panda
What else? Gold.
NOW THAT'S PUTTING A POSITIVE SPIN ON IT!
http://biz.yahoo.com/finance/971127/problem_loans_at_big_1.html
Earl: The late Senator Everett Dirkson could not have said it any better than you did!
All: When the "powers that be" - whoever they are - start attacking the derivatives traders, then you know there is trouble ahead. Wonder where all of these fellows were when there was a call to regulate world-wide derivatives trading months ago.
No one wants to put up the intersection street light until after the accident. I guess that is human nature.
Isn't it frustrating that Lyndon Larouche has been warning about this for over 6 months, but nobody listened? If he didn't have such crazy ideas, perhaps more might have!
Best wishes to everyone at Kitco downunder and upover -- regardless of whether Thanksgiving is part of your world or not!
Vronsky: Saw your post on Lincoln's 1863 Thanksgiving Proclamation. His words are as appropriate now as they were then. Would that he were here now.
All: I think we all need to remember that investing in gold is only part of what we must do to prepare for the coming rainy day -- we must also reaffirm our ties with one another -- and with that mysterious Being in the Universe that made us all!
I guess that I would classify myself as a Goldbug. I too beleive in the virtues of the yellow metal. I just like to make sure that I'm not deluding myself.
Just as an example; The Privateer is a goldbug. I think his pages are excellent but he did get it wrong with the October rally and the spot price thereafter. I'm suggesting that perhaps his belief in the virtue of the metal pre dispossed him to the more optimistic gold scenarios.
I will continue to ask questions, and I will continue to look forward to your replies and anyone else's who can be bothered. Just trying to absorb as much information as possible from people more in the know than me while keeping my feet on the ground.
How do you organise these posts? Or do you just have a most amazing memory??!
Time now for me to get some order into my Kitco life....and any suggestions are most welcome!
URLS ex Kitco have reached huge proportions, but I've realised that a great deal of Kitcoites' postings have far more value than a a lot of those sites.
Take care- always good to see you.
Update: 1997, 4th largest bank in Japan folds.
295.75/296.25 dlrs
What happens when gold goes to ~$42/oz. ? Does the Treasury ( U.S. ) step in to support the price? :- ) )
Patience. Currencies will tumble one by one. The stock market players will taken by 'surprise' as they were about a year and half ago. They dodged the bullet that time. This time they may not be so lucky. As Clint Eastwood would say, "So, do you feel lucky? Punk."
There will be no instant gratification in gold, yet. It will probably head lower until some major currency snaps. At that point, there will be no exiting the markets. The doors will be locked and someone will be yelling, "Fire!"
To reiterate, the U.S. public doesn't care about gold. They are preoccupied with stock market profits and greed. When fear takes hold, it will know no price. The Euro will be looked upon as a way of avoiding the currency risk considerations when investing in Europe. Will it work?
Probably not, but who knows for sure?
As to the IMF, what are they going to do? Bailout the whole world? :- ) ) The era of competing currency devaluations are here. Watch for the 'Big Three Auto Makers' to be heading to Washington to complain about 'unfair' advantages ( read currency exchange rates... ) . Tick-tock, tick-tock, tick-tock.......
Anyone notice how Clinton doesn't look so good these days??
Happy Thanksgiving to everyone in the U.S. Off to eat the bird!!!! ( Sorry Ted, I have to enjoy the fruits of my 'crime' :- ) )
Happy day DUDE!! And also to all the other non-dead-flesh-eating celebrators. h M!!
AWAY.........to the celebration and football ( for the diehards )
stuffinghimselfwithwhatevercrosseshisplateandglassandturningofftheputerohmy...........
cheers down under....eh OZ/NZ's?? i enjoyed your banter night of last...
Read your book in 1995 and acted on it. Although I missed the last dramatic up market move, I felt it was a prudent thing to protect my family from major financial risk and still feel this way today. I started my trial subscription of your newsletter in November. You are truly professional and sincere. There is something I would like to ask. News has been reporting that many central banks over the world consider selling gold for better return. I am a layman to monetary policy and finance, but that notion makes me wonder. I thought the critical functions of a nation's central bank were to regulate the monetary system and maintain economic order instead of seeking better return. Otherwise, central banks can just buy each other's bonds and earn good returns. Is this a symptom of complacency or we are now truly moving into a new era of credit based universe? Best Regards --W. Hwang
Reply from Bob Prechter "it's the former."
