FT : US warns on China air force modernisation

China is modernising its air force on an “unprecedented” scale and is “rapidly closing the gap with western air forces”, the Pentagon said on Thursday in its annual report on the capabilities of the Chinese military.
The improvements in the Chinese air force were apparent not only in its aircraft but also in its use of jamming communications and electronic warfare, said the report. China also appeared to be operating a drone for reconnaissance at sea.

The Pentagon said that China’s headline defence budget of $119.5bn was understated by about 20 per cent, with the real figure for spending on the military closer to $145bn.
The report is an annual publication by the Pentagon which is mandated by Congress. However, it comes at a time of increasing military tensions between China and the US and its allies in Asia.
US and Chinese officials sparred verbally at a major regional security conference at the weekend, with Chuck Hagel, US defence secretary, accusing China of using coercive tactics in its maritime disputes while Wang Guanzhong, deputy chief of the Chinese general staff, said that Mr Hagel’s comments were “full of hegemony”.
China’s dispute with Vietnam in the South China Sea has escalated in recent weeks after China started drilling for oil in an area claimed by both countries while Chinese and Japanese fighter jets twice came dangerously close to each other in the East China Sea.
According to the Pentagon report, China conducted its “largest open sea exercise to date” last September when its three navy fleets took part in drills in the South China Sea – one of the growing number of signs that China’s military focus is shifting beyond its traditional emphasis on Taiwan.
The section on the air force provided the most new detail. The Pentagon said that within a few years, the air force would use largely fourth-generation fighter aircraft. The report also claims that China is trying to buy Su-35 aircraft from Russia which has a sophisticated radar system and which would allow it to undertake longer patrols in the East China and South China Seas.
The Pentagon said it was “probable” that China used a drone for a reconnaissance mission in the East China Sea in 2013 and it had revealed details of four different drones under development. It cited another Pentagon report that claimed the China drones programme enjoyed “unlimited resources” and “might allow China to match or even outpace US spending on unmanned systems in the future”.
While the US Justice department in May filed charges against five Chinese military officers for allegedly stealing trade secrets of US private companies, the latest Pentagon report did not provide any new details on Chinese cyber activities.

(The Telegraph) Mario Draghi takes historic gamble with negative rates but still

Mario Draghi takes historic gamble with negative rates but still stops short of QE
ECB's revolutionary move aims to force banks to pay a charge if they continue to park money for safe-keeping in Frankfurt

The European Central Bank has become the first of the world’s monetary superpowers to cut its deposit rate below zero, taking a leap into the unknown as it tries to drive down the euro and head off deflation.
The bank opened the door to direct purchases of private assets or quantitative easing, and announced a €400bn blast of long-term lending at cheap rates for banks.
The benchmark interest rate was cut to a record low of 0.15pc, tantamount to zero. The revolutionary move was to lower the deposit rate to -0.1pc, forcing banks to pay a charge if they continue to park money for safe-keeping in Frankfurt.
“Are we finished? The answer is no,” said Mario Draghi, the ECB’s president. “If required, we will act swiftly with further monetary policy easing. The Governing Council is unanimous in its commitment to using unconventional instruments within its mandate should it become necessary to further address risks of prolonged low inflation.”
The rate cuts prompted fury in Germany, where the head of the German Association of Savings Banks, Georg Fahrenschon, accused the ECB of expropriating savers. “We are tearing a hole in the pensions of savers. Over time these low rates will destroy the value of assets,” he said

