. Oil slipped to a two-month low. Rebounds by metal producers and technology companies trimmed the retreat in the MSCI World, which fell 0.9 percent earlier after S&P said Spain will experience a “more prolonged period of economic weakness” than anticipated at the start of 2009. Equities also declined after Moody’s Investors Service cut credit grades for six companies controlled by Dubai, a day after Greece’s government bonds tumbled on a debt downgrade. “Right now in terms of these issues with Dubai and Greece and others, that’s fear,” said Benny Lorenzo , chairman and chief executive officer of Kaufman Brothers LP, a New York-based investment bank. “Given that backdrop of concern, it’s amazing how well the U.S. market has absorbed all of those issues.” Price Increases 3M rose 3.4 percent for the biggest gain in the Dow Jones Industrial Average and Sprint rallied 5.6 percent after Citigroup Inc. analysts advised buying the shares. AK Steel Holding Corp. jumped 6.2 percent, the most in the S&P 500, on plans to raise prices by $30 a ton. The MSCI Emerging Markets Index of equities in developing nations retreated 0.7 percent as Dubai’s DFM General Index plunged 6.4 percent, extending its retreat since Nov. 16 to 30 percent. Saudi Arabia’s benchmark slumped 2.4 percent, and indexes in Poland and China lost more than 1 percent. Europe’s Dow Jones Stoxx 600 Index retreated 1.1 percent. Santander SA, Spain’s largest bank, led the nation’s IBEX 35 Index to a 2.3 percent slump. The extra interest, or spread, that investors demand to hold Spanish 10-year debt rather than German equivalents rose to 69.5 basis points from 60.7 basis points yesterday. Shrinking Economy The Spanish government plans to raise the value-added tax next year and levies on income from capital while cutting some stimulus spending, even as the economy is projected to shrink. Spain doesn’t agree with S&P’s revision, and the announcement won’t affect policy because the government has already started taking steps to rein in the deficit, said a finance ministry official, who declined to be named. National Bank of Greece SA and Piraeus Bank SA slid more than 6.5 percent as Fitch followed yesterday’s downgrade of Greece’s sovereign debt by cutting the lenders. The Athens Stock Exchange General Index dropped 3.4 percent and has lost 12 percent in the past three days. Greek Finance Minister George Papaconstantinou said there is “absolutely” no chance of a default as the country’s bonds slumped the most in a decade, while the cost of credit-default swaps on Dubai’s state-controlled DP World implied a 33 percent risk that the port company will renege on debt. “A financial crisis is like a disease,” Philip Gisdakis , the head of credit strategy at UniCredit SpA in Munich, wrote in a research note today. “It spreads.” Treasury Auction Treasuries fell after an investor class that includes foreign central banks bought the least amount since June of today’s $21 billion offering of 10-year securities. Yields on 10-year notes rose as indirect bidders took 34.9 percent of the notes at today’s auction, the least since June. The sale was the second of three this week totaling $74 billion. The yield , which moves inversely to price, on the 10-year note rose 0.04 percentage point to 3.42 percent, according to BGCantor Market Data. Crude oil fell to a two-month low of $70.67 a barrel in New York after a government report showed that U.S. fuel inventories climbed as refineries bolstered operating rates. Gasoline stockpiles rose 2.25 million barrels to 216.3 million, the report showed. To contact the reporter on this story: Nick Baker in New York at nbaker7@bloomberg.net .

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Emerging-Market Stocks Decline on Dubai, Greece Concern; Yen, Gold Advance