Love to the family! Thanksgiving Blessings. ( ;-@
BTW, amino acid matrix of fowl is about 50%, fish rates a 70%, egg albumin around 90% match. You need those ten essential amino acids and vitamin B12 ( cobalomine ) that does NOT occur in plants or plant proteins in any meaningful quantities. Hence, vegetarians need supplements, otherwise you will be deficient in key nutrients for your immune system... Enough of the medicine side show for now... :- )
Real estate is driven by available jobs, period! If there's no work, housing starts/sales go down the tubes. The time to own real estate is when the economy is beginning to recover from a recession, interest rates begin to fall, and jobs are being created. This currency fiasco will torpedo real estate. Interest rates will be the culprit along with job losses due to trade wars.........
Oddly enough, lately I've noticed a lot of Red Tail Hawks in the area. About two years ago, I had the somewhat rare privilage of seeing one hawk attack two robins. In less than a minute, there was only one robin left flying. I assume the other one got eaten by the hawk. There was an 'explosion' of feathers in a tree that the robin had ducked in to for safety... Apparently it wasn't as safe as the robin thought. I wonder, is there a moral to this story?
Trees are green after all.... ( sort of like the dollar? ) :- ) )
implementation of the program are solved, a U.N. official said Thursday.
Iraq also ruled out allowing U.N. weapons inspectors into its presidential palaces to search for forbidden weapons.
"We understand that the government of Iraq is not prepared to discuss a third phase of the oil-for-food program until the issues
raised by them ... are effectively met," Eric Falt, spokesman for Iraq's U.N. relief coordinator, told Reuters.
Iraq was concerned with what it said was the slow approval of contracts under the deal and issues related to letters of credit
and delivery of humanitarian items, he said, adding: "But I would like to stress that this is not something we can discuss at our
end."
http://www.yahoo.com/headlines/971127/news/stories/iraq_12.html
biggest challenge: a full-blown credit crunch. No big bond issues will be done
for the rest of the year, spreads on outstanding bonds have gone haywire and
trading has ground to a halt. Local sources of credit have also dried up.
Corporate borrowers can expect little help from their bankers; devaluation has
blasted a hole in many local banks' balance sheets and they have no money to
lend even if they wanted to. Peter Lee reports on the likely shape of things to
come
Investment bankers are a tough breed, more used to hard negotiations and aggressive
trading than to dealing with delicate human emotions. So the Asian capital-markets
chief of a western firm pitching to the Thai ministry of finance one Thursday in early
November found it difficult to know how to handle the scene that confronted him.
"These people were panicking," he says. "I had one senior official literally in tears.
Hardly anyone is visiting them any more and they don't know what to do. They were
saying 'please help us'."
After a few gruff words of encouragement, the banker came up with one interesting
proposal: not for a new bond issue but for a more radical approach to Thailand's
financial difficulties. He suggested that the ministry invite an advisory board of
international firms - one European, one American and one Japanese - to negotiate
with the international creditors of Thai borrowers. This group might offer to take Thai
loans off the books of foreign banks at a sharp discount to par, hold them in some
kind of fund and then either sell them on to new-money buyers, such as vulture-fund
investors or more strongly capitalized foreign banks with less previous exposure in
Asia, or somehow reschedule the interest and principal payments so as to keep the
restructured loans current and the underlying borrowers solvent.
Only time will tell whether the Thais ever try to adopt this proposal. It may be too
radical for them for two reasons. First, unlike the $18 billion IMF support package, it
involves a market-led initiative. Secondly, it recognizes the true depth of the problem
confronting Asia.
Rather than merely the pricking of a speculative bubble in currency, stock and
property markets, this is truly a debt crisis in the making. It may lead to widespread
corporate and bank defaults - no-one can yet quite bring themselves to talk about
sovereign defaults - and will require something akin to a corporate bankruptcy
work-out at the sovereign and regional level.
"Imagine it as a country or a region going into Chapter 11 [bankruptcy]," says the
banker. "Countries will have to, as the IMF has suggested, close down certain entities
like some of the worst-run banks. There may be a fire-sale of some assets. But even
more importantly they must protect the core, viable companies and keep them going.
If they feel they cannot, then in the end I couldn't blame them for telling the foreigners
to get lost. They have to protect their own people now."
Keeping the viable companies afloat will be tough because in the coming weeks and
months Asia faces a massive credit crunch. The international bond and equity markets
have to all intents and purposes closed and will not reopen before the first quarter of
next year. The only possible exceptions will be for small structured deals involving
credit enhancement or securitization of hard-currency revenues.
"Prior to Hong Kong's dive, [when the Hang Seng Index fell 10.14% on October 22
it pushed out already wide credit spreads for Asian borrowers by another 100 basis
points or more] there were a lot more options for many issuers in the region which
need capital," says Paul Shang managing director at Lehman Brothers. "Following
that, the situation as regards issuers' ability to do deals is completely different. The
primary markets have been all but shut down. We are telling clients that for the rest of
this year at least it is very unlikely that they will be able to go ahead and issue debt or
equity on favourable terms." In every country there is a growing backlog of issuers
that need to raise capital, some urgently, but simply cannot.