Der Spiegel deemed it was the “end of capitalism”, while Die Welt described Mr Draghi as Europe’s Bismarck, a near autocrat beyond control. It is a foretaste of what may happen if the ECB does graduate to QE later this year, once the machinery is ready.
David Marsh, head of the financial forum OMFIF, said the latest stimulus is mostly window dressing and may backfire. “The fear is that it cannot and will not provide the massive impulse needed to return the euro area to full health. But it will nonetheless be more than sufficient to antagonise public opinion in Germany,” he said.
The anti-euro party Alternative fur Deutschland won seven seats in the European Parliament in last month’s elections, giving it a platform for the first time.
In an extraordinary development, Germany’s finance minister, Wolfgang Schäuble, has called into question the backstop plan for Italian and Spanish bonds unveiled with spectacular effect by Mr Draghi two years ago, saying the scheme cannot go ahead without German consent and “we will not approve of such a programme”. The comments yet again call into question how far Germany is willing to go keep the system together.
David Owen, from Jefferies Fixed Income, said the lending measures offer more than meets the eye and amount to a mini-bazooka. “Draghi has drawn a line in the sand and is telling us that he is not going to raise interest rates for four years. This is highly significant,” he said.
Banks will be able to borrow €400bn for four years at near zero rates at LTRO (long-term refinancing operation) auctions in September and December. The magic is in the details. While the sums are far lower than earlier LTRO auctions, the banks will be able to tap the ECB for funds equal to 7pc of their private loan book without using up collateral. “They can get free money for four years so long as they lend it to the real economy,” he said.
ECB officials hope that this will unlock a surge of lending. The aim is to stop “passive tapering” as banks rush to repay loans and beef up capital ratios, a phenomena that has caused the ECB’s balance sheets to shrink by €800bn.
Mr Draghi has also copied a tool deployed by the Bank of Japan in February, letting banks obtain liquidity equal to three times their lending. The first trickle of QE is coming through as €165bn bonds held from an earlier scheme are no longer “sterilised”, but the pace will be glacial.
The ECB package of emergency measures is in striking contrast with developments in the US and Britain, where central banks are moving toward the exit door, deeming the job done.
It underscores the gravity of the crisis in Europe, where lending to the private sector is declining at a rate of 1.8pc and several countries are in deflation. Italy, Holland and Portugal relapsed into economic contraction in the first quarter, while France fell back to zero growth. The recovery is in danger of withering on the vine.
The blitz comes late, with EMU inflation already down to 0.5pc. The ECB slashed its inflation forecast for this year to 0.7pc, making a mockery of the coming stress test for banks, which deems 1pc to be the most extreme “adverse scenario”.
The ECB also lowered its inflation estimate to 1.1pc in 2015 and 1.4pc in 2016, showing how far it has strayed from its 2pc target. Mr Draghi has warned in the past of a “pernicious negative spiral” in prices, but insisted that their is currently no “self-fulfilling” dynamic at work pulling Europe into a trap.
Even so, the prolonged effects of “lowflation” are serious, since any drop in the rate at this stage can have powerful effects on the intensity of debt-deflation in the crisis countries. It is a key reason why debt ratios keep spiralling higher despite austerity cuts.
Danae Kyriakopoulou, from the Centre for Economics and Business Research, said the negative deposit rate may do more harm than good. Banks hold just €30bn in cash reserves at the ECB – down from €700bn in mid-2012 – so the move will not free up much money for lending.
“What we may see instead is deposit flight as savers look for banks more willing to take on their cash elsewhere, as happened in Denmark. This in turn could even lead to a fall in lending, making the rate cut effectively contractionary, and do little to raise eurozone inflation,” she said.
The negative deposit rate risks causing havoc in the money market industry, one reason why the US Federal Reserve never tried it. The industry is worth €843bn in Europe, of which €375bn is from foreign funds.
The ECB is clearly hoping that some of this money will drift away, pulling down the euro exchange rate, which has strengthened 5pc in the past year and pushed the bloc closer to deflation. Early on Thursday the euro plunged one cent against the US dollar to $1.35 but bounced back and ended slightly higher.
Hans Redeker, currency chief at Morgan Stanley, said it will be a struggle to weaken the euro for long given the eurozone’s ballooning current account surplus of €280bn and the repatriation of funds by banks shoring up defences at home. “The ECB has bought time but Europe’s banks are incapable of recycling the surplus,” he said.
The stock markets rallied by 1pc in France, 1.1pc in Spain and 1.5pc in Italy on the historic measures, though reaction in Germany was muted. Many of the details were flagged in advance. Jens Nordvig, from Nomura, said credit markets have already priced in near perfection. It may take “broad-based” asset purchases to keep the rallies going.
Full-blown QE is not yet on the cards, though the ECB has a €1 trillion plan for use in extremis. Mr Draghi said the bank wants to “signal” that it is willing to buy asset-back securities if need be. They would be packages of loans but not the incendiary concoctions that led to the US subprime crisis. “They should be simple, not CDS (collateralised debt securities) cubed, or squared. They should be real loans, not based on derivatives,” he said.
It is an immature market in Europe, with just €700bn of assets to buy, and it is unclear whether purchases of asset-backed securities can direct much lending to small businesses, where it is most needed. It is costly to put together packages of sellable loans for family firms. “Their importance to politicians far outstrips their attractiveness to creditors,” said Matt King, from Citigroup.
In the end, the ECB may have to bite the bullet and resort to full-blown purchases of sovereign debt, just like the central banks of the US, Britain and Japan. That thorny issue has been put off for a few more months while the ECB prays for a miracle.

