OT: A biotech wrinkle on the Credit crunch toward end of commentary. Personally, I think the rating agencies, investment banks and dealers have permanently damaged their reputations with those that would normally be their best bond customers.
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Is It Just a 'Super SIV'? Bank-Backed Rescue Fund
Could Ease Credit Crunch Or Postpone a Reckoning
October 16, 2007; Page C14
The U.S. Treasury-brokered plan to set up a big bank-backed fund to buy assets from cash-starved "structured investment vehicles" looks smart at first glance.
SIVs rely for funding on short-term debt called asset-backed commercial paper and invest in longer-term assets like mortgages and asset-backed securities. They have had a hard time refinancing their asset-backed commercial paper since investors began worrying about the quality of their holdings this summer. So these vehicles have had to sell assets at fire-sale prices.
The new fund, dubbed "master liquidity enhancing conduit," or M-LEC, will buy assets from SIVs so they can avoid drastic price cuts. It is meant to give investors confidence to start buying asset-backed commercial paper again. But it could worsen the credit crunch if more market turbulence hits.
How so? Well, M-LEC will purchase only top-rated assets -- up to $100 billion worth. The fund is backed by Citigroup, J.P. Morgan Chase and Bank of America, which will partially backstop its purchases, but it will be largely funded with new issues of asset-backed commercial paper.
A big new issuer of asset-backed commercial paper, with three banking giants behind it, with the blessing of the U.S. Treasury under Henry Paulson, could soak up a lot of demand for such paper, especially if credit investors stay skittish. Competing with M-LEC for investment dollars could make the SIVs' own fund-raising efforts even harder.
Meanwhile, those SIVs that sell their top-rated assets to M-LEC may not endear themselves to remaining investors, who will be stuck with exposure to bigger concentrations of what may be perceived as riskier assets. SIVs may try offering richer yields than M-LEC to attract investors. But, if traditionally conservative commercial-paper buyers worry that an SIV's asset sales are the beginning of a death spiral, they might stay away in droves anyway.
So why go to the trouble of establishing M-LEC? Well, if SIVs continue suffering, they will begin drawing on their bank lines of credit. That risks tying up lending capacity needed by the rest of the economy. And if SIVs stumble badly, their bank backers will have to take a chunk of the assets onto their own balance sheets.
If M-LEC can forestall that until investors in asset-backed commercial paper regain their appetite, banks and their regulators will breathe a sigh of relief. If investor sentiment doesn't recover, M-LEC will only have postponed the reckoning.
Sharks in the Water
Is anyone safe? Biotech executives might ask themselves that question after Biogen Idec put itself on the block. Even though it rewarded investors with a 40% return for the year to date, activist investor Carl Icahn was able to push the company into considering a sale.
[Biogen Idec]
Two things have emboldened activists. First, the climate is right. Big pharmaceutical companies are desperate to get their hands on new drugs to keep their sales forces busy. So biotech companies that have approved drugs can demand a substantial premium. Second, activists have tasted success. Mr. Icahn earned more than an 80% return on his stake in Medimmune in less than a year when he publicly pressed for a sale to AstraZeneca.
Now, activists are stalking ever-bigger quarry. With a market capitalization approaching $25 billion, Biogen Idec once would have appeared too big for raiders. Should even larger, troubled rivals such as Amgen fear similar pressure?
Perhaps not. Fewer than a handful of biotech companies are larger than Biogen Idec. It is already large, even for the biggest drug makers. The idea of purchasing Amgen, with a market value of $63 billion, could make even drug giants blanch. Moreover, though activists are carrying larger guns, they still have limited firepower.
Mr. Icahn, for example, often says he is interested in buying companies he takes stakes in. This provides something of a floor under any sale price. Yet it strains belief that he could mount a successful bid for Biogen Idec -- let alone a company more than twice as large. For now, bigger companies can breathe relatively easy.
--Dwight Cass, Richard Beales, Antony Currie, Robert Cyran |
