Be prepared for banking nasties

Alex Brummer12 April 2012

IN ITSELF, the collapse into bankruptcy of American discount retailer Kmart might appear unimportant. The group has been struggling for years to meet the challenge of upstart Wal-Mart.

The present crisis was provoked when major suppliers refused to fill the discount group's shelves because of fears it could no longer pay its bills. Kmart will now be kept alive by a lifeline from a consortium of bankers headed by Credit Suisse First Boston, which is advancing a $2bn (£1.4bn) credit while Kmart seeks to climb out of Chapter 11, where it is protected from creditors.

The significance of the collapse is that it comes at a tricky moment for the global banking system. It arrives hard on the heels of Enron, where huge loan losses are being taken by JP Morgan Chase and others. All this at a time when the banks are still counting the cost of Argentina's implosion.

The devaluation of the Argentina peso and the moratorium on bank debt are posing serious accounting difficulties for bank auditors.

It was all but inevitable that the sharp slowdown in the US and global economy post 11 September would produce casualties. It was thought they would most likely be among the airlines. Congress's bailout of the major US carriers prevented that in America although both Swissair and Sabena went under in Europe.

We are now beginning to see the secondary effects of 11 September as corporations that were able to keep afloat through creative accounting like Enron, or through robust demand like Kmart, are being exposed to the elements.

None of this will leave our own banks unaffected. Through syndication and credit insurance most bank debt is now shared among the biggest players across the globe. Losses can be thinly spread.

British banks feel they have emerged relatively unscathed although the full cost of the telecoms licence fiasco and the present financial embarrassment of cable companies NTL and Telewest has yet to be fully felt. Some kind of debt reorganisation at both groups is very much on the cards.

What may be more worrying is that the stress is spreading from specialist to broader banking areas. One of the larger British banks tells us that in the past six weeks there has been a severe setback to loan quality.

Auditors watching the present embarrassment of Andersen at Enron are thought to be taking an extremely cautious approach at present. Moreover, as the decision to tighten credit conditions for mortgages shows, the financial sector is becoming concerned about the build-up of personal debt to record levels. The upcoming bank reporting season in Britain threatens provisioning nasties.

Reshaping BA

THE Middle East route-sharing deal between British Airways and KLM has given a small lift to BA shares. This link-up provides a demonstration of how a broader BA-KLM alliance or even a merger (of the kind sought by BA chairman Lord Marshall) might work, with Amsterdam's Schipol airport acting as an alternative hub to a crowded Heathrow.

What the market is really waiting upon is the outcome of BA's 'Future Size and Shape' exercise, which is expected to determine BA's strategy going forward. Chief executive Rod Eddington has already laid off 7,200 workers post 11 September and there is concern that as BA axes unprofitable European routes - where cut-price carriers are making hay - there may be drastic job cuts to come.

The scale of the cuts reportedly has divided Marshall, a veteran of BA's most imperial days, and Eddington, who has a less grand view. Indications from BA headquarters are that the group is veering away from a huge downsizing. Revenues are going to be dramatically lower in the third quarter and an adjustment will be needed. But it is unlikely to be the wholesale bloodletting that was once feared.

P&) offer

ONE of the hidden factors in the battle for P&O Princess is a historic rivalry between the Ofer and Arison Israeli shipping families. Among the biggest shareholders in Royal Caribbean is Eyal Ofer of the Ofer group, Israel's largest privately owned shipping fleet.

It was to Ofer that P&O chairman Lord Sterling turned in December 2000 when he was having trouble selling his unwanted 50% stake in Associated Bulk Carriers. It was absorbed into Ofer's Zodiac Maritime Agencies, the London-based ship management group, for £68m.

Micky Arison, son of Israeli-born Carnival founder Ted Arison, does not want the Ofer family to gain the upper hand in the cruise market. Hence his determination to take his higher bid, worth 500p a share, directly to independent shareholders.

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