Sales of passenger cars in China rose 48% in June to 872.9k according to the China Association of Automobile Manufacturers (Bloomberg). Overall vehicle sales were up 36% to 1.14 mln. For the first half of 2009, passenger vehicle sales rose 26% to 4.53 mln. Overall sales were up 18% to 6.1 mln. Sales of commercial vehicles declined .5% in the first six months to 1.57 mln. Full year sales are projected at 10-11 mln vehicles. At this rate, China is almost certain to purchase more vehicles than the US this year becoming, at least for now, the world's largest auto market. Demand has in part been driven by China's stimulus program which includes cutting some retail taxes and providing vehicle subsidies.
Paradoxically, profits at the 19 largest domestic car manufacturers fell 9.9% in the first five months of the year. Eight reported profit gains, eight reported profit declines, and three had outright losses. Revenues for the group were down 2.3%. GM is the largest international car maker in China. Its first half sales rose 38% to 814k vehicles. Hyundai's first half sales increased 56% to 257k.
Saturday, July 11, 2009
New Development in China Iron Negotiations: Espionage
China has detained four employees of Rio Tinto and, while there are differing accounts, appears to have accused them of espionage (NYTimes, FT). The government alleges the four obtained confidential state documents relating to negotiations between Rio and state firms over the price of iron (prior post). It appears at least one Chinese executive has also been detained for passing documents to Rio and others are under investigation. One of the four Rio employees detained is an Australian citizen (Stern Hu) while the others were Chinese nationals. The Australian government has called for talks over the arrests. Australian officials noted that the documents in question related to commercial matters rather than state secrets, and therefore should be held to a different standard. It is unclear what effect, if any, China's action will have on relations with Australia. Australia exports around 80% of its iron to China. China consumes roughly half of the world's production of iron ore.
Rio rejected a $19.5 bln deal to sell part of itself to Chinalco last month. Chinalco says it had nothing to do with the arrests (ABC).
Rio rejected a $19.5 bln deal to sell part of itself to Chinalco last month. Chinalco says it had nothing to do with the arrests (ABC).
Sunday, July 5, 2009
Golden Key Update
Golden Key is one of Barclay's disastrous SIVs (prior post). Last week a judge rejected an appeal by some creditors seeking to amend a lower court ruling regarding the distribution of the SIV's assets (FT). The lower court had ruled that pari passu creditors should be repaid according to the original loan repayment schedule. This means that those due to repaid first would be repaid in full before creditors with later maturities saw any money. Needless to add, there is not enough to pay off all creditors. The SIV has $6.2 bln of senior debt outstanding. Golden Key went into receivership in October of 2007.
China Says No to Iron Miners
Last week the China Iron and Steel Association rejected proposals from the world's three largest miners on new iron ore prices (FT). The CISA also rejected the iron ore producer's proposal in May (prior post). Rio Tinto's contracts expired last week which means they will now start charging Chinese steelmakers the spot price for iron. The miners, Vale, Rio Tinto, and BHP Billiton, have agreed to cut prices 28-33% for deliveries to Japanese, Korean, and Tawianese steelmakers leaving contract prices around $75-80 per tonne including delivery charges. The CISA wants producers to cut prices 40-45%. Iron miners say the offer of a 33% cut is a 'take-it-or-leave-it' proposition. The current spot price in China is around $80 per tonne. Rio and BHP are selling almost half of their current production on the spot market. Vale's spot sales are increasing. China's continued intransigence jeopardizes the 40 year old 'benchmark standard' whereby miners and steel producers agree to abide by the first price negotiated between a miner and a producer.
Rogue Trader in Oil
Steven Noel Perkins, a broker at PVM Oil Associates, placed an unauthorized trade for 9k lots of Brent oil futures on the InterContinental Exchange on Tuesday at 2 AM UK time (FT). The trade was 9 mln barrels of oil. This period is the oil market's most illiquid - typically .5 mln barrels an hour. Including Perkins order, 16 mln barrels traded Tuesday morning. His trade drove the market price of Brent up to $73.50 per barrel, the highest price of 2009. The price declined to $65.50 per barrel on Friday. The trades generated a loss of $10 mln for PVM Oil Associates. PVM is the world's largest over the counter oil broker.
Sunday, June 21, 2009
Unemployment
For the week ended June 13, the advance figure for seasonally adjusted unemployment claims was 608k up 3k from the prior week (DOL). Generally speaking, claims of 400k and above indicate increasing unemployment, and 300k and below indicate a tighter jobs market. The unadjusted number was up 554k which was down 27k from the prior week. The advance seasonally adjusted unemployment rate was 5% (unadjusted 4.5%), down from the prior week's 5.1% (unadjusted 4.6%). The highest insured unemployment rates for June 18 were in MI (7.5), OR (7.0), and NV (6.3). The largest increases in claims were in PA, FL, and OH. The largest decreases were in AK, PR, WI.
