Credit Crisis: Challenges Of Funding Giant Deals
Wrigley Deal Highlights Challenges Of Funding Giant Deals[full article]Snickers maker Mars Inc.'s decision to buy Wm. Wrigley Jr. Co. (WWY) with financial help from Warren Buffett's Berkshire Hathaway Inc. (BRKA BRKB) highlights the growing role that nontraditional sources of financing have begun to play in making deals.
Private equity firms and others were able to engineer giant deals in 2006 and early 2007, thanks mainly to easy access to financing from banks. But as debt investors became less willing to finance new deals, buyers have had to look into less obvious sources of funding.
"It's a large deal. Large deals are having a hard time getting done and Mars is probably looking for certainty on the financing," said Ken Wasik, an investment banker who heads the consumer products group at Jefferies investment bank, about Berkshire's role in the Wrigley transaction.
Berkshire is putting in the "subordinate debt" or the riskier layer, which is the part of debt that the market is having the most trouble with right now, he said. "The credit markets right now are not firmed up to the point where there is an active market for that type of financing," Wasik said.
Funding for the roughly $23 billion Wrigley transaction includes about $11 billion from Mars, a $5.7 billion committed senior debt facility from Goldman Sachs (GS), and $4.4 billion of subordinated debt from Berkshire Hathaway. At closing Berkshire will also buy a $2.1 billion stake in Wrigley at a discount to the price being paid Wrigley shareholders.
"There is no question that the financial markets are very challenging right now," said Executive Chairman Bill Wrigley Jr. during a conference call Monday. "Coming up with the capital to make this deal work was a challenge." More details on the structure of the deal are likely to available in securities filings in coming weeks.
In recent months, another consumer products deal also utilized a different source of funding. ConAgra Food Inc. (CAG) in March agreed to sell its trading unit to a hedge fun. But ConAgra said it would itself finance $525 million of the purchase price through the receipt of three tranches of debt securities.
In the near term there could be more of these deals that tap other sources of funding, said Wasik. But in the long term debt markets should improve and " markets should be returning to normalcy where such deals can be done with certainty," he added.
Wrigley shareholders, at least, had plenty to be pleased about Monday. Shares recently rose 23.2% to $76.95 on volume of 19.8 million compared with average daily volume of 1.4 million. Earlier, shares reached a 52-week high of $77.75.
"It's right up his alley," said Don Yacktman, president of Yacktman Asset Management of Buffett's role. "He's paying up for this thing, but each of these companies is highly profitable and it makes great long-term sense from a business standpoint." Wrigley is one of the top ten holdings of Yacktman's fund.
The deal also sparked chatter about the possibility of more deals in the candy industry. Shares of Hershey Co. (HSY) rose 4.3% to $36.24, and Cadbury Schweppes (CSG) gained 2.9% to $46.11. Wrigley executives also acknowledged during the conference call that the industry could see more consolidation. Hershey declined to comment and a Cadbury representative couldn't immediately be reached.
"Our guess is that (Hershey) will rise today on a belief that Hershey, pressured by a giant Mars-Wrigley competitor, will be forced to combine with Cadbury's confection arm," Bear Stearns analyst Terry Bivens wrote in a research note to investors early Monday. But in the longer term, he believes thinks Hershey will continue to underperform. "It will take a long time - as in years, if ever, for the majority-owning Hershey Trust to agree to any sale of the company," he said.
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Super Inflation - Euro Style
Europe's Uber-Inflation Headache[full article]The European Central Bank has stubbornly defied its critics by keeping its eye firmly on inflation, and resisting pressure to cut rates. But its policy seems to have had little impact on soaring prices.
The European Commission warned that it expects inflation within the 15 nation euro zone to rise to 3.2% for the year. This adds to pressure on the European Central Bank to refrain from a confidence-boosting interest-rate cut.
The euro rose to $1.5686 on Monday afternoon in Europe from $1.5635 in late Friday trading in New York. The euro's 15.0% rise against the dollar over the past year is particularly painful for the continent's manufacturing companies, whose already-high labor costs rise relative to those in other currency zones.
