dividend

Will PIK toggle bonds come back to hurt Apollo?

Jim Kim — Thu, 06 Nov 2008 12:20:39 -0500

Recall back in the boom days of private equity, sponsors were calling the shots. One reflection of that was the rise in pay-in-kind toggle interest options on buyout debt. Pay-in-kind notes allow a company to pay interest with more debt rather than cash. TheDeal.com notes that before 2005, PIK loans and notes had been issued mainly as subordinated or convertible debt. During the boom, they were commonly used as senior debt to finance leveraged buyouts or pay sponsors' dividends. After a deal review, Moody's concludes that Apollo has been a big user of such bonds, electing relatively more often to pay in more bonds. Such bonds may buy a portfolio company some breathing room, but in the end they may merely be postponed. The piper will have to be paid at some point. Certainly most people will see the PIK options as a bad sign.

For more:
- here's the article from TheDeal.com

Related Articles:
Apollo news from FierceFinance

Morgan Stanley inks deal with Japanese bank

Jim Kim — Mon, 13 Oct 2008 13:35:48 -0400

Morgan Stanley CEO John Mack made good on his word to close the Mitsubishi UFJ deal by Tuesday. The deal was apparently signed, and the stock soared. The deal terms are more favorable to the Japanese bank. It will buy $7.8 billion of convertible preferred stock that carries a 10 percent dividend and strike price of $25.25 per share. The Japanese bank will also buy $1.2 billion in non-convertible preferred stock, also at 10 percent. Originally, the deal called for a $9 billion infusion--$3 billion in common stock at a price of $25.25 per share and $6 billion in convertible preferred stock at 10 percent, convertible at $31.25 per share. What remains fuzzy here is what assurances the government provided the investors. Previous reports held that the Treasury made some assurances regarding the value of Mitsubishi UFJ's investment if Treasury is forced to take buy into Morgan.

For more:
- here's the AP article

Merrill Lynch to slash dividend?

Jim Kim — Thu, 14 Aug 2008 20:35:58 -0400

It's no secret that banks are constrained as they try to raise capital these days. Shareholders seem to have borne the brunt of these efforts, to say the least, and there's got to be a limit as to how much abuse they can take. But it looks like dividends may have to be cut by more banks. At Lehman Brothers, the top dogs could eliminate its 17-cent dividend and still not raise a whole lot. But at Merrill Lynch, such a move may be inevitable; it could save nearly $3 billion a year if it eliminated its dividend. Fortune notes that analysts Dick Bove of Ladenburg Thalmann and Brad Hintz of Sanford C. Bernstein have predicted a dividend cut at Merrill Lynch. Obviously, capital remains an issue. We'll see how this plays out.

For more:
- here's the Fortune article

Bill Gross: Writedowns to hit $1 trillion

Jim Kim — Wed, 30 Jul 2008 13:41:01 -0400

According to the Financial News Online writedown-o-meter, banks collectively wrote off $205 billion as of June. Since then, the total has climbed higher. While we've heard many people suggest that the worst is over, Bill Gross, the outspoken bond manager at Pimco, is not one of them. He suggests that banks may ultimately be forced to write down more than $1 trillion, according to Financial News Online. Whew! He told clients there's about $5 trillion in mortgage-related risky assets on bank books. The flip side is that these potential losses will require additional capital, which may prove hard to come by. We'll see more asset sales, more dividend cuts, and less lending. None of this is good news. I'd like to think that $1 trillion is way high, but who knows.

For more:
- here's the article

Are Lehman Brothers' options dwindling?

Jim Kim — Thu, 24 Jul 2008 07:42:54 -0400

Will Lehman Brothers be forced to sell its Neuberger Berman asset management unit? There's been a lot of talk that it might be forced to find a buyer, or sell shares to the public. A UBS analyst just told clients that the bank will likely take that step in concert with a sale of risky assets, basically about $30 billion worth of mortgage-related stuff, reports the New York Post. I'm sure the bank has considered these options. My guess would be that the valuations just aren't there. But Lehman, like other banks, may not have a lot of choice. It could take its dividend from 17 cents to zero and not raise much. Foreign investors do not seem to be biting. A leveraged buyout looks iffy, so short of selling the entire company, what else can it do but sell assets? Of course, in a best-case scenario, the capital it has already raised--$12 billion--will be enough. Of note, its stock is now back above book value.