As well as uncertainty about the depth of the crisis in Asia, a year-end effect is holding
investors back and exacerbating the problem. Portfolio managers don't want to take
any risks between now and the year-end when they will have to mark their positions
to market. Even if they think that, say, Korean bonds, with spreads of 250bp, are
worth buying on a 12-month to 18-month view, they must also recognize the risk that
- with occasionally wild intraday spread volatility of 50bp to 100bp - they may have
to account large paper losses in the next few weeks. Even if Korean spreads tighten
next year and the portfolio manager eventually locks in a profit, the damage will
already have been done. A portfolio manager making a paper loss in new Asian
positions is unlikely to receive generous treatment from either his bosses or his
investing clients. Investors are more concerned about existing positions, which for the
most part they cannot hedge or exit, than about taking new ones. And they are not
even thinking about supporting new borrowing.
Spreads in Asia, in these extreme markets, have moved out of the range of any
previously comprehensible relative-value analysis, not only against the rest of the
world but also against each other. In early November, following the announcement of
an IMF bail-out package for Indonesia, its debt traded 130bp tighter than Thailand's,
even though Indonesia at BBB minus is rated a notch lower than Thailand at BBB.
Spreads on Thai bonds, which had been widening all year from lows of 100bp at the
end of 1996 to around 200bp following devaluation of the baht, hit more than 500bp
over treasuries during October. That's a spread more in line with a single B rated
corporate junk-bond issuer than an investment-grade sovereign borrower like
Thailand.
Bankers may argue that with yields on long-dated US bonds at a historical low of
around 6.2%, new deals could still be launched at attractive absolute borrowing
levels, if only issuers would be realistic on spreads. The real problem, they say, is that
borrowers are still hankering for the spreads they enjoyed before the crisis and are
afraid of establishing new benchmarks for themselves at the new high spreads. "There
is definitely capital out there ready to go to work," says Paul Smith, head of Asian
debt capital markets for ING Baring. "But even since July, [when the Thai baht was
devalued] borrowers have been trying to price new deals by adding a little bit of
premium to the spreads at launch on their previous deals. They still haven't bitten the
bullet and realized that investors will need to at least believe in the possibility of spread
tightening on a new issue from present secondary levels."
Most of the talk about spreads is little more than sophistry. No-one really knows
where Asian spreads are at the moment. Traders produce quotes for Thailand of
500bp one day, 400bp the next, then 500bp again. But there is no significant trading
behind those figures, which may spring from a last trade of a mere $1 million-worth of
bonds.
There is limited liquidity in one or two sovereign or quasi-sovereign 10-year bonds for
each country, usually the global bonds or yankees. In everything else, trading is
virtually suspended. Traders rely on guesswork when producing spreads, adding on a
risk premium above the benchmark sovereign asset for corporate bonds that may, in
reality, not see a single trade for days at a time. Bid-offer spreads are 25bp and more
for benchmark bonds that used to trade on only 3bp. Dealing amounts are tiny, some
brokers' screens have gone blank and traders seem to spend more time in the rest
rooms than they do at their desks. There is no chance of meaningful price discovery
for a new issue in such conditions.
The Philippines was the last sovereign borrower to explore the idea of a new bond
financing, in early October, and it decided not to proceed. "They just wanted to say
that they had some proposals on the table," claims one investment banker. "It was
important for them to say that to appease a domestic audience. There was no real
prospect for actually doing anything."
In early November, the last large corporate bond deal being marketed from the
region, the 10-year $150 million 144A deal for Thai pulp and paper company
Advance Agro, was completed at a huge spread of 911bp over treasuries. The
company pays 75% of its costs in baht and receives 65% of its revenues in dollars. It
is therefore the sort of Asian issuer for which the markets ought to be receptive. Its
third-quarter earnings will show its margins improving as a result of currency
devaluation.
The deal's low CCC+ rating from Standard & Poor's reflects concerns about liquidity
in the Thai bank market and about the structural subordination of the unsecured bonds
to the company's substantial secured bank debt ( the company's implied senior-debt
rating is single B ) . Advance Agro has paid a huge spread for an issue which, at
$111.35 million, is smaller than intended. By issuing bonds with a 13% coupon at
89.8% of par, the issuer raised proceeds of just under $100 million after paying
lead-manager Morgan Stanley Dean Witter its 4% fee. Half the proceeds will
refinance existing debt, half will fund capital expenditure on its second plant. The
company decided to forgo raising extra working capital at such high cost. Had it
completed the deal before the recent market meltdown it would have paid at least
300bp less. The leading investors in the issue were US high-yield specialists, rather
than emerging market investors. Some Asian issuers that previously relied on
low-priced syndicated loans and regarded the US high-yield debt market with
distaste, may follow Advance Agro into the junk bond market as bank funding dries
up.