Claims for unemployment benefits are one of three measures of the health of US employment that are produced by the Department of Labor. The unemployment claims numbers are aggregated by the Employment and Training Administration (ETA). The other two measures, a survey of homes and a survey of businesses, are produced by the Bureau of Labor Statistics (BLS). All three measures are described below.
Unemployment insurance in the US started in Wisconsin in 1932 (wikipedia, DOL). The US government's program was codified in the Federal Unemployment Tax Act of 1939 (Answers.com, IRS). The act required each state and territory (DC, PR, USVI) to establish its own unemployment insurance program and to integrate that program with the federal program. Unemployment benefits are funded through unemployment insurance taxes which are deducted from employee payrolls on behalf of states and the federal government. Federal tax revenues are placed in the FUTA Trust Fund. State revenues are placed in a federally controlled account. FUTA funds pay for the administration of the state programs, and pay half of any extended benefits (see below) paid to recipients. States can also borrow from the FUTA fund if their funds run out of money. The FUTA tax rate is 6.2% on the first $7k of taxable wages paid to an employee. State taxes up to 5.4% can be deducted against the federal rate leaving the effective rate at around .8% (or $56 per worker per year). Employers are required to pay these taxes if they pay wages above $1500 in any quarter or if they had paid employees for one day a week or more for at least 20 weeks during the year. Because FUTA funds pay for the administration of state programs, state unemployment insurance funds are available in their entirety to pay unemployment insurance benefits. State programs vary widely in their scope (DOL). The duration and amount of benefits depends on the state, the person's past compensation, and the length of their employment. Programs pay up to 26 weeks of pay, and on average pay 38% of a worker's salary. Part-time, temporary, and self-employed workers are not qualified to receive unemployment benefits. Employees that are fired for cause, quit, or resign are also ineligible. Generally benefits are not paid for the first two weeks of unemployment. Unemployed persons apply for benefits through their state agency.
When a state's insured unemployment rate (see below) is above a certain level (in CT it is 5% - ct.gov), the state can offer 'extended unemployment benefits'. This program was created in 1970 and revised in 1981. Extended benefits increase the duration of the state's unemployment benefits by 13 weeks. In the middle of 2008, the government created the 'Emergency Unemployment Compensation' program (EUC, Sourcewatch). This added 13 weeks (later extended to 20 weeks) of federally funded benefits to existing state unemployment benefits. The EUC expires at the end of 2009. If I understand this correctly, most states unemployment benefits are 26 weeks in duration. The EUC then adds 20 weeks onto that. And those states with a high insured unemployment rate which qualify for extended benefits increases the duration of benefits by 13 weeks.
Weekly unemployment claims reports can be found on the BLS web site (BLS, most recent full report here and here). The report presents seasonally adjusted and unadjusted numbers. If done correctly, seasonally adjusted numbers allows for month-to-month comparisons of employment data (i.e., you can compare March to February rather than just March to March of the prior year). The report also provides the 'insured unemployment rate'. This is the percentage of insured workers that are currently receiving unemployment benefits. Unemployment insurance generally pays less than half of a worker's former salary, and provides benefits to fewer than 40% of the unemployed.
As stated above, the Bureau of Labor Statistics measures unemployment through two different surveys conducted by the Census Bureau and the Bureau of Labor Statistics (BLS). The Household Survey (aka 'the Current Population Survey'), is a monthly sample survey of 60k households which includes roughly 110k persons. The Household Survey is used to calculate the unemployment rate for the US. The survey breaks the US into 2,025 geographic areas/sampling units. They then select 824 to represent each state (and the District of Columbia) and try to select for representative diversity in other categories like urban/rural, industrial/farming, etc. After a household has been included for 4 months, it is removed for 8 months, then interviewed for 4 months, and then removed entirely from the survey. This approach results in monthly turnover of 25%, and annual turnover of 50%. The Census Bureau collects its data through 2,200 interviewers. The interviewers ask about job holding and job seeking among the residents of the household. As of the first month of inclusion, the BLS notes the members of the household that are 15 or older. Those 16 and older will either be classified as in an institution (school, prison, nursing facilities, etc.), the armed forces, or employed / unemployed. For those who fit multiple classifications (e.g., at school but also has a part-time job), the default is to view them as employed / part of the workforce. Those not looking for work are not part of the labor force (e.g., homemaker). Workers are considered employed if they did any work for pay during the survey week (generally the survey week is around the 12th of the month). Unpaid workers that work more than 15 hours in a family business are considered employed (e.g., sonny helping out in granny's vegetable stand). An unemployed person is one that does not have a job, looked for work in the prior four weeks, and is available for work. The definition of 'looking for work' is quite broad and would include calling your brother to ask if he knows anyone that needs help. But it must be active - passive activities (e.g., reading want ads) do not count. Those persons who have an interest in work and have been employed at some point in the past 12 months, but are not actively pursuing work are classified as 'marginally attached to the labor force'. The fact that they are not actively looking means they are not unemployed. A subset of the marginally attached workers are the 'discouraged workers'. These are workers who have stopped looking for work for one of four reasons - they believe there is no job in their line of work / geography, there previously were unable to find work, they lack the skills necessary to obtain a job, or they are viewed as unqualified by their age or some form of discrimination. It sounds like the interviewers visit most households in person. Results are 'weighted' to adjust for population estimates based on the last census. The weighting tries to adjust for age, sex, ethnicity, state of residence, etc. There is a 90% chance of the survey being within 290k of the figure obtainable through an actual count. Lots of effort is expended trying to ensure the training and overall quality of the interviewers and interview process. Every month the survey results are reported by the Bureau of Labor Statistics which is part of the Department of Labor (BLS). This survey has been conducted every month since 1940. It was originally started as a WPA project.
