2009 Market Disruption Webinar
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2009 Market Disruption Webinar

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Year end review of 2009, especially focusing on trading and price movement in illiquid securities. Also a look at the road ahead in 2010.

Year end review of 2009, especially focusing on trading and price movement in illiquid securities. Also a look at the road ahead in 2010.

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2009 Market Disruption Webinar 2009 Market Disruption Webinar Presentation Transcript

  • 2009 Market Disruption: Illiquid Securities & the Road Ahead December 17, 2009
  • – About Us – Pluris Valuation Advisors LLC i a l di Pl i V l ti Ad i is leading Pluris has exclusive access to l i valuation services firm specializing in valuations for portfolio reporting, financial reporting, tax, secondary market trading data. and litigation support. Our proprietary research on illiquid and distressed securities in inactive As the secondary market continues markets places us in a unique position to estimate to develop, secondary market data fair value for hard-to-value and complex financial instruments. is becoming increasingly critical in pricing. p g Unlike many firms, Pluris has technical accounting resources to monitor accounting developments and ensure our financial reporting valuations are At Pluris, we have the technical in compliance with U.S. GAAP or IFRS. Our accounting resources to liaise with services include valuations for business audit and management teams and dit d tt d combinations, restricted securities, auction rate other users to ensure valuation securities, securitized financial instruments, methods and conclusions are distressed debt, bankruptcy claims, limited partnerships, partnerships and any other security lacking reasonable and supportable. liquidity.
  • – Auction Rate Preferred Securities – Breakdown of Issuers and ARPs Redemption Rates: Issuer Amount Outstanding Amount Issued Redemption BlackRock 31% 100% Redemption 0% Redemption $ 6,829,875,000.00 $ 9,881,700,000.00 DNP $ 400,000,000.00 $ 1,000,000,000.00 60% •Calamos •Boulder Eaton Vance $ 2,064,150,000.00 $ 2,628,875,000.00 21% •Cohen & Steers •Kayne Anderson Evergreen $ 286,000,000.00 $ 900,000,000.00 68% •First Trust Franklin Templeton $ 123,325,000.00 $ 190,000,000.00 35% •Flaherty & Crumrine ING 85% $ 225,000,000.00 5,000,000.00 $ 1,480,000,000.00 , 80,000,000.00 Morgan Stanley 30% ARPS $ Issued $ Outstanding % Redeemed $ 1,000,286,559.00 $ 1,420,000,000.00 Neuberger Berman 61% $ 361,850,000.00 $ 937,650,000.00 Overall $60,000,000,000 $30,500,000,000 49% Nicholas-Applegate 38% $ 635,000,000.00 $ 1,030,000,000.00 Taxable $23,000,000,000 $ 7,500,000,000 67% Nuveen 41% $ 8 790 325 000 00 8,790,325,000.00 $ 14 776 700 000 00 14,776,700,000.00 Tax-Exempt $32,000,000,000 $23,000,000,000 28% Pimco 42% $ 2,476,575,000.00 $ 4,280,000,000.00 The New America 31% $ 529,750,000.00 $ 770,000,000.00 Van Kampen 29% $ 2,320,786,258.00 $ 3,287,750,000.00 Western Asset 12% $ 457,000,000.00 457 000 000 00 $ 517,000,000.00 517 000 000 00 Please note all figures are rounded & may not equal 100% Source: SecondMarket
  • – Auction Rate Preferred Securities – Percent Redeemed by Issuer (Overall) 100% 80% 60% 40% 20% 0% Percent Redeemed by Issuer (Taxable vs Tax-Exempt) vs. 100% Taxable Tax‐Exempt 80% 60% 40% 20% 0% Source: SecondMarket
  • – Student Loan & Muni Auction Rate Securities – SLARS & MARS Redemption Activity-2009YTD MARS Amount Issued Amount Outstanding g Percent Redeemed Overall $165,000,000,000 $30,000,000,000 82% SLARS Amount Issued Amount Outstanding Percent Redeemed Overall O ll $85,000,000,000 $85 000 000 000 $64,000,000,000 $64 000 000 000 25% Taxable $60,000,000,000 $46,000,000,000 23% Tax-Exempt $25,000,000,000 $18,000,000,000 28% Slow but steady march of redemption activity, particularly in the muni markets. Please note all figures are rounded & may not equal 100% Source: SecondMarket
  • – What About the Bond Markets? – US BOND MARKET ISSUANCE 1996-2009 YTD ($Billions) 3 500 3,500 3,000 2,500 Corporate Debt  Corporate Debt * 2,000 Mortgage‐Related ** 1,500 Asset Backed 1,000 500 0 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 mortgage backed private label Note: All 2009 figures through Q3 Source: U.S. Department of Treasury, Federal Agencies, Thomson Reuters
  • – And the ABS Market? – US ABS ISSUANCE 2005-2009 YTD ($Millions) ($ ) 500,000  450,000  400,000  350,000  350 000 Auto A t 300,000  Credit Cards 250,000  Equipment 200,000  200,000 Home Equity q y 150,000  Other 100,000  Student Loans 50,000  ‐ 2005 2006 2007 2008 2009 Note: All 2009 figures through Q3 Source: Thomson Reuters, SIFMA
