Raising Eyebrows

"So over the next 6 months, we have been undertaking extensive measures to ensure that key clients are reassured that banking with us is both safe and advantageous to rivals", so droned a Partner to me on Wednesday.

 
I was initially apprehensive when I got a meeting 'invitation' from him, wondering what somebody so senior wanted a one-to-one meeting with me about. As it turned out, it seemed to be to give him a chance to rehearse a speech he is giving to even more senior partners next week, and he wanted input from somebody nearer to the actual work.

It was a hugely boring meeting so I'll skip the detail, but suffice to say that I have been pulled onto an enormous drive to boost Hedge Fund confidence that trading with us won't risk their money in the event of bankruptcy by it getting locked up by administrators as happened with Lehman Brothers.  It's a huge waste of everybody's time, as in the event it won't actually provide any such guarantee - but hey, as long as we can show them 'proof' that it is in place, it reassures them.  

As he droned on, my eyes glazed over and then wandered over his shoulder to the trading floor beyond, and fell on one of the news screens. I squinted and couldn't help saying "ooh, does that say 50% tax rate in 2010?"

I might as well have slapped the Partner in the face for the reaction it had - he stopped his diatribe, turned to read the mid-Budget headline, paled, and then went increasingly pink. I had to keep a straight face as he went out to get a better look, and then came back for a rant as he calculated how much more tax he would now be paying a year. (He ended up confirming it would be £90,000 next year, which for those not so good at maths means he takes home a 'mere' £1.1m - presumably excluding bonuses given that is such an unknown for 2009).

I know, even a part of me had the same reaction: my heart bleeds you lucky, overpaid fat bastard. On the other hand, if we put aside wealth envy for one moment, his subsequent reaction proves the criticism of this move made by many in the press about the potentially limited (and negative impact) of this on the country.  He's a smart chap, and quickly starting mentioning having various income recategorised next year - no details, so I can only assume he means bonus-related and other asset income - and even rebasing to another office, since in theory it doesn't matter where he works from that perspective.

At a high level, people are either assets or liabilities to a country from an economic perspective. Are they net contributors like the Partner, who work hard and pay a lot in taxes, or at the other extreme are they like Karen Matthews, the benefit leech with 5+ children, who lives off the state and costs the country £100k+ each year in benefits?

It clearly makes no sense to incentivise high contributing wealth generators, both in the City and other key industries in which the UK currently has a competitive industry, to seek ways to avoid paying tax by setting it to a level perceived as unfair.  It didn't work in the 1970's and it won't work now.  The real problem is the relative rate, and at 50% over £150,000, this catapults us above all our main rivals, even quasi-socialist states such as France and Germany.

What is most depressing is that the budget seems to have been politically motivated above all, not what is in the best interests of the country.  It was always going to be a nightmare for Alistair Darling. Old Eyebrows finally had to admit that the government have completely and utterly fucked up the economy over the last decade.

I think we all know that our beloved, unelected leader shoulders 90% of the blame for the degree of pain the country is about to experience, and I put that down to the kind of mismanagement that would have anybody in the private sector fired. MP's expenses are another fine example of the double standards.  Still, I must admit that with my wedding to L being only 5 months away, and with my plan to launch the business this summer gaining momentum, I can't help feeling the same as the Partner - perhaps I will just relocate.  After all, blogging's a global game.

Analysis: GGP Declares Chapter 11

Well, the loss of my lunchtime bolt hole has proved a bit of a problem for me in finding time to post in the last couple of weeks. To be fair, I have been working on (and completed) a draft of the business plan, and have also selected a group of vendors to approach in the coming weeks for a build estimate.

Meantime my next major task is completing a functional spec for the site, as there's no way I trust the average coding monkey with the all-important design and usability. Overall it is going very well, and I am feeling really positive that I can create something unique, useful and commercially viable.

Of course the big news of the last fortnight was GGP finally filing for Chapter 11 bankruptcy protection.

