Published: September 30 2008 10:58 | Last updated: September 30 2008 10:58
The dollar advanced against the euro and the yen on Tuesday as US investors repatriated funds following the failure of the US government to push its $700bn financial rescue plan through Congress.
Adam Cole at RBC Capital Markets said weakness in global equity markets was not a reason to sell the dollar, despite the US being at the epicentre of the financial earthquake.
“The main reason for this is the massive accumulation of overseas stocks on the part of US investors over the last four years which is now almost certainly being reversed as cash flows back into dollars,” he said.
These flows were particularly strong from emerging markets, traders said.
Further signs that the effects of the credit crisis were spilling over across the globe also supported the dollar.
This trend was emphasised by news of a €6.4bn capital injection into Dexia, the Franco-Belgian lender, by the governments of Belgium, Luxembourg and France.
“One aspect of support for the dollar has been the evidence that the financial market turmoil that has so far been mostly contained to the US is now spreading,” said Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ.
The dollar rose 0.4 per cent to $1.4363 against the euro, climbed 1.1 per cent to Y105.10 against the yen and gained 0.9 per cent to SFr1.0992 against the Swiss franc.
The dollar also stood flat at $1.8060 against the pound.
However, analysts said the longer-term direction of the dollar was cloudier.
Maurice Pomery at IDEAGlobal said the US administration looked to be in disarray, raising questions over investor confidence in the US as the world’s banker.
He said the onus was now on the US to get a fast resolution to the wrangling in Congress, otherwise some global central central banks might feel that it was finally time to diversify away from the dollar.
For this reason, Mr Pomery said, custodial holdings of US assets by foreign central bank’s needed very close examination over the next few weeks.
“Any signs of large reductions could see a run on the dollar,” he said.
Elsewhere, a tentative stabilisation in European stocks saw the low-yielding yen give back some of Monday’s sharp gains.
The yen eased 0.6 per cent to Y150.88 against the euro and lost 1 per cent to Y189.64 against the pound.
Libor Rises Most on Record After U.S. Congress Rejects Bailout
By Gavin Finch
Sept. 30 (Bloomberg) — The cost of borrowing in dollars overnight rose the most on record after the U.S. Congress rejected a $700 billion bank-rescue plan, putting an unprecedented squeeze on the global financial system.
The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent today, the British Bankers’ Association said. The euro interbank offered rate, or Euribor, for one-month loans jumped to a record 5.05 percent, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, also increased to an all-time high.
“This is unheard of, the money markets should be the engine driving the financial system but they have broken down,” said Kornelius Purps, a fixed-income strategist in Munich for UniCredit Markets and Investment Banking, a unit of Italy’s largest lender. “Any institution that hasn’t completed its 2008 funding needs by now is going to be in very serious trouble. More banks are going to need to be bailed out.”
The seizure in the credit markets is tipping lenders toward insolvency, forcing U.S. and European governments to rescue five banks in the past two days, including Dexia SA, the world’s biggest provider of loans to local governments, and Wachovia Corp. Money-market rates climbed even after the Federal Reserve yesterday more than doubled the size of its dollar-swap line with foreign central banks to $620 billion. In Europe, banks borrowed dollars from the ECB at almost six times the Fed’s benchmark interest rate today.
Commercial Paper
Libor, set by 16 banks including Citigroup Inc. and UBS AG in a daily survey by the BBA, is used to calculate rates on $360 trillion of financial products worldwide, from credit derivatives to home loans and company bonds.
As money-market rates rise, banks charge higher interest on loans to companies and consumers. U.S. securities firms and lenders alone have a record $871 billion of bonds maturing through 2009, according to JPMorgan Chase & Co.
Yields on overnight U.S. commercial paper jumped 171 basis points today to an eight-month high of 3.95 percent, according to data compiled by Bloomberg. Average rates on paper backed by assets such as credit cards and auto loans rose 229 basis points to 6.5 percent, the highest since 2001. Companies sell commercial paper to help pay for day-to-day expenses such as salaries and rent.
Funding constraints are being exacerbated as financial companies try to settle trades and buttress balance sheets over the quarter-end, balking at lending for more than a day.
