Dresdner Lifts Recommendation on Financial Debt to `Overweight'

Sept. 24 (Bloomberg) -- Dresdner Kleinwort Group, the investment-banking unit of Allianz SE, lifted its recommendation on financial debt to ``overweight'' from ``neutral,'' citing improving money markets and investor appetite for the bonds.

Dresdner's recommendation applies to senior bank debt, bonds that rank ahead of other obligations in the event of a bankruptcy. The investment bank has an ``underweight'' opinion on lower-ranking Tier I debt, and a ``market-weight'' recommendation on lower Tier II debt, according to an e-mailed report.

``I've never been overweight senior bank debt before in my career because it tends to trade very tightly,'' said Willem Selms, a credit analyst in London at Dresdner, in a telephone interview. ``Clearly, banks have been penalized in the sell-off. If there is any return of confidence, this is a very safe place to be.''

The risk of lending to European banks and insurers fell to its lowest in almost two months Sept. 21, according to traders of credit-default swaps. Contracts on the iTraxx Financial Index, a benchmark for the cost of protecting the senior debt of 25 companies including Barclays Plc and Deutsche Bank AG, were little changed today at 25 basis points, after dropping as low as 22 basis points last week. A basis point is 0.01 percentage point.

A basis point on a credit-default swap contract protecting 10 million euros ($13.5 million) of debt for five years is equivalent to 1,000 euros a year.

Dresdner's change of recommendation follows Royal Bank of Scotland Group Plc's move Sept. 19. Edinburgh-based Royal Bank last week raised it recommendation on the bonds of banks and insurers to ``overweight'' from ``underweight'' after the U.S. Federal Reserve cut its benchmark interest rate for the first time since 2003.

I think, I like European banks and of course their "debt"...

 

Didn´t want to bore you guys, maybe you are interested in some more background informations ...


Rewind? - "The risk of a full-blown melt-down of credit markets has receded"

Sep 26 16:32
by Helen Thomas
Comment

We’re a touch light on good news around here currently. But here’s a snippet The pair that brought the world the Great Unwind, are now a little more cheerful - hedge funds might be a source of comfort to the big investment banks coming out of the credit squeeze. More…

We’re a touch light on good news around here currently. But here’s a snippet The pair that brought the world the Great Unwind, are now a little more cheerful - hedge funds might be a source of comfort to the big investment banks coming out of the credit squeeze.

Stefan-Michael Staimann and Susanne Knips at Dresdner Kleinwort are taking another look at the European banks in the light of recent events - and there’s some improvement in their message:

In our view, the risk of a full-blown melt-down of credit markets has receded. Central banks have injected generous liquidity, credit prices have recovered from their lows, and the first round of US brokers avoided disaster in their third quarters. We also sense early signs of new demand for some credit assets, for instance from new distressed debt funds or from the Freddie Mac’s and Fannie Mae’s raised sub-prime allocations.

The risk of unsettling headlines is high, warn the pair - banks’ results, hedge fund redemptions, and individual banks struggling publicly with liquidity problems could all unsettle matters.

But crucially, says Staimann and Knips, “credit markets are unlikely to return to their pre-crisis ‘everything goes’ attitude.” The new world will be characterised in several ways:

1. Declining supply of underlying credit assets - as LBOs dry up and supply of new residential mortgages falls
2. Demand moving from structured to plain vanilla - focus moves from yield enhancement to capital preservation
3. Deterioration of credit quality - US mortgages, LBO credit, and the backdrop of a lacklustre US economy
4. Less leverage desired and available
5. Lower total returns on credit could pressure transaction cost - total returns will be hard to maintain in absence of mark-to-market gains and with lower leverage
6. Re-intermediation of some financial assets into the banking system
7. Regulatory tightening and litigation - “as always, regulators regulate the last crisis” - expect noise from litigation

For the banks, Staimann and Knips stand by their view that capital markets-related revenues were ripe for a correction - the bonanza couldn’t last forever. But in contrast to their February tome, where the coming Great Unwind of hedge funds was considered situation critical for Europe’s banks, the funds this time are not where the problems lie.We believe revenue prospects in credit markets (and here in particular structured credit and LBO lending activity) and with private equity will deteriorate. The revenue pool from hedge funds could remain solid, and only emerging markets are expected to carry on growing.

In their base case, they see investment banking revenues dropping by around 10 to 15 per cent in 2008, on the back of a 30 to 40 per cent slump from the first half of this year into the second. Those falls could then be magnified by the shift from high margin business (structured credit, LBOs, private equity advisory) into lower margin areas.

That we’re afraid is as good as it gets - and that after a 20 per cent correction the DK pair are starting to look more favourably on the likes of Credit Suisse, UBS and Deutsche.

But hold up. That’s only the base case - predicated on the idea that there will be “limited contagion from the US economy.” Another thing that rests on the unproven theory of decoupling then.