The final straw was the combination of the bond solicitation process failing to persuade sufficient Rouse bondholders to extend, and the threat of action from disgruntled creditors ready to file a claim on certain malls - that meant GGP had little choice but to seek to protect its assets from being effectively raided.

GGP filed with $27.3 bln debt and $29.6 bln assets - figures that are of course disputed - and obtained $375 million in debtor-in-possession financing courtesy of Pershing Square.

Bill Ackman is a canny operator, and clearly used this to hedge Pershing's existing position (at 25% they are the third largest shareholder in GGP currently). By providing DIP financing, Pershing yields a healthy 12% annual return on the debt. Additionally Pershing gain warrants to buy 4.9% of the new equity when it emerges from bankruptcy, and most interestingly the potential to convert the $375m DIP into equity.

The latter option has to be admired, as it ensures Pershing Square will be guaranteed equity whichever way the firm emerges from bankruptcy. I am confident however that it remains strongly in Ackman's interests to maintain common shareholder value, although this does now raise the spectre of dilution. I have analysed this in some detail, and believe that dilution risk is a minimal factor: if the event occurs, that means GGP will have successfully restructured, emerged from bankruptcy and the huge upside potential to the shares will offset and limit any impact.

GGP President, Tom Nolan, gave several interviews subsequently, and placed the blame squarely on the frozen credit markets as the primary cause of GGP's current problems. It will clearly form the central crux when outlining the company's argument as to why a loan extension agreement is justified, and increases the likelihood of approval by the courts.

Certainly the fact that no major rivals who wanted to buy some of the best, revenue-generating properties put up for sale could secure funding is a powerful illustration of the wider market problems, and in favour of GGP.

Nolan also stated that GGP does not see an immediate need to tap DIP financing for 8 weeks, due to cash flow business running costs illustrates the relatively healthy position of the business model. Once again, GGP stands out as an unusual case. Bill Ackman also immediately went to the press to rubbish assumptions by many that GGP's weakness would be to the gain of rivals, by effectively meaning Chapter 11 meant liquidation and an eventual firesale of assets.

Today Fitch downgraded some of GGP's CMBS debt, citing that:

"If the properties remain in bankruptcy, General Growth could seek to load up the properties with additional debt to help repay their corporate unsecured debt."

So far, everything has progressed exactly as I had hoped with regards to the Chapter 11 filing, with the exception of Pershing's DIP equity conversion option. Liquidation and/or widescale share dilution remain the only scenarios in which being long in GGP would not produce significant returns.

It will be interesting finding out what the restructuring proposal submitted to the court contains.  The above illustrates another mechanism by which GGP could pay off unsecured lenders and/or the bondholders without necessarily needing to sell properties.  A key point mentioned here but not considered is that GGP are completing a strategic review, with a specific aim of only offering to liquidate lesser malls as part of the court proposal.

A combination of financial re-engineering, some limited asset sales, and a wider extension request for loans until the credit markets recover sufficiently to enable normal refinancing is the most likely right now.

The Price of Advice

With the long Easter weekend now upon us, I am going to use this as an opportunity to plug on with the business plan.  Otherwise though, a quick observation on life at the bank, which has become amazingly boring since I got back from Egypt last month.  It almost feels like the quiet after a hurricane has passed over.. we rats are only poking our noses out of the hiding holes we have been in for essential activity.  

The good news is that, as of last week, all of those I know who have been fired from my bank have now all landed new jobs.  It's a great sign that they have been able to cash in on the ill-justified prestige associated with this place, and secure decent roles even in these tough times.  By chance I had a quick coffee with another headhunter myself mid-week - as I say to all of them, while I am not actively looking, I am always "open to opportunities".

In this case, he spent half an hour ignoring me and pitching a near-identical role to me over at one of the other banks down in Canary Wharf.  I have no desire to increase my commute from West London by another half an hour or more a day, I remember from living down there that Docklands is a gigantic, soulless wind tunnel without any of the charm or benefits of the City.

