Technological Disruption & the Labor Market: Should We Be ...
2009 Market Disruption Webinar
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Transcript of 2009 Market Disruption Webinar
December 17, 2009
2009 Market Disruption: Illiquid Securities & the Road Ahead
– About Us –
Pl i V l ti Ad i LLC i l di l i Pluris Valuation Advisors LLC is a leading valuation services firm specializing in valuations for portfolio reporting, financial reporting, tax, and litigation support. Our proprietary research on illiquid and distressed securities in inactive
Pluris has exclusive access to secondary market trading data.
As the secondary market continues on illiquid and distressed securities in inactive markets places us in a unique position to estimate fair value for hard-to-value and complex financial instruments.
As the secondary market continues to develop, secondary market data
is becoming increasingly criticalin pricing.
Unlike many firms, Pluris has technical accounting resources to monitor accounting developments and ensure our financial reporting valuations are in compliance with U.S. GAAP or IFRS. Our
p g
At Pluris, we have the technical accounting resources to liaise with
dit d t t d services include valuations for business combinations, restricted securities, auction rate securities, securitized financial instruments, distressed debt, bankruptcy claims, limited partnerships and any other security lacking
audit and management teams and other users to ensure valuation methods and conclusions are
reasonable and supportable.partnerships, and any other security lacking liquidity.
reasonable and supportable.
– Auction Rate Preferred Securities –
Breakdown of Issuers and ARPs Redemption Rates:
•Calamos100% Redemption 0% Redemption
•Boulder
Issuer Amount Outstanding Amount Issued Redemption
BlackRock $ 6,829,875,000.00 $ 9,881,700,000.00
31%
DNP $ 400,000,000.00 $ 1,000,000,000.00
60%
•Cohen & Steers•First Trust•Flaherty & Crumrine
•Kayne AndersonEaton Vance $ 2,064,150,000.00 $ 2,628,875,000.00
21%
Evergreen $ 286,000,000.00 $ 900,000,000.00
68%
Franklin Templeton $ 123,325,000.00 $ 190,000,000.00
35%
ING $ 225,000,000.00 $ 1,480,000,000.00
85%
ARPS $ Issued $ Outstanding % Redeemed
Overall $60,000,000,000 $30,500,000,000 49%
Taxable $23,000,000,000 $ 7,500,000,000 67%
$ 5,000,000.00 $ , 80,000,000.00
Morgan Stanley $ 1,000,286,559.00 $ 1,420,000,000.00
30%
Neuberger Berman $ 361,850,000.00 $ 937,650,000.00
61%
Nicholas-Applegate $ 635,000,000.00 $ 1,030,000,000.00
38%
Nuveen $ 8 790 325 000 00 $ 14 776 700 000 00
41%
Tax-Exempt $32,000,000,000 $23,000,000,000 28%$ 8,790,325,000.00 $ 14,776,700,000.00
Pimco $ 2,476,575,000.00 $ 4,280,000,000.00
42%
The New America $ 529,750,000.00 $ 770,000,000.00
31%
Van Kampen $ 2,320,786,258.00 $ 3,287,750,000.00
29%
Western Asset $ 457 000 000 00 $ 517 000 000 00
12%
Please note all figures are rounded & may not equal 100%Source: SecondMarket
$ 457,000,000.00 $ 517,000,000.00
– Auction Rate Preferred Securities –
Percent Redeemed by Issuer (Overall)100%
0%
20%
40%
60%
80%
Percent Redeemed by Issuer (Taxable vs Tax-Exempt)Percent Redeemed by Issuer (Taxable vs. Tax-Exempt)
40%
60%
80%
100%Taxable Tax‐Exempt
0%
20%
40%
Source: SecondMarket
– Student Loan & Muni Auction Rate Securities –
MARS Amount Issued Amount Outstanding Percent Redeemed
SLARS & MARS Redemption Activity-2009YTD
SLARS Amount Issued Amount Outstanding Percent Redeemed
O ll $85 000 000 000 $64 000 000 000 25%
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Overall $165,000,000,000 $30,000,000,000 82%
Overall $85,000,000,000 $64,000,000,000 25%
Taxable $60,000,000,000 $46,000,000,000 23%
Tax-Exempt $25,000,000,000 $18,000,000,000 28%
Slow but steady march of redemption activity, particularly in the muni markets.