Don't give in to desperation
The danger for potential issuers is that the mere act of attempting to access such
unpromising bond markets may be interpreted as a sign of desperation. Trying to raise
long-term bond financing to appease short-term bank creditors - or to pay back a
bridge loan to an underwriter - is no great marketing pitch for a new offer. Any
corporate attempting to market a deal in the next few weeks would probably have to
spend most of its time answering investors' questions about the sovereign credit.
"What we're telling clients is: 'if you don't need to do it, don't do it,'" says Stephen
Roberts, managing director of Salomon Brothers. Ultimately it will be up to the
sovereign borrowers to reopen the markets and begin winning back new capital.
If the markets for Asian bonds are tough to read, it is tougher still to gain any true
sense of what is happening to the loan portfolios of the local and international banks.
The countries that have signed IMF packages - Thailand and Indonesia - have already
offered some hint of what is in store. In Thailand, 58 finance companies have been
suspended. Of 230 private sector banks in Indonesia, 16 have been closed.
But bank analysts in Indonesia say that for all its apparent political bravery, this is a
token effort. The problems at those banks were well known and no-one was dealing
with them much anyway. The Indonesian government might well close down at least
the same number again.
With syndicated lending accounting for roughly 60% of new fund-raising by Asian
entities, banks are at the heart of the problems in Asia. Unsustainable growth rates in
the region have sucked all banks into excessive loan growth for most of this decade.
That's particularly evident in Thailand where credit to the private sector as a
proportion of GDP rose from 88% in 1991 to 135% at the end of 1996 and in
Malaysia where it has risen from just over 100% to 158% over the same period. But
worse than the growth in domestic lending is the increase in external debt. Between
1991 and 1996, Thailand's rose from $18.4 billion to $62.2 billion and that of the
Philippines grew from $28.2 billion to $42.1 billion. Indonesia's increased from $64.1
billion to $91 billion. Worst of all has been the nature of much of this lending, which
has financed not just excessive manufacturing capacity but also property and
financial-market speculation. For these banks, currency devaluations are a potential
killer.
Asia is suffering for its massive borrowing of short-term dollars which have been
reinvested in local-currency assets of now doubtful quality. While currency pegs to the
dollar remained in place and local interest rates were kept high to combat inflation,
Asian governments underwrote and encouraged an irresponsible binge. Borrowers
had no incentive to hedge their foreign-currency liabilities. Some companies borrowed
short-term dollars and invested in local-currency instruments - not just conservative,
liquid instruments like bank deposits but also higher-yielding commercial paper issued
by other local companies. A number of companies used short-term dollar borrowing
to finance long-term capital expenditure projects, directly contrary to normal good
practice of matching maturity and currency of funding to assets and projects. The local
banks were key intermediaries in all this, raising dollar debt and on-lending to local
companies that could not raise the foreign-currency funding themselves.
The strongest go to the wall
"The irony of the situation in the Southeast Asian countries is that the companies who
are now faced with the largest problems i.e. the ones who have the biggest FX losses,
are the best credits, sine they were the ones that were able to borrow offshore,"
points out Avinder Bindra, managing director of Citicorp International. "The smaller
companies stayed home and borrowed local currencies and are now probably in
better shape." Large companies like Thailand's Siam Cement and Siam City Cement
have billions of dollars-worth of unhedged foreign-currency exposure. Bankers are
not sure how losses on these positions will be accounted for. Some countries may
allow companies to amortize their losses over a number of years, because if they
recognized all their losses up front many companies would be bankrupt. One banker
says: "In Korea, the Korean banks and the government will take much of the pain. In
Thailand, the foreign banks will share the pain. It will be every man for himself." Some
Thai owners and managers are rumoured to be looting the transferable assets of their
companies in the expectation that the banks will soon take control.
There is anecdotal evidence that some stronger international banks are seeking to
upgrade their relationships with the better Asian companies during this crisis. Some
foreign banks have benefited from a transfer of retail deposits out of local banks. As a
result, their local-currency funding costs remain competitive. Singaporean banks are
said to be making working-capital loans to stronger Indonesian companies at rates
below prevailing levels on commercial paper. Meanwhile the local banks struggle.
Some companies are trying to arrange short-term bilateral bank lines to keep
themselves alive for the next few months. But it would be a brave bank - or perhaps
one with no previous exposure to the region - that would start lending heavily now.
