Sunday, April 18, 2010
Wednesday, May 20, 2009
Welch Criticizes Obama on Handling Chrysler Bankruptcy
(Bloomberg) -- Jack Welch, former chief executive officer of General Electric Co., criticized the government- backed bankruptcy of Chrysler LLC for favoring unions at the expense of creditors and said President Barack Obama’s economic stimulus programs will cause budget deficits.
“I don’t particularly like where he’s taking us,” Welch said, referring to Obama, during an interview yesterday at the Boston Convention Center. Welch, 73, who led GE from 1981 to 2001, was a guest speaker at the New England Business Xpo.
“To get the money he needs, he has to have a fake budget,” Welch said. “He’s fooling people about how we’re going to have the top line support the programs in the middle without enormous taxes and some programs not going.”
White House spokesman Reid Cherlin had no immediate comment late yesterday.
Obama has defended the $17 billion in cuts he’s making in a $3.55 trillion budget against criticism from lawmakers by saying any savings, large or small, “add up.” The administration’s plan eliminates or reduces 12 federal programs, from a $1 million Christopher Columbus fellowship foundation to $91 million for a nuclear waste repository in Nevada. The reductions represent one-half of 1 percent of the entire budget.
Welch praised Obama’s communication skills, particularly his speech at the University of Notre Dame on Sunday. Still, he said he’s concerned about some of Obama’s programs.
Among them is the restructuring plan for Chrysler LLC. The automaker and the government plan to use bankruptcy to transfer Chrysler’s best assets, such as its Jeep brand, into a new company with streamlined costs. The Chrysler workers pension fund will get a 55 percent stake.
Chrysler filed for bankruptcy in April after a group of secured creditors refused to participate in a $2.25 billion buyout for a $6.9 billion Chrysler loan. The government said the loan buyout would have prevented the bankruptcy, and Obama criticized the lenders for speculating at taxpayers’ expense.
Read more here
“I don’t particularly like where he’s taking us,” Welch said, referring to Obama, during an interview yesterday at the Boston Convention Center. Welch, 73, who led GE from 1981 to 2001, was a guest speaker at the New England Business Xpo.
“To get the money he needs, he has to have a fake budget,” Welch said. “He’s fooling people about how we’re going to have the top line support the programs in the middle without enormous taxes and some programs not going.”
White House spokesman Reid Cherlin had no immediate comment late yesterday.
Obama has defended the $17 billion in cuts he’s making in a $3.55 trillion budget against criticism from lawmakers by saying any savings, large or small, “add up.” The administration’s plan eliminates or reduces 12 federal programs, from a $1 million Christopher Columbus fellowship foundation to $91 million for a nuclear waste repository in Nevada. The reductions represent one-half of 1 percent of the entire budget.
Welch praised Obama’s communication skills, particularly his speech at the University of Notre Dame on Sunday. Still, he said he’s concerned about some of Obama’s programs.
Among them is the restructuring plan for Chrysler LLC. The automaker and the government plan to use bankruptcy to transfer Chrysler’s best assets, such as its Jeep brand, into a new company with streamlined costs. The Chrysler workers pension fund will get a 55 percent stake.
Chrysler filed for bankruptcy in April after a group of secured creditors refused to participate in a $2.25 billion buyout for a $6.9 billion Chrysler loan. The government said the loan buyout would have prevented the bankruptcy, and Obama criticized the lenders for speculating at taxpayers’ expense.
Read more here
Tuesday, May 19, 2009
Boeing Sees ‘High Water Mark’ in Defense Spending
(Bloomberg) -- Boeing Co. is making acquisitions and refreshing older product lines to prepare for what may be a peak for military purchases next year as U.S. President Barack Obama shifts priorities, the company’s top defense executive said.
“It’s possible that 2010 could be the high-water mark as far as defense spending” on new weapons, Jim Albaugh, president of Boeing’s Integrated Defense Systems, said in an interview.
Boeing, the second-largest defense contractor and commercial-plane maker, had four of its main weapons programs pared or canceled in the Pentagon’s 2010 budget proposal last month. Obama and Defense Secretary Robert Gates want to focus on conflicts like those in Afghanistan and Iraq while curtailing programs such as Boeing’s Future Combat Systems for the Army and the F-22 jet, which was designed to fight a Cold War adversary. The military generated 52 percent of Boeing’s $61 billion in revenue last year.
