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Sellers of default insurance on Aiful Corp. debt may have to pay out about $975 million to settle contracts on Japan’s third-biggest consumer lender, according to CMA DataVision prices.
Aiful triggered a settlement auction of credit-default swaps when it agreed to extend the maturity of loans to avoid bankruptcy, the International Swaps & Derivatives Association’s Japan Determinations Committee ruled yesterday. The cost of Aiful swaps implies that sellers of protection on $1.3 billion of the company’s debt will pay 75 cents on the dollar to settle contracts, CMA prices show.
The ruling ends a three-month dispute that threatened to undermine confidence in Japan’s default swaps market. The committee previously rejected three requests to trigger the contracts, citing a lack of publicly available information on which to make a judgment, even though Aozora Bank Ltd. said it hadn’t been paid by Kyoto-based Aiful.
“This is significant in Japan’s credit-default swaps history,” said Junichi Shimizu, an analyst at Deutsche Bank AG in Tokyo. “It will be a precedent.”
The dispute over Aiful swaps helped expose flaws in Wall Street’s system for determining payments on derivatives linked to the debt of defaulted companies less than a year after securities firms changed practices to avoid overreaching regulation. Policy makers demanded more transparency after the meltdowns 15 months ago of Lehman Brothers Holdings Inc. and American International Group Inc., two of the largest traders, froze credit markets.
Goldman Demand
Aiful faced possible failure after Goldman Sachs Group Inc. this month demanded that its 3.7 billion yen in loans be repaid. The company offered to settle the borrowing at a discount to win the New York-based lender’s support for its restructuring proposal, two people familiar with the matter said on Dec. 11.
The company said last week it would delay payments on 280 billion yen ($3 billion) of debt until Sept. 30 next year and ISDA’s Japan committee ruled the delay constituted a so-called restructuring credit event.
Credit-default swaps are derivatives, contracts with values derived from assets or events, including stocks, bonds, commodities, currencies, interest rates or the weather. Banks, hedge funds and insurance companies use the swaps to insure bonds and loans against default or to speculate on the creditworthiness of countries and companies.
Japan Auction
It’s the first time swaps on a Japanese company will be settled at auction and may set a model for future events. Japan Airlines Corp. plunged to a record in Tokyo trading yesterday on speculation the company may seek bankruptcy protection.
A total 2,780 contracts were outstanding on Aiful debt as of Dec. 25, making it the second-most insured Japanese borrower after the government, according to Depository Trust & Clearing Corp. in New York, which runs a central registry that captures most trading.
Credit-default swaps on Aiful cost $6.4 million in advance and $500,000 a year to protect $10 million of debt from default for five years, according to London-based CMA prices on Dec. 15, the last day data was available.
Run by founder and Chief Executive Officer Yoshitaka Fukuda, Aiful hasn’t sold bonds in public markets since March 2007 and reported a record first-half loss of 282.3 billion yen in November. It struggled with debt after a crackdown by authorities on excessive interest rates made Japan’s consumer lenders liable to pay billions of dollars of refunds.
Aiful said Dec. 24 it will have repaid 76 billion yen by June 10, 2014. It also said 2,095 employees will retire by Feb. 28, helping reduce annual staff costs by 13 billion yen, and that it took a one-time charge of 5.8 billion yen for the cuts.
World airline passenger traffic fell 3.1 percent in 2009, the biggest drop in aviation industry history, fuelled by the global financial downturn, the International Civil Aviation Organisation said.
Preliminary figures for airline travel this year showed that international traffic declined by about 3.9 percent and domestic traffic by 1.8 percent, despite sharp growth in some regions.
Total passenger traffic - both domestic and international - fell in all regions except the Middle East, which posted 10 percent growth. All other regions recorded negative growth, with Africa hardest hit at minus 9.6 percent overall, the ICAO said.
The 3.1 percent drop in passenger traffic this year compared to 2008 was the largest on record for the industry and "reflects the one percent drop in the world gross domestic product for the year," the organization said in a statement.
"The double-digit domestic passenger traffic growth in the emerging markets of Asia and Latin America, and the relative strong performance of low cost carriers in North America, Europe and Asia Pacific helped curtail the decline in total traffic."
Britain remains the last major economy in recession according to official data released overnight, although signs of recovery emerged as the country's output shrank less than previously forecast.