In Indonesia, companies were particularly fond of zaitech-type market arbitrage,
borrowing dollars at 7% and investing in rupiah instruments for the 12 percentage
point interest differential. "Some of these dollar borrowers now find that their local
currency investments are not being paid off and the cost of carrying them is
enormous," says Bindra. "However on an operating basis some of them are very good
companies. The banks are now faced with a dilemna. They cannot let them all go."
What the banks will do is the big and as yet unanswered question.
Lack of transparency, which has always been an issue for investors and lenders to the
region, is now a major concern. There are fears that the full extent of bank and
corporate unhedged foreign-currency exposure and of bad loans has yet to emerge.
Figures are being bandied about for short-term dollar debt falling due within one year
- $40 billion is often quoted for Indonesian borrowers - but their accuracy is
uncertain. The region's central banks have little idea of the level of private-sector debt,
the size of local commercial-paper markets, or of how holdings are split between local
and offshore investors.
And more time bombs may be ticking away. Local accounting practices do not
necessarily require banks or companies to revalue exposures on foreign-currency debt
falling due in three or five years. No-one can be sure how close companies and banks
are to the brink until banks refuse to roll over credit to the companies and the
companies go into default, as has recently begun happening in Korea, for example
with some of the retailers in the New Core chaebol ( commercial conglomerate ) .
Funds dry up
"The biggest problem in the region now is liquidity," says Paul Shang, managing
director at Lehman Brothers. "Under more normal circumstances, a bank would take
a good look at a fundamentally sound operating business in Indonesia or Thailand with
financial difficulties and decide to roll over its loans. But many banks don't have the
luxury of making that decision, because they don't have the money themselves. Not
only can the banks not raise tier-one and tier-two capital to pay for provisioning, in
some cases they cannot even raise short-term interbank funding." He adds: "If a bank
is looking at one company that's in trouble, it's easier to be creative in keeping it going.
When it's a macro problem, it's much harder and much more frightening to keep
putting money in."
Sources of funding are disappearing. Korean banks, which had been big buyers of
high-yielding bonds from issuers in lesser-rated Asian countries, would now face a
negative carry if they tried to buy, say, China's 10-year global bonds at credit spreads
of 150bp.
It's not just local banks that face problems. Japanese banks are the largest foreign
lenders to the region, with aggregate exposure according to the BIS of $94 billion at
the end of 1996. Of this, $37.5 billion was to Thailand and $22 billion to Indonesia.
Analysts reckon maybe half these exposures are backed by Japanese corporations
and finance their local subsidiaries and affiliates. But with the Japanese banking system
already hit by bad debts at home and its capital being eroded by falling domestic
equity prices, it remains unclear whether Japanese banks will be rolling over credit
lines to Asean borrowers or calling them in.
Asian financial markets have not yet bottomed out. Whenever markets briefly stabilize
and stocks, currencies or bonds seem to recover, more bad news comes along and
the sell-off continues. When Thai spreads widened from 90bp to 200bp in the
summer, a few investors bought on the expectation they would rally, if not all the way
back to 90bp, at least to 180bp. Instead they gapped out. Almost every investor that
has bought Asian bonds this year believing they had been oversold way beyond
fundamental value has lost money - except perhaps for the nimblest traders and hedge
funds.
By mid-November, attention was beginning to focus on Korea, the world's
eleventh-largest economy, much larger than its troubled neighbours to the south. It is
the strongest-rated country in the region at A+/A1, even after downgrades at the end
of October from AA/A1+, and is a member of the OECD to boot.
In late October, Korean state-owned borrowers outlined their hopes for
capital-market fund raising in 1998 to a select group of foreign underwriters. They
were looking for huge amounts. The Korean Development Bank ( KDB ) alone is
hoping for $8 billion, Export-Import Bank of Korea ( Kexim ) wants just a little less
and Korea Electric Power Co is seeking $2 billion. That's a total of $15-20 billion, or
more that state-owned Korean borrowers hope to raise. Whether that is possible
must remain in doubt. At the end of October, Kexim's $350 million Euro/144A deal
mandated to Salomon Brothers and SBC Warburg Dillon Read was put on hold.
"Spread on KDB 01s has jumped from the high 90s to around 320," says Chris van
Niekerk, executive director responsible for debt capital markets at SBC Warburg
Dillon Read. "That's clearly a huge spike-up. The volatility has been so great it's been
difficult for people to digest the effects. Investors are left with some substantial
mark-to-market losses and, as would be expected, many are taking a wait-and-see
attitude before considering re-engaging."
On a relative-value basis, with KDB 10-year bonds trading in recent weeks anywhere
from 200bp to 300bp over treasuries, it looks like the cheapest single A credit in the
world. But no-one is looking at Korea on a relative-value basis any longer. To buy
Korean debt, an investor must take a view on where Korea will be rated in six
months' time - by then, its credit ratings may well have fallen further.
