Published October 23, 2008

Off-balance sheet items no worry: CIMB

By S JAYASANKARAN
IN KUALA LUMPUR

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FEARS that Malaysia's largest investment bank CIMB could be sitting on a huge pile of off-balance sheet contingent liabilities that could become distressed are largely misplaced, the bank said.

Mr Nazir: CIMB has no exposure to toxic assets or troubled banks

At end-June 2008, according to French-based securities house CLSA, the bank recorded off-balance sheet 'commitments and contingencies' of RM327.42 billion (S$137.4 billion), a figure that is 13 per cent up from RM289.1 billion a year ago.

By way of contrast, the corresponding figure in Maybank, the country's largest bank, was RM204.22 billion; and RM59.2 billion at Public, the country's third-largest bank. But the other two banks are more consumer driven.

Nazir Razak, the bank's urbane chief executive, is emphatic about the bank's soundness. 'There are only two ways to get into trouble - exposure to toxic assets, and exposure to the troubled banks,' he said. 'We have neither.'

CIMB's off-balance sheet items are mainly of three types - commitments to customers on loans that have not been drawn down, contracts on foreign exchange and interest rate swap contracts, he said.

'To minimise the risk of interest rate fluctuations on the bonds we hold, we try and hedge everything using interest rate swaps, so it's a notional value that you see. It's greatly exaggerated. The actual exposure is very, very small. And that's borne out by our profit-and-loss numbers. Whether interest rates go up or down, they remain very steady.'

Analysts said that the 'notional' figure Mr Nazir talks about is generally meaningless. What is more important, they said, is the actual credit equivalent, which in CIMB's case is estimated around RM20.9 billion.

Moreover, the bulk of CIMB's derivatives are ringgit-denominated, a fact underlined by the central bank last week when it released a statement allaying concerns about Malaysia's financial system.

'We do have some US dollar exposure,' shrugged Mr Nazir. 'But they are stuff like Petronas's Yankee bonds and Singapore Telecommunications' US dollar bonds.'

Indeed, analysts are relatively sanguine about the size of CIMB's derivatives pool. 'CIMB is the largest investment bank in the country and the biggest market maker where bonds are concerned,' said Shan Choo, the head of CLSA in Kuala Lumpur. 'Their foreign exchange trades are not inconsiderable either so you'd expect them to have the biggest amount.'

She added: 'The bottom line is that it's pretty effective risk management. It neutralises any risk on interest rate fluctuations.'

Indeed, perhaps because of its very nature, CIMB has always been the bank with the largest amount of off-balance sheet items. But concern over its health mirrors fears that the financial maelstrom engulfing the West could somehow spread eastwards. Moreover, the main culprit behind the turmoil in Western banks was off-balance sheet assets that turned toxic.

According to CIMB insiders, the bank began eliminating its counter party exposures to foreign investment banks that its internal research units deemed risky back in August last year. This was confirmed by Mr Nazir.

Published October 23, 2008

I-Bhd and CapitaLand venture to build mall in limbo

Klang Valley deal yet to be inked, which means Reit listing uncertain too

By PAULINE NG
IN KUALA LUMPUR

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THE global financial crisis has thrown plans by CapitaLand to jointly develop an international-class shopping mall in the Klang Valley with Malaysian builder I-Bhd into a bit of uncertainty.

Property executives told BT the Singapore-listed developer had entered into a memorandum of understanding to build the mall with an estimated gross development value (GDV) of half a billion ringgit but, because of the anxiety created by the current financial turmoil, had yet to ink the deal.

Earlier, in July, mainboard-listed I-Bhd had revealed the company was negotiating with a number of foreign institutional investors with a view to establishing a 70:30 joint venture (JV) to build the shopping complex component - the second phase component - of i-City. A 29-hectare intelligent township in Shah Alam, i-City's total GDV is estimated at RM2 billion (S$840 million). Shah Alam is the Selangor state capital located 25-30 km from the Kuala Lumpur city centre.

Saudi Al Rajhi Bank acquired 36 of the 44 units of three- and five-storey office suites to be built in the first phase, for an en bloc price of RM95 million, or RM457 per square foot - said then to be a new pricing benchmark for Shah Alam.

Property executives said CapitaLand was to own 70 per cent of the proposed JV firm, which would buy a 6 ha plot for the 800,000-odd sq ft mall. As a specialist mall operator, CapitaLand would manage the centre upon its completion.

The company may have also looked at another retail mall in Shah Alam: the 1.23 million sq ft mall which Singapore-based Lend Lease Asian Retail Investment Fund 2 acquired a half share in with a unit of Malaysian-listed SP Setia and plans to build at an estimated GDV of RM750 million.

