Dexia's Sinister Reality

We have long discussed what we suspect will be one of the first European financials to hit the proverbial fan. Given today's anarchic behavior in the US and European markets (credit and equity) and the continued insistence by TPTB (yes you Mr. Greek finance minister) that this is all due to a speculative rumor-mongering attack, we decided to layout some basic facts on one of the banks that was saved by the Fed/FDIC.

Dexia has a Tangible Common Equity Ratio of 0.97% (according to a Bloomberg screen, and we have excluded Canada for our hyperventilating Canadian readers who pull a fainting goat each time they see that which should better remain out of sight and out of mind) which is 2nd lowest among the 848 financial firms globally with Total Assets over $100bn.

Dexia has EUR167.5bn of debt outstanding. EUR5.3bn is due to mature in September and EUR6.3bn more in October alone.

At a current 5Y CDS of 720bps equivalent for seniors (around 29% upfront for sub debt), rolling that debt is going to be expensive. But it gets better, because USD8bn of the September maturing debt is TLGP-backed debt which as can be seen in the far right column in the chart below have ridiculously low yield (yes that is a yield not a spread). This means that DEXGRP needs to roll USD8bn low interest expense debt in the next two weeks into extremely expensive financing OR suckle at the ECB's teat - watch for that jump in liquidity provision.

Of course CDS markets are not unaware of this - as the chart below indicates - but the point being - is a bond manager in his right mind to hedge exposure to this name? Is DEXGRP fundamentally sound and deserving of the market's confidence? If not then reducing exposure seems to make perfect sense to us and furthermore free markets, liquid arbitrage potential between CDS and cash bond markets (as well as equity and volatility markets for this name) mean attacking one leg of the capital structure is simply too risky a proposition (and expensive) unless conviction is high that this firm appears distressed.

Charts: Bloomberg

So whether you view market price action as sinister or simply a reflection of reality, it is time the band aid of TLGP (among every other government-funded crutch) is removed and the market allowed to perceive risk and receive signals upon which to act in order that those that survive can proceed and lead.

And in case you were wondering what the rest of the TLGP-heavy maturities look like - Q3 and Q4 are going to be a busy time for bank refis. For example, MS has USD3.15bn due 9/22, Citi USD3bn by 11/15, and BAC USD3.6bn due 12/2 - all at miraculously low yields/interest expense.


dexter (Latin) - pertaining to the right-hand side

siniter (Latin) - pertaining to the left-hand side