ECB Injection
The Frankfurt-based ECB said it lent banks $30 billion for one day at a marginal rate of 11 percent, 900 basis points above the Fed’s key rate of 2 percent. The ECB said it received bids for $77.3 billion. The Bank of Japan injected more than 19 trillion yen ($182 billion) into the country’s system over the past two weeks, the most in at least six years. The Reserve Bank of Australia pumped in A$1.95 billion ($1.6 billion) today.
In the year before the turmoil in money markets began in July 2007, the Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, never exceeded 15 basis points. It was a record 250 basis points today.
“The money markets have completely broken down, with no trading taking place at all,” said Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt. “There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.”
Asian Rates
Borrowing rates rose in Asia earlier today. The three-month interbank offered dollar rate in Singapore jumped to an eight- month high of 3.90 percent. The three-month rate in Hong Kong rose by the most in almost a week to 3.664 percent. The difference between the rate Australian banks charge each other for three-month loans and the overnight indexed swap rate reached 98 points, close to a six-month high.
Financial institutions have posted almost $590 billion of writedowns and losses tied to U.S. subprime mortgages since the start of last year, according to data compiled by Bloomberg.
Dexia got a 6.4 billion-euro ($9.2 billion) state-backed rescue, Belgian Prime Minister Yves Leterme said today. Yesterday, the U.K. Treasury seized Bradford & Bingley Plc, Britain’s biggest lender to landlords, while governments in Belgium, the Netherlands and Luxembourg extended a lifeline to Fortis, Belgium’s largest financial-services firm. Elsewhere, Hypo Real Estate Holding AG received a loan guarantee from Germany, and Iceland agreed to rescue Glitnir Bank hf.
`New Extreme’
“Counterparty fear in the banking sector is at a new extreme,” said Greg Gibbs, director of currency strategy at ABN Amro Holding Bank NV in Sydney. “Credit conditions are as tight as a drum. Unless this settles down, central banks would need to cut rates globally to bring funding costs down.”
Congress’s rejection of the U.S. government’s bank-rescue plan yesterday prompted traders to fully price in a cut in the Fed’s target rate of at least a quarter point next month, futures on the Chicago Board of Trade showed. The odds were zero percent a month ago.
The difference between what banks and the U.S. Treasury pay to borrow money for three months, the so-called TED spread, was at 352 basis points today after breaching 350 basis points for the first time yesterday. The spread was at 110 basis points a month ago.
“We can be sure that funding pressures are not going to ease while there is so much uncertainty,” said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., part of the world’s largest inter-bank broker. “Cash is going to be at a premium. There’s really no end in sight.”
Lehman Affiliates Sued by Bank of America for $500 Million
By Lindsay Fortado
Sept. 30 (Bloomberg) — Bank of America Corp. sued three Lehman Brothers Holdings Inc. affiliates for $500 million, claiming they refused to return money the bank provided as collateral for derivative transactions.
The affiliates of Lehman Brothers, which filed the largest bankruptcy in U.S. history on Sept. 15, told Bank of America the assets were frozen, according to the lawsuit filed Sept. 26 in New York state court in Manhattan.
Lehman Brothers Commodity Services Inc. has $51.7 million in collateral supplied by Bank of America, Lehman Brothers Special Financing Inc. has $356.7 million and Lehman Brothers Finance SA has $59.6 million, according to the suit. The entities aren’t in bankruptcy, Bank of America said.
“The Lehman entities have attempted to mislead BoA by implying that they are prevented from disbursing the collateral as a result of their ultimate parent’s Chapter 11 proceedings,” Charlotte, North Carolina-based Bank of America said in the complaint.
Nomura Global Financial Products Inc. and Aeterno Master Fund LP sued Lehman Brothers Special Financing Inc. separately yesterday in the same court. Nomura seeks 58 million euros ($84 million) and Aeterno is suing for $14 million.
Lehman spokesman Mark Lane declined to immediately comment.
The cases are Bank of America NA v. Lehman Brothers Commodity Services Inc., 08602793/2008; Aeterno Master Fund LP v. Lehman Brothers Special Financing Inc., 08602815/2008; and Nomura Global Financial Products Inc. v. Lehman Brothers Special Financing Inc., 08602814/2008, New York State Supreme Court (Manhattan.