December 9, 2009

By Michael Patterson Dec. 9 (Bloomberg) — Stocks fell in Asia and Europe, with the benchmark index for emerging markets sinking for a fourth day, as Dubai struggled to restructure debt and Greece’s bonds faced a further downgrade. The yen and gold rose. The MSCI Emerging Markets Index declined 0.6 percent at 10:23 a.m. in London as Dubai’s equity gauge dropped 6.4 percent. The MSCI World Index of stocks in developed nations retreated 0.2 percent, led by a 2.8 percent fall in the Athens Stock Exchange General Index. The yen climbed against all 16 most-traded currencies. Greek Finance Minister George Papaconstantinou said there is “absolutely” no chance of a default as the country’s bonds slumped the most in a decade, while the cost of credit-default swaps on Dubai’s state-controlled DP World implied a 33 percent risk that the port company will renege on debt. Widening budget deficits are hampering government efforts to stimulate economies, with the U.K. and Ireland scheduled to announce spending cuts today. Japan’s economy grew at less than one-third the pace initially reported in the three months ended Sept. 30. “A financial crisis is like a disease, it spreads,” Philip Gisdakis , the head of credit strategy at UniCredit SpA in Munich, wrote in a research note today. “Although Greece is small enough of a problem that it must be bailed out, the risk is that it will not only be Greece that will need support.” Greek Bonds Greek 10-year government bonds slid for a fifth day, their longest-losing streaking since May, driving the yield up 27 basis points to 5.61 percent. Chris Pryce , director of sovereign and international public finance at Fitch Ratings in London, said today in a Bloomberg Television interview he’s not convinced the nation will avoid a debt default as its budget deficit rises. The Dubai Financial Market General Index plunged for a third day, wiping out its 2009 advance, as state-controlled Dubai World planned asset sales and Moody’s Investors Service downgraded six Dubai borrowers. The ADX General Index in Abu Dhabi, the wealthiest of the seven sheikdoms that comprise the United Arab Emirates, lost 2.7 percent. The MSCI Emerging index headed for its longest losing streak in more than two months. Greece’s banks led declines in European shares as the Dow Jones Stoxx 600 Index slipped 0.7 percent. National Bank of Greece SA, the nation’s biggest, slid 4.7 percent in Athens. EFG Eurobank Ergasias SA , the second-largest, tumbled 5.8 percent. Man Group Plc, the biggest publicly traded hedge-fund manager, slid 3.6 percent in London after the value of its flagship fund dropped. Japan Stocks Japanese stocks fell the most in eight days after a government report showed the economy grew at an annual 1.3 percent pace in the third quarter, slower than the 4.8 percent in preliminary figures last month. The Nikkei 225 Stock Average fell 1.3 percent as the MSCI Asia Pacific Index declined 0.6 percent. Mitsubishi UFJ Financial Group Inc. , Japan’s largest bank by market value, tumbled 5.2 percent in Tokyo. Mitsubishi Heavy Industries Ltd., the country’s biggest maker of heavy machinery, sank 2.5 percent. The yen strengthened 0.8 percent versus the dollar as investors sought the Japanese currency as a refuge. Futures on the Standard & Poor’s 500 Index were little changed. The benchmark gauge for U.S. equities tumbled 1 percent yesterday, paring its rally since March 9 to 61 percent. The measure is valued at about 22 times its companies’ reported operating earnings, near the highest since 2002, according to data compiled by Bloomberg. Geithner Plan Treasury Secretary Timothy Geithner plans to tell Congress that the Obama administration will extend the $700 billion financial-rescue program until next October, according to people familiar with the matter. The pound dropped against all but two of the 16 major currencies, losing 0.3 percent against the euro, on speculation Chancellor of the Exchequer Alistair Darling will fail to reassure investors the U.K. can shore up its finances when he presents his pre-budget report to Parliament in London today. U.K. government bonds slipped, with the yield on the 10-year note climbing 1 basis point to 3.70 percent. The cost of hedging against losses on Dubai sovereign debt surged 47.5 basis points to 592, according to CMA DataVision prices for credit-default swaps. Contracts on Greece jumped 12 to 221, the highest since March, and swaps on the U.K. climbed 1 to 78, the highest since July. Creditors of Nakheel PJSC, the property developer owned by Dubai World with $3.52 billion of bonds due Dec. 14, are scheduled to take part in a conference call today with bond trustee Deutsche Bank AG, said two people invited to participate who declined to be identified because the discussion is private. To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net .

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JPMorgan May Lose $3 Billion in Revenue on Derivatives Rules, Analyst Says