IMF to the rescue
At the end of October, just when the big Korean borrowers were discussing their
funding plans with major investment banks, one or two voices were heard suggesting
that the IMF would have to provide financial support for Korea before the year-end -
a view many dismissed as alarmist. But by early November, previously scornful
bankers were accepting the notion and busily calculating just how much might be
needed. Most agreed a rescue package would have to be at least $70 billion,
dwarfing those for Thailand, Indonesia and Mexico in 1995. The Korean government
attacked some newspapers and analysts for speculating about an IMF bail-out. But
rumours persist that there were informal talks between the IMF and the Korean
government at the end of the first week in November.
Korea has suffered from a growing current-account deficit financed through external
borrowing. Foreign-currency reserves have been depleted by an unspecified amount
in a forlorn attempt to support the won. From September to mid-November the won
fell from W890 to the dollar to W999, despite government intervention. Meanwhile
evidence is emerging of financial mismanagement at banks and corporations, which
may add to the burden on the public sector. In October the KDB estimated that
non-performing loans at the eight large commercial banks were 14.7% of total loans.
But it's a sure bet that, like almost every official estimate of the scale of bad debt in
Asia, this will eventually prove to have been an understatement.
KDB itself has become a tool for bailing out the country's failing companies. The bank
took a large equity stake in collapsing car maker Kia as part of a political effort to
prevent Korean borrowers defaulting on loans to foreign banks. As a result, spreads
on KDB bonds have risen as high as 300bp, up from 70bp earlier this year. That
300bp may look like a wide spread for a single A credit, but if KDB continues to act
as a bail-out fund for junk Korean companies its bonds may end up yielding even
higher spreads.
Some bankers are privately warning that Korea will be rated only just above
investment grade before too long and that Thailand and Indonesia may be rated below
investment grade before the crisis is over. Countries may yet resort to extreme
measures. Because domestic borrowers are still threatened by currency exposure on
their foreign debt, they may use up what liquidity remains in the financial system to buy
dollars and sell local currency, thus exacerbating the problem. One foreign banker
claims: "In Indonesia, for certain it was the local corporates suddenly selling rupiah to
hedge their dollar borrowings that were behind most of the forex movements. They
were far more of a factor than George Soros." He adds: "Some have now hedged but
many haven't done anything yet." Capital controls may yet be imposed.
Trading mutual panic
Among the international commercial and investment banks in the region, the sense of
panic is barely controlled. Most are trying desperately to unwind their own exposures.
A system of crude financial barter has sprung up with the local banks. According to
one foreign banker: "We might go to an Indonesian bank a
Among the international commercial and investment banks in the region, the sense of
panic is barely controlled. Most are trying desperately to unwind their own exposures.
A system of crude financial barter has sprung up with the local banks. According to
one foreign banker: "We might go to an Indonesian bank and say: 'We can raise $50
million of financing for you on a club-loan basis, but in return, you must spend $20
million of that buying some specific assets from us.'" It is a safe bet that these would
not be top-notch assets, which raises questions over the quality of the loan to the
Indonesian bank.
Many firms know they cannot reduce their bond inventory and much gossip focuses
on the size of the paper losses at those firms still running large balance sheets.
Peregrine, the largest player in local-currency debt markets, took out full-page adverts
to deny rumours it was suffering financial difficulties. Bank lenders to the firm are, in
the words of one, "monitoring exposure very carefully". Some firms may yet suffer for
having sold protection in the credit-derivatives markets at spreads 200bp narrower
than those now prevailing for Asian names. Other banks may pay for extending bridge
loans to borrowers, a tactic some commercial and investment banks began using
earlier this year as competition for capital-markets mandates intensified.
Jobs are certain to be cut. On November 4, NatWest Markets announced the closure
of its Asian bond division and the loss of 55 jobs. At other firms job losses are
already happening. In the Central district hotel bars and in Lang Kwai Fong, Hong
Kong's bankers talk of little else. A saleswoman from a big American investment bank
mentions that an analyst and two secretaries were let go last week; a broker from a
British firm mentions sales heads being pulled back from an Asian country and asked
to cover two countries from Hong Kong while other people are made redundant.
Even now, there is still some hope that conditions will improve next year. But this will
require brave political leadership in Asian countries. Governments must confront
problems, especially at financial institutions, and take credible measures to stamp out
corruption and nepotism, and to restore confidence. If all these things happen, money
will flow back into Asia.
Meanwhile a few borrowers may get deals away if they include credit clauses allowing
for price step-ups in the event of rating downgrades or covenant breaches. Borrowers
will give up flexibility to make financing acceptable. But even such credit structures
must be used carefully. Put options may attract investors, but they can be a disaster
for borrowers who find themselves having to repay deals just when their cashflow is
weakest. Several Thai property companies, such as Bangkok Land, Hemaraj Land
and Tanayong, have Euro-convertible bonds outstanding with put options exercisable
in 1998 and 1999. Certain Thai property companies are already struggling to meet
interest payments and those with puttable deals must now strive to restructure
long-term debt to meet likely redemptions.