By John Murray-Brown in Dublin and Neil Dennis in London
Published: September 30 2008 07:37 | Last updated: September 30 2008 11:54
Ireland’s government on Tuesday unveiled a wide-ranging guarantee arrangement to safeguard the deposits and debts at six financial institutions in response to turmoil in the financial markets.
The scheme, which guarantees an estimated €400bn of liabilities, covers retail, commercial and inter-bank deposits as well as covered bonds, senior debt and dated subordinated debt. Most depositors were already covered by an existing deposit insurnace scheme, for up to €100,000. But Tuesday’s initiative was primarily aimed at easing the banks’ short-term funding, which had seized up in recent days.
Shares in the three biggest banks rose sharply after the government announced the immediate start of the scheme, which expires in September 2010, for the deposits in Allied Irish Banks, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society and the Educational Building Society.
Allied Irish Banks climbed 20 per cent to €5.95 in early Dublin trading, Anglo Irish Bank jumped 41.3 per cent to €3.25 and Bank of Ireland gained 19.3 per cent to €3.90.
”The guarantee is being provided at a charge to the institutions concerned and will be subject to specific terms and conditions so that the taxpayers’ interest can be protected,” the government said in a statement.
Brian Lenihan, the finance minister, said the guarantee would make it easier for Irish banks to access funds. ”Since the collapse of several institutions in the US, it has been very difficult to access funds on international markets for Irish banks,” he said. “This will present real problems for the Irish economy if it is not addressed.”
The government moved after Irish banks suffered their biggest one-day fall in share price for two decades on Monday.
Anglo Irish Bank, the specialist property lender, plunged 45 per cent while Irish Life and Permanent, the bancassurer and the Republic’s largest mortgage provider, fell 34 per cent. Allied Irish Banks weakened nearly 16 per cent and Bank of Ireland lost 15 per cent.
Ireland was once dubbed the Celtic tiger economy and seen as a model for the accession states of the European Union. With its construction and property markets stalling, last week it became the first country among the 15 members of the euro single currency area to declare it was officially in recession.
The Paulson Plan addresses market illiquidity for toxic assets but the real problem is a lack of bank capital and the risk of widespread insolvency. Fixing this requires a government injection of new bank capital or a forced conversion of bank debt into equity. This column argues against the former as it would further socialise the US financial system. The Package needs some work, but Congress must stop its infantile posturing and act soon.
The Paulson plan addresses market illiquidity….
The Paulson plan for using up to $700 bn of federal government money to buy up illiquid securities – mainly complex financial instruments such as asset-backed-securities, and in particular private label retail mortgage backed securities – represents an incomplete step towards dealing with the simplest part of the financial disaster that is threatening to engulf the US financial sector and, with a short lag, the real economy.
Paulson’s TARP (Troubled Assets Relief Program), which I prefer to call TAD (Toxic Asset Dump) is a program designed to deal with market illiquidity. It is the most extreme manifestation of the authorities acting as what Anne Sibert and I have called market maker of last resort (MMLR) for systemically significant assets whose markets have become illiquid.
The MMLR supports market prices when either there is no market price or when there is a large gap between the actual market price of the asset, which is a fire-sale price resulting from a systemic lack of cash in the market, and the fair or fundamental value of the asset – the present discounted value of its future expected cash flows, discounted at the discount rate that would be used by a risk-neutral, non-liquidity-constrained economic agent (e.g. the government).
The MMLR can do this either by accepting the illiquid security as collateral for a loan or by purchasing it outright. The central bank can, in principle, act as MMLR when the support actions involve just collateralised lending, at the discount window, in repos or at purpose-designed liquidity facilities like the TAF (the Term Auction Facility), the PDCF (the Primary Dealer Credit Facility and the TSLF (Term Securities Lending Facility), but two conditions must be satisfied. First, ex-ante, the terms of the collateralised loan must be such as to give the central bank an adequate risk-adjusted rate of return (in excess of the rate on Treasury bills or bonds of the same maturity). It is not the job of the central bank to subsidise the borrowing bank ex-ante. Second, should the collateralised loan default (that is, both the borrowing bank and the issuer of the collateral default at the same time), the Treasury guarantees to indemnify the central bank automatically and immediately.