In its semi-annual forecast, the Commission said that soaring prices of food, oil and metals would raise the cost of producing other goods, sending inflation soaring well above last year's figure of 2.1% and the European Central Bank's target of 2.0%. The commission also offered mediocre forecasts for economic growth this year of 1.7% and 1.5% for 2008. The economy of the eurozone grew by 2.6% last year.
"The moderation in growth results from the persisting turmoil in the financial markets, the marked slowdown in the United States and soaring commodity prices, all of which are taking their toll on global activity," the Commission said on Monday.
The EU Economic and Monetary Commissioner Joaquin Almunia said that while Europe would not head into a recession, he warned that if inflation spiraled it would choke growth. "Inflation has become a major problem for all of us," he told reporters Monday, adding it was important to avoid anything, including wage hikes, that could lead to further price rises.
EU countries are not the only ones that face the dilemma of countering soaring inflation with the need to buoy a flagging economy by lowering interest rates. On Monday Iceland's statistics office said that inflation in April soared to 11.8%, its highest level since 1990. The impact of rising oil and food prices has been compounded by the weakness of the Icelandic krona, pushing up the price of imported goods.
In a move which surprised economists Hungary's central bank decided on Monday to push interest rates up by 25 basis points to 8.25% on Monday, after inflation rose to 6.7% last month.
The European Commission's report piled pressure on the European Central Bank, which has remained consistently hawkish over interest rates. The ECB has faced criticisms from politicians -- notably Italy's prime-minister-in-waiting, Silvio Berlusconi -- who have warned about the damaging impact of a strong euro particularly for economies that are dependent on exports to the United States or to countries with currencies linked to the dollar. (See: "Europe's $1.50 Headache Is Italy's Migraine" )
In a speech on Monday European Central Bank President Jean-Claude Trichet defended the bank's policy, arguing that controlling inflationary pressure contributed to "appeasing tensions and volatility in the financial markets whilst paving the way for future sustainable growth and job creation in Europe."
Because key commodities are priced in dollars, they have been rising against the U.S. currency as the greenback weakness on foreign exchange markets.
In London gold traded as high as $895.80 per ounce, up from $890.10 late Friday.
Oil rose to a record $119.93 in pre-market electronic trading on the New York Mercantile Exchange from Friday's close of $118.52, after BP shut the Forties pipeline that delivers nearly a third of Britain's North Sea oil. The line was closed due to a Scottish refinery strike.
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Corn & Oil Prices Jump
Corn jumps as wet weather fans supply concerns, oil jumps[full article]
Corn prices jumped Monday as investors bet that more rain in the U.S. Midwest will force farmers to plant less of the crop, tightening supplies and adding to growing food costs for consumers and livestock owners.
Other commodities traded mostly higher, with crude oil rising to a record near $120 and gold, silver and copper also gaining.
Corn prices have shot up 21 percent this year amid dwindling stockpiles and surging demand to feed livestock and make alternative fuels such as ethanol.
But the weather has been the biggest factor in recent days, with heavy rain in corn-growing areas leaving fields too soggy to work and putting farmers far behind schedule. More rain is expected in the coming days, meaning farmers may have to plant significantly less corn than planned. U.S. farmers were expected to plant about 86 million acres of corn in 2008, an 8 percent drop from last year.
"These forecasts for additional showers still continue to raise concerns that farmers may not be able to get the full 86 million acres planted. The weather will challenge them to get that done," said Shawn McCambride, analyst with Prudential Financial in Chicago.
Corn for May delivery jumped 10.75 cents to $5.88 a bushel on the Chicago Board of Trade after earlier rising as high as $5.96 a bushel.
Rising corn prices mean consumers can expect even higher grocery bills for meat and pork, as livestock producers are forced to pass on higher animal feed costs and thin their herd size.
The planting delay has prompted some farmers to consider using their rain-soaked acres for other crops like soybeans, which have a later growth cycle. That prospect sent soybean prices sharply lower Monday, with the May contract plunging 46.25 cents to $12.795 a bushel on the CBOT.
Other agriculture futures traded mixed. Wheat for May delivery added 15.5 cents to $8.16 a bushel on the CBOT, while July rice futures fell 50 cents to $23.68 per 100 pounds.
In energy futures, crude oil surged to a new high just below $120 a barrel, driven up by labor actions that cut crude supplies from the North Sea and Nigeria. Prices later retreated and gyrated between gains and losses as the dollar steadied against the euro.