Chicago-based Boeing anticipated a slowdown in traditional defense spending and bought six companies last year to boost offerings of unmanned vehicles, cyber-security systems and logistics, Albaugh said. Boeing also is shifting more work in- house, such as building some electronics instead of buying them, moving away from a model of integrating parts made by suppliers.
“We know that being vertically integrated today makes your programs somewhat less vulnerable in the future,” Albaugh said in yesterday’s interview in New York. The Defense Department became “a little disenchanted” with having private companies oversee integration of all the parts made for weapons systems.
Extending Older Programs
Boeing also is trying to extend older programs, such as by offering a stealth version of its 34-year-old F-15 fighter, and developing other uses for products like the experimental X-45 drone aircraft that was terminated in 2006, Albaugh said.
“It is simply not reasonable to expect a defense budget to continue increasing at the same rate,” Gates told the Senate Armed Services Committee on May 14. The Pentagon is seeking $664 billion for fiscal year 2010 including $130 billion for wars. The base budget of $533.8 billion represents a 2 percent increase when adjusted for inflation, half the average of the previous eight years.
Boeing bought six companies in 2008 including drone-maker Insitu Inc. of Bingen, Washington, and Digital Receiver Technology Inc. of Germantown, Maryland, a maker of wireless communication equipment for the U.S. intelligence services. The value of the deals wasn’t disclosed, and Albaugh declined to identify targets or say how much he might spend this year.
‘Driving Cash’
The planemaker’s cash depletion in the past year, due in part to a strike at the commercial side of the business and higher pension costs, shouldn’t hamper expansion, Albaugh said. Chief Executive Officer Jim McNerney and Chief Financial Officer James Bell are “driving cash pretty hard” and have been supportive of acquisitions, he said.
Boeing lost 49 percent of its market value in the past year, the most among the dozen members of the Standard & Poor’s 500 Aerospace & Defense Index. The company, which trails only Lockheed Martin Corp. in defense, gained 25 cents to $44.62 at 4 p.m. in New York Stock Exchange composite trading.
Boeing’s new vertical-integration approach will be limited because not all of the technologies needed to build a weapon can be brought in-house, said Howard Rubel, an analyst at Jefferies & Co. in New York.
Companies will have to continue to collaborate to deliver the weapons the Pentagon needs, Rubel said. Boeing doesn’t make enough of its own sensors to outfit its airplanes, and will depend on Northrop Grumman Corp. and Raytheon Co. for some of those products such as airborne radar, he said.
‘Gild the Lily’
“They know they’re not in the best shape and it’s hard to see how they can gild the lily when a number of their programs are challenged,” Rubel said.
Some of Boeing’s current military programs may get a boost from the new budget plan, including a “great helicopter portfolio” that will benefit from Secretary Gates’s focus on counterinsurgency missions, Rubel said.
“As we’ve gotten more visibility into the 2010 budget, we see some real positives,” Albaugh said. “Special Forces is going to be a real focus; that means more helicopters.”
Unmanned vehicles and tactical reconnaissance systems probably will also be in the Pentagon’s spending plan, he said.
Read more here
“It’s possible that 2010 could be the high-water mark as far as defense spending” on new weapons, Jim Albaugh, president of Boeing’s Integrated Defense Systems, said in an interview.
Boeing, the second-largest defense contractor and commercial-plane maker, had four of its main weapons programs pared or canceled in the Pentagon’s 2010 budget proposal last month. Obama and Defense Secretary Robert Gates want to focus on conflicts like those in Afghanistan and Iraq while curtailing programs such as Boeing’s Future Combat Systems for the Army and the F-22 jet, which was designed to fight a Cold War adversary. The military generated 52 percent of Boeing’s $61 billion in revenue last year.
Chicago-based Boeing anticipated a slowdown in traditional defense spending and bought six companies last year to boost offerings of unmanned vehicles, cyber-security systems and logistics, Albaugh said. Boeing also is shifting more work in- house, such as building some electronics instead of buying them, moving away from a model of integrating parts made by suppliers.
“We know that being vertically integrated today makes your programs somewhat less vulnerable in the future,” Albaugh said in yesterday’s interview in New York. The Defense Department became “a little disenchanted” with having private companies oversee integration of all the parts made for weapons systems.
Extending Older Programs
Boeing also is trying to extend older programs, such as by offering a stealth version of its 34-year-old F-15 fighter, and developing other uses for products like the experimental X-45 drone aircraft that was terminated in 2006, Albaugh said.