Outright purchases of illiquid private securities would expose the central bank to the full default risk on the security it purchases. That means, in my view, that this is no job for the central bank, except as agent for the government. The central bank can manage the transactions on behalf of the Treasury, but it is the Treasury, and behind it the tax payer, that carries the credit risk.
It is possible for the Treasury, through the outright purchase of illiquid toxic private assets both to help the banks selling the toxic securities and the tax payer. This would be the case if it prices the securities it purchases above their fire-sale market prices but below their fundamental values. It is of course difficult to determine, when markets are illiquid, what the present discounted value of the future cash flows of a security is, even if the purchaser can always choose to hold the security till maturity, as the Treasury can. Even if the fundamental value could be determined somehow, I doubt whether the bulk of the US banking system could survive even with their illiquid assets priced at their fundamental value.
But the real problem now is lack of capital and the threat of widespread insolvency in the banking sector
As the full horror story of the bad investments and bad loans made by so many American banks has gradually been revealed, it is clear that the US banking sector faces an insolvency crisis and not just an illiquidity crisis. The number of impaired mortgages is exploding, and not just in the subprime and Alt-A categories, but across the whole residential mortgage spectrum. Impaired commercial and industrial mortgages are rising fast. Bad loans to the construction industry and to developers are mushrooming. ABS backed by automobile loans, by credit card receivables are tottering in growing numbers as are many other unsecured household loans. With the economy slowing down and probably entering recession soon, even exposures to the non-financial corporate sector will become more vulnerable.
In a nutshell, the US banking sector needs recapitalisation. “Banking sector” here includes the entire ‘shadow banking sector’, including such entities as the financial instruments division of AIG, that leveraged itself to the eyeballs and engaged in massive maturity and liquidity transformation. It needs to shrink overall (as regards employment, value added and especially as regards the number of banks and their leverage), but the much reduced number of banks that ought to survive this crisis badly need additional capital.
Where can American banks get additional capital today? A very few – really only the best-of-breed like Goldman Sachs, which raised $5 billion each from Warren Buffett (through his company Berkshire Hathaway) and from the issuance of new shares to American institutional investors – can get the capital they need at home, in the US; and even then it is expensive (I must declare an interest here – I am a part-time Adviser to Goldman Sachs International). Another possible source of new capital are the nouveaux riches of the Middle East and the Far East – the Sovereign Wealth Funds and large state-owned banks of China, Singapore, Korea and the Gulf States. The supply of capital from these sources is restricted by the rather disastrous (on a marked-to-market basis) first attempts late in 2007 and early in 2008 at diversifying out of Treasuries by these new deep pockets of the future. No doubt they will be back – these institutions take a long-term perspective and are unlikely to become the hapless captives of mark-to-market valuation, but the speed with which they gird their loins is unlikely to match the speed with which the current crisis moves.
That leaves just two sources of capital. The first is the US federal government. It could inject capital into US banks, say by purchasing preference shares. I would uncouple such a capital injection from Paulson’s toxic asset purchase plan. The market illiquidity problem is related to but not the same as the banks’ capital deficiency problem. The government could implement a system-wide capital injection by specifying maximum leverage ratios (or minimum capital ratios) for various categories of financial institutions. It could then inject capital in return for preference shares to bring all these leverage ratios down to the maximum levels (all the capital ratios up to the minimum levels).
My main concern about this way of injecting additional capital is that it would take the socialisation of the US financial system yet a step further. Governments may be able to run the deposit-raising side of an ordinary commercial bank. For the government to decide on other funding strategies, let alone on desirable lending and investment strategies is a bridge I hope not to cross.
Preferred solution: mandatory debt for equity conversions
Finally, there is my preferred solution to the capital deficiency problem: the compulsory conversion of some of the banks’ debt into equity. Again, this could be done by the government specifying maximum leverage ratios (or minimum capital ratios) for various categories of financial institutions. Different kinds of debt then would be mandatorily converted into equity (preference shares or ordinary shares) with the proportion of each category of debt to be converted into stock inversely related to the seniority of the debt. These proportions would have to satisfy the requirement that all leverage ratios be brought down to the maximum levels (all capital ratios up to the minimum levels). There are infinitely many ways of skinning this cat, but it will not be difficult to produce a simple and fair solution.