December 2, 2009

By Elizabeth Hester Dec. 2 (Bloomberg) — Revenue at JPMorgan Chase & Co ., the second-largest U.S. bank, may drop by as much as $3 billion should most derivatives trades be moved to exchanges, a Sanford C. Bernstein & Co. analyst said. That could mean a reduction in earnings per share of up to 20 cents in a “worst case” situation, analyst John McDonald said today in a research note after meeting Steven Black , vice chairman of the investment bank. Derivatives made up about 8 percent of revenue from 2006 to 2008, he said, without providing a comparative figure if trading is shifted. JPMorgan, which had $77.3 billion in net revenue in the first nine months of this year, is among firms that face new regulations as Congress considers legislation that may restrict trading in the contracts. The proposals generally would require dealers and large investors to trade the most common derivatives on exchanges or regulated trading platforms. JPMorgan “sees the largest risk from legislation mandating that all derivatives be traded on an exchange as opposed to through the OTC market, limiting the company’s ability to create customized products,” McDonald wrote, referring to the over- the-counter market. He declined to comment beyond the note. He said earnings estimates for the New York-based bank represented a “worst case” in which the “most severe regulatory changes take place.” McDonald didn’t include gains in volume or capital relief that may come from having the majority of contracts standardized and cleared on exchanges. Fed Pressure Dealers have been under pressure from the Federal Reserve to loosen their control of how the markets are run. The gross amount of outstanding contracts reached $605 trillion at the end of June, according to the Bank for International Settlements in Basel, Switzerland. The contracts carried a gross market value of $25.4 trillion, BIS data show. Derivatives traders profit from the so-called bid-ask spread, the gap between what they charge customers and what they pay to hedge the trades. They can charge more on derivatives that aren’t actively traded, are customized or considered riskier. The more actively traded the contracts become and the more transparent prices get, the narrower the spread. Banks also could lose trading revenue from the extra fees they effectively charge clients by extending them leverage on derivatives transactions, said Brian Yelvington , head of fixed- income strategy at Knight Libertas LLC , a Greenwich, Connecticut-based broker-dealer. Geithner’s Testimony “You’re able to drive more bid-ask income through because of the fact that you have a certain financing relationship,” Yelvington said in an interview today. “If the product moves to an exchange, your financing flexibility is hampered.” Treasury Secretary Timothy Geithner reiterated his call that clearinghouses should initially determine which derivatives contracts are cleared, during testimony today to the Senate Committee on Agriculture, Nutrition and Forestry. He also said he was willing to consider some exemptions for end-users of derivatives as long as oversight loopholes aren’t created. JPMorgan’s investment bank is also awaiting compensation guidelines including the mix of cash and stock they will be able to award, and the required vesting period, McDonald said. He said the firm was trying to balance retaining employees and paying them for a profitable year while taking into account regulatory and public opinions. The firm isn’t likely to repeat its record fixed-income trading results in 2010 as credit spreads tighten and more competitors enter the market, wrote McDonald, predicting a 12.5 percent decline in revenue next year. The decline will probably be offset by higher investment banking fees and lower provisions for loan losses. JPMorgan has made “significant” investments in its commodities, equities and emerging markets businesses, especially Asia and Latin America, McDonald wrote, citing Black. The firm is planning a three-year overhaul of its technology and operations to consolidate trading platforms and employees in the division. To contact the reporter on this story: Elizabeth Hester in New York at ehester@bloomberg.net .

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Dollar Rises Most Since April on Reduced Risk Demand Before Fed Statement