Barron's : Convertible Bonds: Nice Yield, Lower Risk

Convertible Bonds: Nice Yield, Lower Risk
Convertible bonds offer much of the upside during bull markets while limiting losses in bad times.

As hybrid securities that don't fit neatly into either the stock or the bond categories, convertible bonds rarely get the attention they deserve. They lose out to common stocks during bull markets and to straight bonds during bear markets.

Yet convertible bonds can play a valuable role in your portfolio, especially right now if you—like many investors—have the dual goals of wanting to participate in any remaining upside of this incredible bull market but also wanting to protect yourself if stocks turn south.

Convertible bonds hold out this dual potential because they are part bond and part stock. They pay a regular interest rate like an ordinary bond, but can be converted into a preset number of shares of the issuing company's common stock.

The performance of a convertible bond depends on many factors, including the value of the shares into which the convertible can be converted, as well as the prices of nonconvertible bonds with similar maturities, interest rates, and credit qualities. In some circumstances a convertible bond will act a lot more like a stock than a bond, and in other situations just the opposite.

In other words, it's possible that a portfolio of convertible bonds can be a good all-weather portfolio.

Sounds good in theory. But how do convertible bonds perform in the real world?

The Hulbert Financial Digest for more than 20 years has been tracking an investment newsletter that invests solely in convertible securities: The Value Line Convertibles Survey. Even during a rough period for investors, the newsletter's recommendations have fared well. Since the bull market top in October 2007, just as the Great Recession and associated bear market was beginning, the newsletter's model portfolio has produced a 9.6% annualized return, according to the Hulbert Financial Digest, versus 5.9% for buying and holding the stock market as a whole.

Better yet, this outperformance was turned in with 41% less risk, as measured by volatility of returns. That's a winning combination. The newsletter is in second place for risk-adjusted performance since October 2007 among the 129 advisory services the HFD has followed over this period.

To be sure, over the entire 20-year period since May 1994, Value Line's convertibles service has lagged the broad stock market—producing a 7.5% annualized return, versus a total return of 9.5% for the Wilshire 5000. But it's hardly surprising that a portfolio of convertibles will have lagged during a period which, on balance, has experienced such strong gains for the broad stock market.

In any case, the performance of the Value Line service has matched that of the average convertibles mutual fund tracked by Lipper. Compared to Value Line's 7.5% annualized return over the past 20 years, for example, the Lipper index of convertibles mutual funds gained 8.3%. However, because Value Line's model portfolio was more than 10% less volatile, or risky, than the Lipper index, their two performances are almost identical on a risk-adjusted basis.

All in all, it appears that convertibles have potential both in the real world as well as in theory.

The accompanying table drills down into the data further and shows how convertibles performed during the last two major bear markets and bull markets, and how traditional portfolios performed over the same time period.

Two themes emerge.

First, in bear markets in particular, convertibles provide substantial downside protection. For example, the Value Line Convertibles Survey lost less than half of what the overall stock market suffered during the 2007-2009 bear market, and only two-thirds the loss of a diversified 60% stock/40% bond portfolio. Its record relative to the overall stock market was almost as good in the 2000-2002 bear market, though in this case notice that it didn't do any better than the diversified stock/bond portfolio.

A second theme: A price is paid for this downside protection. Convertibles' bull-market returns are not as great as those of an all-stock portfolio. Still, it's worth emphasizing that their bull-market returns are nothing to sneeze at, either. And notice that the Value Line Convertibles Survey in bull markets does outperform the diversified stock/bond portfolio.

Even more than the usual care needs to be exercised right now when picking a convertible, however, since many of them trade well above the value of the shares into which they can be converted and, therefore, have elevated risk. Their hefty premiums are the result of investors' willingness to pay a big price for the downside protection that convertibles offer. For these and other reasons, you may want to follow the lead of an advisor, such as the Value Line Convertibles Survey.

Or, rather than buying individual securities, you may want to go with a mutual fund that holds convertible securities. For example, you'd need at least a six-figure portfolio to purchase even the smallest-possible lots of each of the positions recommended in the Value Line Convertibles Survey portfolio. And commissions and bid/ask spreads can impose a particularly large cost when buying small lots.