“It is simply not reasonable to expect a defense budget to continue increasing at the same rate,” Gates told the Senate Armed Services Committee on May 14. The Pentagon is seeking $664 billion for fiscal year 2010 including $130 billion for wars. The base budget of $533.8 billion represents a 2 percent increase when adjusted for inflation, half the average of the previous eight years.
Boeing bought six companies in 2008 including drone-maker Insitu Inc. of Bingen, Washington, and Digital Receiver Technology Inc. of Germantown, Maryland, a maker of wireless communication equipment for the U.S. intelligence services. The value of the deals wasn’t disclosed, and Albaugh declined to identify targets or say how much he might spend this year.
‘Driving Cash’
The planemaker’s cash depletion in the past year, due in part to a strike at the commercial side of the business and higher pension costs, shouldn’t hamper expansion, Albaugh said. Chief Executive Officer Jim McNerney and Chief Financial Officer James Bell are “driving cash pretty hard” and have been supportive of acquisitions, he said.
Boeing lost 49 percent of its market value in the past year, the most among the dozen members of the Standard & Poor’s 500 Aerospace & Defense Index. The company, which trails only Lockheed Martin Corp. in defense, gained 25 cents to $44.62 at 4 p.m. in New York Stock Exchange composite trading.
Boeing’s new vertical-integration approach will be limited because not all of the technologies needed to build a weapon can be brought in-house, said Howard Rubel, an analyst at Jefferies & Co. in New York.
Companies will have to continue to collaborate to deliver the weapons the Pentagon needs, Rubel said. Boeing doesn’t make enough of its own sensors to outfit its airplanes, and will depend on Northrop Grumman Corp. and Raytheon Co. for some of those products such as airborne radar, he said.
‘Gild the Lily’
“They know they’re not in the best shape and it’s hard to see how they can gild the lily when a number of their programs are challenged,” Rubel said.
Some of Boeing’s current military programs may get a boost from the new budget plan, including a “great helicopter portfolio” that will benefit from Secretary Gates’s focus on counterinsurgency missions, Rubel said.
“As we’ve gotten more visibility into the 2010 budget, we see some real positives,” Albaugh said. “Special Forces is going to be a real focus; that means more helicopters.”
Unmanned vehicles and tactical reconnaissance systems probably will also be in the Pentagon’s spending plan, he said.
Read more here
Sunday, May 17, 2009
Onyx sues Bayer over anti-cancer compound
(Reuters) - Onyx Pharmaceuticals Inc (ONXX.O) said on Sunday it sued Bayer AG (BAYG.DE) over its rights to an anti-cancer compound that it says it discovered during joint research with the German drugmaker.
Onyx's lawsuit, filed in the U.S. District Court for the Northern District of California, seeks a declaration that fluoro-sorafenib is a jointly owned collaboration compound under an agreement between the two companies.
Onyx said it learned that the compound is a variant of Nexavar tablets, which Onyx and Bayer co-develop and market.
The company said fluoro-sorafenib has the same chemical structure as Nexavar except that fluoro-sorafenib contains a fluorine atom instead of a hydrogen atom.
"The new molecule had been identified in 1998 during the research collaboration period by the companies' joint research teams," Onyx said in a statement. "Discussions with Bayer regarding Onyx's rights to fluoro-sorafenib under the companies' 1994 collaboration agreement were not productive."
Doctors use Nexavar to treat liver cancer and advanced kidney cancer. Onyx and Bayer co-developed Nexavar and have marketed the drug in the United States and other countries.
Bayer said it disagrees with Onyx.
"We plan to defend ourselves against the complaint as we believe that Onyx has no rights to the substance," Bayer said in an e-mailed statement.
A hearing has not been scheduled yet, an Onyx spokeswoman said.
Onyx's revenue from its agreement rose 10 percent to $53.7 million in the first quarter of this year, it said on May 6.
Read more here
Onyx's lawsuit, filed in the U.S. District Court for the Northern District of California, seeks a declaration that fluoro-sorafenib is a jointly owned collaboration compound under an agreement between the two companies.
Onyx said it learned that the compound is a variant of Nexavar tablets, which Onyx and Bayer co-develop and market.
The company said fluoro-sorafenib has the same chemical structure as Nexavar except that fluoro-sorafenib contains a fluorine atom instead of a hydrogen atom.