October 30, 2009

By Matt Townsend Oct. 31 (Bloomberg) — The dollar gained the most against the euro in six months on concern the global recovery may stall as economic stimulus winds down, reducing demand for higher- yielding assets funded by the greenback. The pound touched the strongest level against the euro this week since September after gains in consumer confidence and mortgage approvals added to signs an economic recovery is taking hold in the U.K. The advance in the dollar before next’s week Federal Reserve announcement pared a fourth consecutive monthly loss, part of the longest losing streak since 2004. “There’s this increasing recognition that much of the recovery we’ve seen so far was due to the temporary boost from various government programs,” said Michael Hart , a currency strategist at Citigroup Global Markets in London. “The optimism is kind of guarded at this point.” The dollar advanced 2 percent to $1.4719 per euro yesterday, from $1.5008 on Oct. 23. It was the biggest gain since a 2.3 percent rise in the five days ended April 10. The dollar rallied from a 14-month low of $1.5063 on Oct. 26. New Zealand’s dollar was the biggest loser against the greenback this week as the Reserve Bank signaled the target rate will stay at a record low of 2.5 percent until the second half of 2010. The kiwi tumbled 4.8 percent to 71.81 U.S. cents, from 75.45 a week earlier, the largest five-day drop since January. The greenback gained 4.5 percent to 7.815 South African rand and 2.5 percent to 1.7612 Brazilian reais on speculation investors reduced carry trades, in which they sell the currency of a nation with low borrowing costs and buy assets where returns are higher. Borrowing Costs The Fed’s target lending rate of zero to 0.25 percent in the U.S. makes the dollar a favored target for investors seeking to fund such trades. The benchmark rates are 7 percent in South Africa, 8.75 percent in Brazil. The euro decreased 4.2 percent to 132.61 yen, from 138.15, in the biggest drop since May. The dollar fell 2.1 percent to 90.09 yen, from 89.64. It touched a level lower than 90 yesterday for the first time since Oct. 15. The Bank of Japan decided this week to end purchases of commercial paper and corporate bonds from lenders as scheduled, while extending unlimited collateral-backed lending through March 31. Policy makers kept the benchmark interest rate unchanged at 0.1 percent. European Central Bank council member Axel Weber said that policy makers may scale back the bank’s “very long-term” loans to banks. The ECB will leave benchmark lending rates at a record low of 1 percent at its meeting on Nov. 5, according to all 34 economists in a Bloomberg survey. Norwegian Rate Norway’s central bank lifted its target lending rate by a quarter-percentage point to 1.5 percent this week, becoming the first in Europe to increase borrowing costs this year. “Central banks are slowly withdrawing emergency stimulus,” Toronto-based strategists Shaun Osborne and Jacqui Douglas at TD Securities Inc. wrote in a research note to clients yesterday. That “perhaps accounts for the modest risk- averse undertone.” The Dollar Index , which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, gained 1.2 percent to 76.39. It was the biggest increase since June. Investors remained skeptical that the Federal Reserve will increase borrowing costs early next year. Fed funds futures indicated a 29 percent chance that the central bank will lift its target lending rate from a range of zero to 0.25 percent at its March meeting, compared with a 41 percent chance last week. Fed’s Statement The Fed completed its $300 billion Treasury purchase program, ending the seven-month buying spree that helped stabilize the housing market and capped increases in borrowing costs. It will release its monetary policy statement on Nov. 4. Sterling rallied 2.8 percent to 89.44 pence per euro as reports showed U.K. mortgage approvals climbed in September to the highest level in 18 months and consumer confidence rose. The pound touched 89.12 on Oct. 29, the strongest level since Sept. 17. Britain’s currency gained 0.9 percent to $1.6452. The Bank of England will probably decide next week to increase its bond-purchase program as the U.K. lags behind other industrialized countries in shaking off its longest recession on record. Policy makers may expand the plan to 225 billion pounds ($372 billion) on Nov. 5 after this week reaching the current 175 billion pound limit for buying bonds with newly created money, the median estimate of 48 economists in a Bloomberg News survey showed. Bank of England The central bank will leave the benchmark rate at a record low of 0.5 percent, according to all 60 economists in a separate Bloomberg survey. Employers in the U.S. cut fewer jobs this month than in September while the unemployment rate rose to 9.9 percent in October, according to the median forecast in a survey of economists. The Labor Department’s report is due Nov. 6. The U.S. currency slid 0.5 percent versus the euro in October in its fourth monthly decline, the longest losing streak since December 2004, as investors piled onto carry trades. The yen weakened 0.4 percent this month versus the dollar. The yen slid 1 percent versus the euro in October. “Everyone is thinking about the exit strategy,” said Hidetoshi Yanagihara , senior currency trader at Mizuho Corporate Bank in New York. “Once they stop these stimulus measures, we are not going to see excessive money awash in the market. Carry trade may be arrested in the near future.” To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

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Bank Earnings Put Delay-and-Pray Tactic to Test: David Reilly

