GM's woes

Yesterday, General Motors management took the time to explain how it intended to preserve the group's liquidity in 2008 and 2009. This latest set of restructuring measures comes just six weeks after the previous one (four truck plant closures and sale of the Hummer brand). It involves reducing office worker costs by 20% -- which would presumably mean making several thousand people redundant. This and other measures (including -- pensioners take note -- lower retiree healthcare) would help meet a new target of cutting costs by $10 billion. GM will also stop paying dividend on its common stock for now, reduce capital expenditure by $1.5 billion vs. plan, and sell up to $4 billion worth of assets (e.g. Hummer) to generate liquidity. GM holds some $24 billion in cash, but has an amazing cash-burning track-record. None of the new measures goes beyond the short-term: on the contrary, further cutbacks on white-collars and capital expenditure may well completely jeopardize GM's chances of coming up with a constructive longer-term vision.

Debt and equity analysts alike do not appear to be fooled by GM's latest announcement. Yesterday evening, after market hours, Moody's placed GM's ratings on review for a possible further downgrade (out of solidarity, Chrysler Automotive LLC's ratings are also on review, and those of Ford Motor Co remain on negative outlook). GM's senior unsecured debt is already rated Caa1, highlighting a very high likelihood of default. With sky-high oil prices and a GM portfolio full of fuel-guzzling models, who will want to take up the $2 to $3 billion of new financing that GM intends to issue? Surely not your conservative portfolio manager, but an aggressive breed that is probably betting on a debt-to-equity swap several years (or quarters?) down the road.

Continental's fight for independence

A few weeks ago, I would have said that the next big news about Continental AG would come on 31 July 2008, when the tyre and car component maker releases its results for the first half of 2008.

On 26 June, after Standard & Poor's changed the outlook to negative on its BBB credit rating, Continental's management insisted that they viewed their financing structure as "sound" and that this change would have "no effect on VDO financing – no additional costs". CFO Dr. Alan Hippe noted that this was equivalent to Moody's Baa2 with a negative outlook, and reflected the difficult market environment for issuing hybrid bonds. "Currently, we would only be able to place the hybrid bond planned as part of the VDO acquisition financing arrangements at extremely unfavorable conditions, which is why we have refrained from going ahead so far." The group continues to target annual sales of more than €26.4 billion in 2008.

But Continental is already back in the news. On Monday, it confirmed that "one brief conversation about a possible engagement by Schaeffler-Group in Continental AG took place at the end of last week." Yesterday, Schaeffler made a takeover offer for the group at €69.37 per share in cash. Unsurprisingly, this morning, Continental is announcing that "the Executive Board of Continental rejects the offer," adding that "the offer is highly opportunistic, does not come to the true value of Continental, does not create trust and lacks a convincing strategic rationale." The press release goes on to describe how Schaeffler took control 36% of Continental's capital "in an unlawful manner", or "using Porsche tactics" as the Financial Times says.

True, the Continental share price had under-performed the DAX index: since July 2007, it lost some 50% of its value before the recent surge, compared to only 25% in the case of the DAX. But the current share price reflects investors' belief that less than €70 per share (or the weighted average price over the last three months) is not sufficient.

But who is Schaeffler anyway? Well, it is a German-based industrial group that supplies the automotive, machinery and aviation/aerospace sectors with mechanical, mechatronic and precision components, including a whole variety of bearings. INA, FAG (since 2001) and LuK are household brands for its customers (and competitors like SKF). Synergies, if any, are with CAS (Continental Automotive Systems), rather than with the tyre activities of Continental. Schaeffler is "an independent family-owned company, which, as a major shareholder with a long-term outlook, offers Continental AG the stability and security it needs to continue on its course in a difficult market environment." Schaeffler says that it does not want to break up Continental and that it will not need to upstream cash flows from Continental to service the takeover financing package.


Continental is one of the healthiest groups in its sector, with an attractive combination of complementary segments that do not follow exactly the same demand or investment cycles, ensuring a reasonable cash flow stream even in "bad" years. Schaeffler's tactics may look mean, but maybe they will trigger a counter-offer from a deep-pocketed financial investor who has been wondering how to use its sponsors' cash. But as far as independence goes, it could well be time for Continental to waive it goodbye...

An Angel for Standard and Poor's Europe

Last Tuesday, Mr. Anthony L. Angel, aka Tony Angel, was appointed "executive managing director and head of its Europe, Middle East and Africa (EMEA) business" of Standard & Poor's, and will report to no less than Deven Sharma, president of S&P.

You will find more on the individual on his website http://www.tonyangel.co.uk/ -- but make sure you use .co.uk rather than .com, as the latter would bring you to rather less stern photos than you would expect from a Cambridge-educated solicitor. This appointment may well mark a change in corporate culture at S&P, where senior managers have long been the fruits of internal breeding and meritocracy. But it also highlights how crucial legal and regulatory matters have become for someone running a credit rating agency.

Two days later, the US's Securities and Exchange Commission voted to "formally propose a comprehensive series of credit rating agency reforms to bring increased transparency to the ratings process." In Europe, the latest recommendations of the Committee of European Securities Regulators (CESR) have focused on the rating of structured products.

The outgoing American-born Barbara Ridpath, managing director and chief credit officer of S&P's EMEA business, would have had to report to Angel. The personalities and egos would presumably have clashed. Not surprinsingly then, that, on the same day as the SEC announcement, 12 June 2008, Barbara Ridpath was officially appointed CEO of a new UK-based International Centre for Financial Regulation, established as an "industry-led project independent of the UK government" to become "an international centre of excellence focused entirely on financial regulation." She will take up her appointment in September 2008. In the meantime, enjoy your time off, Barbara!

Friday 13 June 2008

"Is Lehman the next Bear Stearns?", all the media ask. Hmm... I wonder whether they are trading as much as they used to. For, from what I understand, reduction in trading volumes because of counterparty risk concerns was the last "red flag" at Bear, before the Fed and JP Morgan came to the rescue. Now, Lehman is replacing some of its top executives: I am not convinced such measures bring much when the slide is already slippery.
In the freight sector, I am intrigued by the launch of new derivatives based on the Baltic Dry Index. Somehow it reminds me of the CBOT evolution: from farmers or orange-growers and their customers to purely-financial punters. Remember "Trading Places"? In freight, are these instruments new toys with which to burn one's fingers?Kemira Oyj, a Finnish chemicals group that counts paper companies among its main customers, has just announced that it would raise its prices by as much as 25% to try and offset higher raw material and energy costs. A week ago, it received a €100 million loan from the EIB to support its R&D activities. Sounds positive doesn't it? Perhaps, but not enough in Moody's eyes: they lower the group's short-term rating, which had been on review for downgrade since 17 March 2008, to Not-Prime, from P-3. Unfortunate timing, but presumably correct decision, as financial difficulties among customers are likely to hinder price-raising efforts (37% of 2007 revenues from Pulp & Paper produts and 22% from Coatings, plus 25% from Water treatment products, which, in turn, are frequently used in the paper industry).
This follows Moody's downgrades two days ago of Sappi, the South African paper company (to Ba2/stable corporate family and debt ratings), and of the French coated fine paper company Lecta SA (to B1/stable corporate family and B3/stable debt ratings).
M-Real will not sell its Reflex mill to Arjowiggins. The companies had envisaged the deal in October 2007, but the European Commission, in its capacity of M&A spoilsport, decided last week that the transaction could only take place if Arjowiggins sold off Reflex's carbonless and digital imaging activities. Anyone else interested in Reflex?