The Office for National Statistics said that British gross domestic product (GDP) contracted by 0.2 per cent during the July-September period compared with the previous three-month period.
Although the data was better than a previous ONS estimate of minus 0.3 per cent, analysts' consensus forecast had been for a revision to minus 0.1 per cent.
Britain officially ends 2009 as the only top economy in recession after the eurozone, France, Germany, Japan and the United States have all emerged from a deep downturn that was sparked by the global financial crisis.
"Gross domestic product contracted by 0.2 per cent in the third quarter of 2009," the ONS said in a statement.
Start of sidebar. Skip to end of sidebar.End of sidebar. Return to start of sidebar."This has been revised from a fall of 0.3 per cent in the previous estimate of GDP, due to upward revisions to construction partly offset by downward revisions to production and services.
"GDP remains 5.1 per cent lower than the third quarter of 2008," added the statistics office.
British Prime Minister Gordon Brown's government, heading for defeat in next year's general election according to polls, believes that the country has returned to growth during the current fourth quarter.
But markets must wait for the release of official data in late January for confirmation.
"A reasonably strong return to growth in the fourth quarter of 2009 seems all but certain, as retailers benefit from what is looking like a strong Christmas," said Ben Read, an economist at the Centre for Economics and Business Research, an independent consultancy.
Britain's economy, which is struggling with high unemployment and massive public debt caused by the financial crisis, has contracted for six quarters in a row - its longest recession since records began in 1955.
British finance minister Alistair Darling recently admitted that Britain's recession would be deeper than thought - with the economy predicted to shrink 4.75 per cent this year compared with a prior official estimate of 3.5 per cent.
The economy is expected to grow by 1.0-1.5 per cent next year, Mr Darling added, matching his previous forecast.
"Whilst we fully support the view that growth will soon reappear in the UK economy albeit at a very low level we continue to caution on expectations that growth ... will continue throughout 2010," BGC Partners senior strategist Howard Wheeldon said following the release of the data.
"Whilst the rate of job losses in the UK has clearly slowed we have as yet been unable to find sufficient evidence of new investment intention within the corporate sectors that might lead to a period of new job creation and thus a period of renewed and sustainable growth," he added.
There was meanwhile better news for another European nation on Tuesday, as Denmark announced it had emerged from recession in the third quarter thanks to its economy growing by 0.6 per cent compared with the preceding three months.
The technical definition of a recession is two or more quarters running of contraction, on a quarter-by quarter comparison.
Global finance giant Citigroup is denying reports hackers stole "tens of millions" of dollars from its banking arm Citibank midway through the year.
The Wall Street Journal yesterday reported the money was lost to "malicious software created in Russia" and that the case was being investigated by the FBI.
The Wall Street Journal reported a specialised piece of malware known as "Black Energy" was behind the losses, having been modified to steal banking authentication details.
"There's a newer, private version of Black Energy that uses plugins to extend its capabilities beyond just DDoS (distributed denial of service), security researcher Joe Stewart told www.pcworld.com.
End of sidebar. Return to start of sidebar.The Wall Street Journal reported that the FBI, the National Security Agency, the Department of Homeland Security and Citigroup exchanged information to counter the attack, which could have begun as long as a year ago.
The hackers, named in The Guardian as the "Russian Business Network", first gained notoriety several years ago after masterminding a string of hi-tech crimes including identity theft, fraud, spam and child pornography.
Citigroup, the world's largest financial services company, rejected any suggestion the FBI was investigating an incident and denied that a raid of such proportions had taken place.
"Any allegation that the FBI is working on a case at Citigroup involving a breach of Citi systems resulting in tens of millions of dollars of losses is false," it said.
"There has been no breach and there have been no associated losses."
However, Dow Jones & Co spokesman Robert Christie told the Associated Press that The Wall Street Journal stood by the accuracy of its story.
A former member of the World Bank's security team said he was not aware of the attack, but said criminal groups based mainly in Europe, Brazil and Southeast Asia "consistently targeted" large banks and that the industry was "haemorrhaging funds".
"Ninety-eight percent of bank heists are now occurring virtually and not in the real world," he told The Associated Press.
The market power of the big banks will be felt by consumers in 2010 as their chiefs warn of further rises in borrowing rates, and the sector prepares for regulatory changes.