October 14, 2009

Commentary by David Reilly Oct. 14 (Bloomberg) — Delay-and-pray. For much of this year that was the strategy for banks when it came to the reserves they set aside to cover souring loans. Now, third- quarter earnings might show whether this gambit is paying off. Most banks let reserves for loan losses dwindle as a percentage of non-performing assets, mostly past-due loans, on a bet that growth of dud loans would slow. They did this to sidestep the need to rebuild reserves, a move that hits profit. The third quarter will prove an important test. If the growth of troubled loans has slowed, banks will get to breathe easier and hold off on diverting money to cover losses. That would bolster earnings at least through the end of the year. If non-performing assets have continued to climb, as they did in the first two quarters, banks will have a tougher time arguing that reserves are sufficient. Many will have to start taking action, and cutting into profit, or risk setting the stage for a fourth-quarter bloodbath. With the stakes so high, investors will need to watch that banks don’t try to game these figures. This is a danger because the treatment of non-performing assets can differ from bank to bank, FBR Capital Markets Corp. banking analyst Paul Miller said in a research note earlier this week. These figures may even differ between a bank’s regulatory filings and what it shows investors in financial statements. Among the top 25 banks and thrifts, second-quarter non- performing assets reported in regulatory filings known as call reports were 17 percent higher than those reported to investors, Miller noted. Gaining Leeway How does that happen? Under regulatory filing rules, banks must wait six months before they stop carrying as a non- performing asset most loans they modify, Miller said. Under generally accepted accounting principles , non-performing assets aren’t defined. That gives banks more leeway in how they treat modified loans and when they stop including them in non- performing asset totals. As mortgage modifications pick up pace, this may become more of a concern, since banks can help earnings if they tamp down non-performing asset figures. “Banks have got themselves in a corner by talking up stabilization of the housing market, but when you go into the trenches nothing is stabilizing,” Miller said. The reserves issue is somewhat less of a concern for big banks such as JPMorgan Chase & Co., which kicks off bank earnings season with its report today. It and Bank of America Corp., Citigroup Inc. and Wells Fargo & Co., all have reserves that are equal to more than 100 percent of non-performing assets. Feeling Pressure That doesn’t mean they’re out of the woods. By adding to reserves at a slower pace this year than increases in non- performing assets, even these banks may feel pressure to be more aggressive in adding to their buffers for loan losses. Bank of America’s reserves, for example, had declined to 116 percent of non-performing assets at the end of the second quarter. That is getting low for a bank of its size. By comparison, JPMorgan had a ratio of 170 percent. Wells Fargo will face particular scrutiny, given that its reserves fell to 128 percent at the end of the second quarter from 181 percent three months earlier. Investors might get antsy if the bank again tries to bolster profit in this way. The issue is more acute at smaller banks. They tend to keep reserve levels lower to start with, usually less than 100 percent. That’s because they have smaller credit-card and auto- loan portfolios, which typically produce more severe losses. Mounting losses from the mortgage mess and credit crunch have now driven reserves at many smaller banks below 50 percent of non-performing assets. Their cushion to absorb losses is getting thin. Housing Rescue There is some optimism that an uptick in the housing market this summer will have taken some pressure off the growth of troubled mortgage assets. That may allow some smaller banks to hold off on shoveling loads of money into reserves. Weighing against that are the growing odds of rising losses from commercial real estate and construction lending. “For many of the regional banks, we expect large credit provisions to largely erase profits again this quarter,” analysts at CreditSights, Inc. said in a report this week. And there is a question of how long regulators can allow some smaller banks to play the delay-and-pray game, given how low reserves have fallen. Of 545 publicly traded U.S. banks with more than $500 million in assets, one-fifth have reserves that are less than 35 percent of non-performing assets, according to Bloomberg data. That doesn’t give them much room for maneuvering if the U.S. recovery is drawn out for several more quarters. How banks balance profit against reserves this earnings season may determine whether investors wind up as the ones left praying. ( David Reilly is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: David Reilly at dreilly14@bloomberg.net

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Dollar Falls to One-Year Low Against Euro on Prospects for Global Recovery