Light, sweet crude for June delivery rose to a record $119.93 a barrel in electronic trading on the New York Mercantile Exchange in overnight trading, but later retreated to $118.82, still up 30 cents.
Other energy futures traded mixed. May gasoline futures fell 2.08 cents to $3.0329 a gallon, while May heating oil futures fell 0.79 cent to $3.3107 a gallon.
In precious metals trading, the boost in oil prices help lift gold more than $5 as investors bought the metal as an inflation hedge.
Gold for June delivery added $5.50 an ounce to fetch $895.20 on the Nymex, after earlier rising as high as $898.10.
Other precious metals also traded higher. Silver for May delivery gained 16.5 cents, while May copper rose 2 cents to $3.9355 a pound.
[full article]
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Wal-Mart's Sam's Club Restricts Purchase of Some Rice
Wal-Mart's Sam's Club Restricts Purchase of Some Rice
Wal-Mart Stores Inc.'s Sam's Club warehouse unit is restricting purchases of some types of rice to four bags a visit as prices reached a record in Chicago futures trading.
The limits on jasmine, basmati and long-grain white rice, a response to ``recent supply and demand trends,'' will be put into effect in all U.S. stores where allowed by law and are effective immediately, Sam's Club spokeswoman Kristy Reed said today in an e-mailed statement.
Some consumers have started hoarding rice, the food staple for half the world as prices soar and supplies shrink. China, Vietnam, India and Egypt have curbed sales abroad to safeguard domestic supplies and cool inflation. Thailand also may restrict shipments, a World Bank official said today.
``The warehouse clubs are doing it to protect their business customers, like smaller restaurants, caterers, nursing homes, day-care centers,'' said food consultant Jim Degen. ``The business members are the most important members in warehouse clubs because they generate so much more revenue per member.'' Degen is a principal of J.M. Degen & Co., a food industry marketing consulting firm based in Templeton, California.
Some of Costco Wholesale Corp.'s stores, including locations in California, have put limits on sales of rice and flour, Chief Executive Officer James Sinegal told Reuters yesterday. Sinegal didn't return a phone call from Bloomberg News seeking comment.
Distribution Systems
Costco and Sam's Club have extensive distribution systems and source worldwide, so they can redistribute their rice supplies within the United States, meaning limits on customers may not be a long-term problem, said Degen.
``We are working with our suppliers to address this matter to ensure we are in stock,'' Sam's Club's Reed said. The stores aren't limiting purchases of flour or oil, she said. Reached via phone, she declined to comment further.
Rice has more than doubled in the past year. Rice futures for July delivery rose 2.6 percent in Chicago today, touching a record $24.85 per 100 pounds, and have climbed 26 percent this month.
Wheat, corn and soybeans gained to records this year, spurring social unrest in Haiti and Egypt.
Wal-Mart, the world's largest retailer, rose 37 cents to $56.92 at 4:15 p.m. in New York Stock Exchange composite trading. Costco, the largest U.S. warehouse club, climbed $1.52, or 2.2 percent, to $69.60.
Food Prices
The higher commodities prices are also pushing up U.S. food prices and spurring inflation. The consumer price index climbed 0.3 percent in March, after no change in the prior month, the Labor Department said April 16. Inflation, combined with falling home values and mounting job losses, is leading to cutbacks in consumer spending that may push the economy into a recession.
Limits on rice purchases will be felt the most in California and Texas, which have large Asian and Mexican populations, whose diets include rice, Degen said.
Soaring prices may put basic foods beyond the reach of the poorest people, raising the risk of a ``silent famine'' in Asia, a World Food Program official said April 21.
In the U.S., half of the domestic rice crop meets 88 percent of the country's demand, said David Coia, a spokesman with the USA Rice Federation in Arlington, Virginia.
`Uncalled-For Hysteria'
``When global prices rise as quickly as they have, as rice has, and as recently happened with wheat, you are going to have some concerns, and hysteria in some cases that is uncalled for,'' Ephraim Leibtag, an economist with the U.S. Department of Agriculture in Washington, said in a telephone interview. ``Food supplies have been pretty stable in the U.S. over the last 20 to 30 years.''