In the mean time, the Congress fiddles while the financial sector burns…
Given the extreme urgency of the situation, the response of the US Congress has been truly astonishing.
The House and the Senate are acting as if this is politics as usual. Some grandstanding here. The threat of delays or even a filibuster. Amendments and modifications that range from the revoltingly populist to the terminally stupid with the disgustingly opportunistic and self-serving in between.
Admittedly, Secretary Paulson laid an egg by including the following phrase in his proposal: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law of any administrative agency”. This reads as though it was personally written by Dick Cheney, the prince of absolute executive authority, no checks and balances, no accountability, no recourse. No administration that brought us WMD in Iraq and the torture camps of Guantanamo Bay and Abu Ghraib should expect anything but hysterical giggles in response to such a request. Not smart.
So, let’s put in accountability and oversight and make sure than Paulson cannot donate $700bn to Nature Conservancy. But then let’s pass the plan.
Ornaments to hang on the Paulson “Christmas tree”
Instead consider some of the ornaments Congress wants to hang on the Christmas tree:
·Caps on the executive remuneration for executives of companies making use of the facility created under the plan. A figure of $400,000 has been bandied about. From the perspective of fairness, 25 cents would probably too much for some CEOs. Indeed, tarring, feathering and running out of town may well be justified in certain cases. But it would stop the banks from making use of the facility for the very reasons that make the Congress want to punish the CEOs of the banks. If it is true, as many in Congress argue, that greedy and irresponsible CEOs have risked their banks, and imperilled the wellbeing of their communities and the stability of the US economy as a whole, in the pursuit of private gain, then these same CEOs would surely once again risk their banks, imperil the wellbeing of their communities and the stability of the US economy as a whole to avoid the $400,000 cap. “Duh”, as my two teenage kids would say. I know there are too many lawyers in Congress, but surely there must be someone with half a brain?
·Amendments to (personal) bankruptcy laws making it easier for homeowners who cannot service their existing mortgages to remain in their homes rather than face repossession. This would be both inequitable (why should tax payers who stuck to mortgages they can afford be asked to subsidise the mortgages of those whose eyes were larger than their stomachs?) and inefficient (it would discourage future mortgage lending). Individual homeowners are also not important for systemic stability.
·Other cookies and goodies for those with mortgages they cannot afford to service (see the previous bullet point).
·Equity stakes for the government in the banks it purchases toxic assets from. This also would discourage banks from accessing the facility, if the acquisition of equity by the government represents a transfer from the bank rather than the quid-pro-quo for a capital injection by the government.
·Warrants for the government (options to acquire equity in the banks during some period at a set price). See the previous bullet point.
Conclusion
Since the invention of the telegraph, panics and crises spread at the speed of light. Congress doesn’t have weeks. It doesn’t have too many days, as I see it. Unless it acts now, the freeze of the financial wholesale markets will intensify and the attacks on financial institutions will resume, first in the US, then in the UK, then in the rest of Europe and soon after everywhere in the financially connected world. Short selling restrictions/bans won’t help.
If Congress continues its infantile posturing, the crisis of the financial system will mutate into a financial crisis paralysing lending by banks to households and non-financial corporations. Instead of a mere recession, there will be a long and deep depression.
At this stage of the game, liquidity concerns, while still omnipresent, have become the epiphenomena of underlying solvency problems in the financial sector. The US banking sector is seriously undercapitalised. The UK banking sector too is undercapitalised and so, albeit to a lesser-known degree (because of much impaired transparency) are the banking systems of the other European nations. Central banks therefore no longer play the lead part. The national treasuries (ministries of finance) backed by the tax payers and the beneficiaries of other public spending programs are taking centre stage. Unless plans to recapitalise systemically important institutions and to support systemically important financial markets are backed with the full faith and credit of the US Federal Government and the other governments in the North Atlantic Region, the coming year will be one to forget.
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Buyout firms>Bain Capital LLC</b> and <b>Hellman & Friedman LLC</b> agreed Monday, Sept. 29, to buy <b>Lehman Brothers Holdings Inc.</b>’s Neuberger Berman LLC, as well as its fixed-income and alternative asset businesses, for $2.15 billion.</p> <p>Talks plowed through the weekend and into Monday morning before a deal was struck, according to a source.</p> <p>The price tag is about half of recent expectations, but a couple of the pieces that had then been factored into the sale were not included.