Under that agreement, the JV firm Greenhill Resources bought 12.3 ha of freehold land from SP unit Bandar Setia Alam for about RM120 million or RM90 psf.

CapitaLand has talked about plans to float a retail real estate investment trust (Reit) on the local exchange, consisting initially of three shopping malls worth RM2 billion. Should the deal with I-Bhd proceed, it is likely the mall when finished would also be injected into the Reit. It already has a listed commercial Reit in partnership with the Quill Group.

'It's meaningless until the JV is signed, but nobody knows what's going to be happening this quarter, or the one after, so there's some holding back,' a property player observed.

Bloomberg yesterday reported another listed developer, YNH Property, was delaying the sale of part of a RM2.1 billion tower in Kuala Lumpur, citing the global credit crisis as a reason.

i-City has been a long time in the offing, planned a decade ago as SumurCity before it was scuttled by the Asian financial crisis. Still, the project is said to have the backing of the Selangor state government and I-Bhd's biggest shareholder is state-owned trust fund Permodalan Nasional.

Reports have said the township would contain some 12 office blocks, three data centres, a five-star hotel and a boutique hotel when fully completed in 10 years. There will also be two blocks of 24-storey residences. The population catchment based on a 15km radius is estimated at 1.5 million people.

According to a property consultant, Malaysian asset prices are generally still 'status quo' for the moment. 'There are foreign institutions wanting to come in to do JVs because they see opportunities,' he said, noting that, in terms of country risk, Singapore and Malaysia are practically the only two countries in South-east Asia that global funds would consider.

Published October 23, 2008

China Printing couple arrested: reports

Sacked CEO, deputy went missing after parent reportedly went bankrupt

By LYNETTE KHOO

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THE sacked chief executive and deputy chief executive of China Printing & Dyeing Holdings were arrested in China on Saturday, according to media reports there.

Mr Tao: Holds a 58% stake in China Printing with his wife Madam Yan

But so far, there has been no official information on the arrest, and China Printing has not made an announcement to the Singapore Exchange.

The duo went missing around Oct 4 when China Printing's parent company Jianglong Holdings reportedly went bankrupt. Operations at China Printing and Jianglong Holdings have ceased, and shares of China Printing have been suspended since Oct 13.

This week, the independent directors (IDs) of China Printing terminated the services of CEO Tao Shoulong and deputy CEO Yan Qi and removed them as signatories to the group's bank accounts in Singapore. Mr Tao and his wife Madam Yan are chairman and CEO of Jianglong Holdings respectively.

The IDs of China Printing are now looking at a possible reorganisation of the company to minimise losses to shareholders. All of China Printing's operations are under its wholly owned subsidiary Zhejiang Jianglong Textile Printing & Dyeing Co in Shaoxing County in China.

After the duo disappeared, the Chinese authorities placed Zhejiang Jiang- long's premises under 24-hour guard and took the company's seals for safe-keeping. The wages of the employees have also been settled by the Chinese authorities.

A company source told BT the financial condition of Jianglong Holdings and China Printing will not be clear until the IDs and CFO of China Printing finish scrutinising the accounts.

The IDs said that they will work with the authorities to decide the best way to realise Zhejiang Jianglong's assets and liabilities. China Printing CFO Goh Cher Shua is going through the group's accounts with the Chinese authorities.

Jianglong Holdings, a private company owned by Mr Tao and Madam Yan, holds a 58 per cent stake in China Printing. According to recent media reports, Jianglong Holdings ran up debts amounting to some 200 million yuan (S$43 million), owed to 300 small suppliers.

About 33 per cent of China Printing shares are in public hands. New Horizon, a Cayman Islands-incorporated private equity fund, has an 8 per cent stake. The fund's limited partners are Temasek Holdings and SBI Holdings Inc.

Published October 23, 2008

Hundreds of Delong workers put on long leave

Firm shuts several furnaces due to weak demand

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(SINGAPORE) Singapore-listed steel firm Delong Holdings said yesterday that it had put a few hundred workers on leave and shut several furnaces in China's northern Hebei province because of weak demand.

'The workers have been put on extended leave,' said a spokesman for China-based Delong, a maker of steel coils.

Domestic Chinese steel prices have plunged from their summer peak, cutting demand for raw material iron ore and leading analysts to say that most steel makers are losing money.

Global crude steel production sank 3.2 per cent last month, and the world's biggest steelmaking country, China, suffered a sharp 9.1 per cent decline in output, the World Steel Association said yesterday.

