2008

Weekly Business
Digest
21st October 2008
The special feature of this edition is a primer on Credit Market Indicators

Networth- Everything Finance

The Finance Club of IIMB
10/21/2008
 Contents

Credit Market indicators – A primer ... 3

Global News .......................................... 4
India News ............................................. 6
Corporate Scorecard........................... 7
Macroeconomic Indicators ................ 7

Special Feature: Credit Market
indicators – A primer
With the credit crisis accelerating and
governments attempting a number of
"solutions," investors are being introduced to
a wide variety of credit metrics. Here is a
quick list of the credit market indicators that
really matter, and where you can find up-to-
date data on each.
LIBOR
LIBOR has gotten plenty of press, but many
have been focused on the TED spread,
which is the yield differential between 90-
day T-Bills and 90-Day LIBOR. TED is
interesting in terms of historic comparison,
but its the absolute level of LIBOR that is a
better credit indicator right now. With T-Bill
rates extremely low (0.19% as of 10/10), and
intra-day T-Bill moves highly volatile, it would
be entirely possible to see T-Bill rates rise by
some degree without any significant
improvement in conditions. Thus the TED
spread would technically be tighter.
Instead, watch 1-month and 3-month LIBOR
rates. Both should be around 1.5-2%, based
on where the Fed Funds target is. Watch
Euro-denominated rates as well. A redemptions, VRDN rates have risen
governmental guarantee of inter-bank loans
would certainly drive LIBOR lower, as LIBOR is
supposed to measure inter-bank lending
rates. Otherwise LIBOR is expected to
remain elevated until at least year-end. Get
various LIBOR rates, including international
levels at the British Bankers'
Association website.
Commercial Paper Term Spread
Many have been watching commercial
paper outstanding as a credit market
indicator. The problem there is that CP
issuance is bound to decline as the system
falters, so total CP outstanding may see
year-over-year declines, even as credit
conditions are improving. A much better
indicator is the yield spread between over-
night CP and 60-day CP. Currently over
night AA-Finance CP costs firms 1.23%,
according to the Federal Reserve, whereas
60-day CP costs 3.51%. Under normal
conditions, those rates would be within
25bps of each other.
Municipal Bond Swap Index
This index measures the average reset rate
on tax-exempt, weekly Variable Rate
Demand Notes (VRDN) issued by
municipalities. Basically, it is the cost of short-
term funding for municipal issuers. It is
calculated by the Securities Industry and
Financial Markets Association (SIFMA) and
hence is often just called the SIFMA index.
VRDN's are a mainstay of municipal money-
market funds. Investors in a VRDN can put
their bond back to the issuer at any reset
date, which in this case is weekly. This
liquidity is usually guaranteed by a highly-
rated bank. With banks under such pressure
recently (Wachovia and Dexia were major
players in this business), and with municipal
money-market funds seeing massive
dramatically.
Typically the SIFMA rate is between 60 and
80% of the 1-week LIBOR rate. So if LIBOR
were 4%, SIFMA would usually come in
around 3%. But the SIFMA rate spiked to
7.96% on September 24, and although it has
fallen to 4.82% as of last week, the level is far
above normal levels. If there rates remain
elevated, municipalities will be under
pressure to refinance their variable rate
debt with long-term debt. And any kind of
debt issuance is extremely expensive in this
market. However, falling SIFMA rates would
indicate investor confidence in municipal
issuers. SIFMA updates its index each
Wednesday. Note that VRDNs are not the
same as Auction Rate Securities, which
remain highly illiquid.
CMBX
The CMBX is a basket of credit default swaps
on commercial mortgage-backed securities
(CMBS). It goes without saying that
commercial mortgages are likely to suffer
significant losses in the near future, likely
larger than other recent recessions. At the
same time, commercial mortgage securities
are structured with significant levels of
subordination. This means that junior
securities take losses before more senior
securities suffer. A typical CMBS deal would
have 30% or so subordination beneath the
AAA-rated tranche. So while losses may be
high, not too many deals will suffer much
more than 30% in losses (which implies a
much greater default rate). In addition,
principal payments go to retire higher-rated
tranches first, therefore the subordination
actually increases over time. Thus the
spread on AAA-rated CMBS should remain
relatively tight. Right now, the recent
vintage AAA CMBX is trading in the 220bps
area. The CMBX is maintained by MarkIt and
is updated daily.
There are a few other indicators which are
commonly cited but I don't think are very
useful. One is swap spreads. This is the
spread between the fixed-leg of a fixed-to-
floating swap and a corresponding Treasury.
Classically this was seen as a generalized
measure of counter-party risk, since normally
a highly-rated bank would stand in the
middle of any interest rate swap. However
right now the swaps market is being driven
by some unusual technicals. Note that the 2-
year swap spread is at all-time wides, where
as the 10-year swap spread is only a couple
basis points wider than its 10-year average.
The 30-year swap spread is at all-time tight
levels. So as a day-to-day indicator, swap
spreads aren't very informative.
Another is Agency debt spreads. With
Fannie Mae and Freddie Mac now fully
backed by the Treasury, one would expect
those spreads to collapse to near zero. Yet
currently 2-5 year Agency debt is trading at
100bps or more above comparably Treasury
rates. While this is indicative of how bad
liquidity currently is in the market, this is as
much a function of swap spreads as
anything else. As long as swap levels remain
elevated, so will Agency debt spreads.
Finally, the various measures of borrowing at
the Fed. This includes the discount window,
the TAF, the TSLF, etc. Investors should realize
that the mere existence of these facilities
has an influence over how much institutions
use them. Put another way, the fact that we
need these programs is the real indicator.
The most recent TAF auction on 10/6
produced the lowest stop-out rate since the
program's inception. Yet its still a very hard
time saying liquidity is improving.
Global News
AIG acts amid probe by attorney general
AIG yesterday agreed to help recover any
illegal compensation payments made to
Martin Sullivan, former chief executive, and
other senior management as part of an
investigation by Andrew Cuomo, the New
York attorney general. The company, which
was rescued by the government last month
with an $85bn loan, is also withholding an
estimated $10m payment from Steven
Bensinger, who served as chief financial
officer until May, and is immediately
cancelling all junkets or perks. The
announcements came a day after Mr
Cuomo threatened legal action unless AIG
