Nov. 4th, 2008

peterbirks: (Default)
Following the auction of the credit protection contracts on Lehman and the two FMs (general value eight to 11 cents on the dollar), the Landsbanki CDSs were auctioned this morning, generating a tentative value of 3.375%. The auctions on Kaupthing and Glitnir come up later in the week. There's no reason to expect markedly different values for those operations either.

That means that of the $7.6bn in default protection sold, all bar about $300m of it will be payable by the sellers of credit default protection. But it's a bit misleading to assume that this will entail $7.3bn in losses. I would suspect that some of it will be "two-way" stuff, with a loss on one side counterbalanced by a gain on the other. Nevertheless, it's likely that we've got another multi-billion dollar hit for some of the hedge funds specializing in this field of "easy" money.

But it's nice to see a bit more of the ultimate impact seeping through the market. As we saw from the auctions of Lehman and the two FMs, the sky doesn't fall immediately afterwards.

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Of more interest was the news that "Richard Branson's Virgin Media" (I cite the popular press here, not the reality), has won an agreement for debt rescheduling. Virgin has $7bn in term debt that needed to be rolled over next year. It's now "renegotiated" that deal so that it can postpone amortization repayments until 2012. That's the good news for Virgin. Of course, banks do not do this for nothing. The lenders to Virgin Media will receive a $120m fee for the renegotiation and an extra $80m a year in interest payments. That latter is not as generous as it seems, because under the original agreement only part of the original moneys had to be repaid in 2010 and part in 2011.

So, any opportunity to say that "Virgin Media is in deep shit" is eliminated, because the banks presumably realized that by renegotiating the loan it can (a) get some extra money up front and on a rolling basis and (b) continue to book at 100% the money owed to it by Virgin Media. That's a much nicer position (for the banks, in accountancy terms) than having to admit that Virgin Media might not be able to generate enough cash flow to repay in full the part of the loan due in 2010 ($1.6bn).

Virgin Media, meanwhile, gets a get-out-of-jail-not-very-free-card -- a bit like being allowed to roll over your capital credit card repayments for a while in return for a slightly higher cost on the interst-only part. This is definitely a case of, the more you owe, the nicer the lender will be to you.

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Standard & Poor's issued a report at the weekend which, at last, contained a killing paragraph (which I hope that all economic commentators will read). It runs:

We believe that in the fixed-maturity portfolio, the potential for unrealized losses to evolve into economic losses is less clear. If in our opinion the unrealized loss on a fixed-maturity securities portfolio is likely to be temporary, the insurance company is willing to hold these securities to full recovery, and in our view it has sufficient liquidity to do so, the reported unrealized loss might not reflect economic reality ((my italics)). As a result, our analysis might either heavily discount or eliminate it. However, to the extent we believe that unrealized losses are representative of an economic loss, we usually incorporate them in our rating analysis, and this could affect ratings or outlooks on certain companies.


What does this mean? Basically, that all permanent (US-speak = "other than temporary") impairments, are real, but not all unrealized losses are real and they should not be treated equally.

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