When prices rise rapidly, consumers buy larger quantities to lock in the lower prices, and that effect is exacerbated when a product is storable, he said.
The Bureau of Labor Statistics index of consumer prices for rice, pasta and cornmeal rose 12.1 percent in March over a year earlier. In March 2007, the index was up 5.2 percent.
``There is no shortage of rice in the United States, and my understanding is that you have these companies like Sam's Club and Costco that want to have rice for all their customers, not just the large purchasers who hoard,'' Coia said by telephone.
The worldwide supply shortfall will begin to ease with the June harvest, and may be resolved by the end of 2009, as farmers increase their crops to meet the demand, he said.
Jobs: Top Recruiters for Career Changes in 2008
Wall Street is the epicenter of economic upheaval. Promising careers can be cut short by writedowns, new regulations, fines and even outsourcing. You know you have great talent. Now you need the right opportunity.Last year in 2007, I left Bear Stearns to start a new company: Millennium Lyon Asset Management. You can visit our web site: www.mlgcap.com. It was the best career move. Invest in yourself. Build a team to implement your shared vision. You'll be greatly rewarded.
Here are some recruiters that can point you in the right direction. The new growth areas in Financial Consulting and Derivatives are: Commodities, Energy, Insurance. You should also get your licenses: Series 7, 66. I'll show you how to register for the exams right away (no politics). Contact me for more information.
Recommended Recruiters
(Subject Areas: Financial Consulting, Project Management, IT, Derivatives)
Mario Giacone mgiacone@computingconceptsinc.com 201-508-2112
Patrick Della Donna pdelladonna@tkresources.com 973-244-5766
Michele F. Parker michelefparker@gmail.com 917-239-3651
Brendan Bergin bbergin@spages.com 212-403-6140 x7147
Chad Astmann ChadAstmann@MichaelPage.com 212-672-6934
All the best on your new venture.
Victor Smith Jr
Millennium Lyon Asset Management
www.mlgcap.com
Jobs: Chief Technical Officer -executive job search
Hi,
We have been retained by the Federal Home Loan Bank of San Francisco to do an executive search for a Chief Technology Officer. I always like to explore all avenues possible, so please feel free to pass this along to your networks. My contact information is on the attached job spec. Feel fre to call me with any questions. The ideal candidate will have both the technical and management skills with an exposure to the trading of deravitive products.
Thanking you in advance. This is a full scope search and we welcome all diverse candidates to apply.
Best,
Michele Michele Fleuranges ParkerConsultant, The Prout Group
Mobile phone: 917-239-3651
Fax:/office phone: 718-651-1913 New York
Position Specification
POSITION: Vice President – Chief Technology Officer
ORGANIZATION: Federal Home Loan Bank of San Francisco
WEBSITE:
http://www.fhlbsf.com/LOCATION: San Francisco, CA
REPORTING RELATIONSHIP: Senior Vice President - Chief Information Officer
COMPANY BACKGROUND:
The Federal Home Loan Bank of San Francisco (FHLBank San Francisco or the "Bank") is one of 12 regional banks in the Federal Home Loan Bank System chartered by Congress in 1932 to provide wholesale products and services to member financial institutions. The Bank is privately owned by its members, which include commercial banks, savings institutions, credit unions, thrift and loan companies, and insurance companies headquartered in Arizona, California and Nevada. It links members to worldwide capital markets by providing them with low-cost credit or funding known as advances (loans) to provide liquidity and enhance competition in the mortgage market. Each Federal Home Loan Bank is a separately chartered entity with its own board of directors and management. The Bank also funds community investment programs that help members create affordable housing and promote community economic development. FHLBank San Francisco contributes 10% of its income to the Affordable Housing Program (the "AHP"), which provides grants to create affordable housing for low and moderate income households and individuals. Since the inception of the AHP, the Bank has awarded approximately $460 million in AHP grants to create over 80,000 affordable homes in states served by its members.
Headquartered in San Francisco, California, the Bank (reported December 31, 2007) has $323.0 billion total assets, $251.0 billion total advances and approximately 300 employees. FHLBank San Francisco is the largest bank in the Federal Home Loan Bank System and considered to be best-in-class according to its member banks regarding its product and service offerings.