One of them was Lehman’s North American investment bank and brokerage assets, which <b>Barclays Capital Inc.</b> bought for $1.54 billion on Sept. 22, only a week after the Lehman parent collapsed into Chapter 11. </p> <p>Also excluded from the agreement is its buyout business, Lehman Brothers Merchant Banking, which now looks likely to be spun off. Led by Charles Ayres, global head of LBMB, the unit closed a $3.3 billion-plus fund in June 2007. </p> <p>Other major private equity businesses involving real estate and venture capital, as well as hedge fund stakes and limited partner investments, were also left out.</p> <p>Moreover, the liquidity crisis likely had an impact on the price. The deal is being financed entirely with equity, which put a limit on what the sponsors could offer, according to a source. </p> <p>Large traditional leveraged buyouts have come to a halt as the government scrambles to piece together a bailout package for Wall Street. On Monday afternoon, the House of Representatives shot down a $700 billion proposal hammered over the weekend, delaying hopes that lending will soon loosen up.</p> <p>A Bain spokesman declined to comment. A spokesman for Hellman did not immediately respond.</p> <p>The deal with the sponsors will create an investment management firm, named Neuberger Investment Management, with more than $230 billion of assets under management as of Aug. 31. </p> <p>Crown jewel Neuberger Berman is the largest piece of the new company, though at its core will also be Lehman’s fixed-income business, Lehman Brothers Asset Management, as well as certain alternative assets. </p> <p>The package includes the bank’s hedge fund and private equity fund-of-funds business, secondary private equity investments and private equity startups in infrastructure and mezzanine debt. </p> <p>Lehman’s global head of investment management, George Walker, will become CEO of Neuberger Investment Management, while Joe Amato will continue to head Neuberger Berman. Also, Michael Odrich and Tony Tutrone, who respectively lead the bank’s private equity and private funds investment group, are joining the new company.</p> <p>Portfolio managers will own a ??significant?? stake in Neuberger Investment Management, according to the announcement. </p> <p>The sale, expected to close by early 2009, will require bankruptcy court approval.</p> <p>It is unclear whether Lehman’s $450 million debtor-in-possession loan, which is guaranteed by Neuberger, is reflected in the $2.15 billion valuation.</p> <p>For legal advice, the sponsors tapped <b>Ropes & Gray LLP</b>’s Alfred Rose, R. Newcomb Stillwell, William Shields, William Mone, Joseph Miller, Mark Bane, Steven Hoort and Anne Pak. </p> <p><b>Willkie Farr & Gallagher LLP</b> provided regulatory advice to Neuberger. </p> <p>Separately, EDF Trading, a unit of French utility<b> Electricité de France SA</b>, said Monday it agreed to buy <b>Eagle Energy Partners I LP</b> from LBMB for an undisclosed sum. </p> <p>Eagle Energy, which manages supply, transportation, transmission, load and storage portfolios for wholesale natural gas and power customers, is a portfolio company of Lehman’s third buyout fund. <p> <i> — Vyvyan Tenorio and Claire Poole contributed to this report.</i></p>” type=”hidden” />
Buyout firms Bain Capital LLC and Hellman & Friedman LLC agreed Monday, Sept. 29, to buy Lehman Brothers Holdings Inc.’s Neuberger Berman LLC, as well as its fixed-income and alternative asset businesses, for $2.15 billion.
Talks plowed through the weekend and into Monday morning before a deal was struck, according to a source.
The price tag is about half of recent expectations, but a couple of the pieces that had then been factored into the sale were not included.
One of them was Lehman’s North American investment bank and brokerage assets, which Barclays Capital Inc. bought for $1.54 billion on Sept. 22, only a week after the Lehman parent collapsed into Chapter 11.
Also excluded from the agreement is its buyout business, Lehman Brothers Merchant Banking, which now looks likely to be spun off. Led by Charles Ayres, global head of LBMB, the unit closed a $3.3 billion-plus fund in June 2007.