After a year of re-pricing loan books, lowering interest rates and uncertainty over when bad debts would peak, a bout of monetary policy tightening by the Reserve Bank has laid the groundwork for higher lending margins.
As well a 15-month competition squeeze, prompted by higher offshore funding costs and the Federal Government bank wholesale funding guarantee, has hampered the funding activity of smaller banks, giving the majors a price setting advantage.
The result has been the development of a lending market comprised of two pillars, two stumps and three minnows.
After undercutting its rivals in early 2009 and targeting first home buyers, Commonwealth Bank and subsidiary BankWest now have 29.5 per cent of the home loan market, according to recent Australian Prudential Regulation Authority data.
Start of sidebar. Skip to end of sidebar.End of sidebar. Return to start of sidebar.Westpac, despite holding its standard variable interest rate (SVR) around 17 basis points above its rivals, has grown its market share by twice the average rate over the past 12 months since acquiring St George Bank and now holds 26.9 per cent of the market.
Westpac in December sparked a public outcry by raising its standard variable rate by 45 basis points - almost double the amount of the RBA's 25 basis point increase to the official cash rate that month.
ANZ and NAB have market shares of 15 per cent and 15.1 per cent, respectively.
Smaller rivals, Bank of Queensland, Suncorp-Metway and Bendigo Bank have been left with 1.8 per cent, 2.9 per cent and 2.2 per cent of the mortgage market, respectively.
The big banks have continually cited higher wholesale funding costs as the reason behind their need to hike lending rates.
But Fat Prophets analyst Colin Whitehead says the banks are also expanding net interest margins - the difference between the rate at which they borrow and the rate at which they lend - and profitability, as they benefit from less fierce competition from smaller rivals.
"That does weaken their arguments that they need to increase rates at a faster pace than the RBA," he said.
But CBA chief executive and Australian Banking Association chairman Ralph Norris points to wide price differentials on rates as indicating "a pretty competitive market."
"I think it's probably the first time in a long time where we've seen such a range of pricing differences between the majors, individually between each other, and also the second tier banks," he told AAP.
Westpac's chairman Ted Evans agrees, saying "competition will ensure that power is not abused."
But over the longer term, borrowing rates will also be impacted by the outcome of APRA's proposed alteration of liquidity rules, now due by June 2011, in line with changes being introduced by the Basel Committee on Banking Supervision.
The changes aim to safeguard the financial system in line with proposed global standards, by ensuring local banks can withstand a mild bank run and continue to roll over maturing wholesale debt.
CLSA analyst Brian Johnson says the conventional wisdom that Australian banks sailed through the global financial crisis largely unscathed is wrong.
"The banks entered the GFC in July 2007 with a serious structural business model flaw with their more than 100 per cent loan to deposit ratios," he said in a recent client note.
The rise of banks as funding intermediaries for the current account deficit has also resulted in a mismatched "borrow short - lend long" business model with most of the banks' current liquid assets comprising short-term commercial paper issued by other banks.
To correct this, APRA proposes banks hold more capital and high quality liquid assets, which it says will add five basis points to standard variable rate loans after the liquidity rules are finalised.
Mr Norris says the changes will force CBA to reduce credit availability and to pass on a standard rate rise to borrowers of between four and seven basis points.
ANZ chief executive Mike Smith puts the likely standard rate hike impact at between 18 and 20 basis points.
Southern Cross Equities analyst TS Lim estimates rises between five and 10 basis points while JPMorgan's Stephen Walters estimates a 35 basis points increase.
Meanwhile, bank shareholders could see their dividends impacted, after suffering share dividend cuts of up to 25 per cent in fiscal 2009.
Under prudential standards to be issued by APRA requiring higher capital requirements from mid-2010, banks will have to retain more capital, creating the potential for smaller dividend payouts.
Mr Johnson notes bank profits are not enough to fund the current average 70 per cent dividend payout ratio as well as maintain Tier 1 capital ratios at elevated levels.
KPMG head of financial services Michelle Hinchcliffe says shareholders are unlikely to see dividends recover until 2012.
"At the end of the day there is always going to be a cost of having these increased levels of capital for having a sound financial services sector."
The dollar was lower at noon after posting a fresh 11-week low amid growing demand for US dollars in reponse to positive US economic data.