Please note all figures are rounded & may not equal 100%Source: SecondMarket
– What About the Bond Markets? –
3 500US BOND MARKET ISSUANCE 1996-2009 YTD ($Billions)
2,500
3,000
3,500
Corporate Debt *
1,000
1,500
2,000Corporate Debt
Mortgage‐Related **
Asset Backed
0
500
96 97 98 99 00 01 02 03 04 05 06 07 08 09
199
199
199
199
200
200
200
200
200
200
200
200
200
200
* Includes all non-convertible debt, MTNs and Yankee bonds, but excludes CDs and federal agency debt** Includes GNMA, FNMA, and FHLMC mortgage-backed securities and CMOs and private-label MBS/CMOs
Source: U.S. Department of Treasury, Federal Agencies, Thomson Reuters
Includes GNMA, FNMA, and FHLMC mortgage backed securities and CMOs and private label MBS/CMOsNote: All 2009 figures through Q3
– And the ABS Market? –
US ABS ISSUANCE 2005-2009 YTD ($Millions)
350 000400,000 450,000 500,000
A t
($ )
200,000250,000 300,000 350,000 Auto
Credit Cards
Equipment
Home Equity
50,000 100,000 150,000 200,000 q y
Other
Student Loans
‐
2005 2006 2007 2008 2009
Source: Thomson Reuters, SIFMANote: All 2009 figures through Q3
– Term Asset-backed Loan Facility (TALF) –
*Req ested f D b 3 2009 facilit *Settled for December 3 2009 facilit
Sector Amount
Auto -Credit Card $1,528,391,039
Sector Amount
Auto -Credit Card $1,528,733,795
*Requested as of December 3, 2009 facility *Settled for December 3, 2009 facility
Equipment $ 199,164,445
Floorplan $ 172,000,000
Premium Finance -Servicing Advances $ 138 578 590
Equipment $ 199,164,445
Floorplan $ 172,000,000
Premium Finance -Servicing Advances $ 137 734 997Servicing Advances $ 138,578,590
Small Business $ 352,964,874
Student Loan $ 662,730,830
Servicing Advances $ 137,734,997
Small Business $ 274,607,684
Student Loan $ 665,146,926
Sector Fixed 3 Yr Loan Fixed 5 Yr Loan
CMBS 2.7435 3.6241
*Rates for December 14, 2009 facility
Sector Newly Issued Legacy Amount
CMBS $0 $1,324,853,713
*Amount of TALF loans requested at Dec. 14, 2009 facility
Source: New York Federal Reserve
– Level III Assets Continue to Pose Threat –
Zions Bancorp50%
All Assets at Fair Value as of September 30 2009 Zions Bancorp47.02%
40%
45%
All Assets at Fair Value as of September 30, 2009
Level 3 Assets as of September 30, 2009
PNC28.71%
25%
30%
35%
vel 3
Ass
ets
Bank of AmericaCitigroup
ComericaHuntington11 88%
Wells Fargo14.22%
JPMorgan14.88%
15%
20%
25%
% o
f Le
v
Fifth Third 1.36%
Synovus3.95%
Bank of America4.49%
Popular5.91%
7.17%
KeyCorp,8.01%
Comerica9.70%
SunTrust9.90%
11.88%
5%
10%
Source: Bloomberg
0%
– Bankruptcies –
TOTAL
BUSINESS CHAP. CHAP. CHAP. CHAP.