The convertibles funds with the best 10-year returns, according to Lipper, and which are both no-load funds and have relatively small minimum investment levels, are Fidelity Convertible Securities Fund (ticker: FCVSX ), with a 0.72% expense ratio; and Vanguard Convertible Securities Fund ( VCVSX ), with a 0.63% expense ratio.

(BofA-ML) The Flow Show : Equities $2bil Outflows Bonds +$4.3 inflows

* Weekly flows: Bond flows (+$4.3bn) exceed Equity flows (-$2.0bn) for third straight week…ironically coinciding with performance of global equities relative to global investment grade bonds at 6-year highs.
* Back in vogue: EM debt funds have now seen 10 straight weeks of inflows as investor appetite for yield stays strong. $2.2bn inflow this week is the largest since Jan’13 (Chart 1)…this follows a massive $76bn of redemptions (23% of AUM) in the 10 months post May’13 taper tantrum.
* Out-of-favor: Floating-rate debt funds record 8 straight weeks of redemptions after an incredible 94 straight weeks of inflows. $1.2bn outflow this week is the largest since Aug’11 (Chart 2). Retail investors have dramatically reduced their expectations of higher rates.

>>> Asset Class Flows
* Equities: $2.0bn outflows (note divergence between $8bn outflows from long only funds and $6bn inflows to ETF’s)
* Bonds: $4.3bn inflows (13 straight weeks) (Table 1)
* Precious metals: $0.7bn outflows (largest weekly outflows since Jan’14)
* MMF: $7.3bn outflows

>>> Equity flows
* EM: $0.3bn outflows (first outflows in 4 weeks)
* Europe: $1.3bn inflows (inflows resume after rare outflows last week)
* US: $1.2bn inflows ($4bn into ETF’s vs $3bn out of LO funds)
* Japan: modest $0.4bn outflows (Table 2)
* By sector, strong $0.7bn inflows to both financials and real estate funds

>>> Fixed Income flows
* Largest weekly outflows ($1.2bn) from floating-rate debt since Aug’11 (8 straight weeks of outflows)
* $2.2bn inflows to EM debt funds (biggest since Jan’13) (Chart 3)
* $2.4bn inflows to IG bond funds (24 straight weeks)
* $0.6bn inflows to HY bond funds (17 straight weeks)
* 7 straight weeks of inflows to both MBS and Munis

RTR As bank fines soar, U.S. threatened $16 billion BNP penalty

Exclusive: As bank fines soar, U.S. threatened $16 billion BNP penalty link to article {http://reut.rs/UgC0uj}

An employee walks behind the logo of BNP Paribas in a company's building in Issy-les-Moulineaux, near Paris, June 2, 2014. REUTERS/Charles Platiau



An employee walks behind the logo of BNP Paribas in a company's building in Issy-les-Moulineaux, near Paris, June 2, 2014.

(Reuters) - U.S. authorities negotiating with BNP Paribas over alleged sanctions violations at one point suggested that France's biggest bank pay a penalty as high as $16 billion, according to people familiar with the matter.

While the sources said that number was only proposed as a negotiating tactic in response to an offer from BNP of about $1 billion, the dollar figures being thrown around demonstrate what bankers and their allies say is an alarming trend of ever-increasing record penalties.

A $16 billion settlement would have pushed BNP's penalty above the biggest ever for a bank -- JPMorgan Chase & Co, which paid $13 billion last year to resolve a number of civil mortgage-related allegations.

More recently, authorities have been discussing a settlement with BNP in the range of $10 billion, sources have said. U.S. authorities are probing whether BNP evaded U.S. sanctions relating primarily to Sudan between 2002 and 2009, and whether it stripped out identifying information from wire transfers so they could pass through the U.S. financial system without raising red flags.

The New York State Department of Financial Services, one of the five offices negotiating the settlement with BNP, could receive at least $2 billion of an eventual $10 billion deal, according to a source familiar with the matter. That would be more than three times that office's $552 million annual budget this year.

A $10 billion fine would almost wipe out BNP's entire 2013 pretax income of about 8.2 billion euros ($11.2 billion). BNP reserved $1.1 billion against a potential fine.

Representatives of the Justice Department and BNP declined to comment on the negotiations.