Flickerings in the gloom
There are some small bright spots in the gloom and signs that the capital markets might
not close completely. On October 9, UBS priced a five-year $200 million
zero-coupon credit-enhanced convertible bond for Taiwanese personal computer
component maker First International Computer. The deal, following four similarly
structured deals led by Goldman Sachs earlier in the year, enjoyed the rock-solid
guarantee of a UBS letter of credit on the bond component. It was launched on a
Monday, two weeks before the great Hang Seng meltdown but with north Asian
currencies and markets just beginning to feel some pressure. It closed two days later.
With no pre-marketing the deal was nine times oversubscribed, showing the strength
of demand for the up-side in Asian equities where the credit-risk component is
eliminated. Other issuers have benefited from the same structure. United Micro
Electronics sold a letter of credit-backed convertible earlier in the year on a 20%
premium at a time when rivals were issuing straight convertibles on 5% premiums.
At the height of Asian market volatility, Salomon Brothers completed a $178 million
financing for Indonesian motorcycle-loan financer Putra Surya Multidana at 17bp over
Libor. Investors took confidence from securitization of bike loans and a credit wrap
from insurer FSA. That deal took months to prepare as the documentation had to be
worked up from scratch. It shows the potential for securitization. The technique might
be extended, most obviously to bank portfolios. Mandates are up for grabs from the
Korean merchant banks for securitizations of lease contracts on capital equipment.
Next year banks will try to sell collateralized loan obligations. "What borrowers have
been tinkering with this year, they will now have to do out of absolute necessity," says
Paul Smith, head of debt capital markets, Asia Pacific, at ING Barings.
Corporate borrowers will go down the same route. "In the past corporates were
happy to keep expanding their balance sheets as they could borrow cheaply," says
Citicorp's Bindra. "They must now realize they cannot continue doing that.
Original-equipment-manufacturers in Taiwan, Korea, Malaysia etc. selling to
multinationals on 90-day or 120-day credit should look at securitizing those
receivables."
Commodity companies producing dollar earnings - from palm oil, nickel and oil for
example - should also benefit. The largest equity deal from the Asean countries last
year was the $471 million deal for oil company Gulf Indonesia which was listed in
New York. "The equity capital markets may not be entirely shut, but rather be in a
phase of extreme selectivity, open only to the right company at the right time and the
right price," says Steven Wisch, managing director at Goldman Sachs. "For a
company like Gulf Indonesia, which has dollar-denominated revenues, strong
management, growth potential and is one of two pure oil and gas companies in Asia,
American and Asian buyers stepped forward."
Despite declining confidence in much of south-east Asia all this year, both in
secondary and primary markets, a record amount of equity was sold by Asian issuers
in 1997. In the year to October, $25 billion was issued compared with $23.5 billion in
the whole of 1996 and $11.3 billion in 1995. Fully 75% of the total for 1997 was
from issuers in greater China - the People's Republic of China, Hong Kong and
Taiwan.
That may presage a broader reordering of countries in the region as investors reassess
growth rates, asset values and, above all, credit risks. When credit spreads have
narrowed in the region during occasional rallies, beneficiaries have been China and
Hong Kong first, followed by Malaysia, Indonesia, the Philippines, Korea and
Thailand in that order. That's very different from their ranking by credit rating at the
moment.
Six months ago, Korea was by far the top credit and China was the cause of most
concern in the run-up to its takeover of Hong Kong. Now China, which went through
currency devaluation in 1994, looks a more attractive story. The spread on China's
five year global deal launched on October 22, just as the Hong Kong stock market
crashed, widened from 68bp at launch to 85bp, event ally reaching 180bp before
fluctuating back to between 100bp and 120bp. The China benc mark due in 2006
traded from 95bp to 250bp and back to around 150bp over the same period, a
comparatively good performance for an Asian credit. China is one of the few Asian
borrowers which, according to market rumour, had the market savvy and the
resources to buy back its own debt as spreads widened.
New year, new structures
At the country and company level, 1998 will be a story of wholesale restructuring.
"Companies will be forced into strategic re-evaluations of their businesses, their
balance-sheet size and their structure, as it becomes clear that fundamental growth
rates are unsustainable," says Roberts at Salomon. One obvious result will be more
M&A activity as companies shed assets partly to raise capital, partly to adapt
themselves to tougher operating and financing markets. Already foreign companies
like Coca-Cola have seized the chance to buy up bottling plants in Korea.