The other employment survey, the Establishment Survey (aka 'the Current Employment Statistics' survey, aka 'the Nonfarms Payroll Report'), is produced by the BLS's Current Employment Statistics program (CES). The Establishment Survey is used to calculate the monthly change in payrolls. Whereas the household survey seeks to understand employment by interviewing households, the establishment survey speaks to non-farm employers. Each month CES surveys 150k businesses and government agencies representing approximately 390k individual worksites. The survey results provide information on employment, hours worked, average orvertime, and the earnings of workers. Workers who work in two jobs are counted twice. The survey excludes proprietors or self-employed persons. The survey includes private industry and non-military government employers. In tabulating results, CES attempts to account for the formation of and destruction of companies. This is the infamous birth death adjustment (BLS). The adjustment is based on data collected on the creation / destruction of companies that is at least 9 months old. While the birth death adjustment attempts to compensate for a shortcoming of the survey, it ensures there will be times when the results of the survey are significantly different from what is actually going on in the economy. Unfortunately, the survey results are likely to be off during periods of great change in the economy which is exactly when people need accurate data the most. The report for May (CES) showed a 345k decline in non-farm employment. This decline was about half the monthly decline for the prior 6 months.
Claims for unemployment benefits are one of three measures of the health of US employment that are produced by the Department of Labor. The unemployment claims numbers are aggregated by the Employment and Training Administration (ETA). The other two measures, a survey of homes and a survey of businesses, are produced by the Bureau of Labor Statistics (BLS). All three measures are described below.
Unemployment insurance in the US started in Wisconsin in 1932 (wikipedia, DOL). The US government's program was codified in the Federal Unemployment Tax Act of 1939 (Answers.com, IRS). The act required each state and territory (DC, PR, USVI) to establish its own unemployment insurance program and to integrate that program with the federal program. Unemployment benefits are funded through unemployment insurance taxes which are deducted from employee payrolls on behalf of states and the federal government. Federal tax revenues are placed in the FUTA Trust Fund. State revenues are placed in a federally controlled account. FUTA funds pay for the administration of the state programs, and pay half of any extended benefits (see below) paid to recipients. States can also borrow from the FUTA fund if their funds run out of money. The FUTA tax rate is 6.2% on the first $7k of taxable wages paid to an employee. State taxes up to 5.4% can be deducted against the federal rate leaving the effective rate at around .8% (or $56 per worker per year). Employers are required to pay these taxes if they pay wages above $1500 in any quarter or if they had paid employees for one day a week or more for at least 20 weeks during the year. Because FUTA funds pay for the administration of state programs, state unemployment insurance funds are available in their entirety to pay unemployment insurance benefits. State programs vary widely in their scope (DOL). The duration and amount of benefits depends on the state, the person's past compensation, and the length of their employment. Programs pay up to 26 weeks of pay, and on average pay 38% of a worker's salary. Part-time, temporary, and self-employed workers are not qualified to receive unemployment benefits. Employees that are fired for cause, quit, or resign are also ineligible. Generally benefits are not paid for the first two weeks of unemployment. Unemployed persons apply for benefits through their state agency.
When a state's insured unemployment rate (see below) is above a certain level (in CT it is 5% - ct.gov), the state can offer 'extended unemployment benefits'. This program was created in 1970 and revised in 1981. Extended benefits increase the duration of the state's unemployment benefits by 13 weeks. In the middle of 2008, the government created the 'Emergency Unemployment Compensation' program (EUC, Sourcewatch). This added 13 weeks (later extended to 20 weeks) of federally funded benefits to existing state unemployment benefits. The EUC expires at the end of 2009. If I understand this correctly, most states unemployment benefits are 26 weeks in duration. The EUC then adds 20 weeks onto that. And those states with a high insured unemployment rate which qualify for extended benefits increases the duration of benefits by 13 weeks.
Weekly unemployment claims reports can be found on the BLS web site (BLS, most recent full report here and here). The report presents seasonally adjusted and unadjusted numbers. If done correctly, seasonally adjusted numbers allows for month-to-month comparisons of employment data (i.e., you can compare March to February rather than just March to March of the prior year). The report also provides the 'insured unemployment rate'. This is the percentage of insured workers that are currently receiving unemployment benefits. Unemployment insurance generally pays less than half of a worker's former salary, and provides benefits to fewer than 40% of the unemployed.