I explained to him several times that I have no interest in taking the risk of a move to do the same role somewhere else.  As and when I move next (and this is all based on the assumption my web business has not fully taken off by then), I want to use it to make a move into a related but different area.  

A good example was one of the guys on the desk who left last year to join a Venture Capitalist firm - no, not junior trader - he's ended up at that crappy little French bank Calyon, so that hedge fund claim was all bullshit.  Sadly it also means my 10mth punt in the office sweepstake didn't come up.

In one sense I dislike VC's and their predatory, short-termist nature (all they are really interested in is taking a firm to the market as quickly as possible to realise quick returns).  However the entrepreneurial aspects are hugely appealing to me, and his move has made me realise that I do not have to continue with a role that I can do with my eyes closed, and can look to make a move across into something new and fresh going forwards.

Of course, who knows with these times what is or is not possible.  I am a great believer in persistence when told no.  You need to have vision and see opportunities rather than closed doors.  No direct experience in the area?  So what?  I had none in my current role here at the bank when I joined - instead blagging through the countless interviews through a combination of being personable, articulate, some juicy white lies and by not being clueless.  If it worked here, it can work anywhere.

On an unrelated topic, I am going to get up on my soapbox about the quality and impartiality of research reports. I have access to so many as you would expect, and and am constantly amazed by how insubstantial the actual research often is. Whenever I go up to research, those fucking clowns are usually surfing the web - their technique is to cut and paste observations of others before rewording, and otherwise calling up investor relations to get the latest key financial figures to add to their reports.  

The end result looks great, when shoed into a professional research report template.  If ever you needed proof that presentation goes a long way, analyst reports by the banks are it.  The actual content is usually woefully inadequate - weeks behind, or offers little if any meaningful insight and usually regurgitates old news or views.

They almost always go with the mainstream consensus, or safe view as well, rather than even discussing different strategies depending on investor risk tolerance.  A good example is GGP, which naturally is one I know a lot about.  Reports out now do not even consider many of the issues I have discussed on here in their recommendation - just a sweeping generalisation of the REIT market prospects in 2009. 

To anybody who doubts it, believe me that if you take the time to do your own research on any company with information available in the public domain, you can easily put yourself well ahead of those who place their trust in crappy, overpriced analyst reports just because they have a bank's brand name stuck in the top corner.

Speculation Drives GGP

I have been making some positive progress on the business plan for the financial website I am planning to create (sorry, will not be discussing specifics as you would expect on a blog!) A high level plan for its initial marketing and revenue generation has been completed, and since I have brain dumped most of the site ideas, I am going to formalise those along with specifics on the design and structure this weekend in a functional spec.

I have started to look into vendors that can build the site, but am so far fairly unimpressed with the package solutions on offer - not to mention all the bullshit extras thrown in like registering the domain name (and controlling it), that presumably appeal to the average lamer they are targeting. I will be telling them exactly what I want, and otherwise will need full control over the daily content management.

It will require some time and effort to assess what is on offer, but I am looking to approach around about 10 vendors for build estimates, options and support contract costs over the next week. I need that not least so that I can complete the financial component of the business plan, including necessary start-up capital and first year trading costs.

After my last entry on Saturday, discussing my increasing confidence in GGP's prospects - not least from Bill Ackman's recent comments - the share price on Monday underwent such an unusual increase (greater than 200% at one point), that the firm issued a statement on the trading activity to confirm there was no known basis.

I was not entirely surprised to see speculation growing from institutions and others that GGP has significant potential for common shareholders. A 98% discount alone tells you that it is clearly not a fair reflection of value. The price as of today has predictably dropped back to around 85 cents since the highs of $1.35 earlier this week - since I was waiting at around 75 cents for falls to buy more, I am happy to hold and continue waiting for a better buying opportunity (ideally somewhere under 50 cents).

In the meantime, additional support for the notion that GGP will eventually complete negotiations with lenders and file for a prepackaged bankruptcy came in the form of real estate magnate Sam Zell, who commented:

"I do not believe GGP will be liquidated," Zell said at a recent New York University real estate investment trust conference. "I expect the company to file bankruptcy. It will do a prepackaged. It will be reorganized and it will be taken public."

