Wednesday, February 20, 2008

Ackman Proposes Bond Insurer Split, Policyholder Veto

(Bloomberg) -- Hedge fund manager William Ackman distributed a plan to restructure bond insurers that may prevent dividends from being paid to the parent companies and minimize losses for holders of asset-backed securities.

Ackman, the managing partner of Pershing Square Capital Management LP in New York, calls for a corporate structure in which dividends would flow to the so-called structured finance unit from the municipal insurer, according to his proposal, sent yesterday to regulators, lawmakers and banks.

Ackman, who is betting against MBIA Inc. and Ambac Financial Group Inc., the two largest bond insurers, stands to benefit from his plan. He has short positions that would gain in value if the holding companies were to default on their debts.

The proposal ``offers the best prospect for protecting the most policyholders and ensuring a viable ongoing municipal bond insurance market,'' New York law firm Edwards Angell Palmer & Dodge LLP, which performed an analysis for Pershing, said in a memo included with the presentation. Copies were obtained by Bloomberg News and confirmed by Ackman.

Ackman's plan has two separate boards of directors, one for the municipal insurer and the other for the structured finance unit. Each board would include policyholders. The municipal insurer would pay dividends to its structured-finance parent only when the board was satisfied the unit could remain AAA rated. The structured finance insurer would send dividends to the holding company only after its board determined the money wasn't needed to cover claims.
 

Tuesday, February 19, 2008

Credit Suisse Writedowns to Cut Profit by $1 Billion

(Bloomberg) -- Credit Suisse Group discovered pricing errors on bonds that will cut first-quarter profit by about $1 billion, prompting the biggest share decline in more than five years.

Switzerland's second-largest bank took $2.85 billion of writedowns on asset-backed securities after an internal review found ``mismarkings'' by a group of traders and credit markets worsened. The Zurich-based bank said in a statement today that it's assessing whether 2007 earnings were also affected.

The announcement comes two days after Qatar said it was buying shares in Credit Suisse and a week after the company reported net writedowns of 2 billion Swiss francs ($1.8 billion) for 2007, a fraction of those disclosed by bigger Swiss competitor UBS AG. Chief Executive Officer Brady Dougan said on Feb. 12 that he was ``more optimistic than many'' about prospects for a debt market recovery.

``I'm speechless,'' said Georg Kanders, an analyst at WestLB in Dusseldorf with a ``buy'' rating on Credit Suisse. ``To announce this just a week after reporting earnings is a major blow. This will again put the whole sector under pressure.''

Credit Suisse fell as much as 10 percent, and was down 4.40 francs, or 7.7 percent, to 52.35 francs by 1:15 p.m. in Swiss trading, cutting the company's market value to 60.8 billion francs. UBS AG, the biggest Swiss bank, dropped 0.8 percent.

`Loss of Confidence'

Credit-default swaps on Credit Suisse's subordinated debt rose to a record, according to Deutsche Bank AG. Credit-default swaps, used to speculate on a company's ability to repay debt, rise as perceptions of credit quality worsen.

Credit Suisse blamed the writedowns on ``significant adverse first quarter 2008 market developments'' and pricing errors ``by a small number of traders'' in the structured credit trading business. The company estimated that it remained profitable so far in the first quarter.

The announcement may raise questions about oversight at the bank less than a month after Societe Generale SA reported the worst trading loss in banking history following unauthorized bets by trader Jerome Kerviel.

``The big question mark is about the bank's control systems,'' said Stefan Raetzer, who helps manage about $28 billion at Allianz Global Investors in Frankfurt. ``The writedown isn't as much of a problem here as the loss of confidence.''

Credit Suisse spokesman Marc Dosch said a ``small number'' of traders had been suspended, declining to provide their names or location. The internal review will be finished before the publication of the annual report, scheduled for March 18, he said. The company will hold a conference call for reporters and analysts at 3 p.m. Zurich time today.

Dougan

The loss is the biggest setback for Dougan, 48, since he took over as CEO from Oswald Gruebel in May after heading the investment bank for three years. Gruebel returned the bank to stable earnings after a decade of management turnover, bungled acquisitions and the first criminal conviction of a bank in Japan. Credit Suisse's writedowns follow about $19 billion in debt and loan markdowns at UBS.

``It unfortunately just reinforces the reputation that the large Swiss banks have generated over the last year for financial ineptitude,'' Peter Thorne, a London-based analyst at Helvea Ltd., said in a note to clients. ``Whilst we had received some assurance that the Credit Suisse balance sheet is not as laden with problem securities as UBS, this disclosure just raises the prospect that they may be simply bad at knowing what problems they do have.''
 