2009 is on track to see close to 15,000 Ch. 11 filings
Ch. 11 Filings 1995-2009(est.)FILINGS 7 11 12 13
2000 35,472 20,335 9,917 407 5,494
2001 40,099 23,482 10,641 383 5,542
2002 38,540 22,321 10,286 485 5,361
2003 35 037 20 631 8 474 712 5 138
15000
20000
2003 35,037 20,631 8,474 712 5,138
2004 34,317 20,192 9,186 108 4,701
2005 39,201 28,006 5,923 380 4,808
2006 19,695 11,878 4,643 348 2,749
2007 28,322 18,751 5,736 376 3,412
5000
10000
2008 43,546 30,035 9,272 345 3,815
2009 30,333 20,375 7,396 241 2,200
0
Source: Bankruptcydata.com, US Court System
Data as of June 30, 2009
– Notable 2009 Bankruptcies –
Company Name Bankruptcy Date Assets (in $mil)
General Motors Corporation 06/01/09 91,047
CIT Group Inc. 11/01/09 80,448Industry Percentage
Manufacturing 12.03%
Breakdown by Industry
Chrysler LLC 04/30/09 39,300
Thornburg Mortgage, Inc. 05/01/09 36,521
General Growth Properties, Inc. 04/16/09 29,557
Manufacturing 12.03%
Banking & Finance 10.79%
Oil & Gas 10.79%
Health Care & Medical 7.05%
Lyondell Chemical Company 01/06/09 27,392
Colonial BancGroup, Inc. 08/25/09 25,816
C k Fi i l G I 10/25/09 20 638
Retail 7.05%
Telecommunications 6.22%
Automotive 5.81%
C t /S ftw 5 81%Capmark Financial Group Inc. 10/25/09 20,638
Guaranty Financial Group Inc. 08/27/09 16,796
BankUnited Financial Corporation 05/21/09 15,046
Computers/Software 5.81%
Publishing 4.56%
Hotel & Gaming 2.90%
Source: US Courts System, Bankruptcydata.com
– Bank Failures –
• As of December 14 2009 there have been 133 bank failures this year with assets As of December 14, 2009 there have been 133 bank failures this year with assets totaling $155.4 billion.
• Failures have cost the FDIC’s Deposit Insurance Fund (DIF) $34.38 billion.
• Banks are failing at the fastest pace in 17 years. Banks are failing at the fastest pace in 17 years.
Bank Name Closing Date Total Assets
C l l B k 8/14/2009 $25 b ll
Largest Bank Failures YTD:
Colonial Bank 8/14/2009 $25 billion
Guaranty Bank 8/21/2009 $13 billion
BankUnited 5/21/2009 $12.8 billion
AmTrust Bank 12/4/2009 $12 billion
United Commercial Bank 11/6/2009 $11.2 billion
Source: Wall Street Journal, AFP
– CPP Review –
• Capital Purchase Plan (“CPP”) was a $250B piece of the Troubled Asset
Largest TARP $ Still Outstanding:
p ( ) $ pRelief Program (“TARP”) to help stabilize the nation’s banks.
• Approximately 650 banks received over $190B in TARP funds.
Bank Amount
Citi* $ 50,000,000,000
Largest TARP $ Still Outstanding:
Wells Fargo** $ 25,000,000,000
PNC $ 7,600,000,000
SunTrust $ 4 900 000 000SunTrust $ 4,900,000,000
Regions Financial $ 3,500,000,000
Fifth Third $ 3,400,000,000
Source: US Treasury, Financialstability.com*Dec. 14-Citi announced intention to repay $20B in TARP funds**Dec. 15-WFC announced intention to repay $25B in TARP funds
– TARP Exit –
• As of December 14, 51 banks have completely returned TARP money., p y y• Over $117B has been paid to the US Treasury.• Bank of America became the latest bank to exit the TARP program when it paid back the US Treasury $45B on December 9th.• Of th 51 th t h id th t l 32 h ith b ht b k
B k D P i P i /W Pl i P i /W %
• Of the 51 that have repaid the government, only 32 have either bought back their warrants or had them auctioned off by the US Treasury.
Bank Date Price Price/Warrant Pluris Price/Warrant %
Goldman Sachs 7/22/09 $1,100,000,000 $90.12 $91.17 - 1.2
Morgan Stanley 8/12/09 $ 950,000,000 $14.56 $17.81 -18.2
American Express 7/29/09 $ 340,000,000 $14.01 $14.69 - 4.6American Express 7/29/09 $ 340,000,000 $14.01 $14.69 4.6
US Bancorp 7/15/09 $ 139,000,000 $ 4.25 $ 4.55 - 6.6
BNY Mellon 8/05/09 $ 136,000,000 $ 9.37 $14.31 -34.5
Source: US Treasury, Financialstability.com
– PIPE Market Provides Helpful Lift –
•Funds raised by private placements exceed funds raised by public offerings in Funds raised by private placements exceed funds raised by public offerings in both 2009 and 2008.