In the past two years the U.S. Justice Department has said it's broken records on penalties for corporate misconduct at least seven times, including three times this year alone. The most recent was Credit Suisse in May, which paid $2.6 billion over charges that it helped American evade U.S. taxes, the largest penalty ever levied in a criminal tax case.

Total corporate criminal penalties in the United States overall increased about 647 percent between 2001 and 2012 to about $4.3 billion, according to figures compiled by University of Virginia law school professor Brandon Garrett.


The robust growth in corporate penalties, especially for banks, has defense lawyers questioning how authorities calculate each landmark settlement and how institutions can prepare for such fines they might face.

Banks are also deploying strategies to try to keep the numbers from growing, including enlisting top executives in settlement negotiations and taking their chances going to trial.

"I think everyone realizes that it's an exuberant market," said one defense lawyer who has negotiated recent settlements with the Justice Department and declined to be named.

There are multiple explanations for the rising fines. For one, cases related to the 2007-2009 financial crisis have produced big settlements connected to trillions of dollars in subprime mortgage financial products. U.S. authorities have also turned their attention to other crimes involving big dollar amounts, including money laundering, sanctions violations and the rigging of benchmark interest rates.

The Justice Department may also be responding to political pressure, especially because no high-profile bankers have gone to jail for the role they played in fueling the financial crisis.

Critics say recent penalties have not been nearly stiff enough, and amount to the cost of doing business.

Regardless, the upward push of the settlements is stark.

In cases over banks' money laundering controls, for example, criminal penalties have skyrocketed since 2010, when Wachovia forfeited $110 million to resolve charges that it willfully failed to establish a compliance program.

By comparison, JPMorgan paid $1.7 billion earlier this year to resolve criminal charges over its failure to maintain an effective anti-money laundering program in connection with its business with convicted Ponzi schemer Bernard Madoff.

A BNP settlement of $10 billion would be more than 14 times higher than the $667 million Standard Chartered paid to resolve sanctions violations in 2012, the highest fine for such violations to date.

A former DOJ official said: "It's almost like more is law now."


RATIONALE

Sources familiar with the BNP settlement talks say there are clear justifications for a fine of as much as $10 billion, as well as other severe potential penalties, such as suspending BNP's ability to process dollar payments.

They point to the sheer volume of the suspect transactions by BNP that allegedly violated U.S. sanctions: about 10 times larger than other banks which have resolved similar cases, according to a person familiar with the matter. A second source said the high level of senior management knowledge of the conduct is another contributing factor.

A third consideration was the bank's poor cooperation with the government’s investigation, an element that also figured in Credit Suisse's guilty plea and record fine.

Cases involving violations of U.S. sanctions also give prosecutors wide latitude to assess criminal penalties, prosecutors and defense lawyers said, since they are done as forfeitures rather than as fines calculated under sentencing guidelines.

When Dutch lender ING Bank NV agreed to forfeit a then-record $619 million in 2012 over illegal transactions with Cuban and Iranian entities, court documents said the bank moved more than $2 billion on behalf of sanctioned entities. A deferred prosecution agreement that explained the fine said only that ING acknowledged that "at least" $619 million was involved in the transactions described.

In general, sentencing guidelines provide a range of things to consider when calculating a corporate penalty, including the pervasiveness of the conduct and whether senior management participated in it, with the ability to discount a fine for companies who cooperate in an investigation and fix their problems.

But even the guidelines offer wide ranges to determine penalties, leaving prosecutors with the discretion to charge the case in a way that gets them to a penalty they seek.

"The numbers are going up because they can," one former prosecutor said.

Sources also attributed some of the growth to the large number of agencies and offices involved in some investigations into financial institutions, each run by aggressive officials seeking their own stamp on a case. BNP is negotiating with at least five offices, including the U.S. Justice Department, the U.S. Attorney's Office in the Southern District of New York, the Treasury Department, the Manhattan District Attorney's office and the New York Department of Financial Services.


EXTORTION

Some lawyers representing major banks said they viewed the escalating penalties as essentially exploiting defendants who usually don't fight back in court.

"Lots of sophisticated observers view these as extortion at this point," said one bank lawyer who declined to be named.

In an attempt to exert downward pressure on the penalties, some banks, including Bank of America, have tried to fight more, with mixed results. A federal jury in New York last October found the bank liable for fraud at its Countrywide unit, but a magistrate judge in North Carolina in March recommended dismissal of another Justice Department lawsuit against the bank over allegedly fraudulent mortgage securities.