Earlier this month, smaller steelmaker FerroChina said that it was unable to repay 706 million yuan (S$153 million) in working capital loans and had suspended operations at its manufacturing plant in China. The global economic crisis has worsened the outlook for manufacturers in China, with several Hong Kong-linked firms closing factories and laying off staff in China.

The government in China's manufacturing heartland of Guangdong may set up a fund to help workers laid off amid the global economic turmoil, state media said on Monday.

Russia's largest steel maker Evraz owns 10 per cent of Delong and has options to take a 51 per cent stake, subject to Beijing's approval. -- Reuters

Published October 23, 2008

Analysts cautious of O&M sector, downgrade Keppel

Forecast drop in oil and gas prices could affect exploration, production spending

By OH BOON PING

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ANALYSTS have grown increasingly cautious on the offshore & marine (O&M) sector here, citing weaker fundamentals and slower orders momentum.

Slowdown ahead: Weaker oil prices, falling rig utilisation and day rates are negative for the offshore newbuild industry, says a Goldman Sachs report

Accordingly, the research houses downgraded Keppel Corp to 'neutral' rating.

In a report, Goldman Sachs said that the forecast drop in oil and gas prices could affect exploration and production spending, and force the drilling cycle into a cyclical weakness. 'Weaker oil prices, falling rigs' utilisations and day rates are negative for the offshore newbuild industry,' it said. Coupled with the credit market woes, this means that demand for newbuild orders would fall.

Indeed, CIMB-GK already sees signs of slower orders, pointing to Atwood Oceanics' recent decision not to exercise its option for a third semi-submersible with SembCorp Marine as an example.

'While we had expected orders to slow down even before the credit crisis, citing deliveries to meet shortages from 2009 onwards in the shallow-water jack-up rig and shipbuilding segments, it now looks like the credit turbulence could hasten the slowdown of orders going into 2009,' it said. And income growth beyond 2009 appears at risk if the order momentum decelerates faster than expected.

This comes as conditions in credit markets worsened following Lehman Brothers' collapse, while many economies look set to enter a prolonged phase of economic slowdown. A massive sell-down on equities had also caused O&M stocks to lose more than 70 per cent of their values in the year-to date.

Also, the industry may see more projects abandoned due to cost overruns from higher equipment costs and insufficient financing.

Said CIMB analyst Lim Siew Khee: 'We see more frantic sales of unchartered assets in the market where operators are pushing back their newbuild plans and starting to look for bargain units built for speculation. Norwegian MPF, which recently filed for bankruptcy protection, is the second casualty of the credit crisis this year, after US MPU Offshore Lift in July.'

Goldman felt that the sector is unlikely to outperform in the next 12 months and has cut its 2009 earnings estimates for Keppel, SembCorp Marine and SembCorp Industries.

Similarly, CIMB has reduced its order assumptions for 2009 to 2010 by 13-44 per cent for the stocks, and downgraded their profit forecast accordingly.

Both Goldman and CIMB downgraded Keppel to 'neutral', targeting prices of $6.70 and $6.10 respectively. The stock ended trading yesterday at $4.17.

SembCorp Marine remains a top pick for CIMB with a price target of $3 - against its closing price of $1.41 yesterday; while Cosco Corp is expected to underperform. CIMB valued Cosco at 85 cents, compared with its close of 70.5 cents yesterday.

Published October 23, 2008

Three property, infrastructure funds allay fears

Two MacarthurCook funds and one Macquarie fund update financial positions

By EMILYN YAP
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THREE property and infrastructure funds yesterday issued statements in a bid to allay market concerns about tighter credit, and to provide updates on their financial positions.

Facing a possible rating downgrade by Moody's Investors Service, MacarthurCook Industrial Reit (MI-Reit) reassured investors that it is 'advanced in negotiations' to refinance a $220 million facility maturing in April 2009. Discussions should be finalised in January next year.

Moody's said on Tuesday that MI-Reit, with a Baa3 corporate family rating, 'faces significant refinancing risks' as this amount of debt is not covered by available committed facilities.

Moody's review also reflected concerns over MI-Reit's asset and tenant concentration, which could be 'much greater...than is consistent with a Baa3 rating.'

To this, MI-Reit said that its income is protected by a long lease expiry profile. For instance, only 3.6 per cent of the trust's rental income will be subject to lease expiry in FY2010.

Head lease arrangements and a diversified portfolio of quality tenants also contribute to income security, it added. Around 36 per cent of rental income comes from manufacturing facilities which 'tend to have higher tenant retention rates in an economic downturn'.

MI-Reit ended trading yesterday with an unchanged unit price of 33 cents.