For more:
- here's the article

Virtual receivorship for Wachovia?

Jim Kim — Tue, 22 Jul 2008 13:25:56 -0400

MarketWatch says this about Wachovia: "A case could be made that Charlotte, N.C.-based Wachovia, where loan defaults have jumped nearly five fold, isn't much better off than the failed lender." The failed lender being referred to is IndyMac. The column wonders whether the government had grounds to step in and bail out the bank. Well, it doesn't look like the Wachovia is in that much trouble, but going forward, it doesn't seem to have a reliable source of capital now that its dividend is all but gone. It's unclear what assets it can sell, though it has retained Goldman Sachs to look for value. All in all, the idea that Wachovia--the fourth largest U.S. bank--could fail isn't entirely out of the question, but it still seems remote as of now. However, things may get worse soon. Maybe that's why they the board hired a regulator.

For more:
- here's the MarketWatch column

Dividends, the best source of capital right now?

Jim Kim — Tue, 22 Jul 2008 08:30:33 -0400

We've noted that most big banks have fewer options when it comes to capital raising. Public offerings are increasingly hard, given concerns about dilution, among other things. Outside investors have been licking their wounds as their early investments have really tanked. So that leaves asset sales and dividend cuts. Asset sales can be a tricky, especially at a time when valuations are an issue. Just ask Merrill Lynch. And for the second time in three months, Wachovia has cut its dividend. It now will pay a nickel a share, compared with 37.5 cents earlier, and 60 cents a share at the start of the year. The move will effectively raise $700 million each quarter. This, of course, is bad for shareholders, but in this environment, what choice did the bank have? It's second quarter earnings were much worse than anticipated--a loss of $4.20 a share. Analysts were expecting 78 cents a share. Ouch. The fourth largest U.S. bank is also slashing 6,350 jobs.

For more:
- here's the AP article

Merrill Lynch's earnings in the spotlight

Jim Kim — Thu, 17 Jul 2008 07:41:20 -0400

Bank earnings for the second quarter have been surprisingly strong, so far. Of course, expectations were really, really low, which helped JPMorgan Chase handily top estimates (by 10 cents a share). That follows news of Wells Fargo's move to actually hike its dividend. But what the industry is really waiting for is Merrill Lynch's earnings, scheduled to be released today as the market closes. It likely will formally announce a sale of its 20 percent stake in Bloomberg. It's less likely to divest its lucrative stake in BlackRock, which announced strong earnings. The Bloomberg sale--and there may be other moves--will certainly offset the $5 to $6 billion in writeoffs analysts expect, due mainly to mortgage-backed and mortgage-insurance exposure. Analysts on average expect a loss of $1.91. Revenues are expected to come in at $3.3 billion from $9.5 billion a year earlier. Whew! That puts the crunch in perspective.

For more:
- here's an AP preview
- here are JPMorgan's numbers
- BlackRock's earnings beat expectations. Article

Man bites dog: Wells Fargo boosts dividend

Jim Kim — Wed, 16 Jul 2008 12:41:28 -0400

These were welcome surprises: Wells Fargo, in addition to reporting a smaller-than-expected quarterly loss, actually boosted its dividend, to 34 cents from 31 cents. This is a bold move; an act of outright confidence at a time when other banks will likely be forced to lower their payouts. You have to wonder if this is almost, well, foolhardy, even though Wells Fargo was able to avoid the worst of the subprime debacle. Still, the bank also took a charge-off of $1.5 billion and boosted reserves against future losses by another $1.5 billion. And, as the AP notes, it has abut $8.5 billion in home equity loans. The bank is signaling that it has its capital needs well in hand. It kept its mortgage origination level at $31 billion, almost all in conforming, traditional loans. Good job.

For more:
- here's the article

Capital raising to get harder for commercial banks

Thu, 22 May 2008 06:59:54 -0400

We all get the sense that banks are due for some more capital raising. But it comes down, in large part, to upcoming writedowns. If they are much worse than expected, banks will have to hit the capital trough again, notes Investors' Business Daily. The problem is, raising capital will only get harder, especially if we assume the SWF and private equity money has dried up. Many have already pushed to the limit of preferred sales. At some point, common shareholders will be forced to protest the terms and dilutive effects. Common share offerings will be iffy propositions at best. The article makes an interesting point. Commercial banks may have the harder time if other asset classes--auto loans for example--hit some turbulence.

For more:
- here's the article