September 22, 2009

By Ron Harui and Candice Zachariahs Sept. 23 (Bloomberg) — The dollar fell to a one-year low against the euro and weakened versus the yen on speculation the global economic recovery is gathering strength, encouraging investors to buy higher-yielding assets. The greenback slid to a 13-month low against New Zealand’s dollar after a New Zealand government report showed the economy unexpectedly expanded for the first time in six quarters. The dollar weakened versus 15 of its 16 major counterparts as economists forecast the Federal Reserve will today keep its benchmark interest rate between zero and 0.25 percent and signal it intends to keep borrowing costs low. “The improving global picture tends to produce selling of the dollar,” said Sean Callow , a senior currency strategist at Westpac Banking Corp. in Sydney. “Our view is that the Fed won’t change its statement, so we’d be very surprised if they changed the reference to exceptionally low levels of the fed funds rate.” The dollar declined to $1.4816 per euro as of 12:10 p.m. in Tokyo from $1.4790 in New York yesterday, after earlier falling to $1.4842, the lowest level since Sept. 22, 2008. The U.S. currency dropped to 1.0221 Swiss francs, after earlier sliding to 1.0189 francs, the weakest since July 22, 2008. The yen climbed to 90.71 per dollar from 91.10, and rose to 134.42 per euro from 134.76. New Zealand’s dollar advanced to as high as 73.12 U.S. cents, the strongest since Aug. 4, 2008, before trading up 1.1 percent at 72.64 cents. New Zealand Dollar New Zealand’s dollar rose against all of the 16 major currencies after Statistics New Zealand said gross domestic product grew 0.1 percent in the three months to June 30, following a 0.8 percent drop in the first quarter. A Bloomberg News survey of economists forecast a 0.2 percent contraction. “Early in the session the market was looking for direction and the kiwis gave it,” said Tony Bieber , a foreign-exchange trader at Suncorp-Metway Ltd. in Brisbane. “The kiwis are leading the charge against the U.S. dollar.” Traders are betting the Reserve Bank of New Zealand will raise its benchmark interest rates by 1.51 percentage points over the next 12 months, compared with a prediction for 1.36 percentage points yesterday, according to a Credit Suisse Group AG index based on overnight swaps. Fed Meeting The Federal Open Market Committee will probably maintain its assessment that “tight” bank credit is impeding growth, said economists including former Fed Governor Lyle Gramley . Lending contracted for five straight weeks through Sept. 9, a drop that in part reflected Fed orders to banks to raise more capital and toughen lending standards, analysts said. All 93 economists surveyed by Bloomberg said the Fed won’t change interest rates at its two-day meeting ending today. Chairman Ben S. Bernanke and his colleagues may discuss how to wind down purchases of mortgage-backed securities, analysts said. “You’ve obviously got some risks with the Fed, but unless they come out and surprise with being hawkish, which I don’t think they will, it’s another reason dollar bears will feel comfortable with their position,” said Phil Burke , chief foreign-exchange dealer at JPMorgan Chase Bank in Sydney. Futures contracts on the Chicago Board of Trade show a 41 percent chance the Fed will keep rates unchanged through March, up from a 27 percent chance one month ago. The Dollar Index , which the ICE uses to track the dollar against the currencies of six major U.S. trading partners, dropped to as low as 75.915, the weakest since Sept. 22, 2008, before trading 0.2 percent down at 75.944. Yen Gains The yen gained for a second day against the dollar on speculation world leaders attending a Group-of-20 meeting this week will signal currencies other than the dollar will need to strengthen to help rebalance global economic growth. Policy makers need to promote a “sustained growth track and facilitate global adjustment, as well as structural reform which will need to be undertaken in both deficit and surplus countries,” Dimitri Soudas , a spokesman for Canadian Prime Minister Stephen Harper , told reporters in Ottawa on Sept. 21. The G-20 meeting starts tomorrow in Pittsburgh. “The dollar remains under selling pressure as the G-20 summit moves toward reforming the international monetary system,” Philip Wee , a senior currency economist in Singapore at DBS Group Holdings Ltd., wrote in a research note today. Losses in the dollar were tempered after Italian Prime Minister Silvio Berlusconi and Australian Prime Minister Kevin Rudd wrote to U.S. President Barack Obama urging him to lead the fight against financial speculation and make it the center of the G-20 summit. “We would like to bring financial speculation and market manipulation, particularly for raw materials, to the center of the debate,” Berlusconi and Rudd said in their letter, a copy of which was posted on the Italian leader’s Web site. Commodities The Reuters/Jefferies CRB Index of 19 commodities rose the most in a week yesterday. Crude oil traded near $72 a barrel after climbing 2.6 percent yesterday. “Back in mid-June, the G-8 meeting revealed clear evidence of disquiet in commodity prices,” Sue Trinh , a senior currency strategist in Sydney at RBC Capital Markets, wrote in an e-mail to Bloomberg today. “Following that June communiqué, major commodity indices slumped around 10 percent in the following week. In foreign exchange, risk proxies followed commodity prices lower.” To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net ; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net .

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Yen Trades Near 7-Week High Versus Euro on Banking Concern, Stock Sell-Off