The net impact of this would be a controlled bankruptcy application with a pre-agreed plan of restructuring - this would enable the firm to sort that out under Chapter 11 protection in much less time, and theoretically with less court interference. It would then emerge from this and should see a huge increase in share value.

At the same time, the existing evidence points to TALF funding continuing to trickle down through the system and have an increasingly positive impact on the credit markets throughout the remainder of 2009 and into 2010.

Everything right now seems to point towards GGP being an excellent long hold for anybody not risk averse. Consider this final point: the consensus view in and outside the US government now is that the commercial real estate sector is a huge and vital component of the US credit market that must be supported. As well as CRE being more viable than the multitude of small home owners in the domestic market, many have also commented on the devastating impact that a Chapter 7 (liquidation) of GGP would have - not just on the firm and its shareholders, but more importantly on the wider market.

Too big to fail? I think people are soon about to work out that this doesn't just apply to the banks, and that the major REIT's are also in that same boat.

Increasing Confidence

Another fine, relaxing weekend is in prospect - L is doing what she does best and having a lie-in as I write, and that leaves me with a spare moment to write a quick entry.

So G20 this week was every bit the anti-climax I expected. I wonder how much of that $1tr package was pre-negotiated - all of it I expect, with some hand shaking and breast beating for the cameras. GGP has been equally unexciting in its lack of progress over the last month, although major shareholder and activist Bill Ackman has spoken out again in favour of the company filing Chapter 11 soon and a pre-packaged bankruptcy.

I agree with the approach, provided common shareholder value is left in tact, which it ought to be given (and Ackman stresses), that GGP's problem is the unusual case of insolvency. Issuing shares as a means of raising capital is almost impossible for a company that has seen its share price fall by 98.5% in a year. Combined with the increasing signs that the US government will be stepping in to directly support the US commercial real estate sector, and specifically the REIT's, I am planning to increase my stake in GGP at these bargain prices.

"Bernanke said the eligible collateral for the Fed's $1 trillion Term Asset-Backed Securities Loan Facility, or TALF, will likely expand to include commercial mortgages and securities that aren't newly issued."

Some patience is required to hopefully buy at a really good price on a dip in the coming weeks, but I am looking to buy another 100,000 shares should the right opportunity arise.

Protests for the Cameras

It has been an amusing week so far in the City. Apart from everybody using it as an excuse to turn up in jeans and send around some great piss-taking jokes regarding the protests, nothing much has actually happened until today.

Then of course, the much publicised four "horsemen of the apocalypse" converging on the Bank of England to lay siege to financial institutions. The whole event has been nothing more than a symbolic gesture, largely for the cameras with gimmicks like this: I suppose the scuffles, pushing around and football crowd like chanting is all about garnering a little attention. Hey, if it relieves some stress then feel free - it's not going to change a damn thing. Over at my bank around the corner, we were just out of sight of all the fun, but it didn't stop me popping out at lunchtime to go and watch. Otherwise the live stream from Sky News provided a welcome distraction from work

I found the appearance of Russell Brand particularly bizarre.

"Tell us Mr Brand, what are you angry about?", asked the eager reporter.

"Well.. I'm just.. here." replied Brand, visibly uncomfortable at the attention.

"But why specifically are you here?"

"Hey I'm just here.... participating mate." (uncomfortable look and silence from Brand)

Pathetic, the guy is a serial publicity seeker who revels in his lothario, bad boy image. He clearly decided that it would improve his image through association, and then when the predictable violence kicked in it would do him no favours and made himself look like an utter fool.

Otherwise though, the real treat was the excuse to nip off early to 'beat the protestors'. They are being contained nicely by the police (fine work by the way chaps), and were rumoured to be 'releasing' them at 5:30pm. Cue the entire office leaving at 5pm. However I'm watching TV now and see them all housed in.

Anyway what has all this really achieved? I'm afraid about as much as the G20 summit will.