Another fund, the MacarthurCook Property Securities Fund, also updated investors on its operations yesterday.

'While interest rates around the world are now trending down, the ability to source competitively priced debt, combined with the anticipated slowing in economic growth, continues to be a concern for the market,' said Richard Haddock, chairman of fund parent MacarthurCook Fund Management Ltd.

A priority is to further reduce debt and prudently manage its underlying portfolios, said the MacarthurCook Property Securities Fund. One strategy is to cut its weightings on unlisted property and use those funds to reduce debt.

A third fund, the Macquarie International Infrastructure Fund Limited (MIIF), said yesterday that it has no bilateral dealings with known troubled financial institutions.

According to the fund, borrowings held by its underlying businesses have remaining maturities of three to 14 years, and most of its interest exposures are also hedged for the medium to long term.

MIIF also said that its businesses are performing strongly in line with management's expectations. It therefore expects income this year to be comparable with that received last year.

The unit price for MIIF rose 2.5 cents yesterday to close at 37.5 cents.

Published October 23, 2008

Pacific Ship Trust's revenue up 29%, DPU flat in Q3

By VINCENT WEE
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PACIFIC Ship Trust (PST) maintained a steady course in the third quarter, lifting gross revenue 29 per cent to US$11.2 million from US$8.7 million but keeping distribution per unit (DPU) flat at 1.0953 US cents.

The higher gross revenue came on a full quarter's contribution from the vessel Kota Naga, which was delivered and commenced charter on May 28, and 14 days' time charter income from the vessel CSAV Laja, which commenced charter on Sept 16.

Net profit after tax rose to US$3.2 million from US$589,000, mainly due to higher revenue and a reduction in fair-value losses on interest rate swaps.

Other expenses - professional and regulatory fees, vessel tonnage tax, advertising and administrative costs - rose US$300,000, related mainly to the acquisition and charter of four new vessels. Finance expenses increased from US$6.4 million to US$7.5 million.

Since the first quarter of FY2008, PST has retained 10 per cent of distributable income for use as working capital. As such, Q3 distributable income was US$3.71 million, almost unchanged from US$3.67 million previously.

DPU for the nine months ended Sept 30 was 3.1553 US cents, slightly lower than 3.19 US cents previously, as distributable income eased to US$10.7 million from US$10.8 million.

'PST enjoyed a strong Q3 performance despite volatile market conditions,' said Alvin Cheng, CEO of trustee-manager PST Management. 'We will endeavour to pursue sustainable returns for unitholders by maintaining a prudent risk management and yield accretive growth strategy.'

PST units closed unchanged at 24.5 US cents yesterday.

Published October 23, 2008

Ascott Reit's DPU up 31% in Q3

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ASCOTT Residence Trust (ART) achieved a unitholders' distribution of $15.86 million for the third quarter ended Sept 30, a 32 per cent increase year-on-year. Distribution per unit (DPU) for the quarter is 2.61 cents, a 31 per cent increase from a year earlier.
Strong show: The trust's CEO said it continued to benefit from geographic diversification and its extended-stay business model

Lim Jit Poh, chairman of Reit manager Ascott Residence Trust Management Ltd (ARTML), said: 'Ascott Reit posted a strong operating performance. Revenue increased $10.7 million. Sixty-six per cent was attributable to organic growth across the portfolio. The other 34 per cent was contributed by newly acquired properties subsequent to Q3 2007.'

ARTML chief executive Chong Kee Hiong said ART continued to benefit from geographic diversification and its extended-stay business model. Its properties in Beijing enjoyed strong growth in average daily rates during the Olympic Games. And its Australian and Singapore properties also performed well.

As at Sept 30, ART's gearing was 34.9 per cent - well within the 60 per cent gearing limit allowable under MAS's property fund guidelines.

The trust's average cost of debt was 3.3 per cent, and its interest cover a healthy 5.1 times. ARTML said that more than 70 per cent of ART's debt is on a fixed-rate basis, as it has consistently taken a conservative approach to capital management.

Some $84.6 million or 15 per cent of total debt is due for refinancing in the current Q4. The trust said it has sufficient cash and bank facilities to meet these refinancing needs. More than 80 per cent of total debt is not due for refinancing until 2011 and beyond.

'We will continue to focus on active management of our properties to maximise asset yields to deliver stable returns to unitholders, despite the difficult economic conditions,' Mr Lim said.

Published October 23, 2008

Don't make us say it again in three months' time

By R SIVANITHY
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WE hate to say 'we told you so', but we told you so. Back at the start of the second-quarter reporting season, this column pointed out that because this crisis is without any real historical precedent, using past valuation parameters in determining 'valuation support' levels may be inappropriate (BT, Hock Lock Siew, July 10, 'Q2 reporting season will test Singapore's defensive reputation').