September 1, 2009

By Ron Harui Sept. 2 (Bloomberg) — The yen traded near a seven-week high against the euro as concern U.S. financial institutions will incur more losses spurred a sell-off in stocks and renewed demand for the relative safety of Japan’s currency. The yen was close to its strongest level versus the dollar in more than a month after Asian shares slumped and CIT Group Inc. deferred interest payments on subordinated bonds because efforts to cover the payments have been unsuccessful. The Australian dollar climbed from near a one-week low against the greenback after a government report showed economic growth unexpectedly accelerated in the second quarter. “There are lingering worries about the health of the U.S. banking sector,” said Toshihiko Sakai , head of trading for foreign exchange and financial products at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. “The bias is for the yen and the dollar to be bought.” The yen traded at 132.20 per euro as of 10:55 a.m. in Tokyo from 132.19 in New York yesterday, after earlier reaching 131.46, the highest level since July 15. Japan’s currency was at 92.97 per dollar from 92.92. The euro bought $1.4217 from $1.4224 in New York yesterday, when it touched $1.4178, the weakest level since Aug. 19. The Australian dollar climbed to 83.16 U.S. cents after earlier falling to 82.41 cents, the lowest level since Aug. 27. Asian Stocks Decline The Nikkei 225 Stock Average slid 2.6 percent and the MSCI Asia Pacific Index fell 1.7 percent, the most since Aug. 17. The Standard & Poor’s 500 Index sank 2.2 percent yesterday. MSCI’s Asian index has rallied 59 percent from a more than five-year low on March 9. “Markets worry that they may have run up too much too fast,” Philip Wee , senior currency economist in Singapore at DBS Group Holdings Ltd., wrote in a research note today. “Risk aversion returned. Expect the dollar to head higher on lower Asian stocks.” CIT said in a regulatory filing it was forced to delay payments on subordinated bonds due 2067 because efforts to execute a so-called alternative payment mechanism have been unsuccessful. The U.S. lender got $3 billion in financing from creditors in July to avoid collapse. U.S. banks on the West Coast still face credit deterioration and higher loan losses, said analysts at RBC Capital Markets. Capital Concerns “Many of these banks may still not have enough capital and reserves” to cushion against writedowns from worsening real estate market, analysts Joe Morford and David King wrote in a research report. The yen tends to gain in financial turmoil as Japan’s trade surplus reduces reliance on foreign capital, while the dollar benefits from its status as the world’s main reserve currency. Australia’s dollar rose and the yen curbed its gains after the Bureau of Statistics said today in Sydney the nation’s gross domestic product expanded 0.6 percent in the second quarter from the previous three months, when it grew 0.4 percent. The median estimate of 20 economists surveyed by Bloomberg News was for a 0.2 percent expansion. Australia’s economy has been “stronger than expected” amid resilient consumer spending, exports and business investment, central bank Governor Glenn Stevens said yesterday after keeping the benchmark interest rate at 3 percent for a fifth month. GDP may expand further in coming quarters as the government spends A$22 billion ($18 billion) on roads, railways and schools. The euro traded near a two-week low versus the dollar after German Finance Minister Peer Steinbrueck said yesterday financing conditions may deteriorate. Steinbrueck also said insolvencies in Europe’s biggest economy may rise in the fourth quarter of this year into the first quarter of 2010. To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net

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Yen Trades Near 7-Week High Versus Euro on Banking Concern, Stock Sell-Off

September 1, 2009

By Ron Harui Sept. 2 (Bloomberg) — The yen traded near a seven-week high against the euro as concern U.S. financial institutions will incur more losses spurred a sell-off in stocks and renewed demand for the relative safety of Japan’s currency. The yen was close to its strongest level versus the dollar in more than a month after Asian shares slumped and CIT Group Inc. deferred interest payments on subordinated bonds because efforts to cover the payments have been unsuccessful. The Australian dollar climbed from near a one-week low against the greenback after a government report showed economic growth unexpectedly accelerated in the second quarter. “There are lingering worries about the health of the U.S. banking sector,” said Toshihiko Sakai , head of trading for foreign exchange and financial products at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. “The bias is for the yen and the dollar to be bought.” The yen traded at 132.20 per euro as of 10:55 a.m. in Tokyo from 132.19 in New York yesterday, after earlier reaching 131.46, the highest level since July 15. Japan’s currency was at 92.97 per dollar from 92.92. The euro bought $1.4217 from $1.4224 in New York yesterday, when it touched $1.4178, the weakest level since Aug. 19. The Australian dollar climbed to 83.16 U.S. cents after earlier falling to 82.41 cents, the lowest level since Aug. 27. Asian Stocks Decline The Nikkei 225 Stock Average slid 2.6 percent and the MSCI Asia Pacific Index fell 1.7 percent, the most since Aug. 17. The Standard & Poor’s 500 Index sank 2.2 percent yesterday. MSCI’s Asian index has rallied 59 percent from a more than five-year low on March 9. “Markets worry that they may have run up too much too fast,” Philip Wee , senior currency economist in Singapore at DBS Group Holdings Ltd., wrote in a research note today. “Risk aversion returned. Expect the dollar to head higher on lower Asian stocks.” CIT said in a regulatory filing it was forced to delay payments on subordinated bonds due 2067 because efforts to execute a so-called alternative payment mechanism have been unsuccessful. The U.S. lender got $3 billion in financing from creditors in July to avoid collapse. U.S. banks on the West Coast still face credit deterioration and higher loan losses, said analysts at RBC Capital Markets. Capital Concerns “Many of these banks may still not have enough capital and reserves” to cushion against writedowns from worsening real estate market, analysts Joe Morford and David King wrote in a research report. The yen tends to gain in financial turmoil as Japan’s trade surplus reduces reliance on foreign capital, while the dollar benefits from its status as the world’s main reserve currency. Australia’s dollar rose and the yen curbed its gains after the Bureau of Statistics said today in Sydney the nation’s gross domestic product expanded 0.6 percent in the second quarter from the previous three months, when it grew 0.4 percent. The median estimate of 20 economists surveyed by Bloomberg News was for a 0.2 percent expansion. Australia’s economy has been “stronger than expected” amid resilient consumer spending, exports and business investment, central bank Governor Glenn Stevens said yesterday after keeping the benchmark interest rate at 3 percent for a fifth month. GDP may expand further in coming quarters as the government spends A$22 billion ($18 billion) on roads, railways and schools. The euro traded near a two-week low versus the dollar after German Finance Minister Peer Steinbrueck said yesterday financing conditions may deteriorate. Steinbrueck also said insolvencies in Europe’s biggest economy may rise in the fourth quarter of this year into the first quarter of 2010. To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net