Other major private equity businesses involving real estate and venture capital, as well as hedge fund stakes and limited partner investments, were also left out.
Moreover, the liquidity crisis likely had an impact on the price. The deal is being financed entirely with equity, which put a limit on what the sponsors could offer, according to a source.
Large traditional leveraged buyouts have come to a halt as the government scrambles to piece together a bailout package for Wall Street. On Monday afternoon, the House of Representatives shot down a $700 billion proposal hammered over the weekend, delaying hopes that lending will soon loosen up.
A Bain spokesman declined to comment. A spokesman for Hellman did not immediately respond.
The deal with the sponsors will create an investment management firm, named Neuberger Investment Management, with more than $230 billion of assets under management as of Aug. 31.
Crown jewel Neuberger Berman is the largest piece of the new company, though at its core will also be Lehman’s fixed-income business, Lehman Brothers Asset Management, as well as certain alternative assets.
The package includes the bank’s hedge fund and private equity fund-of-funds business, secondary private equity investments and private equity startups in infrastructure and mezzanine debt.
Lehman’s global head of investment management, George Walker, will become CEO of Neuberger Investment Management, while Joe Amato will continue to head Neuberger Berman. Also, Michael Odrich and Tony Tutrone, who respectively lead the bank’s private equity and private funds investment group, are joining the new company.
Portfolio managers will own a “significant” stake in Neuberger Investment Management, according to the announcement.
The sale, expected to close by early 2009, will require bankruptcy court approval.
It is unclear whether Lehman’s $450 million debtor-in-possession loan, which is guaranteed by Neuberger, is reflected in the $2.15 billion valuation.
For legal advice, the sponsors tapped Ropes & Gray LLP’s Alfred Rose, R. Newcomb Stillwell, William Shields, William Mone, Joseph Miller, Mark Bane, Steven Hoort and Anne Pak.
Willkie Farr & Gallagher LLP provided regulatory advice to Neuberger.
Separately, EDF Trading, a unit of French utility Electricité de France SA, said Monday it agreed to buy Eagle Energy Partners I LP from LBMB for an undisclosed sum.
Eagle Energy, which manages supply, transportation, transmission, load and storage portfolios for wholesale natural gas and power customers, is a portfolio company of Lehman’s third buyout fund.
— Vyvyan Tenorio and Claire Poole contributed to this report.
Dexia gets $9B injection by Renee Cordes
Updated 06:35 AM EST, Sep-30-2008
Belgium, France and Luxembourg on Tuesday, Sept. 30, unveiled a €6.4 billion ($9.2 billion) bailout package for Dexia SA as the global financial crisis forced another European lender to its knees.
The capital boost for the world leader in public-sector financing will come from Belgium’s federal and regional governments, the French government and state-controlled fund manager Caisse des Dépôts et Consignations, the Luxembourg government, and Dexia’s largest institutional shareholders.
“Our ambition was to have a very strong political involvement in order to send a signal to the markets,” Belgian Prime Minister Yves Leterme told reporters in Brussels. “This action is correct, strong, and contains opportunity.”
Separately, Dexia announced the resignation of chairman Pierre Richard and CEO Axel Miller, citing the impact of the financial crisis on the group. The duo have agreed to stay on until their successors have been appointed.
The Dexia rescue package was widely expected and came a day after its shares tanked 30% in their steepest decline since the stock began trading nearly 12 years ago. The stock, which was suspended from trading Tuesday, has shaved 54.2% this year.
Dexia said the capital injection translates into about €9.90 per share, or the average closing price over the past 30 days. Few details were released on how the capital injection would be carried out though the parties said the Luxembourg government will invest euro 376 million in convertible bonds.
In a statement, Dexia said the €6.4 billion will allow it to remain one of Europe’s better-capitalized banks even when taking account of potential negative impacts resulting from market volatility and a further deterioration in the portfolio of Financial Security Assurance Inc., Dexia’s New York-based bond unit.
Dexia is the fifth European lender to receive a government rescue package so far this week.
Within the past day, the three Benelux governments agreed a €11.2 billion lifeline to Dutch-Belgian group Fortis NV/SA; Germany ponied up €35 billon for property lending specialist Hypo Real Estate Holding AG; the U.K. nationalized mortgage lender Bradford & Bingley plc, having sold the best assets to Spain’s Banco Santander SA; and the Icelandic government agreed to pay €600 million for 75% of Glitnir Bank hf.