As stated above, the Bureau of Labor Statistics measures unemployment through two different surveys conducted by the Census Bureau and the Bureau of Labor Statistics (BLS). The Household Survey (aka 'the Current Population Survey'), is a monthly sample survey of 60k households which includes roughly 110k persons. The Household Survey is used to calculate the unemployment rate for the US. The survey breaks the US into 2,025 geographic areas/sampling units. They then select 824 to represent each state (and the District of Columbia) and try to select for representative diversity in other categories like urban/rural, industrial/farming, etc. After a household has been included for 4 months, it is removed for 8 months, then interviewed for 4 months, and then removed entirely from the survey. This approach results in monthly turnover of 25%, and annual turnover of 50%. The Census Bureau collects its data through 2,200 interviewers. The interviewers ask about job holding and job seeking among the residents of the household. As of the first month of inclusion, the BLS notes the members of the household that are 15 or older. Those 16 and older will either be classified as in an institution (school, prison, nursing facilities, etc.), the armed forces, or employed / unemployed. For those who fit multiple classifications (e.g., at school but also has a part-time job), the default is to view them as employed / part of the workforce. Those not looking for work are not part of the labor force (e.g., homemaker). Workers are considered employed if they did any work for pay during the survey week (generally the survey week is around the 12th of the month). Unpaid workers that work more than 15 hours in a family business are considered employed (e.g., sonny helping out in granny's vegetable stand). An unemployed person is one that does not have a job, looked for work in the prior four weeks, and is available for work. The definition of 'looking for work' is quite broad and would include calling your brother to ask if he knows anyone that needs help. But it must be active - passive activities (e.g., reading want ads) do not count. Those persons who have an interest in work and have been employed at some point in the past 12 months, but are not actively pursuing work are classified as 'marginally attached to the labor force'. The fact that they are not actively looking means they are not unemployed. A subset of the marginally attached workers are the 'discouraged workers'. These are workers who have stopped looking for work for one of four reasons - they believe there is no job in their line of work / geography, there previously were unable to find work, they lack the skills necessary to obtain a job, or they are viewed as unqualified by their age or some form of discrimination. It sounds like the interviewers visit most households in person. Results are 'weighted' to adjust for population estimates based on the last census. The weighting tries to adjust for age, sex, ethnicity, state of residence, etc. There is a 90% chance of the survey being within 290k of the figure obtainable through an actual count. Lots of effort is expended trying to ensure the training and overall quality of the interviewers and interview process. Every month the survey results are reported by the Bureau of Labor Statistics which is part of the Department of Labor (BLS). This survey has been conducted every month since 1940. It was originally started as a WPA project.
The other employment survey, the Establishment Survey (aka 'the Current Employment Statistics' survey, aka 'the Nonfarms Payroll Report'), is produced by the BLS's Current Employment Statistics program (CES). The Establishment Survey is used to calculate the monthly change in payrolls. Whereas the household survey seeks to understand employment by interviewing households, the establishment survey speaks to non-farm employers. Each month CES surveys 150k businesses and government agencies representing approximately 390k individual worksites. The survey results provide information on employment, hours worked, average orvertime, and the earnings of workers. Workers who work in two jobs are counted twice. The survey excludes proprietors or self-employed persons. The survey includes private industry and non-military government employers. In tabulating results, CES attempts to account for the formation of and destruction of companies. This is the infamous birth death adjustment (BLS). The adjustment is based on data collected on the creation / destruction of companies that is at least 9 months old. While the birth death adjustment attempts to compensate for a shortcoming of the survey, it ensures there will be times when the results of the survey are significantly different from what is actually going on in the economy. Unfortunately, the survey results are likely to be off during periods of great change in the economy which is exactly when people need accurate data the most. The report for May (CES) showed a 345k decline in non-farm employment. This decline was about half the monthly decline for the prior 6 months.
Sunday, June 14, 2009
Fontainebleau Las Vegas Goes Chapter 11
Fontainebleau was unable to obtain the $800 mln it needed to complete its $2.9 bln 3,900 room project on the Las Vegas strip (NYTimes, other problems on the strip prior post). The project is 70% complete. In April, Fontainebleau filed a $3 bln lawsuit against Bank of America, JP Morgan Chase, Deutsche Bank and other firms alleging they had improperly terminated an agreement to provide funding. The financial firms backed out of their funding commitment on the grounds that a default had occurred. The company maintains that no default event occurred. The company amended its suit last month to include allegations that Deutsche Bank interfered with contracts to benefit other projects DB had financed on the strip.
A few days after the bankruptcy filing, Bank of America was sued by 120 investment companies that loaned money to the Fontainebleau project (Las Vegas Sun). The lawsuit says that if a default occurred, Bank of America then improperly induced the investment companies to make a $336 mln loan in March. And if a default did not occur, Bank of America improperly withheld funds from the project which caused its bankruptcy.
Fontainebleau's company's Miami Beach property was not included in the bankruptcy.
A few days after the bankruptcy filing, Bank of America was sued by 120 investment companies that loaned money to the Fontainebleau project (Las Vegas Sun). The lawsuit says that if a default occurred, Bank of America then improperly induced the investment companies to make a $336 mln loan in March. And if a default did not occur, Bank of America improperly withheld funds from the project which caused its bankruptcy.