"The new molecule had been identified in 1998 during the research collaboration period by the companies' joint research teams," Onyx said in a statement. "Discussions with Bayer regarding Onyx's rights to fluoro-sorafenib under the companies' 1994 collaboration agreement were not productive."
Doctors use Nexavar to treat liver cancer and advanced kidney cancer. Onyx and Bayer co-developed Nexavar and have marketed the drug in the United States and other countries.
Bayer said it disagrees with Onyx.
"We plan to defend ourselves against the complaint as we believe that Onyx has no rights to the substance," Bayer said in an e-mailed statement.
A hearing has not been scheduled yet, an Onyx spokeswoman said.
Onyx's revenue from its agreement rose 10 percent to $53.7 million in the first quarter of this year, it said on May 6.
Read more here
Biotech Jobs Germinate as San Francisco Diversifies Economy
(Bloomberg) -- A once-vacant rail yard 2 miles from downtown San Francisco is coming to life as a center of biotechnology and transforming San Francisco’s economy beyond tourism and financial services.
San Francisco is too dependent on those industries, says Mayor Gavin Newsom, who’s using a tax cut and other incentives to woo businesses with growth potential. He’s especially targeting biotechnology, which has a foothold in the city’s emerging biomedical district known as Mission Bay.
Pfizer Inc., the world’s largest drugmaker, will open a five-story biotechnology headquarters in Mission Bay next year. At a so-called biotech hotel, where start-ups rent space, a scientist studies tissue samples for Groningen, Netherlands- based Brains On-Line BV. Partners at Versant Ventures and other venture capital firms on the hotel’s top floor can look out at the industry they’re funding.
“This area is going to pop,” said Gail Maderis, chief executive officer of FivePrime Therapeutics, the first biotechnology company to move to Mission Bay. “We have pharma and biotech companies coming through all the time and they look and see Mission Bay growing. This will be the largest life sciences hub west of the Rockies.”
Newsom, 41, sweetened the appeal to biotech companies by waiving the 1.25 percent payroll tax through 2015, allowing extra parking spaces and expediting building permits.
“Five years ago, there were three biotech companies in the city; now there’s 47,” Newsom, a Democrat running for California governor, said in an interview. “I have great confidence that things will continue to advance.”
Growth by Diversifying
Biotech companies added 300 jobs in the city last year as it lost a total of 20,000. About one of every seven jobs in San Francisco is tied to tourism, out of a daily workforce of about 550,000, according to the state Employment Development Department.
“Diversifying the economy is absolutely a good thing to do,” said George Jouganatos, an economic consultant in Sacramento who teaches at California State University. “San Francisco has a large financial sector, which is in decline, and the tourism business is in somewhat of a decline.”
The city’s budget this fiscal year is $6.5 billion, said Ted Egan, chief economist. Hotel tax revenues fell 30 percent in February and 20 percent in March from a year earlier, he said. Hotel occupancy fell to 60 percent in February from 74 percent a year earlier.
The biotechnology cluster is growing on a former rail yard south of downtown. The site once crisscrossed with sidings and spurs was deserted in the 1960s when shipping shifted across the bay to Oakland.
University Leads Way
After a redevelopment plan was approved in 1998, the University of California at San Francisco built three biomedical research facilities, a community center and four apartment buildings for students and staff. The biotech industry eventually followed.
FivePrime, a closely held company that’s identifying protein-based therapies, moved in 2005 from South San Francisco, home of Roche’s Genentech Inc. Savings from the tax waiver are enough to pay one scientist, said Maderis, 51. That’s a big boost for a 100-employee startup that’s 10 years from being profitable, she said.
Having a Mission Bay address helps recruit employees, said Alan Sachs, vice president of Merck & Co.’s research division. Whitehouse Station, New Jersey-based Merck’s Sirna Therapeutics unit will fully occupy its quarters next year, he said.
New York-based Pfizer will bring 120 workers when its building is completed, said Elizabeth Power, a spokeswoman.
Read more here
San Francisco is too dependent on those industries, says Mayor Gavin Newsom, who’s using a tax cut and other incentives to woo businesses with growth potential. He’s especially targeting biotechnology, which has a foothold in the city’s emerging biomedical district known as Mission Bay.