Cadbury profits dip, shares slip on no cash return

(Reuters) - The world's largest confectionery maker, Cadbury Schweppes (CBRY.L: Quote, Profile, Research), missed analyst forecasts with a 2 percent fall in 2007 profits and its shares dipped as it warned there will be no cash return from its drinks demerger.

Cadbury also gave a cautious outlook on Tuesday for the North American soft drinks business which is to be spun off at the end of the second-quarter, with profit margins down sharply in 2007 and unlikely to start to recover until 2009.

The London-based group had intended to return cash to shareholders on the demerger but has now decided against this in order to preserve investment-grade ratings for both companies. Cadbury shares slumped 6.1 percent to 575 pence, the FTSE 100's biggest loser, by 5 a.m. EST.

"There is unlikely to be a return of cash to shareholders as we have decided to maintain both companies on investment-grade ratings," Chief Executive Todd Stitzer told a conference call.

Cadbury decided last October to spin off its 7 billion pound ($13.7 billion) drinks business -- to be called Dr Pepper Snapple Group -- and list it in New York, after a world credit squeeze derailed a lucrative sale to private-equity buyers.

The group, which makes Dairy Milk chocolate, Trident gum and Halls cough drops, reported 2007 underlying pretax profit of 915 million pounds, below an analyst forecast range of 922 to 936 million and a consensus forecast of 929 million pounds.

Cadbury is raising the 2007 dividend by 11 percent to 15.5p.
 

Medtronic quarterly net falls

(Reuters) - Medical device maker Medtronic Inc (MDT.N: Quote, Profile, Research) on Tuesday said quarterly earnings fell on charges related to the acquisition of Kyphon.
 
Fiscal third-quarter net earnings were $77 million, or 7 cents a share, compared with $710 million, or 61 cents a share, a year earlier.
 

Monday, February 18, 2008

Euro zone growth may be weaker than hoped: Noyer

(Reuters) - European Central Bank (ECB) Governing Council member Christian Noyer said in an interview released on Sunday euro zone growth might be weaker than hoped as a result of market turmoil but he saw no "big setback."

In an interview with the Financial Times newspaper, Noyer said French banks' exposure to the U.S. subprime market was lower than others' and the European Union economy should resist financial turmoil better than that of the United States.

"Growth may be weaker than we hoped but I don't see a big setback," Noyer said when asked about the impact of the subprime crisis on the European economy.

ECB President Jean-Claude Trichet warned after the last rate meeting on February 7 that the euro zone economy might grow slower than potential in 2008.

In December ECB economists forecast 2008 growth of around 2 percent, but a number of ECB policymakers have suggested this might need to be revised down when fresh projections are published in March.

"If we are a little bit below potential, but still close to the average we've had for a number of years... I don't think that makes (structural) reforms impossible," Noyer said in a transcript of the interview released ahead of publication in Monday's edition.
 

Westland/Hallmark Recalls Record Amount of U.S. Beef

(Bloomberg) -- Westland/Hallmark Meat Co., the supplier of ground beef to U.S. school lunch programs, recalled a record 143.4 million pounds of meat after the government said it was unfit for humans.

The company, based in Chino, California, withdrew all raw and frozen products made since Feb. 1, 2006, because some of the cattle weren't fully inspected, the Department of Agriculture said in a statement yesterday. A total of 37 million pounds went to nutrition programs, including schools, since October 2006.

The order relates to so-called downer cattle discovered between the normal USDA inspection before slaughter and the killing of the animals, the department said. Downer cattle, those unable to walk, are banned from the food chain as a precaution against Bovine Spongiform Encephalopathy, also known as mad-cow disease, the USDA said.

The risk of consumers contracting BSE from the meat is ``negligible,'' the USDA said in a separate statement. ``The prevalence of the disease in the United States is extremely low,'' with two animals testing positive for the disease out of 759,000 tested nationwide since June 2004, the department said.

A video taken at the plant released by the Humane Society of the U.S. shows workers kicking cows and using electric prods and forklifts to make them move. Two Westland/Hallmark former employees were charged with animal cruelty by the San Bernardino District Attorney's office Feb. 15.

Operations Ceased

The company ceased operations last month after the video was revealed. In a statement posted on the company's Web site Feb. 3, Westland/Hallmark president Steve Mendell said the company was cooperating fully with the USDA. Two messages left yesterday with Westland/Hallmark seeking comment weren't immediately returned. Today is a U.S. public holiday.

The U.S. consumed 28 billion pounds of beef in 2006 and the U.S. beef industry was worth $71 billion that year on a retail basis, according to the USDA. Beef exports totaled 1.15 billion pounds worth $1.63 billion.