Fontainebleau's company's Miami Beach property was not included in the bankruptcy.
Some Recent Economic Data...
The Commerce Department reported that seasonally adjusted wholesale inventories shrank 1.4% in April following a 1.8% decline in March (WSJ). Sales of wholesalers fell .4% in April after a 2.4% decline in March. Sales were down 19.5% year-over-year against an inventory decline of 6.2%. The inventory to sales ratio fell to 1.31 from 1.32 in March. The ratio was 1.12 in April of 2008.
Automotive inventories fell 4.5% on a 7.8% decline in sales. Inventories of durable goods fell 1.9% in April after a 3.6% decline in March. Nondurable inventories were flat in April after declining .5% in March. April nondurable goods sales were up .8% after falling 1.5% in March.
The Commerce Department reported May retail sales were up .5% (WSJ). Revenue at gasoline stations was up 3.6%. Absent this rise, sales were up .2%.
The Bureau of Economic Analysis reports that the April trade deficit was $29.2 bln up from $28.2 bln in March (BEA). Exports fell $2.8 bln and imports fell $2.2 bln.
Foreclosure filings in May fell 6% from March according to RealtyTrac (RealtyTrac). May is the third month in a row that foreclosure filings have been over 300k. Nevada, Florida, and California remained the top states for foreclosures. The top 10 states accounted for 77% of all foreclosures.
Home owners now own 41.4% of the equity in their homes, the lowest level since records started and down 53.9% since 2007.
The Federal Reserve's flow of funds data showed a $1.1 trln decline in the net worth of US households in Q1. Net worth is now $13.9 trln below its peak in 2007.
Personal savings as a % of disposable income was 5.7% in April, the highest level since February of 1995 when it was 5.9%.
Automotive inventories fell 4.5% on a 7.8% decline in sales. Inventories of durable goods fell 1.9% in April after a 3.6% decline in March. Nondurable inventories were flat in April after declining .5% in March. April nondurable goods sales were up .8% after falling 1.5% in March.
The Commerce Department reported May retail sales were up .5% (WSJ). Revenue at gasoline stations was up 3.6%. Absent this rise, sales were up .2%.
The Bureau of Economic Analysis reports that the April trade deficit was $29.2 bln up from $28.2 bln in March (BEA). Exports fell $2.8 bln and imports fell $2.2 bln.
Foreclosure filings in May fell 6% from March according to RealtyTrac (RealtyTrac). May is the third month in a row that foreclosure filings have been over 300k. Nevada, Florida, and California remained the top states for foreclosures. The top 10 states accounted for 77% of all foreclosures.
Home owners now own 41.4% of the equity in their homes, the lowest level since records started and down 53.9% since 2007.
The Federal Reserve's flow of funds data showed a $1.1 trln decline in the net worth of US households in Q1. Net worth is now $13.9 trln below its peak in 2007.
Personal savings as a % of disposable income was 5.7% in April, the highest level since February of 1995 when it was 5.9%.
Detroit Madness
Home prices in Detroit are down by a third, but volume in April was up 23% year-over-year (CNNMoney). While the article is light on data, it is filled with stories of out-of-town investors snapping up properties to improve and rent out. They have quotes from a number of locals who are acting as agents for these 'investors'. Some are looking to qualify for Section 8 HUD funding under which the government would pay part of renter's rent. These investors could qualify for a Section 8 from the army as well. This city is dying and has been for 60 years. Property is cheap there for a reason. These people would be better off dumping their money into a hole.
GM CDS Settlement Price
Traders set a value of 12.5 cents on the dollar for credit default swaps contracts that protected against a GM bankruptcy (Bloomberg). Dealers set a value of 97.5 cents on the dollar for holders of CDS against GM senior secured loans. Last week GM's CFO said holders of those bonds would be paid back at par. GM will be the largest CDS settlement since Lehman Brothers last year.
Koenigsegg for Saab?
Crazy expensive Swedish auto maker Koenigsegg is apparently the front runner to purchase Saab (Bloomberg, prior post). Koenigsegg's sports car costs $1.2 mln and has a top speed of 249 mph. The company's 2007 sales were $13.8 mln, almost double the prior year, and it employs 45 people. The company is led by founder Christian von Koenigsegg. The company is 49% owned by Norwegian industrial designer Baard Eker. Eker has a reputation for spotting value and turning companies around. He owns boat builder Hydrolift SA which he purchased out of bankruptcy. He has a staff of engineers that design a variety of products and expects he will be able to contribute engineering expertise to Saab.
Saab has 4,000 employees and sold 93k vehicles last year. Saab filed for reorganization in February after GM said it would cut its ties to the company by 2010. Saab claims it received interest from 20 bidders in the company. Koenigsegg has emerged as the leader due to its plan to invest in the company and because it is the only bidder with automotive expertise.
GM bought Saab from Sweden's Wallenberg family starting in 1990.