stopped "outrageous" expenditures and
helped recover past ones, including certain
executive compensation. He said such
expenditures could have violated a New
York law.
CDS market an easy, unfair scapegoat
Credit-default swaps [CDS] have gotten a
bad wrap during the financial crisis,
undeservedly so according to Robert Pickel,
CEO of the International Swaps and
Derivatives Association. In testimony before
the Senate, Pickel said the role of CDS in the
crisis is 'greatly exaggerated' and 'to say
that CDS were the cause, or even a large
contributor, to that turmoil is inaccurate.'
Lawmakers have called for greater
oversight of the $54.6T CDS market since
Lehman Brothers, one of the top ten backers
of the contracts, went bankrupt. The Fed
chose Pimco (a unit of Allianz (AZ)), the
world's largest bond fund, to manage
commercial-paper assets for its Commercial
Paper Funding Facility (CPFF) program, while
State Street (STT) gets the go-ahead as
custodian and administrator. CPFF will allow
the government to bring stability to the
commercial-paper market, which is used by
corporations to fund day-to-day operations.
Fed chief Bernanke pledged Tuesday
officials will not stand down until markets
return to normal, and said he's confident the
government's moves "will help restore
confidence to our financial system and
place our economy back on a path to
vigorous, healthy growth."
Unlimited liquidity hits $250B
The ECB, Bank of England and Swiss National
Bank loaned banks $254B in their first tenders
of unlimited dollar funds, led by the ECB's
$171B. Central bankers are trying to
unfreeze credit markets and get banks
lending to each other again (see next item)
after a crisis of confidence led to last week's
stock-market selloff, the biggest since 1933,
threatening to send the world into a global
recession
Buffett throws his lot in with stocks
Warren Buffett has stepped up his
campaign to instil confidence in the
markets, proclaiming in a newspaper that
he is shifting his personal wealth into US
stocks. “I’ll follow the lead of a restaurant
that opened in an empty bank building and
then advertised: ‘Put your mouth where your
money was’,” the billionaire investor wrote in
Friday’s New York Times. “Today my money
and my mouth say equities.”
Private equity cuddling huge loan losses
Private-equity firms, including Apollo,
Blackstone and TPG, which bought billions
of dollars of senior debt 'on the cheap' from
top-tier banks like Citigroup, Deutsche Bank
and Royal Bank of Scotland, are sitting on
major paper losses. The loans, bought for an
average of $0.85 on the dollar, now trade
for about $0.65. "The trouble is, things are still
likely to get worse as the economy
weakens. And private-equity firms acquired
the leveraged loans with - yes - leverage.
The selling banks financed the transactions,
lending the buyers about 75% of the
purchase price."
Wachovia buyout hurried along
The Fed is fast-tracking Wells Fargo's $15.1B
acquisition of Wachovia, which it says could
be consummated within five days.
Wachovia said Sunday it will forego a
shareholder vote on the issuance of
preferred stock to Wells Fargo in favor of
expediency. Shareholders still need to
approve the proposed merger. Analysts say
Wells Fargo is likely to sell or downsize
Wachovia's investment-banking unit. I-
banking is not Wells' strong suite.
U.K. takeover sinks RBS
The U.K. government is set to buy majority
stakes in Royal Bank of Scotland the nation's
fourth-largest bank, and HBOS, its biggest
mortgage lender. RBS will get £20B, with the
government taking £5B in preference shares
and underwriting £15B in capital. The
aggressive move is aimed at shoring up the
country's struggling financial system and
flagging investor confidence, and falls in line
with other governments across Europe
which are taking radical steps to prevent
systemic collapse. Shares of RBS are
down 7.4% at 7:00 EDT. HSBC is up 8.5%, and
Barclays is up 7%.
Bush to Host First in Series of Summits
on Financial Crisis
The leaders of the U.S., France and the
European Commission will ask other world
leaders to join in a series of summits on the
global financial crisis beginning in the U.S.
soon after the Nov. 4 presidential election.
President George W. Bush, French
President Nicolas Sarkozy and European
Commission President Jose Barroso said in a
joint statement after meeting yesterday that
they will continue pressing for coordination
to address ``the challenges facing the
global economy.''
Japan’s Yamato Life Insurance files for
bankruptcy Japan’s Yamato Life Insurance
has filed for bankruptcy with $2.7bn in
liabilities, to become the 1st financial sector
casualty of US credit crisis in Japan. The
failure of Yamato Life is the 1st collapse of a
Japanese insurance company in seven
years. The insurance firm’s bankruptcy
follows the collapse of Japan’s first listed real
estate investment trust, New City Residence
Investment, which failed with ¥112.3bn in
debts. Yamato Life failed largely because of
its problematic investments in securitisation
products, rather than as a direct result of
problems in the domestic insurance market
India News
RBI has cut the cash reserve ratio by 150
basis points to 7% from the earlier 9%. The
cut in CRR is expected to release INR 600bn
into the financial system. The Ministry of
Finance has also announced set up of a
Government panel that will review the
liquidity situation in the India economy. The
group will submit its interim report of the
situation in the duration of one week
Airlines seek $1bn bailout The global credit
meltdown has hit India. India's beleaguered
airline sector has become the 1st industry to
seek an official bailout from the
government. The Federation of Indian
Airlines (FIA) has asked for a $1bn interest
free loan from the government to tide over
the current crisis in addition to many other
fiscal sops and easing of regulatory
measures. FIA also wants a moratorium of
three years on the repayment of the loan.
Simply put, many an airline will be grounded
which doesn't sound implausible considering
that the $6bn industry is expecting losses to
mount to $2bn this year
TCS acquires Citigroup's captive BPO for
$505MM Tata Consultancy Services (TCS)
has announced the acquisition
Citigroup's captive BPO arm Citigroup
Global Services for $505MM. This deal marks
the largest buyout of a foreign captive BPO
in India, coming after acquisition of Aviva
BPO by WNS for $230MM. TCS and Citigroup
have also signed a contract under which
the former would provide it with services
totalling $2.5bn over the next 9.5 years. The
Citi BPO has EBIT margins of 20% and is
expecting the revenues to touch $278MM
this year
instruments and stopped them from issuing
fresh P-notes or renewal of old ones
of
Corporate Scorecard
 Infosys has reported revenues of INR 54bn
for Q2FY’09, a QoQ growth of 11.6%, and
net profit of INR 14bn, a QoQ rise of 10%.
These numbers were ably aided by rapid
depreciation of the rupee against the dollar.
On a year-on-year basis, the revenues of
Infosys grew by a healthy 32% and net
profits went up by 30.2%