Observers said the steep sums at stake have also forced top bank executives and bank allies to get more involved in settlement talks. JPMorgan's Chief Executive Officer Jamie Dimon traveled to Washington to visit U.S. Attorney General Eric Holder while the bank negotiated its $13 billion deal last year.

In the case of BNP, numerous top French officials have intervened, including French President Francois Hollande, who appealed directly to the White House, asking whether the potential penalties will be fair and proportionate to any crime.

In early May, BNP CEO Jean-Laurent Bonnafe and the bank's lawyers met with the New York Department of Financial Services and made a plea for leniency, one source said earlier this month.


BEYOND FINES

Prosecutors and regulators have also looked to more tailored punishments beyond fines to try to improve conduct, including installing monitors and demanding terminations at a company.

One of the major sticking points in settlement discussions with BNP has been the New York bank regulator's threat to temporarily suspend BNP Paribas's ability to clear U.S. dollar transactions.

A suspension could be a significant blow for BNP Paribas, which clears hundreds of billions of dollars through New York every day.

The efforts to deter future misconduct have also pushed prosecutors to explore more prosecutions of individuals, with more of a focus on what executives' role at high levels of a company might have been in enabling misconduct, lawyers said.

"It's clear to me from the cases I'm handling that they are looking hard and long for cases to bring against individuals," another former prosecutor turned defense lawyer said.

In general, prosecutors are looking to craft penalties that harm, but don't kill financial firms, especially those that are critical to the smooth functioning of larger markets.

"It's always supposed to be, the monetary penalty has to have some ability to hurt," said one former prosecutor who now counsels banks in criminal inquiries. "They need to come up with a number that hurts but allows them to keep doing business."

>>> What to look at today - 06/06/2014

US Market closed higher on ECB Announcement, Small Caps leaded the move with Russell 2000 +2,1%, Euro$ has been stronger after ECB, Industrials were strong helped by JOY +6,7% after numbers, energy (+0.6%) and materials (+0.4%) lagged. Meanwhile, the countercyclical side saw relative strength among utilities (+0.8%), while consumer staples (+0.4%), health care (+0.2%), and telecom services (+0.04%) lagged...Volume were higher than the last few days but still below average @ 615mil shares...today Non Farm Payrolls is going to be an important catalyst...VIX @ 11,68 -3,31%...- World Bank maintains its China 2014 GDP target of 7.6% and 2015 target of 7.5%, echoing comments from IMF head Lipton overnight suggesting that there is no evidence of a significant slowdown in China. Note that in contrast, the IMF
called on China to lower its 2015 GDP objective to 7.0% to achieve more sustainable growth. World Bank also said China has the ability to step up...Press spec. on PM Abe has requested the Health and Welfare minister to make a more concerted effort to press forward with GPIF pension fund reform to increase its investment in the stock market, official announcement could be made in Sept or Oct....Nikkei+0.14% HS-0.2% Shanghai -0.62%

Eur$ 1.3655 S&P Fut +0.12% European Fut. +0.25%

Macro
- Europe Luxury Momentum Not in Right Direction: HSBC’s Rambourg
- Investors Buy Bonds Amid Little Appetite for Risk: Citigroup
- Spanish Banks : Catalunya Banc's EUR 7bn Hercules portfolio attracts offer from Soros - Expansion
- Hansson Says ECB Measures Should Help Demand, Lift Inflation