  • – Term Asset-backed Loan Facility (TALF) – *Req ested as of December 3, 2009 facilit Requested fD b 3 facility *Settled for December 3 2009 facilit 3, facility Sector Amount Sector Amount Auto - Auto - Credit Card $1,528,391,039 Credit Card $1,528,733,795 Equipment $ 199,164,445 Equipment $ 199,164,445 Floorplan $ 172,000,000 Floorplan $ 172,000,000 Premium Finance - Premium Finance - Servicing Advances $ 138 578 590 138,578,590 Servicing Advances $ 137 734 997 137,734,997 Small Business $ 352,964,874 Small Business $ 274,607,684 Student Loan $ 662,730,830 Student Loan $ 665,146,926 *Rates for December 14, 2009 facility *Amount of TALF loans requested at Dec. 14, 2009 facility Sector Fixed 3 Yr Loan Fixed 5 Yr Loan Sector Newly Issued Legacy Amount CMBS 2.7435 3.6241 CMBS $0 $1,324,853,713 Source: New York Federal Reserve
  • – Level III Assets Continue to Pose Threat – 50%  All Assets at Fair Value as of September 30, 2009 All Assets at Fair Value as of September 30 2009 Zions Bancorp Zions Bancorp Level 3 Assets as of September 30, 2009 47.02% 45%  40%  35%  PNC % of Lev 3 Assets 28.71% 30%  vel 25%  25% 20%  JPMorgan Wells Fargo 14.88% 14.22% 15%  Huntington Citigroup Bank of America Bank of America Comerica 11.88% 11 88% 7.17% 4.49% 9.70% 10%  Popular SunTrust Synovus 5.91% 9.90% KeyCorp, 5%  Fifth Third   3.95% 8.01% 1.36% 0%  Source: Bloomberg
  • – Bankruptcies – 2009 is on track to see close to 15,000 Ch. 11 filings TOTAL BUSINESS CHAP. CHAP. CHAP. CHAP. Ch. 11 Filings 1995-2009(est.) FILINGS 7 11 12 13 2000 35,472 20,335 9,917 407 5,494 20000 2001 40,099 23,482 10,641 383 5,542 2002 38,540 22,321 10,286 485 5,361 15000 2003 35,037 35 037 20,631 20 631 8,474 8 474 712 5,138 5 138 2004 34,317 20,192 9,186 108 4,701 10000 2005 39,201 28,006 5,923 380 4,808 2006 19,695 11,878 4,643 348 2,749 5000 2007 28,322 18,751 5,736 376 3,412 2008 43,546 30,035 9,272 345 3,815 0 2009 30,333 20,375 7,396 241 2,200 Data as of June 30, 2009 Source: Bankruptcydata.com, US Court System
  • – Notable 2009 Bankruptcies – Company Name Bankruptcy Date Assets (in $mil) Breakdown by Industry General Motors Corporation 06/01/09 91,047 Industry Percentage CIT Group Inc. 11/01/09 80,448 Manufacturing 12.03% Chrysler LLC 04/30/09 39,300 Banking & Finance 10.79% Thornburg Mortgage, Inc. 05/01/09 36,521 Oil & Gas 10.79% Health Care & Medical 7.05% General Growth Properties, Inc. 04/16/09 29,557 Retail 7.05% Lyondell Chemical Company 01/06/09 27,392 Telecommunications 6.22% Colonial BancGroup, Inc. 08/25/09 25,816 Automotive 5.81% Capmark Fi C k Financial G i l Group I Inc. 10/25/09 20,638 20 638 Computers/Software C t /S ftw 5.81% 5 81% Publishing 4.56% Guaranty Financial Group Inc. 08/27/09 16,796 Hotel & Gaming 2.90% BankUnited Financial Corporation 05/21/09 15,046 Source: US Courts System, Bankruptcydata.com
  • – Bank Failures – • As of December 14 2009 there have been 133 bank failures this year with assets 14, 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. Largest Bank Failures YTD: Bank Name Closing Date Total Assets Colonial B k C l l Bank 8/14/2009 $25 b ll 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 p ( ) $ p Relief Program (“TARP”) to help stabilize the nation’s banks. • Approximately 650 banks received over $190B in TARP funds. Largest TARP $ Still Outstanding: Bank Amount Citi* $ 50,000,000,000 Wells Fargo** $ 25,000,000,000 PNC $ 7,600,000,000 SunTrust $ 4 900 000 000 4,900,000,000 Regions Financial $ 3,500,000,000 Fifth Third $ 3,400,000,000 *Dec. 14-Citi announced intention to repay $20B in TARP funds Source: US Treasury, Financialstability.com **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 the 51 that have repaid the government, only 32 have either bought back th th t h id th t l h ith b ht b k their warrants or had them auctioned off by the US Treasury. Bank B k Date D Price Pi Price/Warrant P i /W Pluris Price/Warrant Pl i P i /W % 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 - 4.6 US Bancorp 7/15/09 $ 139,000,000 $ 4.25 $ 4.55 - 6.6 BNY Mellon 8/05/09 $ 136,000,000 $ 9.37 $14.31 -34.5 Source: US Treasury, Financialstability.com
  • – PIPE Market Provides Helpful Lift – • Funds raised by private placements exceed funds raised by public offerings in both 2009 and 2008. Year PIPE ($millions) IPO ($millions) 2008 $121,253 $121 253 $ 29 969 29,969 2009 YTD $ 39,371 $ 30,779 • Secondary market activity continues to confirm that Black-Scholes is inappropriate for warrant valuations valuations. • Significant concern about valuations and accounting for convertibles and warrants: – Warrants more likely to get liability treatment, even from standard anti-dilution provisions – Bifurcation of convertibles remain a concern – Both warrant values and conversion features are significantly overvalued by theoretical models Source: Private Raise, FactSet