Will the Q3 reporting season see analysts make more accurate (that is less optimistic or more realistic) forecasts? Let's hope so ...

We also said that local analysts, like their US counterparts, had very probably understated risk and overstated earnings (a diplomatic way of saying that despite all that had transpired, everyone was still too complacent about the state of the world and how it affected the markets).

The conclusion reached back then was that because Wall Street had not corrected anywhere as much as the rest of the world, the United States would surely suffer from earnings shocks, and if the same were to occur here, it would severely test the local market's 'safe haven' reputation.

Fourteen weeks later, those predictions and fears have come to pass - in the US and Europe, any euphoria associated with the massive bailouts undertaken by the US Treasury, Federal Reserve, UK and European governments and central banks around the world have been quickly replaced by a sudden realisation that with a crunching, debilitating recession ahead, earnings are going to take a walloping.

Here, the Straits Times Index's plunges over the past two days have been driven mainly by selling of the banks - which in turn stems from analysts rushing out sector downgrades ahead of the banks' Q3 reports. But a glance at the massive selldown already suffered by property stocks, conglomerates and government-linked companies suggests the realisation of poorer forward earnings isn't confined to just the banks but everyone else as well.

Better late than never? Perhaps. The problem is that even with the plunges of the past month, there are indications that overly optimistic earnings might still be a problem.

For example, Citi Investment Research confessed in an Oct 6 report on Wall Street that although its own 2008 earnings estimates have been too aggressive, they were still 'far more conservative than consensus forecasts . . . the current US$77 EPS (earnings per share) estimate for 2008 looks perilous'.

It added that sometime next year, it might be possible to hope that the more traditional valuation methodologies could work because at the moment, given record-high volatility, huge earnings uncertainty and even the risk of insolvencies, these tools are probably not useful at all.

As for the three local banks, Morgan Stanley and Kim Eng Research this week wrote that these stocks are overvalued relative to their earnings, which not surprisingly has helped trigger the rout in the sector since Monday.

Meanwhile for the property market, DBS-Vickers on Oct 20 spoke of developers running into a 'triple whammy'.

'In a slowing property market, the revenue stream slows as a result of declining sales, as the developers' construction progress ends up returning a lower cash flow. There could then be downward pricing pressure on the developer so as to move sales. But when this coincides with a scenario of tightening credit, then developers find themselves in a triple-whammy situation - slowing sales, increasing difficulty in obtaining credit or rolling over debt from their lenders, and increased cost and revenue uncertainty given that construction companies and property purchasers alike will be impacted by the rising cost and potentially decreasing availability of credit'.

The oil and gas sector, in the meantime, has been pounded by collapsing oil prices, and as for China stocks, the less said the better, especially after Ferrochina's bombshell that it is unable to service some of its loans.

Will the Q3 reporting season see analysts make more accurate (that is less optimistic or more realistic) forecasts? Let's hope so - we'd hate to have to say in three months' time that we told you so.

Published October 23, 2008

EYE ON THE ECONOMY
Big-car COE premium plunges by almost half

By SAMUEL EE
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(SINGAPORE) The COE premium for big cars plunged yesterday to almost half its value in the previous tender, driving home the weakness in the market for new cars.

A Category B certificate of entitlement (COE) for cars above 1,600cc closed at $7,589 - down a whopping $6,811 from a fortnight ago. Just six months before, this category - for larger, more expensive cars - hit a year-high of $19,501.

The last time a freak result dragged Cat B below $10,000 was in the second half of February 2007 when it settled to $6,002.

According to the boss of a Continental dealership, the latest COE bids are 'a worrying sign that we are either in recession or slipping into one fast'. Buying sentiment is very weak, he said. 'We had very little showroom traffic last weekend.'

The premiums for other vehicle categories also fell in yesterday's bidding exercise. Cat A for cars below 1,600cc sagged $2,812 to $10,989, while Cat E, the open category, shed $3,057 to $12,001.

Cat C for commercial vehicles was a significant $4,396 lower at $11,503, and Cat D for motorcycles slipped $280 to $1,609.

Some motor traders are not completely surprised by the sharp fall in premiums. An executive with a popular Japanese marque said he saw it coming because 'October has been quite a bad month so far'.



'Just imagine, there were 30 per cent less Cat C COEs, yet the premium dropped by more than $4,000,' said the executive. 'This means that not only individual buyers are holding back on their purchases, businesses are not buying too.'