At 12:00 (AEDT), the dollar was trading at $US0.8767/71, down from yesterday's close of $US0.8794/99.
During the morning, the local unit traded between a high of $US0.8777 and a low of $US0.8744.
The latter was the dollar's lowest level since it reached $US0.8682 on October 5.
The dollar lost ground during the overnight session as better-than-expected US existing home sales data helped maintain a rally in the US dollar.
The local unit continued under pressure at the start of today's Asian session, despite an encouraging start on regional equity markets.
ANZ economist Amber Rabinov said the positive US data provided market participants further evidence of a US economic recovery.
"We did just see a continuation of some of the themes that have been persistent over the past few weeks,'' Ms Rabinov said.
"We haven't really seen any slowdown in the momentum of the recovery of the US dollar.
"It has been pretty steady and it does suggest that we could see the Aussie dollar dip lower as we head into the new year.''
The dollar has lost about seven per cent against the US dollar since it reached $US0.9406 on November 16.
Ms Rabinov said there was a risk the dollar could slide as low as $US0.8660 during the traditionally quiet Christmas/New Year trading period.
But she said the outlook for the local unit over the first half of next year remained positive.
Investors returning to long US dollar positions had done so more at the expense of currencies such as the euro rather than the dollar, Ms Rabinov said.
"We have seen quite a sharp pull back in positioning in a number of other currencies, such as the euro, where speculators are now net short euros whereas two weeks ago they had been substantially long,'' Ms Rabinov explained.
"But we haven't seen the same degree of pullback in Aussie dollar positions. They still remain quite long in the speculator market.
"That's suggesting there is still confidence that the Aussie dollar will head higher in the new year.''
The share market suffered marginal losses in opening trade, despite a positive lead from Wall Street on better-than-expected US home sales data for November.
At 10:15 (AEDT), the benchmark S&P/ASX200 index was down 5.9 points, or 0.13 per cent to 4698.3 points, while the broader All Ordinaries index slipped 5.6 points, or 0.12 per cent, to 4718.8.
On the Sydney Futures Exchange the March share price index contract was five points higher at 4693, on a volume of 4,041 contracts.
Resources giant BHP Billiton lost 12 cents to $41.53, while rival Rio Tinto fell 13 cents to $72.62.
The major lenders were mixed, with Westpac gaining four cents to $24.19, while NAB fell four cents to $26.27.Commonwealth Bank of Australia dropped 20 cents to $52.39 and ANZ gave up nine cents to $21.38.
On Wall Street, better-than-expected US home sales data for November pushed the major indices higher, offsetting a downward revision of US September quarter economic growth.
Start of sidebar. Skip to end of sidebar.End of sidebar. Return to start of sidebar.US home sales jumped 7.4 per cent in November to a 6.54 million annual rate - the highest level since February 2007 - while third quarter US economic growth reached 2.2 per cent, down from a previous estimate of 2.8 per cent.
The Dow Jones Industrial Average advanced 50.79 points, or 0.49 per cent, to 10,464.93, while the broader Standard & Poor's 500 firmed 3.97 points, or 0.36 per cent to 1118.02.
The tech-laden Nasdaq composite gained 15.01 points, or 0.67 per cent, to 2252.67.
Macquarie Private Wealth advisor Helen Spencer said trading volumes were very thin and trade lacklustre despite a stronger Wall Street lead.
"It's a bit of a mixed bag, despite the positive lead from offshore,'' Ms Spencer said.
"There is a... lack of momentum leading into the Christmas break.''
The positive US housing numbers helped support housing related stocks, she said.
By 10:33 AEDT, James Hardie was seven cents higher at $8.29 on turnover of 156,175 shares.
The gold price was weaker overnight, then picked up at the open, Ms Spencer said.
The spot price of gold in Sydney was $US1086.00 per fine ounce at 10:34 AEDT, down $US8.92 on yesterday's closing price of $US1094.92.
Gold stocks were mixed, with Newmont Mining falling five cents to $5.33, while Lihir Gold firmed one cent to $3.16 and Newcrest Mining gained 29 cents to $34.35.
Sellers of default insurance on Aiful Corp. debt may have to pay out about $975 million to settle contracts on Japan’s third-biggest consumer lender, according to CMA DataVision prices.