Keep an eye on
- ACA FP : World Bank backs Crédit Agricole loans
- ADP FP : ADP, Partners Bid For LaGuardia Airport Revamp, Tribune Reports
- ATC NA : Altice's Patrick Drahi Hungry for More Cable, Telecom Deals {http://on.wsj.com/1rPctHg}
- BARC LN : Barclays Fine Leads to New U.K. Scrutiny of Derivatives Conflict
- BMPS IM : Monte Paschi to Offer Shares at EU1 Each in Rights Offering
- BNP FP : BNP Co-COO to Step Down as Part of Settlement, NYT {http://nyti.ms/1pIXgW2}
- CRG IM : Carige May Offer New Shares at 30%-40% Discount, Sole Reports
- DB1 GY : Deutsche Boerse Said to Explore Sale of ISE Options Business
- DBK GY : Deutsche Bank Will Pay Up to EU119m to Banks Underwriting Sale
- DBK GY : Deutsche Bank New Shr Sub. Price at ~17.4% Discount to TERP(Theorical Ex Right price = €27.2543), right start trading today until 20/06 on German Exch. until 18/06 on NYSE) - ticker DBKB GR
- DGE LN : Bacardi, Diageo Eye Bottling in Russia, Kommersant Reports
- DTE GY : T-Mobile US Jefferies comments suggesting potential DISH bid of $45/share {NSN N6PPXS6TTDSU <go>}
- EDF FP : Hollande’s Nuclear Target Will Create Difficulties, CEA Says
- FR FP : Valeo to Enter France’s CAC 40 as Vallourec Exits
- GDS FP : Ramsay Health Care prepares to sign French deal, $1.2 billion deal for a majority stake in GDS
- GSZ FP : GDF Suez May Sell Further Stake in Australian Assets: AFR
- 3389 HK : Hengdeli Flat after Prada numbers, Hengdeli -24% YTD
- IT IM : Italcementi Sale Price EU4.825/Shr in EU500m Capital Increase
- IMMP FP : Eurosic to Buy 89% of SIIC de Paris for EU850m
- INGA NA : ING to float Europe and Japan insurance arm {http://on.ft.com/ScHLau}
- 1913 HK : Prada Tumbles to Lowest Since 2012 After Earnings Miss -5.84% in HK
- SAN FP : Sanofi’s Viehbacher Sees No Reason to Join Pharma M&A Frenzy {NSN N6PEWN6JTSEN <go>}
- SN/ LN : Medtronic Smith & Nephew Buy Would Dilute 2014 EPS 5%-6%: BI
- UCG IM : UniCredit’s Fineco Seen Valued at EU3.5b: Reuters
- ZC FP : Zodiac Aerospace Buys U.S.-Based Greenpoint Technologies

>>> Brokers Upgrades & Downgrades - 06/06/2014

>>> Up
*ASOS RAISED TO BUY VS NEUTRAL AT UBS
*BOUYGUES RAISED TO OUTPERFORM AT RAYMOND JAMES
*WORKSPACE RAISED TO BUY VS HOLD AT JEFFERIES

>>> Down
*BANK HANDLOWY CUT TO HOLD VS BUY AT ING
*EURASIA DRILLING CUT TO NEUTRAL VS BUY AT CITI
*IMAGINATION TECHNOLOGIES CUT TO HOLD VS BUY AT LIBERUM
*SNAM CUT TO NEUTRAL VS OUTPERFORM AT CREDIT SUISSE
*TERNA CUT TO UNDERPERFORM VS NEUTRAL AT CREDIT SUISSE
*UCB CUT TO HOLD FROM BUY AT ING
*WERELDHAVE CUT TO HOLD VS BUY AT ING

>>> PT Change
*Enel Green Power PT Cut to EU2.4 vs EU2.5 at Bernstein
*ITALCEMENTI PT CUT TO EU11 VS EU12 AT BOFAML; KEPT AT BUY
*Pop. Milano PT Cut to EU0.78 at SocGen; Kept at Buy
*UCB PT RAISED TO EU65 FROM EU55 AT ING

>>> Initiation
*ALPHA BANK RESUMED BUY AT GOLDMAN, PT EU0.80
*ASTRAZENECA RESUMED EQUALWEIGHT AT MORGAN STANLEY, PT 4,000P
*PIRAEUS BANK RESUMED NEUTRAL AT GOLDMAN, PT EU1.75
*SAAB RATED NEW BUY AT CITI, PT SEK242.00
*THOMAS COOK RATED NEW BUY AT BERENBERG; PT 200P

>>> Call

>>> Deutsche Bank New Shr Sub. Price at ~17.4% Discount to TERP

Deutsche Bank New Shr Sub. Price at ~17.4% Discount to TERP

New shr subscription price of EU22.5 each at 17.44% discount to theoretical ex-rights price of EU27.2543, based on yday’s official close of Deutsche Bank shares cum rights on Xetra.
* Rights to new shrs starting trading today (until June 20 on German stock exchanges; on NYSE until June 18)
* Rights Ticker: DBKB GR

Details :
Reference price for rights to new
Deutsche Bank shares ~EU1.45 each, implied by terms of EU6.75b
share sale, according to Bloomberg calculations.
• Theoretical ex-rights price ~EU27.70 based on Deutsche Bank share price of ~EU29.15
• NOTE: last month, Deutsche Bank raised EU1.75b by placing ~60m shares at EU29.2 apiece to Paramount Holdings, which is controlled by Sheikh Hamad Bin Jassim Bin Jabor Al-Thani of Qatar