The number of Cat C COEs for goods vehicles and buses was cut 30 per cent in the mid-quota year review. Yesterday's tender was the second to reflect the reduced quota.

But there is a possible silver lining in the latest COE results. Some distributors are hoping the plunge in premiums - and the resulting price cuts for new cars - will attract buyers back into their showrooms.

'If we get more people coming in to look for bargains, then things will get better,' said the executive. 'But if the results of the next COE tender are still lukewarm, then you know things are going to stay this way for a while more.

Published October 23, 2008

US$ hits S$1.50, pound gets pounded

As recession fears grow, US$ and yen grow in strength

By LARRY WEE

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(SINGAPORE) Recession fears rattled currency markets anew yesterday, sending the US dollar and Japanese yen to multi-year highs but punishing some other currencies quite viciously.

Locally, the greenback jumped by an unusually large 1.2 per cent to finish at a fresh 13-month high of almost S$1.4977 yesterday, while also scaling new heights versus other Asian currencies like the Malaysian ringgit, Indian rupee, New Taiwan dollar and the Philippine peso.

US investors tend to pull out of risky markets in times of crisis and send their money home - so the greenback invariably thrives when recession looms. The yen also gains when the huge pool of Japanese savers seek home comforts in the face of uncertainty elsewhere.

Yesterday, the worst losses were reserved for the British pound, which plunged through key round number supports such as US$1.70 and US$1.65 after the Bank of England's governor Mervyn King warned late in US trading hours that Britain was headed for a long and painful slowdown.

This triggered a fresh round of selling on both the stock and currency fronts.

While the Singapore dollar recorded a fresh 2008 low of S$1.4995 per US dollar yesterday, the local unit was also able to chalk up fresh 2008 highs versus even faster-falling currencies like the pound and euro yesterday - which ended the day at S$2.4546 and S$1.9338 respectively.

In Asian trading, the pound fell as much as 5 per cent from Tuesday's Asian close to hit a fresh five-year low of US$1.62, before recovering to close the day at US$1.64. In the process, the UK currency also nosedived to eight-year lows of S$2.4290 and 160.90 yen - the latter a slide of 28 per cent since the end of 2007.

Traders suggested that the currency market's renewed mood of fear and risk aversion was no doubt exacerbated by overnight news of lower commodity prices and more stock market losses - the latter led by a 4 per cent slump in the tech-heavy Nasdaq Composite Index. Indeed, by the Asian close yesterday, some Asian bourses had recorded even sharper losses.

Here, the Straits Times Index ended 99.66 points or 5.2 per cent down at 1,821.13, its lowest closing level in more than four years. Elsewhere in Asia, Japan's Nikkei-225 index fell 6.8 per cent, while Hong Kong's Hang Seng Index and Korea's Kospi stock benchmark both ended 5.1 per cent lower.

Amid all this, the yen gained strength. Even the greenback eventually finished Asian trading at a two-week low of 99.13 yen. In Singapore dollar terms, the Japanese unit jumped 3.3 per cent to finish at a fresh three-year high of S$1.5105 per 100 yen.

The euro, meanwhile, was forced well below US$1.30, and at one point found itself the best part of 10 yen weaker than its Tuesday highs - at its worst yen lows in more than four years - before regaining some composure by the Asian close.

Standard Chartered Bank researchers, who had already warned early in October that the greenback could enjoy an extended run-up all the way to mid-2009, explained that the US currency tends to do well at times of global recession - just as in the 1970s and 1980s - because US investors tend to withdraw from riskier overseas destinations en masse and send their money back to US shores.

For perspective, they estimated that assets under management by US-run funds could amount to almost double the combined total of that managed by the world's central banks and sovereign funds put together.

As for the yen, its even more impressive strength has been attributed to a massive savings pool equivalent to some US$7 trillion - which also tends to run for the cover of home in times of crisis.

'Eventually, the multi-decade trend of US dollar weakness will resume as global economic expectations stabilise and investors refocus on nominal interest rate spreads and use the US dollar as a funding currency. For now, however, US dollar bulls will continue to enjoy one of their rare victories,' they predicted yesterday.

Published October 23, 2008

Hope flickers for victims of Lehman-linked notes

2 proposals to take over Minibond notes, says MAS; DBS, Hong Leong and Maybank offer to compensate 'vulnerable' investors

By SIOW LI SEN

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(SINGAPORE) The gloom surrounding Lehman-linked structured products is starting to lift a little.

On the one hand, three different financial institutions came forward yesterday with the promise that they would soon start compensating 'vulnerable' investors who had parked their funds in Minibonds and DBS High Notes. In some cases, the compensation would start as early as today and some investors might receive it in full.