  • – Today’s Environment – Fair value accounting remains at the heart of controversy and change as standard setters grapple with political pressure while regulators, practitioners, users and co pa es s ugg e o es ab s bes p ac ces companies struggle to establish best practices in determining exit-based fair value at the measurement date. • Fair value accounting was accused of causing the financial crisis. A recent g g University 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 week 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 Impairments assumption that all observable market data in markets Relaxed the other-than-temporary impairment indicator that are not active represent distressed transactions. The by shifting from an “intent to hold” model to a less final rule kept Level 2 intact. It added significant new restrictive “don’t intend to sell” model. Required the disclosure requirements and a two-step test to assess reclassification of certain previously recognized losses trading volume and transaction orderliness. The two-step out of the i f h income statement and into the balance sheet. di h b l h test is to help determine whether an adjustment to For previously recognized OTTIs, the credit component quoted prices is necessary. of OTTIs remained in earnings, but the non-credit component got reclassified to OCI. In performing this Update No. 2009–05, Measuring Liabilities at Fair bifurcation, companies are required to consider their Value best ti t f th b t estimate of the present value of cash flows t l f h fl w Describes valuation techniques that should be used to D b l h h h ld b d expected to be collected from the debt security. value a liability when a quoted price in an active market However, the rule did not specify an explicit approach for the identical liability is not available. Clarifies when for accomplishing this. 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 157 4, Volume and Level of Activity for the Asset or Update No. 2009–12, Measuring the Fair Value of Liability Have Significantly Decreased and Identifying Alternative Investments Using NAV Transactions That Are Not Orderly Provides an expedient way to estimate the fair value of When 157-4 was first proposed, it threatened to certain alternative investments by permitting companies eliminate Level 2 altogether under the inaccurate to use unadjusted NAV NAV.
  • – Tomorrow’s Environment – • Fair Value Measurements and Disclosures Topic 820, Improving Disclosures, 820 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 update for a vote by written ballot. 820’ new di l d t f t b itt b ll t 820’s disclosures will ill 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 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 books, 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 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 money, forgiven, – 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 there is significant concern about credit quality. h f b d l – 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 accounting. 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 Nikkei Index 1992 2002 25000 8/16/1993 6/18/1996 20901.49 4/12/2000 20000 (40.79)% 15000 8/11/1992 6/12/1995 10/1/1998 10000 17% 20.2% 20 2% 21.40% 5000 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 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 valuations. FINANCIAL REPORTING VALUATION PORTFOLIO VALUATION ASC 820 (FAS 157) Level 2 and 3 • Distressed debt and bankruptcy claims ASC 825 (FAS 159) Elections, including debt • Orphan Equities ASC 815 (FAS 133) Embedded derivatives, convertible bifurcations E b dd d d bl b f ASC 805 (FAS 141R) Business valuations • Auction Rate Securities ASC 350 (FAS 142) Intangible assets • CDOs, CMOs, RMBS, CMBS ASC 350 (FAS 142) Goodwill impairment • Trust Preferred Securities (TPS) ASC 718 (FAS 123R) Option pricing • Convertible securities ASC 320 (FAS 115) ( ) Illiquid & distressed securities q • Private warrants LITIGATION SUPPORT • Restricted stock Pluris provides expert testimony, for example, in litigation involving • PIPEs companies that may (or may not) have breached an obligation to • LP interests 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, CPA President VP, Technical Accounting info@pluris.com www.Pluris.com