 Geojit Financial Services has reported a

58% drop in its consolidated net profit for
Nomura to acquire Lehman's India BPO - Q2FY’09 to INR 52MM, from INR 125MM in
Finally there is some hope for the 2,000 odd the corresponding year ago quarter. Total
employees of Lehman Brothers' back office income decreased by 2% to INR 459MM
in India. In a significant development, from INR 470MM
Japanese securities house Nomura Holdings
Inc has reached a basic agreement to
purchase Indian units of Lehman Brother.
The Japanese firm has already accepted
about 3,000 workers from Lehman Brothers'
Macroeconomic Indicators
Asia-Pacific units and some 2,500
employees from Europe and the Middle-East Rupee vs. Dollar 48.6800
to join Nomura. Lehman Brothers' Indian
BSE Sensex 9975.35
operations included tasks such as
procedural work entailed by securities Nifty 3074.35
transactions besides IT development
Dow Jones Industrial Average 8852.22
Index
SEBI reverses the restrictions on P-Notes -
NASDAQ Composite Index 1711.29
SEBI has reversed the restrictions on issue of
participatory notes by foreign institutional S&P 500 940.55
investors against securities, including
derivatives, as underlying. The move seems Nikkei 225 8693.82
aimed at reversing the foreign fund outflows
in recent times due to the credit crisis in the Crude Oil 71.85$
US and spread to Europe. In October last
year, the markets regulator had put a 40%
cap on FIIs’ total asset holding via
participatory notes or overseas derivatives