The assurances came last night from DBS in connection with its High Notes as well as Hong Leong Finance and Maybank over Minibonds. DBS said its compensation in Singapore and Hong Kong could touch $70-$80 million.

Meanwhile, rescue is also at hand for the rest of some 8,000 Minibond investors. Two financial institutions have come forward and are bidding to take over the notes so that they can run until maturity. The Monetary Authority of Singapore (MAS) wants these institutions to offer investors an exit option as well.

MAS said last night that an independent financial adviser is expected to be appointed within a week and the adviser should be able to advise investors on the proposals to take over the Minibond notes.

Both proposals to take over the notes are from international financial institutions licensed by MAS to operate in Singapore, it said. The proposals are confidential at this stage, and the details are being finalised.

Once the proposals are finalised, HSBC Institutional Trust Services, the trustee for the Lehman Minibond Programme, will inform all note-holders at the earliest appropriate time.

MAS said it has told the two financial institutions and the trustee 'that any commercially viable proposal should also provide an exit option for investors who do not wish to remain invested in the notes'.

Any proposal has to be voted in by at least 75 per cent of the note-holders which will be cast at an extraordinary general meeting, and confirmed by the court.

Investors bought Minibonds arranged by Lehman Brothers worth $508 million over the last two years, of which $375 million was sold to about 8,000 retail investors through nine distributors.

Another 1,400 investors bought DBS' High Notes 5 which is linked to Lehman Brothers.

Many investors were retirees who poured the bulk of their hard-earned savings into these notes attracted by their quarterly interest or coupon payments which paid as much as 5 per cent against miserly fixed deposit rates of sub-1 per cent.

When Lehman Brothers went bankrupt last month, investors were left high and dry and there have been emotional scenes of retirees crying, stunned by their sudden descent into potential destitution.

Many received a large dose of hope last night.

Hong Leong Finance said it will compensate in full vulnerable Minibond investors who were 62 years or older at the time of investment and had only a primary school education. Sixty-two is the government's official retirement age.

Maybank also said it will compensate in full vulnerable Minibond investors but did not disclose details, while DBS Bank too said it will begin to compensate today those customers it had mis-sold its High Notes 5 notes.

Hong Leong Finance, which has 28 branches mainly in the heartlands, said 'in exchange for the customer's Minibond programme notes and without any admission of liability, the company will offer, in full and final settlement, payment of the original investment amount net of all interest paid to date'.

The offer is not expected to have a material adverse effect on the company's results for the current financial year.

A source said the number of cases do not run in the hundreds.

Hong Leong Finance spokesman Gerry de Silva said as for the rest of Minibond investors, the company will continue to review and deal with them in a fair and equitable manner, and as expeditiously as possible.

Priscilla Loke, Maybank spokeswoman, said investors have the option to take compensation from the bank or continue holding the notes until maturity with whoever takes over from Lehman.

DBS, meanwhile, said last night that its High Notes 5 were sold to 4,700 customers in Singapore and Hong Kong who invested a total of $360 million.

Of these customers, two-thirds are from DBS Treasures which caters to customers with a minimum of $200,000 cash and/or investments, and 80 per cent are below age 60.

'As a matter of policy, we do not discuss individual cases. However, to-date we have found that a number of cases did not meet the standards DBS upholds and the bank will be compensating these customers with effect from tomorrow. Based on the number of cases we've reviewed, we estimate that the total customer compensation in Singapore and Hong Kong will be in the range of S$70-$80 million.'

DBS added that the unwinding process of the products is currently underway.

'Regrettably, our initial expectation of the worst-case scenario whereby investors will lose their entire principal investment amount is likely to materialise. DBS will not gain from this process and the bank will make a final announcement next week when the final credit redemption amount, based on prevailing market conditions, is determined.'

Published October 21, 2008

Making profit warnings more meaningful

By WONG WEI KONG

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AS THE earnings season gets underway amid a financial and economic crisis, profit warnings will increasingly be issued by underperforming companies ahead of their results announcement.

The idea behind such warnings is a good one: it is to allow market expectations a period of time to adjust to the fact that a company will not be living up to its earlier guidance or targets. It helps avoid an earnings shock, and the negative impact that can have on the share price.

Yet, companies need to realise that the mere act of issuing a profit warning is not enough. A profit warning has to be meaningful.

Take, for instance, the profit warnings issued by two companies yesterday.

A-Sonic Aerospace made what is possibly the shortest of all profit warnings seen in many months. In a one sentence statement, the company simply said that 'the results of the company and its subsidiaries for the third quarter ending 30 September 2008 and the nine-month period ending 30 September 2008 are expected to register losses'.

