The credit-markets are showing signs of life again.
The buy-under of Bear Sterns (BSC) and subsequent actions by the Fed to allow Investment Banks to access the discount window using asset backed paper as collateral seem to be having the right effect.
The market cheered when Lehman Brothers (LEH) was able to place an offering
of preferred convertible stock at reasonable terms. This was followed by news of Thornburg Mortgage (TMA) and Washington Mutual (WM) raising equity capital to continue their operations.
Though the terms were highly dilutive for the existing equity holders, the fact that the firms were able to raise capital without the intervention of the US government or Sovereign Wealth Funds was a welcome sign.
Leverage Loans: Market Unfreezing
Citigroup (C) is close to completing a transaction to place more than $12B of leverage buyout related loans to a group of private equity investors. The loans were sold at around 90c to the dollar, a much better price than the 15-20% loss which was being projected earlier. The amount placed amounts to about 25% of all leverage loans Citigroup is currently carrying on its books.
A few weeks ago it would have been impossible to imagine that a beleaguered bank like Citigroup would be able to place such a large amount of loans at such reasonable terms. This is another indication that the credit markets are now unfreezing. Private capital is now sensing a once in a lifetime chance to pick up high quality paper at deep discounts and they are now diving in by
This deal has the potential to be the harbinger for more placements, as other buy-side firms, itching to put their money to work, start scooping up the leveraged loans. Given Citigroup’s beleaguered negotiating position, this deal also establishes a floor for pricing of such placements in the future. This bodes well for banks who are sitting on a huge amount of leveraged buyout paper, which was fuelled by the private equity boom of 2006-2007.
The placement also means that the leverage buyout market will gradually start opening up again.
Perhaps the biggest benefactor will be the buyout of Clear Channel Communication (CCU) which is currently stuck in litigation. The private equity firms taking CCU private were unable to agree on the financing terms with the funding banks. The banks were desperately looking for the flimsiest pretext to renege on their funding commitments since they expected to book 15-20% loss as soon as the deal closed.
A few weeks ago I had written a post which explored the level of write-downs taken by banks to account for the sub-prime related assets. My conclusion was that the write-downs were extreme since they were based on extremely pessimistic marks in a dysfunctional market. As a result there is tremendous potential for write-ups as the credit markets start functioning properly.
A number of market observers are now talking about the same thing, with the Fast Money crew specifically noting that Morgan Stanley (MS) was extremely aggressive in booking the $9B+ write-down and will see
an upside within a year.
Online Shopping and Google
CNBC’s Margaret Brennan had an interesting piece about the effectiveness of marketing dollars in online retail.
What is interesting to me are the different ways that Internet stores are reaching customers to bring them “in store” — online.
One of the most effective ways is also one of the cheapest: Forrester’s Research shows that e-mails sent to repeat customers by stores involves the cheapest marketing cost ($6.85 is the average cost per order), while yielding a high average order value ($120.27 average order value.)
Search engine shopping is also among the cheapest ($8.63 average cost per order) while yielding a high return ($109.73 average order value.) These cheap marketing tools are helping retailers maximize profits.
Earlier this year, I had written a post in response to an article by Henry Blodget, where I had suggested that during an economic-slowdown, marketing dollars will increasingly move online since they allow retailers to get the quickest bang for their marketing dollars. The data from CNBC seems to confirm that search is a highly effective method of generating sales, especially among new customers who traditionally have much higher acquisition costs than existing customers.
Though online retail grew by 17% year over year, it still represents just 7% of the total retail market, leaving a tremendous amount of upside.
High gas prices are also pushing customers to shop with their mouse instead of driving to a store. They not only save the time and the gas money, but are also able to comparison shop to get the best deal. Many online retailers do not charge sales-tax for out of state residents, and offer free or discounted shipping which is helping push more shoppers online.
The effectiveness of search as a medium to drive sales bodes well for the undisputed leader in search, Google (GOOG). Google’s stock has been under immense pressure this year with questions about how the economic slowdown will affect online advertising.
Financial and mortgage related firms have been cutting back on their online marketing.
The unfreezing of the credit markets and government actions to spur mortgage refinancing means that we are sitting on the cusp of another big boom for mortgage vendors. I expect the mortgage vendors to come back aggressively into the online advertising market to make up for the lack of business over the past year.