Saab has 4,000 employees and sold 93k vehicles last year. Saab filed for reorganization in February after GM said it would cut its ties to the company by 2010. Saab claims it received interest from 20 bidders in the company. Koenigsegg has emerged as the leader due to its plan to invest in the company and because it is the only bidder with automotive expertise.
GM bought Saab from Sweden's Wallenberg family starting in 1990.
Continuing Problems in Insurance Industry: The Hartford
On Friday, The Hartford announced that it intends to sell $750 mln shares through a 'discretionary equity issuance' to raise capital (Bloomberg, WSJ, prior post). Last month the Treasury Department approved the company's application to access TARP funds. It is one of six insurance companies approved by the government, but the only one to date that has indicated it will accept the funds. The company has applied for $3.4 bln of funds, but the exact amount has not been set. The company qualified for TARP funds by purchasing an S&L based in Sanford, FL.
The sale of shares to the government will trigger a payment to Hartford's largest investor, Allianz SE. Hartford received a $2.6 bln investment from Allianz in October after posting a $2.6 bln loss in Q3. The Hartford recently negotiated the size of the fee to Allianz down from $300 mln to $200 mln. In addition to the Allianz investment last year, The Hartford sold $3 bln of stock between 2001 and 2004.
Obviously any insurance company that had high exposure to the stock, real estate, or even the bond markets has seen significant losses over the last year. The fact that the company needs to sell stock on top of its TARP funds speaks to the scale of its problems. The company announced that it expects to post losses in the second quarter that are similar in size to the losses it posted in Q4 of 2008 and Q1 of 2009. Hartford's stock hit a low of $3.33 in March, and closed Friday at $12.95.
The company's CEO, Ramani Ayer, announced his intent to retire by year end. In the last year, the company has parted ways with its CFO, COO, and CIO.
The sale of shares to the government will trigger a payment to Hartford's largest investor, Allianz SE. Hartford received a $2.6 bln investment from Allianz in October after posting a $2.6 bln loss in Q3. The Hartford recently negotiated the size of the fee to Allianz down from $300 mln to $200 mln. In addition to the Allianz investment last year, The Hartford sold $3 bln of stock between 2001 and 2004.
Obviously any insurance company that had high exposure to the stock, real estate, or even the bond markets has seen significant losses over the last year. The fact that the company needs to sell stock on top of its TARP funds speaks to the scale of its problems. The company announced that it expects to post losses in the second quarter that are similar in size to the losses it posted in Q4 of 2008 and Q1 of 2009. Hartford's stock hit a low of $3.33 in March, and closed Friday at $12.95.
The company's CEO, Ramani Ayer, announced his intent to retire by year end. In the last year, the company has parted ways with its CFO, COO, and CIO.
Gold ATMs in Germany
A company in Germany plans to install gold ATM machines around Germany (Reuters). A prototype in Frankfurt's main train station was dispensing one gram coins minted by Umicore for €31 - a 30% premium over spot prices. The company plans to offer 1g, 5g, and 10g coins as well as Krugeraands in its production machines. The company will adjust prices in real-time to reflect current gold prices.
The company is TG Gold Supermarket (tg-gold-super-markt.de) a subsidiary of INFOS GmbH.
The company is TG Gold Supermarket (tg-gold-super-markt.de) a subsidiary of INFOS GmbH.
Xanadu
And then in the Meadowlands of New Jersey there is 'Xanadu' (Xanadu). While the intent may have been to recreate Kublai Khan's stately pleasure-dome, this development appears to have more in common with the Charles Foster Kane's mansion. Xanadu is 2.4 mln sq ft and has a projected budget of $2.3 bln (NYTimes). It was originally scheduled to open in 2007 but that date got pushed back a number of times and the opening is now scheduled for sometime in 2010. The facility will have an 800 foot indoor ski slope. Sports store Cabela has a 202k sq ft store which will have a 40k gallon aquarium, life sized dioramas, running waterfalls and streams, etc. The development will also have a bowling alley, an 18 screen movie complex, a LegoLand Discovery Center, and a 3,400 seat theater. The anchor restaurant is a Cheesecake Factory(which seems a tad mundane given how over the top everything else is). The company has tried to focus on European and Latin American retailers with limited presence in the US. Stores include Zara and Mango, Deichmann (20k sq ft store), H&M, Children's place. The property still needs tenants - it claims to be 70% leased. With retail sales falling, retailers are closing stores and demanding more from lessors. Filling the remaining space on economically beneficial terms will be difficult.
The original project sponsor was the Mills Corporation. Mills was acquired by Simon Property Group and Farallon Capital in 2007 after $352 mln in accounting errors led the company to the brink of collapse. The new owners sold their interest in Xanadu to Colony Capital in 2007. In March, Colony Capital sued construction lender Xanadu Mezz Holdings, 'a nonbank affiliate of Lehman Brothers', accusing the company of defaulting on its commitment to lend money to the project. Xanadu Mezz had committed $208 mln of funding, but has only loaned out $125 mln. Xanadu says it is $22.9 mln short of its needs.