Dexia Group was created in 1996 from the alliance of Crédit Communal de Belgique and Crédit Local the France, one of the first cross-border banking mergers in Europe.
Today, Dexia is the world’s top lender to local governments, with branches or subsidiaries in 26 countries. The company has been overstretched after propping up its FSA bond unit.
In August, Dexia pledged $300 million to FSA after provisions related to the subprime mortgage crisis led to losses at the unit. Dexia agreed a $5 billion credit line in June, and invested $500 million into the unit earlier this year.
On Tuesday, Dexia said that it would convert its $5 billion credit line granted to FSA’s Financial Products asset management subsidiary in June would be converted into an equally sized repo facility, “hence significantly reducing the risk profile.”
Earlier this month, Dexia said it expected losses of about $350 million related to senior bond exposure to Lehman Brothers Holdings Inc.
A Delaware judge issued an opinion late Monday refusing to allow private-equity firm Apollo Management LP to walk away from its $6.5 billion acquisition of Huntsman Corp.
Vice Chancellor Stephen Lamb of the Delaware Court of Chancery ruled that Apollo-owned Hexion knowingly and intentionally breached numerous of its covenants under the merger contract, and ordered Hexion to honor its obligations under the deal.
“We’re absolutely elated with the ruling,” said Huntsman Chief Executive Peter Huntsman. “Hexion acted very badly, and reading through the judge’s opinion it’s clear that Apollo was mastermind behind the misdeeds here.”
“We are disappointed by the court’s decision,” said a Hexion spokeswoman. “We are reviewing the decision and our options.”
In July 2007, just before the credit crunch hit, Hexion struck a deal to buy Huntsman at $28 a share. In June, the New York buyout firm filed suit against Huntsman. It asked the Delaware Court of Chancery to kill the transaction because a combined Hexion-Huntsman would be insolvent, preventing the financing banks from lending the $15.35 billion in financing that would fund the deal.
Apollo also said that a deterioration in Huntsman’s business constituted a “material adverse effect,” which also excused the firm from closing the deal. Vice Chancellor Lamb ruled that weakness in financial performance didn’t constitute a material adverse effect on Huntsman’s business.
“The court recognizes that there remain substantial obstacles to closing the transaction,” said Vice Chancellor Lamb. “Despite these obstacles,” the judge ordered Hexion to use its best efforts to close the transaction at the $28 deal price.
Huntsman was down 15% to $7.35 at 4 p.m. in composite trading on the New York Stock Exchange.
The judge roundly criticized Apollo’s actions, including the so-called insolvency opinion it obtained from advisory firm Duff & Phelps that it used as a legal basis for its claim that it could walk away from the deal because it couldn’t obtain financing. Vice Chancellor Lamb deemed the opinion “unreliable” because it “was produced with the knowledge that the opinion would potentially be used in litigation, was based on skewed numbers provided by Apollo, and was produced without any consultation with Huntsman management.”
It is far from clear that the deal can get done in the current market environment. The court essentially said figuring that out is Apollo’s problem.
“When it is known whether the financing contemplated by the commitment letter is available or not,” the judge wrote in his 89-page opinion, “Hexion and its shareholders will thus be placed in the position to make an informed judgment about whether to close the transaction . . . and, if so, how to finance the combined operations.”
Attention in the case will now likely focus on Deutsche Bank AG and Credit Suisse Group, the banks that agreed to finance the deal. Huntsman recently hired its own valuation firm, American Appraisal, which determined that the merger would result in solvent company. The chemical company has said that the banks would honor their lending commitments for the merger if they were delivered a solvency opinion.
The ruling comes at an unpropitious time for Apollo, which is prepping a public listing on the NYSE. Apollo also has struggled with poor performance of a number of portfolio companies in its cornerstone buyout business.
Huntsman has filed a separate suit against Apollo in Texas state court. Weeks before agreeing to the Apollo deal, Huntsman struck a deal to be bought by Basell Holdings BV for $25.25 a share. Huntsman alleges Apollo illegally interfered with that deal.