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Amcor Offers $2.02 Billion for Part of Rio Tinto’s Alcan Packaging Unit

August 17, 2009

By Rebecca Keenan and Sarah McDonald Aug. 18 (Bloomberg) — Amcor Ltd. , Australia’s biggest packaging company, offered to buy part of Rio Tinto Group’s Alcan packaging unit for $2.025 billion in what would be its largest acquisition. Amcor offered to buy the European food packaging, global pharmaceuticals, Asian food and global tobacco units, the Melbourne-based company said today in a statement. The offer will be funded by a A$1.6 billion ($1.3 billion) share sale and bank debt, Amcor said. Buying the operations will increase Amcor’s global share of pharmaceutical packaging to 56 percent from 6 percent, Deutsche Bank AG said in a report last month. Profit at Amcor, led by Managing Director Ken Mackenzie , has been declining since 2007 according to data compiled by Bloomberg. “It looks like a well-negotiated deal from the Amcor board and management and funded fairly conservatively in order to maintain the company’s current credit rating,” Nomura Holdings Inc. credit analyst Ben Byrne said in an e-mail. The cost of buying Amcor credit-default swaps fell to 115 basis points from 130 after the news was announced, Nomura prices show. Amcor ’s shares gained 4.1 percent to A$5.65 when last traded on Aug. 14, trimming the decline this year to 2.6 percent compared with the 18 percent advance on the benchmark S&P/ASX 200 Index. Rio gained 0.7 percent to A$57.50 at 12:53 p.m. Sydney time. “Now is the right time in the economic cycle to be making acquisitions as asset values are substantially lower than they have been for many years,” Mackenzie said in the statement. Offer Valuation Amcor is paying between 5.5 and 5.7 times the adjusted last 12 months earnings before interest tax depreciation and amortization for the units, Mackenzie said. Amcor’s previous biggest purchase was the $1.5 billion takeover of the PET bottling and container lid business of Germany’s Schmalbach- Lubeca AG in 2002. Amcor, which today said full-year net income dropped 18 percent to A$211.7 million, will sell shares on a four-for-nine basis at A$4.30 a share, it said. The purchase may generate savings of between A$200 million and A$250 million by the third year of ownership, Amcor said in a presentation today. “Alcan Packaging remains the most obvious solution to Amcor’s growth challenge, given the neat strategic and growth aspects that it would bring,” Royal Bank of Scotland Group Plc analysts said in a research note dated yesterday. Rio Asset Sales London-based Rio has agreed to a period of exclusivity with Amcor and will respond to the offer after consulting with the relevant European works councils, it said in a statement today. Rio agreed on July 6 to sell the Food Americas part of its packaging unit to Bemis Co. of the U.S. for $1.2 billion. The remaining packaging assets may fetch more than $2 billion based on the valuations used in that sale, according to Citigroup Inc. Rio said at the time it may write down the value of some of the assets when it announces half-year earnings on Aug. 20. The company has also raised a further $2.5 billion this year from selling iron ore and potash assets in Latin America, a U.S. coal mine and a share in a Chinese aluminum smelter. It has had $6.6 billion of asset sales in the last 18 months, Rio said today in a statement. “We believe Amcor’s offer is in the interests of all stakeholders,” Rio’s Chief Financial Officer Guy Elliot said in the statement. Credit-default swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails meet its debt agreements. An increase suggests deteriorating perceptions of credit quality and a drop shows improvement. A basis point is 0.01 percentage point. — With assistance by Sarah McDonald in Sydney and Madelene Pearson in Melbourne. Editors: Andrew Hobbs , Keith Gosman To contact the reporters on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net ; Sarah McDonald in Sydney at smcdonald23@bloomberg.net ;

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