Anyone in Asia with cash will be able to buy at bargain levels. Some investment banks
are already thinking about shifting their emphasis away from heavily staffed
capital-markets business towards principal investing operations. Others foresee the
emergence of new patriarchal company owners among those Asian billionaires still
able and willing to buy companies outright. Such private sources of capital may not
replace the public bond and equity markets for Asian issuers, but they may at least
tide some companies over.
If the better companies can survive the next few months some good may come out of
all this, as long as the crooked and incompetent are flushed out. "You can say: 'Isn't it
a pity what is happening to Asia.' But this is a classic day of reckoning," says
Lehman's Shang. "A few of these companies have been engaging as a matter of
everyday business in wrong-headed practices they should never have been allowed to
get away with."
Eventually, Asian sovereign borrowers will return to bond markets, establish new
benchmarks, lay the foundation of the country story and reopen the markets for other
issuers. When they do so, they might be mindful of another long-term lesson of this
crisis: the danger of overdependence on any one source of funding - in this case the
international capital markets. There is plenty of capital within the region but it needs to
be mobilized. Malaysian institutions tend to invest in Malaysia, Indonesian mutual
funds in Indonesia. There have been Taiwanese dollar deals for the EBRD. Maybe it
would be better for the Taiwan authorities to let other borrowers from the region sell
Taiwanese dollar paper.
In coming years, these countries should foster better local capital markets with all the
fixed-income infrastructure of liquid money markets, benchmark sovereign yield
curves, strong regulators and credible rating agencies. "There's nothing bad about
foreign portfolio investment per se, but it needs to be considered in conjunction with
access to domestic capital," says Carlos Cordeiro, managing director at Goldman
Sachs. "Indonesian companies should at least have a choice between term-rupiah
financing and dollars. The responsibility for developing well-functining domestic capital
markets is one that governments must take."
Hong Kong provides a positive example. It regularly runs a budget surplus, but began
issuing treasury bills and notes at the start of the 1990s, added liquidity-adjusted
facilities, made contributions to the provident fund compulsory and recently set up the
Hong Kong Mortgage Corp. Bindra says: "One hopes all the domestic markets can
develop on these lines, especially if central banks share the same spirit of cooperation
with which they have tried to fight speculators."
Actions, not words
But before such grandiose schemes can get under way, Asia will have more
short-term shocks to deal with. The crisis is not over and the pessimists - talking of
widespread defaults, lasting recession, political upheaval, social disorder among the
newly unemployed, possible ethnic violence against the Chinese in southern Asia -
believe it may just be beginning. No-one knows where the bottom is. They only know
that when the Hang Seng index crashed and pulled Wall Street and the rest of the
world with it, the old financial order in Asia crumbled and its certainties were swept
away. The new order is yet to be built. In such times it's perhaps wiser to watch what
people do than to listen to much of what they say.
For western and Asian brokers, traders and analysts joining lunchtime queues at the
larger bank branches around Central on October 23 and 24, it was a strange
atmosphere. Some exchanged friendly greetings with old colleagues they had worked
with in previous jobs but not seen for months, as if this were a big reunion party for
the Hong Kong financial community. The air of unreality was understandable. Many
would soon be returning to their Citibank Tower and Exchange Square offices to
parrot to clients the official line that the Hong Kong dollar peg - Asia's last fixed
exchange rate - would definitely hold and that the currency would never be allowed to
devalue, no matter what devastation took place elsewhere in Asia. Many, perhaps
more sheepish, remained grimly intent on the task they had all come to perform but
few openly talked about: emptying Hong Kong dollar bank accounts and converting
their cash assets into US dollars or European currencies.
Not a gold topic, but... Vitamin B12 is only found in meat. It is essential for the production of red blood cells. Deficiency leads to a condition known as pernicious anemia. It is fatal. The 'cure' for this disease was found during the ( U.S. ) Civil War, eating beef liver. :- (
Although today, most food is fortified with something or other. Now, if we could just get them to stop taking the nutrients out of the food, before they fortify it.... Folic acid is another example. It's very important for pregnant women to have ample amounts in their diet to prevent spina bifida in their new born. Lentils are loaded with it. So, I guess man ( and woman ) does not live by meat alone... :- ) Balance and variety is the key.............
Now, about this damn gold brick that I'm using as a door stop outside...
we may be nearing a bottom in gold market...Bloomberg News has spot
gold down .20. I think gold can hold its own going into weekend.
South Korean market continues to tank...down 3%. The House of Cards
is still in order...tremendous European exposure to Asian debt.
For all markets.. http://quote.yahoo.com/m2?u...
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I told my kid he can have skates now or a skate factory later. He went out, got a job and bought the skates anyway.
God Bless All
HAPPY THANKSGIVING