Pfizer Inc., the world’s largest drugmaker, will open a five-story biotechnology headquarters in Mission Bay next year. At a so-called biotech hotel, where start-ups rent space, a scientist studies tissue samples for Groningen, Netherlands- based Brains On-Line BV. Partners at Versant Ventures and other venture capital firms on the hotel’s top floor can look out at the industry they’re funding.
“This area is going to pop,” said Gail Maderis, chief executive officer of FivePrime Therapeutics, the first biotechnology company to move to Mission Bay. “We have pharma and biotech companies coming through all the time and they look and see Mission Bay growing. This will be the largest life sciences hub west of the Rockies.”
Newsom, 41, sweetened the appeal to biotech companies by waiving the 1.25 percent payroll tax through 2015, allowing extra parking spaces and expediting building permits.
“Five years ago, there were three biotech companies in the city; now there’s 47,” Newsom, a Democrat running for California governor, said in an interview. “I have great confidence that things will continue to advance.”
Growth by Diversifying
Biotech companies added 300 jobs in the city last year as it lost a total of 20,000. About one of every seven jobs in San Francisco is tied to tourism, out of a daily workforce of about 550,000, according to the state Employment Development Department.
“Diversifying the economy is absolutely a good thing to do,” said George Jouganatos, an economic consultant in Sacramento who teaches at California State University. “San Francisco has a large financial sector, which is in decline, and the tourism business is in somewhat of a decline.”
The city’s budget this fiscal year is $6.5 billion, said Ted Egan, chief economist. Hotel tax revenues fell 30 percent in February and 20 percent in March from a year earlier, he said. Hotel occupancy fell to 60 percent in February from 74 percent a year earlier.
The biotechnology cluster is growing on a former rail yard south of downtown. The site once crisscrossed with sidings and spurs was deserted in the 1960s when shipping shifted across the bay to Oakland.
University Leads Way
After a redevelopment plan was approved in 1998, the University of California at San Francisco built three biomedical research facilities, a community center and four apartment buildings for students and staff. The biotech industry eventually followed.
FivePrime, a closely held company that’s identifying protein-based therapies, moved in 2005 from South San Francisco, home of Roche’s Genentech Inc. Savings from the tax waiver are enough to pay one scientist, said Maderis, 51. That’s a big boost for a 100-employee startup that’s 10 years from being profitable, she said.
Having a Mission Bay address helps recruit employees, said Alan Sachs, vice president of Merck & Co.’s research division. Whitehouse Station, New Jersey-based Merck’s Sirna Therapeutics unit will fully occupy its quarters next year, he said.
New York-based Pfizer will bring 120 workers when its building is completed, said Elizabeth Power, a spokeswoman.
Read more here
Thursday, May 14, 2009
Toyota Prius orders mount as shake-up looms
(Reuters) - Toyota Motor Corp, under pressure ahead of a scheduled management shake-up, has won 75,000 orders for its new Prius hybrid, the Nikkei business daily said, promising a fierce battle for Honda Motor Co's rival Insight hybrid.
Toyota, facing a potential $8.6 billion operating loss in the year to next March, has previously announced plans to appoint the founder's grandson to head the company in June and make many other management changes including a new head for its loss making U.S. operations.
The Financial Times highlighted an upcoming change in Toyota's management, noting that the personnel line-up announced last month replaced 40 percent of top managers.
Toyota's shares gained 2 percent, outperforming Honda's 1.3 percent rise and just ahead of the benchmark Nikkei share average's 1.7 percent.
Honda's new Insight hybrid, launched in early February in Japan, has outpaced the company's sales forecast with sales of nearly 20,000 units in the first three months.
A Toyota spokeswoman could not confirm the Nikkei report, saying the automaker had not compiled dealers' orders ahead of a scheduled launch on Monday.
Toyota has said it would bring back a former senior executive, Yoshimi Inaba, to lead its U.S. operations after he had left the company in 2007 to run an airport in Nagoya, near Toyota's headquarters.
Read more here
Toyota, facing a potential $8.6 billion operating loss in the year to next March, has previously announced plans to appoint the founder's grandson to head the company in June and make many other management changes including a new head for its loss making U.S. operations.
The Financial Times highlighted an upcoming change in Toyota's management, noting that the personnel line-up announced last month replaced 40 percent of top managers.
Toyota's shares gained 2 percent, outperforming Honda's 1.3 percent rise and just ahead of the benchmark Nikkei share average's 1.7 percent.