Reyphon Agriceutical Ltd did little better. 'The group's financial results continue to decline and the financial results for the third quarter ended 30 September 2008 are expected to be significantly lower compared to the corresponding third quarter ended 30 September 2007,' it said.

What's missing in these two announcements, and what investors are expecting, is why?

To be sure, investors were served a warning to lower their expectations, or to expect the worst. But without saying what were the factors that led to the poorer performance, the two profit warnings are not meaningful. Without more information, investors cannot properly assess the situation.

Thankfully, not all companies make profit warnings this way.

Last week, Banyan Tree Holdings warned that it may fall into a loss for the third quarter of 2008. But it provided reasons - the deterioration of the global financial situation, coupled with the political turmoil in Thailand which had affected its operations there. The group also took the opportunity to tell investors that it has no bilateral dealings with known troubled financial institutions and has not entered into any complex financial instruments. It also gave an update on its business outlook, as well as how it is responding to the situation, such as controlling its spending and cutting its costs where possible.

Earlier this month, QAF Ltd warned that the group is expected to incur a substantially higher losses before tax for the third quarter of 2008, relative to its second quarter 2008 loss of $1.5 million. Like Banyan, it provided context. The losses would mainly be caused by the performance of the group's primary production division and its apple juice manufacturing division. Both units suffered from high raw material prices. An unrealised foreign exchange loss was also a contributing factor, it said.

The contrast between the two sets of profit warnings is stark. Which serves investors better? More companies need to put more information into their profit warnings. By the time companies are prepared to issue a profit warning, they already have most if not all the facts in hand. Of course, it's a task that brings far less pleasure than announcing new projects in good times.

But companies should remember that transparency and information flow is as critical, if not more so, in times of crisis.

Published October 21, 2008

Prices of commodity stocks take a hit

Poor economic conditions resulted in fall in commodity prices and returns

By OH BOON PING

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PRICES of commodity stocks have slumped in recent weeks as investors slashed their holdings amid a worsening credit crunch.

'Unless we see that there is a recovery in demand, commodities could continue to trend sideways.' - OCBC Investment Research analyst Carey Wong

The stock price of Wilmar International nearly halved since January to close at $2.30 yesterday, while shares in Noble Group lost 66 per cent over the same period.

Similarly, Olam, which supplies nuts, spices and timber, closed at $1.04 - down from $2.80 on Jan 2 - while Golden Agri-Resources plummeted from its year's high of $1.20 to 18.5 cents yesterday.

The latest developments come after the massive sell-down of stocks across the region, following a worsening of the credit crisis.

Also, Singapore's economy has slipped into a technical recession, where the government is predicting a half percentage point contraction in gross domestic product (GDP) in Q3. Full-year growth forecast has been slashed to 3 per cent.

OCBC Investment Research analyst Carey Wong said: 'I guess the main kicker is when the economies will pick up as commodities are cyclical plays. So unless we see that there is a recovery in demand, commodities could continue to trend sideways.'

The credit crunch also stoked concern that banks may choke off lending to highly leveraged firms, thus affecting their ability to refinance their loans.

Said Mr Wong: 'Gone are the days of using cheap credit to fuel growth. And there is also the issue of weakening demand, which leads to lower cashflows and thus inability to meet debt obligations.' Hence, he adds, having a more leveraged business definitely exerts more pressure on the stock.

In terms of near-term outlook for commodities, Goldman Sachs hit a bearish note, citing poor economic conditions, which resulted in a sharp decline in commodity prices and returns.

'In fact, our global economics team has already reduced the outlook for global economic growth in 2009 from 3.7 per cent to 3 per cent, which in itself substantially weakens the forward outlook for commodity demand,' said the investment giant in a report.

Indeed, Merrill Lynch said that the freeze in the credit markets 'has been pushing oil demand lower in many countries, with US demand declining by almost two million barrels per day or 10 per cent year-on-year in the last four weeks'.

Vehicle sales are falling in developed and emerging economies alike, and air traffic growth is coming to a virtual standstill.

Despite the financial bailouts announced recently, Merrill thinks that there is little chance that banks will lend aggressively again in the coming months, even though bank credit default spreads and interbank lending rates in Europe and the US have fallen since then.

Goldman said that it has cut price forecasts across commodities - except gold - and sees further downside in near-term commodity returns.

The three-month price target for WTI Crude is set at US$70.50, while Brent Crude price could drop to US$69 within a quarter.

The three-month price targets for London gold and silver are set at US$930 and US$12.30 respectively.