Year PIPE ($millions) IPO ($millions)
2008 $121 253 $ 29 969
• Secondary market activity continues to confirm that Black-Scholes is inappropriate for warrant valuations
2008 $121,253 $ 29,969
2009 YTD $ 39,371 $ 30,779
warrant valuations.
• Significant concern about valuations and accounting for convertibles and warrants:
– Warrants more likely to get liability treatment, even from standard anti-dilution provisionsprovisions
– Bifurcation of convertibles remain a concern
– Both warrant values and conversion features are significantly overvalued by theoretical modelstheoretical models
Source: Private Raise, FactSet
– Today’s Environment –
Fair value accounting remains at the heart of controversy Fair value accounting remains at the heart of controversy and change as standard setters grapple with political pressure while regulators, practitioners, users and companies struggle to establish best practices in co pa es s ugg e o es ab s bes p ac ces determining exit-based fair value at the measurement date.
• Fair value accounting was accused of causing the financial crisis. A recent g gUniversity of Chicago Booth School of Business white paper concludes “not”.
• In 2009 25 new accounting rules were made. 18 of them address fair value accounting. 4 of them deal directly with the topic.
• In a speech made public last week the FASB proposes different fair value • In a speech made public last week, the FASB proposes different fair value accounting rules for banks. The FASB believes current rules are “pro-cyclical” -making banks seem richer when times are good, and poorer when times are bad.
Source: Chicago Booth, The Initiative on Global Markets, Working Paper No. 41, Christian Laux and Christian Leuz
– 4 Rules New in 2009 –
FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary ImpairmentsRelaxed the other-than-temporary impairment indicator by shifting from an “intent to hold” model to a less restrictive “don’t intend to sell” model. Required the reclassification of certain previously recognized losses
f h i d i h b l h
assumption that all observable market data in marketsthat are not active represent distressed transactions. The final rule kept Level 2 intact. It added significant new disclosure requirements and a two-step test to assess trading volume and transaction orderliness. The two-step
out of the income statement and into the balance sheet. For previously recognized OTTIs, the credit component of OTTIs remained in earnings, but the non-credit component got reclassified to OCI. In performing this bifurcation, companies are required to consider their b t ti t f th t l f h fl w
test is to help determine whether an adjustment to quoted prices is necessary.
Update No. 2009–05, Measuring Liabilities at Fair ValueD b l h h h ld b d best estimate of the present value of cash flows
expected to be collected from the debt security. However, the rule did not specify an explicit approach for accomplishing this.
FSP FAS 157-4, Determining Fair Value When the
Describes valuation techniques that should be used to value a liability when a quoted price in an active market for the identical liability is not available. Clarifies when adjustments should be made for liabilities traded as an asset and those that are not traded as an asset.
FSP FAS 157 4, Determining Fair Value When the Volume and Level of Activity for the Asset orLiability Have Significantly Decreased and Identifying Transactions That Are Not OrderlyWhen 157-4 was first proposed, it threatened to eliminate Level 2 altogether under the inaccurate
Update No. 2009–12, Measuring the Fair Value of Alternative Investments Using NAVProvides an expedient way to estimate the fair value of certain alternative investments by permitting companies to use unadjusted NAVeliminate Level 2 altogether under the inaccurate to use unadjusted NAV.
– Tomorrow’s Environment –
• Fair Value Measurements and Disclosures Topic 820 Improving Fair Value Measurements and Disclosures, Topic 820, Improving Disclosures About Fair Value Measurements (“820”), is about to be voted on. The FASB has reviewed comment letters and instructed their staff to proceed with the drafting of a final
d t f t b itt b ll t 820’ di l ill update for a vote by written ballot. 820’s new disclosures will include a sensitivity analysis for Level 3.
• Companies will begin to get focused on adopting IFRS. They will make their impact assessments and evaluate the fair value will make their impact assessments and evaluate the fair value accounting differences between U.S. GAAP and IFRS.