The new meadowlands giants stadium will open in 2010. In August, a train will start operating between the Meadowlands and Manhattan. The original developer had a sister project called Madrid Xanadu (madridxanadu).
The original project sponsor was the Mills Corporation. Mills was acquired by Simon Property Group and Farallon Capital in 2007 after $352 mln in accounting errors led the company to the brink of collapse. The new owners sold their interest in Xanadu to Colony Capital in 2007. In March, Colony Capital sued construction lender Xanadu Mezz Holdings, 'a nonbank affiliate of Lehman Brothers', accusing the company of defaulting on its commitment to lend money to the project. Xanadu Mezz had committed $208 mln of funding, but has only loaned out $125 mln. Xanadu says it is $22.9 mln short of its needs.
The new meadowlands giants stadium will open in 2010. In August, a train will start operating between the Meadowlands and Manhattan. The original developer had a sister project called Madrid Xanadu (madridxanadu).
Thursday, June 11, 2009
Commercial Real Estate
The US commercial real estate lending market is $3.2 trln in size (Reuters, FT, WSJ, Reuters, WSJ, Bloomberg). Banks hold $1.5 bln of CRE loans. Another $700 bln has been securitized in commercial mortgage backed securities. Insurance companies hold $285 mln and $500 mln is held by various parties including the GSEs. The global CRE market is $6.5 trln.
Wall Street sold $230 bln of CMBS in 2007, $10 bln in 2008, and zero in 2009. In 2004, there were $93.3 bln sold. A key problem in securitizing CRE mortgages is the lack of appetite for the lower quality tranches. Given the problems in the industry, nobody wants to be first in line to suffer losses. As long as the CMBS market remains closed, and banks are unwilling to lend, CRE borrowers that need to refinance are going to be in trouble.
There will be $15 bln of CMBS loans coming due in 2009, $42 bln in 2010, and $69 bln in 2011. DB says default rates on outstanding CMBS could hit 30% with loss rates of 13% (keeping in mind that CMBS issuance expanded dramatically during the weakest lending years of 2005-2007). Troubled loans rose 48% in Q1 to $23.7 bln. The delinquency rate hit 2.8% up from .47% at the end of 2007. CMBS losses after foreclosure have doubled to 72% this year. There have been 14 loans liquidated through May of this year. Office vacancies in the US rose from 13.3% a year ago to 15.5% in Q1.
In Q1, the default rate on commercial real estate loans held by banks hit 2.25% up from 1.62% in Q4. This is the largest quarterly increase since 1992 and the highest default rate since 1994. Analysts see the default rate rising to 4.1% by the end of 2009. This data does not include default rates on apartment buildings which rose from 1.77% to 2.45% in Q1, with a projected peak rate of 4.5% for the year.
Many have been hoping TALF would reinvigorate the market (prior post). The Fed has been quite selective in how TALF funds can be used for CMBS purchases. CMBS need to be rated AAA. The Fed will hire firms in the private sector to monitor the quality of CRE loans. TALF funds cannot be used for floating rate mortgages, construction loans, or properties without steady cash flow, etc. CMBS purchased with TALF funds have a larger haircut than other borrowing programs.
Two weeks ago, S&P warned that it was likely to downgrade tens of billions of AAA rated CMBS issued between 2005 and 2007 due to a change in its ratings methodology. Given the lax standards applied to mortgages during that period, the pending downgrade is no surprise. S&P's change has raised concerns of cascading downgrades as occurred in the RMBS market a year ago. Yields on AAA rated CMBS rose from 9.4% to 10.7% on the S&P news. Prices on top rated senior debt have fallen from 95 cents a year ago to 70 cents currently.
Troubled CMBS loans are taken over by special servicers. Servicers attempt to mediate between borrowers, lenders, and equity owners to limit losses and prevent foreclosures. Whereas standard practice allows servicers to extend loan maturities 6-12 months, servicers are now seeking the right to extend maturities up to 5 years.
Tax rules make it difficult for borrowers that are current on their loans to hold restructuring talks with CMBS servicers. The restructuring talks trigger a change in the status / value of the mortgage in the securitized trust and require taxes to be paid. The trusts are non-taxable, so this becomes a problem for investors. Treasury is considering issuing guidance to allow servicers to initiate talks as early as 2 years ahead of the maturity date of a loan. The change could be made in the next few weeks.
Much like the residential market, some commercial borrowers took out interest only mortgages on their properties. There were $179 bln of 'partial interest-only' loans written between 2005 and 2007 and packaged into CMBS. Of CRE mortgages sold to CMBS in 2007, 87% allowed borrowers to put off paying principal for several years or until the loan matured (i.e., full-term interest only loans). In 2004 interest only mortgages made up 48% of loans. The hope was that these loans would allow owners to improve and maintain their properties to enhance their value.