Terms/Timetable
• To issue 299.8m new shares at EU22.5 each; subscription ratio 18:5, shareholders may acquire 5 new shares for every 18 existing shares held
• Rights trading: Starts June 6, until June 20 on German stock exchanges
• On NYSE: Starts June 6, until June 18
• Subscription period: Expected to run from June 6 through June 24
• Rights Ticker: DBKB GR
• Expected inclusion in existing Deutsche Bank shares on German stock exchanges/NYSE: on or about June 25

FT : World Bank backs Crédit Agricole loans

The World Bank’s International Finance Corporation has agreed to guarantee part of a $2bn portfolio of emerging market loans owned by Crédit Agricole in the latest example of banks using complex financing to help lower their regulatory capital costs.
IFC is providing $90m worth of credit risk protection on a wide variety of emerging market loans, such as infrastructure lending in Egypt. It is the largest structured finance transaction ever created by IFC and officials there are hoping it will enable it to provide credit to developing countries in a more efficient way.

“We could have taken that $90m and lent it to companies or we could go to a bank and support $2bn worth of loans,” said an IFC official.
The deal is an example of a “synthetic securitisation” or “reg-cap trade,” which involve banks purchasing credit risk protection – typically from a hedge fund or insurer – on part of a portfolio of loans. Using the structures frees up a bank’s regulatory capital, enabling it to increase its lending while the providers of the credit protection can earn a hefty return.
Such deals have been a persistent – if contentious – part of the financial system since the invention of credit default swaps in the late 1990s.
Proponents of the securitisations say that sharing credit risk with private investors can be a useful tool to enable banks to lend amid higher capital charges. However, the deals have caught the attention of regulators in the US and in Europe who are worried that some of the transactions may conceal risk in the banking system rather than transfer it.
“The presumption here is that banks face a capital adequacy challenge,” said the IFC official. “This is a very efficient way for us to allow banks to do much more developing market business.”
Most reg-cap deals are being struck in Europe, where lenders are still scrambling to reduce their capital usage and where investors are also searching for higher-yielding transactions.
IFC said it expected a return in line with current market rates.
The transaction involves a revolving portfolio, meaning loans are of relatively short duration and will be replenished as they mature. IFC is guaranteeing losses on the middle or “mezzanine” portion of the portfolio.
The deal includes a relatively uncommon feature whereby Crédit Agricole will retain a vertical slice of the securitisation, in an effort to further align the interests of the French bank and IFC.
The transaction has been signed off by the local French regulator and the European Banking Authority, which are following new guidelines from the Basel committee of banking regulators, according to people familiar with the IFC deal.
IFC had initially planned to partner with New York-based hedge fund Christofferson Robb to invest in a reg-cap fund, but has since decided to undertake such transactions independently. It struck its first such deal – a similar, though smaller, synthetic securitisation with Standard Chartered – about four years ago.

FT : BofA in talks to pay $12bn over probe

Bank of America is in talks to pay at least $12bn in cash and homeowner relief to end a long-running civil investigation by the Department of Justice alleging that it mis-sold mortgage-backed securities, people familiar with the matter say.
The Charlotte-based bank paid $9.5bn to resolve a similar investigation by the Federal Housing Finance Agency, the US housing regulator, in March.

BofA, which acquired Countrywide Financial and Merrill Lynch during the financial crisis, has already paid over $25bn in fines and settlements since 2009, according to a FT analysis. The settlement would resolve the biggest known legal threat to the bank, which has been wracked by litigation since the financial crisis.
BofA has offered to pay at least $5bn of the $12bn in consumer relief to aid struggling homeowners, potentially by reducing outstanding mortgage debt, as part of the state-federal probe.
The story was first reported in The Wall Street Journal.
Including the FHFA settlement, BofA’s total penalty would exceed the $13bn deal struck by JPMorgan Chase last autumn to settle similar mortgage sales claims with the DoJ. At the time that was the largest settlement against a bank.
The DoJ has racked up penalties against financial institutions, with Credit Suisse paying $2.6bn in fines and pleading guilty over helping Americans evade paying taxes.
BofA said in March that it had been in negotiations with the DoJ to resolve the mortgage probe.
The bank declined to comment.