Honda's new Insight hybrid, launched in early February in Japan, has outpaced the company's sales forecast with sales of nearly 20,000 units in the first three months.
A Toyota spokeswoman could not confirm the Nikkei report, saying the automaker had not compiled dealers' orders ahead of a scheduled launch on Monday.
Toyota has said it would bring back a former senior executive, Yoshimi Inaba, to lead its U.S. operations after he had left the company in 2007 to run an airport in Nagoya, near Toyota's headquarters.
Read more here
Elliott Seeks Credit Swaps Payday in Failing Firms
(Bloomberg) -- Elliott Management Corp., the hedge fund that almost pushed the government of Peru into default in 2000, is now seeking to profit from the failure of distressed companies.
About 11 percent of Elliott’s $13 billion of assets were in so-called basis trades at the end of the first quarter, meaning it bought bonds and credit-default swaps that protect against losses on the debt, according to a report dated April 29 sent to investors and obtained by Bloomberg News.
“These trades are among the most interesting arbitrage trades in our book, and they are especially attractive given their extra profitability in the event of default of the underlying referenced obligation,” Elliott said in the letter.
New York-based Elliott, founded by Paul Singer in 1977, joins Deutsche Bank AG and Citadel Investment Group LLC in seeking to make money from the trades, pitting them against traditional creditors as defaults reach the highest since 2002.
Elliott has a bet on Clear Channel Communications Inc., which Moody’s Investors Service said will likely need to restructure its debt this year, potentially making it harder for the largest U.S. radio broadcaster to skirt bankruptcy because some of its creditors stand to profit from its failure.
‘Easy Decision’
“Investors will hold out if they would benefit more if there’s a default than a successful distressed debt exchange,” said Kingman Penniman, president of high-yield research firm KDP Investment Advisors in Montpelier, Vermont. “It’s an easy decision to say ‘No’ and put the company into bankruptcy.”
Credit-default swaps were created by JPMorgan Chase & Co. more than a decade ago to hedge against losses from bank loans. They pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent.
Hedge funds, insurance companies and asset managers are now using them to speculate on the creditworthiness of companies, sending the amount of contracts outstanding to $28.2 trillion as of May 8, according to the Depository Trust & Clearing Corp., which runs a central registry that captures most trading.
At least 32 companies including newspaper publisher Gannett Co. and department store owner Saks Inc. had more credit-default swaps outstanding than the bonds the contracts protected, according to a March study by Garman Research LLC.
“Investors are no longer quite as hostage to the companies to whom they lend,” said Christopher Garman, chief executive officer of the Orinda, California-based debt research firm.
Contracts Outstanding
A net $2 billion of protection was outstanding against a default by San Antonio, Texas-based Clear Channel as of May 1, according to the DTCC. The broadcaster has about $6.6 billion of bonds and more than $15 billion of senior secured debt.
Elliott holds Clear Channel loans, which it has hedged with credit-default swaps, and also has a basis trade on the broadcaster, according to the letter. The details on the firm’s holdings are dated March 31.
“Elliott, along with many other financial institutions, uses basis arbitrage as a trading and hedging tool to generate a current yield plus additional profits in the event of market normalization or default,” the firm said in a statement. “Elliott’s consistent performance is attributable, in part, to its history of success in hedging its portfolio.”
Jennifer Gery-Egan, a Clear Channel spokeswoman, declined to comment on the company’s financial health in an e-mail.
CreditSights Inc. and Barclays Capital analysts have cited the rise in basis trades for restructuring attempts that floundered. Residential Capital LLC faced bondholder resistance to its debt-exchange proposal in December partly because the investors also held derivatives, Bradley Rogoff, an analyst at Barclays in New York, said in a report that month. Minneapolis- based mortgage lender ResCap was later bailed out by taxpayers.
Gannett’s Attempt
Gannett, the publisher of USA Today, may have fallen short of its goals to reduce debt maturing in 2011 and 2012 in part because “a large percentage” of bondholders had bought credit- default swaps tied to the debt, CreditSights analysts said in a May 6 report. Citigroup Inc. analysts led by John Fenn in New York recommended investors buy McLean, Virginia-based Gannett’s bonds and credit-default swaps.
Frankfurt-based Deutsche Bank and hedge fund Citadel of Chicago were among the firms that piled into basis trades last year as the gap between the two markets began to widen. The difference expanded to a record after the collapse of Lehman Brothers Holdings Inc., leading to losses.