COMPENSATION: Competitive
DUTIES:
The Vice President, Chief Technology (CTO) is responsible for translating the business vision and strategy into a technology infrastructure that effectively meets the needs of the business. Responsibilities include establishing a bank-wide application roadmap and defining and ensuring technical and development standards for the Bank. Other responsibilities, though not exhaustive, include the following:
- Develop and maintain multiple views of the Enterprise Architecture (Applications, Information, Infrastructure, Security, Management) that support the achievement of business goals.
- Create and maintain an application roadmap.
- Define and enforce Bank-wide technology standards
- Improve system delivery through the reuse of architecture models, existing systems, services, and solutions.
- Provide a standard and structured approach for integrating numerous, complex applications and systems in the Bank.
- Identify and eliminate the duplication of functionality and data throughout the enterprise.
- Establish integrated information flow architecture for the Bank.
- Participate in the project approval and review process to ensure that design decisions adhere to Enterprise Architecture standards.
- Produce documentation of design patterns for application development teams or product implementation teams to leverage.
- Effectively manage the security of the Bank’s systems.
- Build credibility and strong working relationships with Business Units.
- Mentor other architects and developers within the Bank.
THE PERSON
EDUCATION: B.S. Computer Science or related field strongly desired MBA or equivalent preferred
PREFERRED EXPERIENCE :
- Minimum of ten to fifteen years of progressively increasing experience in information technology, preferably in a financial services institution.
- Demonstrated development experience in several different programming languages.
Experienced in planning, development and implementation. - Experience in managing information systems design and analysis.
- Working Knowledge of Oracle applications and systems programming.
- Knowledge of database management.
- Experience with network systems, telecommunications and data processing operations.
OTHER CHARACTERISTICS
- Excellent interpersonal skills.
- Strong communications and presentation skills.
- Influencer.
- Developing staff.
- Recruit and retain effective staff.
CONTACT INFORMATION
Name: Michele Fleuranges Parker
Title: Consultant
Phone: 917-239-3651
Email: michelefparker@gmail.com
Fax: 718-651-1913
or
Name: Lourdes Bennett
Title: Office Manager
Phone: 216-771-5539
Email: lbennett@proutgroup.com
Address: The Prout Group, Inc.
1111 Superior Avenue, Suite 1120
Cleveland, OH 44114
Fax: 216-771-2260
Wall Street cuts for Wachovia
Wall Street cuts for Wachovia
The 12% staff reduction appears to represent the deepest retreat by any bank so far, and comes after Wachovia posted a $350 million first-quarter loss.
[full article]
Wachovia Corp. announced Monday it will slash its workforce on Wall Street by another 12% as the bank tries to recover from a particularly ill-timed expansion into mortgage lending.
The reduction of 500 corporate and investment banking employees -- most of them in New York and Charlotte, N.C. -- means the bank will have cut its ranks of Wall Streeters by 25% from its high last year. It appears to represent the deepest retreat by any bank so far.
The cuts come as Wachovia reels from an unexpected $350 million first-quarter loss. That loss is compared with net income of $2.3 billion in the year-earlier period and was due mainly to the bank writing down mostly mortgage-related assets by $2 billion and boosting loan-loss provisions to $2.8 billion, or double the prior quarter's amount. To plug the holes to its balance sheet, the bank raised $7 billion in new capital and slashed its dividend by 41%.
Should the mortgage losses worsen, Wachovia's days as an independent institution may be numbered. CreditSights analyst David Hendler said in a research report that Wachovia and its network of 3,300 branches would make a tempting target for J.P. Morgan Chase & Co., which until recently was interested in acquiring Washington Mutual Inc.
Wachovia's problems drive home just how badly the bank bet when, at the height of the housing frenzy two years, ago, it acquired big California mortgage lender Golden West for about $25 billion.
At midday the bank's stock was down 10%.
In addition to facing big problems in real estate lending, Wachovia's investment banking unit generated $77 million of losses in the first quarter and had $430 million of losses in the prior three-month period. The bank has been trying to boost its Wall Street presence for many years, most recently by paying $7 billion last year to acquire retail broker A.G. Edwards Inc. The bank has also in recent years been aggressively building its branch network in New York, where it remains far behind not just leaders Chase and Citigroup, but also fellow Charlotte-based giant, Bank of America.