Prior to the housing bust bankers, analysts, economists, and government officials were in agreement that the fundamentals of residential housing were sound and the future looked bright. These same parties are now all predicting the imminent collapse of commercial real estate. While the fundamentals of CRE are abysmal, the fact that this is so well known ensures that banks, bondholders, and regulators will be bending over backwards to accommodate borrowers. Those that accept the 'green shoots' argument think it is only a matter of time until the CRE market rebounds. General Growth Properties blamed intransigent CMBS investors in part for its bankruptcy. There were rumors at the time that some investors had purchased Credit Default Swaps on GGP and then bought a small position in the bonds to force the company into bankruptcy. For some borrowers CMBS may prove to be their undoing.
My guess is that with accomodations made by lenders and regulators the CRE disaster will turn into a slow-motion train wreck - this could take years to play out. The longer it takes, the more muted its effects will be on banks, lenders, and the overall economy.
Wall Street sold $230 bln of CMBS in 2007, $10 bln in 2008, and zero in 2009. In 2004, there were $93.3 bln sold. A key problem in securitizing CRE mortgages is the lack of appetite for the lower quality tranches. Given the problems in the industry, nobody wants to be first in line to suffer losses. As long as the CMBS market remains closed, and banks are unwilling to lend, CRE borrowers that need to refinance are going to be in trouble.
There will be $15 bln of CMBS loans coming due in 2009, $42 bln in 2010, and $69 bln in 2011. DB says default rates on outstanding CMBS could hit 30% with loss rates of 13% (keeping in mind that CMBS issuance expanded dramatically during the weakest lending years of 2005-2007). Troubled loans rose 48% in Q1 to $23.7 bln. The delinquency rate hit 2.8% up from .47% at the end of 2007. CMBS losses after foreclosure have doubled to 72% this year. There have been 14 loans liquidated through May of this year. Office vacancies in the US rose from 13.3% a year ago to 15.5% in Q1.
In Q1, the default rate on commercial real estate loans held by banks hit 2.25% up from 1.62% in Q4. This is the largest quarterly increase since 1992 and the highest default rate since 1994. Analysts see the default rate rising to 4.1% by the end of 2009. This data does not include default rates on apartment buildings which rose from 1.77% to 2.45% in Q1, with a projected peak rate of 4.5% for the year.
Many have been hoping TALF would reinvigorate the market (prior post). The Fed has been quite selective in how TALF funds can be used for CMBS purchases. CMBS need to be rated AAA. The Fed will hire firms in the private sector to monitor the quality of CRE loans. TALF funds cannot be used for floating rate mortgages, construction loans, or properties without steady cash flow, etc. CMBS purchased with TALF funds have a larger haircut than other borrowing programs.
Two weeks ago, S&P warned that it was likely to downgrade tens of billions of AAA rated CMBS issued between 2005 and 2007 due to a change in its ratings methodology. Given the lax standards applied to mortgages during that period, the pending downgrade is no surprise. S&P's change has raised concerns of cascading downgrades as occurred in the RMBS market a year ago. Yields on AAA rated CMBS rose from 9.4% to 10.7% on the S&P news. Prices on top rated senior debt have fallen from 95 cents a year ago to 70 cents currently.
Troubled CMBS loans are taken over by special servicers. Servicers attempt to mediate between borrowers, lenders, and equity owners to limit losses and prevent foreclosures. Whereas standard practice allows servicers to extend loan maturities 6-12 months, servicers are now seeking the right to extend maturities up to 5 years.
Tax rules make it difficult for borrowers that are current on their loans to hold restructuring talks with CMBS servicers. The restructuring talks trigger a change in the status / value of the mortgage in the securitized trust and require taxes to be paid. The trusts are non-taxable, so this becomes a problem for investors. Treasury is considering issuing guidance to allow servicers to initiate talks as early as 2 years ahead of the maturity date of a loan. The change could be made in the next few weeks.
Much like the residential market, some commercial borrowers took out interest only mortgages on their properties. There were $179 bln of 'partial interest-only' loans written between 2005 and 2007 and packaged into CMBS. Of CRE mortgages sold to CMBS in 2007, 87% allowed borrowers to put off paying principal for several years or until the loan matured (i.e., full-term interest only loans). In 2004 interest only mortgages made up 48% of loans. The hope was that these loans would allow owners to improve and maintain their properties to enhance their value.
Prior to the housing bust bankers, analysts, economists, and government officials were in agreement that the fundamentals of residential housing were sound and the future looked bright. These same parties are now all predicting the imminent collapse of commercial real estate. While the fundamentals of CRE are abysmal, the fact that this is so well known ensures that banks, bondholders, and regulators will be bending over backwards to accommodate borrowers. Those that accept the 'green shoots' argument think it is only a matter of time until the CRE market rebounds. General Growth Properties blamed intransigent CMBS investors in part for its bankruptcy. There were rumors at the time that some investors had purchased Credit Default Swaps on GGP and then bought a small position in the bonds to force the company into bankruptcy. For some borrowers CMBS may prove to be their undoing.
My guess is that with accomodations made by lenders and regulators the CRE disaster will turn into a slow-motion train wreck - this could take years to play out. The longer it takes, the more muted its effects will be on banks, lenders, and the overall economy.
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