The basis has since converged, allowing investors to recoup some of their losses or earn profits for those that did the trades after the Lehman failure.
Deutsche Bank made money by owning debt and credit swaps of Lyondell Chemical Co., a Houston-based oil refiner and chemical producer that went bankrupt in January, according to a person with direct knowledge of the firm’s trading.
Read more here
About 11 percent of Elliott’s $13 billion of assets were in so-called basis trades at the end of the first quarter, meaning it bought bonds and credit-default swaps that protect against losses on the debt, according to a report dated April 29 sent to investors and obtained by Bloomberg News.
“These trades are among the most interesting arbitrage trades in our book, and they are especially attractive given their extra profitability in the event of default of the underlying referenced obligation,” Elliott said in the letter.
New York-based Elliott, founded by Paul Singer in 1977, joins Deutsche Bank AG and Citadel Investment Group LLC in seeking to make money from the trades, pitting them against traditional creditors as defaults reach the highest since 2002.
Elliott has a bet on Clear Channel Communications Inc., which Moody’s Investors Service said will likely need to restructure its debt this year, potentially making it harder for the largest U.S. radio broadcaster to skirt bankruptcy because some of its creditors stand to profit from its failure.
‘Easy Decision’
“Investors will hold out if they would benefit more if there’s a default than a successful distressed debt exchange,” said Kingman Penniman, president of high-yield research firm KDP Investment Advisors in Montpelier, Vermont. “It’s an easy decision to say ‘No’ and put the company into bankruptcy.”
Credit-default swaps were created by JPMorgan Chase & Co. more than a decade ago to hedge against losses from bank loans. They pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent.
Hedge funds, insurance companies and asset managers are now using them to speculate on the creditworthiness of companies, sending the amount of contracts outstanding to $28.2 trillion as of May 8, according to the Depository Trust & Clearing Corp., which runs a central registry that captures most trading.
At least 32 companies including newspaper publisher Gannett Co. and department store owner Saks Inc. had more credit-default swaps outstanding than the bonds the contracts protected, according to a March study by Garman Research LLC.
“Investors are no longer quite as hostage to the companies to whom they lend,” said Christopher Garman, chief executive officer of the Orinda, California-based debt research firm.
Contracts Outstanding
A net $2 billion of protection was outstanding against a default by San Antonio, Texas-based Clear Channel as of May 1, according to the DTCC. The broadcaster has about $6.6 billion of bonds and more than $15 billion of senior secured debt.
Elliott holds Clear Channel loans, which it has hedged with credit-default swaps, and also has a basis trade on the broadcaster, according to the letter. The details on the firm’s holdings are dated March 31.
“Elliott, along with many other financial institutions, uses basis arbitrage as a trading and hedging tool to generate a current yield plus additional profits in the event of market normalization or default,” the firm said in a statement. “Elliott’s consistent performance is attributable, in part, to its history of success in hedging its portfolio.”
Jennifer Gery-Egan, a Clear Channel spokeswoman, declined to comment on the company’s financial health in an e-mail.
CreditSights Inc. and Barclays Capital analysts have cited the rise in basis trades for restructuring attempts that floundered. Residential Capital LLC faced bondholder resistance to its debt-exchange proposal in December partly because the investors also held derivatives, Bradley Rogoff, an analyst at Barclays in New York, said in a report that month. Minneapolis- based mortgage lender ResCap was later bailed out by taxpayers.
Gannett’s Attempt
Gannett, the publisher of USA Today, may have fallen short of its goals to reduce debt maturing in 2011 and 2012 in part because “a large percentage” of bondholders had bought credit- default swaps tied to the debt, CreditSights analysts said in a May 6 report. Citigroup Inc. analysts led by John Fenn in New York recommended investors buy McLean, Virginia-based Gannett’s bonds and credit-default swaps.
Frankfurt-based Deutsche Bank and hedge fund Citadel of Chicago were among the firms that piled into basis trades last year as the gap between the two markets began to widen. The difference expanded to a record after the collapse of Lehman Brothers Holdings Inc., leading to losses.
The basis has since converged, allowing investors to recoup some of their losses or earn profits for those that did the trades after the Lehman failure.
Deutsche Bank made money by owning debt and credit swaps of Lyondell Chemical Co., a Houston-based oil refiner and chemical producer that went bankrupt in January, according to a person with direct knowledge of the firm’s trading.
Read more here
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