Wachovia's latest capital-injection raises questions of just how good a handle management has on its business. Earlier this year, Wachovia raised about $6 billion, but Chief Executive Ken Thompson said during a conference call that market conditions deteriorated more than the bank had anticipated, forcing it to return to investors for another round. It isn't clear what sort of terms the bank consented to now, but it agreed to pay a 7.98% dividend when it sold $3.5 billion worth of preferred stock in February.
Mr. Thompson said on the call that Wachovia will use its cash to manage its ways through the difficult environment and try to avoid tapping investors yet again for funding.
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`Tidal Wave' in Commodities Rises to $400 Billion
`Tidal Wave' in Commodities Rises to $400 Billion [full article]
Global investments in commodities rose by more than a fifth in the first quarter to $400 billion, helping boost prices as investors sought a buffer against inflation and a weaker dollar, Citigroup Inc. analysts said.
Investments in commodity indexes rose $40 billion in the first three months of the year to $185 billion, a larger gain than the whole of 2007, Citigroup analysts Alan Heap and Alex Tonks said today in a note to clients.
A ``tidal wave of investment flows into commodity markets has further boosted prices,'' the analysts said. ``The weakening U.S. dollar has been the main macro force attracting funds to commodity markets. Other contributors are falling real interest rates and inflation worries.''
The UBS Bloomberg Constant Maturity Commodity Index of 26 futures rose to close at a record on March 5. The gauge climbed 22 percent last year for a sixth consecutive annual increase and has advanced 17 percent this year, while the Standard & Poor's 500 Index gained 3.5 percent in 2007 and has fallen 6.5 percent this year. Most-active crude oil, gold, platinum, wheat, corn and soybean futures are among those that set records this year.
After investments in indexes, commodity trading advisers account for the biggest portion of the total amount invested, the Citigroup analysts said. At the end of the first quarter, advisers accounted for $94 billion, 18 percent more than at the end of last year, the analysts said.
$70 Billion Inflow
Hedge funds ranked third, with $75 billion in commodity holdings, an increase of 25 percent over the end of 2007, Heap and Tonks said. In all, they estimate $70 billion in additional investment funds flowed into commodities markets in the first quarter.
Exchange-traded funds, or ETFs, accounted for $46 billion in commodity investments as of March 31, up 31 percent from $35 billion at the end of 2007, the analysts said. ETFs track equity, bond and commodity indexes and are often cheaper and easier to trade than similar mutual funds.
The ``tidal wave'' of the past quarter is showing ``signs it is already ebbing,'' Heap and Tonks wrote. ``We don't think it is sustainable.''
The credit crisis that began last year has made it ``harder to get finance to build new supply capacity and to build new infrastructure,'' cooling demand, Heap and Tonks said. The effects of the credit crisis on equities markets accelerated the flow of investment funds into commodities, which they said also may prove temporary.
``There was no conviction regarding financial assets,'' Jim Vail, who manages $1.5 billion in natural-resource funds at ING Investment Management Co. in New York, said today in a telephone interview.
`Seasonal Top'
``It was a seasonal top in commodity prices,'' Vail said. ``There's going to be some pullback, and I look at that as an opportunity.''
``In this type of environment, where supply constraints are repeating themselves, it's going to keep prices higher,'' he said. ``Capital costs are also higher. As the marginal cost of production continues to increase, it tells you where prices are going.''
Long-term fundamentals of rising demand and constrained production, which have stimulated investment in recent years, remain intact, yet some investors have started cutting their bets on rising raw-materials prices since the end of the quarter, Heap and Tonks said.
The dollar's decline, while providing a short-term boost to prices from investors seeking a store of value, may not last if the weaker U.S. currency fails to stimulate economic activity to increase consumption of raw materials, Heap and Tonks said. A falling dollar's effect on futures also may fade if it depresses prices in producer currencies, eroding profits, they said.
[full article]
Prime Broker biz up for grabs after Bear buyout
Broker biz up for grabs after Bear buyout
Prime competitors nab Morgan's new clients, while B of A can't find a buyer
[full article]
As investment banks witnessed key hedge fund clients of Bear Stearns' prime brokerage unit yank their assets from the company last month, in a run that ultimately cost Bear its independence, it's reasonable to think they'd be wary of courting such a chancy clientele.