The recall shouldn't create a supply problem, Kim Essex, vice president of communications at the National Cattlemen's Beef Association, said in a Bloomberg Television interview from Denver today. ``I am very confident in the safety of the beef supply,'' she said.

The recalled meat is considered a low risk to food supply because almost all the meat has either been consumed or is being held from distribution, Richard Raymond, USDA under secretary for food safety, said in a teleconference call yesterday.

Hamburger Patties

The ground beef bought for schools was processed into products such as hamburger patties, chili meat and taco meat, Bill Sessions from the USDA's Agricultural Marketing Service, said on the call, according to a transcript.

The recall is categorized as a Class II, meaning ``there is a remote probability of adverse health consequences from the use of the product,'' according to Raymond.

The recall is more than four times the size of the previous record, a 35 million-pound removal of Thorn Apple Valley Inc. ready-to-eat meats potentially contaminated with listeria in January 1999, Raymond said.

``All of the larger recalls done in the past were all Class I,'' Raymond said. ``In this one we feel there is a very, very remote possibility of anyone suffering health consequences.''

About 150 U.S. school districts are no longer using beef from Hallmark Meat Packing Co., the Associated Press reported, without saying where it got the information.

Kidney Exports

Schools in Washington state and California said they wouldn't serve students beef for now, Agence France-Presse reported, citing unidentified local officials.

Hamburger patties and meatballs in schools in South Florida are being destroyed as part of the recall, the South Florida Sun- Sentinel newspaper reported, without saying where it got the information.

Westland/Hallmark's exports last year consisted of kidneys and livers to Ivory Coast and livers to Angola, the USDA said. There have been no exports to Japan or South Korea since at least 2003, the department said.

Japan and South Korea banned U.S. beef imports after the first U.S. case of mad-cow disease was found in 2003. Japan, once the largest U.S. beef export market, now only imports meat from animals aged 20 months or younger, which have a lower risk.

The 27-nation European Union only imports hormone-free beef from the U.S., which has to be produced separately from other livestock, Michael Mann, a spokesman for agriculture and rural development at the European Commission, said by telephone today. The EU exported 87 tons of beef to the U.S. in 2006.
 

Rio Seeks Higher Prices Than Vale in Iron-Ore Talks

(Bloomberg) -- Rio Tinto Group, the world's second- largest iron-ore producer, is seeking bigger price increases from Asia steelmakers than Brazilian rival Cia. Vale do Rio Doce.

Rio wants to receive a ``freight premium'' to reflect the lower cost for customers in China, Japan and South Korea of shipping ore from ports in Australia rather than Brazil, it said today in a statement distributed by the Regulatory News Service. Nippon Steel Corp., JFE Holdings Inc. and Posco today said they agreed to a 65 percent increase in Vale's prices from April 1.

This ``could mark the end of the `one price fits all' settlements of the last few decades,'' Michael Rawlinson, head of mining, resources and energy at Liberum Capital Ltd. in London, wrote today in a report. A full recovery by Rio of the freight premium to China would mean a ``massive'' 154 percent boost in ore prices, he said.

In comparison, JFE agreed to a 71 percent boost for higher- grade ore from Vale's Carajas mine in Brazil, while the biggest- ever annual gain was 71.5 percent in the year that started April 1, 2005.

Contract prices for the steelmaking ingredient have risen to a record for a sixth straight year as China boosts output of the metal to feed a construction boom. Soaring freight fees last year added to the price increases for Asian steelmakers and made iron ore from Australia more cost effective than Brazilian supplies.

Carajas Settlement

Rio Tinto ``will continue to negotiate to obtain a freight premium, to reflect its proximity to Asia and its major customers,'' Sam Walsh, chief executive officer of the London- based company's iron ore unit, said today in the statement.

Rio will also seek ``further customer clarification about the settlements, and in particular the settlement for Carajas ore, which is the relevant reference ore for Rio Tinto products,'' Walsh said.

BHP Billiton Ltd., the world's largest mining company, tried and failed to negotiate a freight premium in 2005, Macquarie analyst Jim Lennon said today by telephone from London. The company didn't get the support of Rio and other producers at the time, he added.

``This has never happened before, but it's certainly a possibility,'' Lennon said. ``The fact that spot prices are three times higher than contract prices means that 65 percent is almost being viewed as a disappointment by the market.''

BHP, based in Melbourne, has started seeking regulatory approvals for its increased $141 billion all-share hostile bid for Rio, which was rejected by Rio on Feb. 6 as too low. A combination of the companies would rival Vale in iron-ore output.