• If the FASB’s recommendations are heeded, banks will begin to keep two sets of books as regulatory reporting drifts away keep two sets of books, as regulatory reporting drifts away from using U.S. GAAP as a platform.
– 2010: The Road Ahead –
–2010: The Road Ahead–
– Trends for 2010 –
•We look for a continued sorting of wheat from chaff – nothing is as revealing We look for a continued sorting of wheat from chaff nothing is as revealing as a serious economic downturn when it comes to exposing and illustrating quality differentials.
• In many of the hardest-hit investment fund segments, it’s already clear who’s dying and who’s going to raise money for growth.
– A FOF manager told us recently, “that it’s when times are bad that you really get to see people’s character”
Managers who have lost money can be forgiven sometimes even if they put up gates– Managers who have lost money, can be forgiven, sometimes even if they put up gates
– But if they’ve squeezed their investors by charging fees on an inflated NAV, forget it
• A proper valuation policy with serious outside oversight is no longer optional.
• Across the fixed-income spectrum, look for illiquidity premiums to tighten, but for risk premiums to widen where h f b d lthere is significant concern about credit quality.
– Prime example is various kinds of ARS
– Look for improving marks where quality is good (and information asymmetries can be overcome)
– Dying in ’09 is dead in ‘10
– Trends for 2010 –
•We look for a return to sanity in financial accounting Perhaps a whole year without We look for a return to sanity in financial accounting. Perhaps a whole year without hauling the chairman of the FASB before a single congressional committee?
• “You can’t handle the truth” won’t wash.
• Look for tightening of the wording in many FSPs to remove vagueness and strengthen fair value.
– Example: 115-2 “expected” versus “estimated”
– Much of the guidance in 157-4 can be strengthened with minor changes in wording
– New standards may include fair value for loan portfolios
• Divorcing GAAP from “regulatory accounting” would be an enormous step forward.
– Our Lost Decade: 2010-2020? –
Nikkei Index 1992 2002
20000
25000
Nikkei Index 1992‐2002
4/12/20006/18/1996
8/16/199320901.49
15000(40.79)%
10/1/19986/12/1995
17%
8/11/1992
20 2%
5000
1000021.40%
17% 20.2%
0
Source: Bloomberg
– Inverse Relationship b/w $USD & SPX –
– About Pluris –
Pluris draws on significant global capital markets and corporate transaction experience. Our in-depth knowledge of the structure and transactions of financial instruments enable us to anticipate challenges knowledge of the structure and transactions of financial instruments enable us to anticipate challenges that may arise in any corporate transaction. We know what to look for, so the learning curve is short even when a transaction is complex.
We have the knowledge to value financial instruments for financial reporting purposes, and we have extensive expertise in portfolio valuations have extensive expertise in portfolio valuations.
PORTFOLIO VALUATION• Distressed debt and bankruptcy claims• Orphan Equities
FINANCIAL REPORTING VALUATIONASC 820 (FAS 157) Level 2 and 3ASC 825 (FAS 159) Elections, including debtASC 815 (FAS 133) E b dd d d bl b f Orphan Equities
• Auction Rate Securities• CDOs, CMOs, RMBS, CMBS• Trust Preferred Securities (TPS)• Convertible securities
ASC 815 (FAS 133) Embedded derivatives, convertible bifurcationsASC 805 (FAS 141R) Business valuationsASC 350 (FAS 142) Intangible assetsASC 350 (FAS 142) Goodwill impairmentASC 718 (FAS 123R) Option pricingASC 320 (FAS 115) Illiquid & distressed securities
• Private warrants• Restricted stock• PIPEs• LP interests
( ) q
LITIGATION SUPPORTPluris provides expert testimony, for example, in litigation involving companies that may (or may not) have breached an obligation to register shares. Our LiquiStat™ database puts us in a unique position to analyze comparative information and testify the appropriate size of damages when such an event occurs.
– Contact Information –
26 Broadway, Suite 1202, New York, NY 10004
(212) 248-4500
Espen Robak, CFA Rick Martin, CPAPresident VP, Technical Accounting
www.Pluris.com