Nothing could be further from the truth. The already fierce competition among prime brokers, which do everything from lending money and securities to processing and clearing trades for hedge funds, has only intensified with Bear's troubles, as major players scramble to pick up the fallen bank's prized hedge fund customers.
And while the prime brokerage industry has been dominated for years by three firms—Goldman Sachs, Morgan Stanley and Bear, which collectively had two-thirds of the market—other major financial services firms have stepped up their prime brokerage efforts in the past few years, including Deutsche Bank, UBS, Credit Suisse and Merrill Lynch.
"The appeal is simple: It's incredibly profitable," said Matt Simon, an analyst at researcher Tabb Group. "Hedge funds assets are approaching $2 trillion, and the larger investment banks are looking at their prime brokerage units and saying, 'Here's where a lot of our profits are going be coming from, and there aren't that many players in this space.'"
As volatile market conditions persist, it's becoming more important for prime brokers to monitor the day-to-day funding and servicing costs to prevent hedge fund clients from becoming a risk to them (as happened at Bear). Think of prime brokers as the grease for the gears that keep the overall market spinning.
Bear's collapse is also accelerating the trend of hedge funds moving away from relying on just one prime brokerage. "There's a bit of a feeding frenzy right now," said Joseph Gawronski, president and chief operating officer of Rosenblatt Securities, a trading firm. "With everything that happened at Bear, shops that didn't have a second prime broker are now saying they really need to get one."
While there's considerable opportunity for prime brokers right now, there's also risk. Denise Valentine, a senior analyst at Aite Group, a financial services consultancy, explained that even with great risk management, it can often be tough for prime brokers to "see the entire picture" of their hedge fund clients' activities. "Prime brokerage is often lending money to entities," she said, "and if those entities don't follow risk protocols, you could find yourself with an issue."
Prime brokerage can also be difficult for new players to enter, said Michael Guarasci, partner at hedge fund Indus Capital Partners. "We have long-standing relationships with our prime brokers, so if a new company wants to come in and do business with us, it may not get anywhere because we're pretty happy with our service. It's not easy to switch prime brokers."
But Bear's clients are up for grabs. J.P. Morgan's pending buyout of Bear gives the investment bank a quick entry into prime brokerage (J.P. Morgan currently is not a top-10 player), but the firm's success is dependent on locking down Bear's hedge fund clients. Late last month, Jeff Penney, co-head of Merrill Lynch's global markets financing and services unit, told Bloomberg that the firm received calls from more than 20 hedge funds in the three days after Bear's collapse; he also said Merrill has increased its hedge fund clientele by 50% over the past year.
Indeed, the definitive survey of the industry by Global Custodian recently ranked Merrill Lynch as the second-best global prime broker behind top-ranked Deutsche Bank. Bear Stearns was third, followed by Morgan Stanley, which fell from its top position in the survey last year. The poll doesn't include market share, but is based on hedge fund ratings of nine services, including consulting, securities lending and technology. In terms of market share based on assets, as of year-end 2006, the most recent data available, the Lipper HedgeWorld prime brokerage league table ranked Morgan Stanley first (with 23% of the market and $153 billion in assets), followed by Bear (21%, $136 billion), Goldman (18%, $119 billion), UBS (7%, $47 billion) and Credit Suisse (4%, $25 billion).
Not every i-bank believes the risk of prime brokerage is worth the reward. In January, Bank of America announced it was putting its prime brokerage unit on the block to shift "investment away from activities that do not directly contribute to the success of the company's integrated model," according to a company statement.
Some observers speculate that Bank of America's prime broker business, which catered to a broader range of hedge fund clients, may not be what other big players are looking for, since nobody's bid for it yet.
Mr. Simon estimated that there are roughly 120 large hedge funds (with $5 billion or more in assets) that all the prime brokers are targeting. "The big clients are where the money's made," he said. "The smaller funds just don't generate the fees that make them worth servicing. At Bank of America, management may have decided the returns just weren't worth the work."
Added Ms. Valentine: "Since nobody's picking it [the B of A unit] up, the inkling is that things must not be good. Alternatively, people could be of the mind-set that the crisis is not over—and while this may be a good opportunity, it's just not the right time."
A Bank of America spokesman declined to comment.
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full article]
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