Liams Last Post : Ireland bond yields soar , Bank Guarantee is extended , Consumer confidence falls , Tullow redeems favour, Greencore comes under pressure

Good Afternoon ,

 

Once more into the breach … and once more the Irish government rolls over the Bank Guarantee.

 

The Minister for Finance, Mr Brian Lenihan, TD today announced that the Government guarantee for short term bank liabilities, including corporate and interbank deposits as well as debt securities would be extended from its current expiry date of 29 September to 31 December 2010.  The text of the statement says that a State guarantee will therefore be available for both short- and long-term liabilities up to the end of the year. This is an important support to the Irish banking system facilitating their access to both short- and longer-term funding to help maintain the overall stability of the banking sector and complements the broad Government Strategy to restore fully the banking system and maximise its contribution to overall economic recovery.  This modification to the Guarantee was recommended to the Minister by both the Governor of the Central Bank, the Financial Regulator and the NTMA. As is customary the Department will be liaising with the European Central Bank on this measure. An approval by the European Commission under the State aid rules needs to be secured before the guarantee can be extended. Following the Minister's meeting with Commissioner Almunia yesterday he is satisfied that Commissioner Almunia is aware of the Irish situation. It is intended that some technical details relating to the implementation of this modification will be agreed with the European Commission in coming days.
The Minister reiterated that this announcement does not affect retail deposits of up to €100,000 as these deposits continue to be guaranteed under the ordinary Deposit Guarantee Scheme and that Scheme is not time limited.

 

The Guarantee was rolled over into a market which is now pricing Irish government 10 year bonds at 6.1% yield , a whopping 386bp spread over bunds and this is a huge blow out in spreads in the past three weeks. We are right back to the levels pertaining at the end of 2008 and into early 2009. All of the 'good Work in terms of austerity measures is being verbally recognised but money talks and markets are pricing in significant risks. Nomura published today though suggesting to clients to buy Irish bonds at particularly good levels and that peripheral country fears are overdone.

 

I can't but get a sense that a crux is coming and that the government can only keep playing the hand they chose to on the fateful day at the end of September 2008 when they issued the government guarantee in the first place. The reality though is that the markets are alive to the scale of the problems and that Ireland can do what it likes to try and do all the right things and Brian Lenihan can make all the promises that the costs are manageable but clearly the market now thinks differently.

 

Meanwhile AIB are staying very quiet in the background …. We wait ever patiently for news about the Bank Zachodni disposal and a disposal of the M&T stake and then we will await the terms of the conversion of the Preference shares and we wonder how much dilution of existing shareholders will take place over the next few months…For the life of me I cannot see any rationale for taking the risk associated with all these moving parts at this juncture.

Meanwhile Bank of Ireland has announced plans to exchange some of its subordinated bonds for new bonds, in an effort to strengthen its capital position further.The bank is planning to exchange bonds worth 400 million Canadian dollars (€301m), which are due for repayment in 2015, for new bonds repayable in 2018. The bank is offering a coupon, or interest rate, of 8.5% on the new notes, compared with 3.8% on the existing debt

Against the background of enormous negative news about the scale of Irelands debt problems it is no surprise perhaps that consumer confidence fell to 61.4 from 66.2 for August.

Elsewhere the Obama infrastructure announcement that sparked the rally in the Building material stocks fizzled out rather quickly and is now seen as a piece of electioneering already. No details of how the plan will be funded and no time line for bringing the legislation through congress. As it is the Roadbuilding legislation introduced last year which was supposed to be provide a major stimulus for road building projects has not really worked with on ly 41% of funds having been appropriated and many projects abandoned due to lack of state funding availability.   What it did show however is that investors perception of CRH at this point seems to have mellowed and the market at these prives is prepared to look more optimistically at the prospect of any positive news.   

Volumes overall were very light in Dublin as the Bond yield story stole the show and kept many on the sidelines.

 

Aer Lingus traffic stats contained no surprises .

 

Greencore came under pressure today with a seller who hit the price down towards the Euro level. The stock later recovered. This has truly been a frustrating company to have been involved with.  The glass ceiling of Eur1.35 which marks the level of the placing done by RBS on behalf of themselves while realising the Carroll stake has proven to be a rea barrier to progress , briefly the sharebroke into the 1.40's this summer but since the results and the resignation of the FD , the market has come to realise that the much vaunted US strategy is a long way off being successful and with the departure of one of the designers and proponents of this strategy , the market is left looking at a company with a high yield but which is not cheap relative to its UK convenience food sector peers and the share price has been drifting steadily as the disappointment gathers pace. And there are more exciting plays in the Irish food sector. I would Instance Kerry and would happily recommend switching into Kerry which has really turned around its own its own performance.

 

Tullow seems to have weathered the storm in Uganda with reuters carrying a report that the Ugandan government would look favourably on a Tullow application for a production licence at the Kingfisher Oil field. The mood music has changed considerably…maybe this was what was driving the recovery in the Tullow share price over the last few days rather than bid spec. Bid spec would surely have been highly unlikely if Tullow was about to lose assets…    

Elan also was in the news today when the company put out a statement saying that the company is "well positioned" to maintain growth. Kelly Martin the CEO said "The bottom line is that Elan remains well positioned to maintain growth, achieve profitability, advance both our science and technology, and provide continuous innovation across both our key businesses," Elan was Monday granted an interim injunction until Sept. 13 in the Irish High Court against what it called "two dissident directors of the board," preventing them from establishing a parallel investigation into concerns about corporate governance. The two directors, Vaughn Bryson and Jack Schuler, who are also shareholders in the company, are attempting to engage a firm of lawyers to look into corporate governance issues, after they had made a complaint at a meeting of the audit committee in May.  Another review is being conducted by the board into allegations by other activist shareholders, and is expected to conclude on Sept. 15.  

 

Have a good evening

 

Liam

 

 

 

___________________________________________

Liam Boggan

　

Merrion Stockbrokers

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