THE DISTILLERY: Suncorp's monkey swings

Jotters reveal why Suncorp's asset sales to Goldman Sachs leave it better off, while another spends some time with bond trader turned author and journalist, Michael Lewis.

Suncorp boss Patrick Snowball has referred to the lender’s ‘bad bank’ as the ‘monkey on his back’. Almost every commentator uses that expression somewhere in their copy this morning, now that he’s succeeded in offloading the loans to Goldman Sachs. While Suncorp has taken quite a hit for the privilege, the monkey is gone, outta here, and the vehicle that Snowball now heads is a much better company for it.

Fairfax’s Malcolm Maiden tells the story of Snowball’s time at Suncorp from beginning to end (so far that is, he isn’t going anywhere), starting with an $18 billion bad bank that has consumed up to half his Q&A time since then.

“The loans were written by Suncorp’s banking division under former chief executive John Mulcahy’s leadership ahead of the financial crisis as part of an aggressive expansion of corporate lending, property development lending, property investment lending and lease financing. At $18 billion when they were carved out of Suncorp’s regional banking franchise in the first half of 2009, they amounted to about 20 per cent of group assets, and that was dangerously high. Not all the loans were bad, but their funding base had been destroyed by the collapse of the wholesale funding markets during the crisis, and as commercial property prices slid, problem loans in the portfolio grew.”

Business Spectator’s Stephen Bartholomeusz notes that it’s quite a statement about the state Suncorp was in for Snowball to be willing to wear a $470 million to $490 million hit to get rid of that monkey.

“Through natural run-off and some previous sales that portfolio has been reduced to $2.8 billion of assets and after today’s sale of $1.6 billion of those loans to Goldman Sachs, which has yielded 60 cents in the dollar of their current face value, Suncorp will be left with just over $1.2 billion of assets within its non-core portfolio. With further anticipated run-off and individual loan sales, the group expects the residual portfolio to be reduced to only about $500 million by July. Despite the apparently heavy losses, the sale is sensible and has produced a better outcome than most in the market would have anticipated, given that similar sales by other lenders have been done at 30 to 40 cents in the dollar.”

The Australian Financial Review’s Chanticleer columnist Michael Smith makes the point that like-for-like comparisons are difficult with these kind of deals because the numbers delivered by Suncorp are net-receivables, which do not include the write-offs.

“Still, it is a good outcome for investors whose expectations for higher capital returns, including the possibility of a special dividend, have been elevated by the deal. Snowball had few other options at the end of the day. By running off the stressed loans, which were largely made up of bad Queensland properties, in an orderly fashion he has extracted better value than many distressed sellers have in the same period. Credit market conditions were also working in Suncorp’s favour at a time when it needed to put the issue to bed. Macquarie and Blackstone were also jostling over final bids right up until Thursday morning.”

And The Australian’s John Durie points out that a recent strategy day for Suncorp highlighted the position of the duopoly insurance arm.

“Finally Snowball gets his chance to reveal the true value of the franchise.”

Meanwhile, The Australian Financial Review’s Jennifer Hewett gives her account of a visit from the hysterically funny and insightful Michael Lewis, the bond trader turned author and journalist.

“Lewis’s special skill, repeated at a UBS Australian Financial Review lunch, is to rip away the complex jargon and self belief so common (still!) in financial markets to explain what he thinks is really going on underneath all the flummery. He often does it by focusing on individuals whose personal experiences illustrate a much broader, even crazier system and story line. It’s very funny on one level, deeply depressing on another."

The Australian Financial Review’s markets and economics writer David Bassanese notes the growing concern that some analysts have for an Australian recession. Although he argues that there’s no reason for Australia to enter a recession if policy makers are doing their job because the economy has “no obvious imbalances”.

Still in the markets, The Australian’s Richard Gluyas determines that the negative sentiment gripping the market has everything to do with the noises coming from the Federal Reserve about when QE3 will be moored.

And finally, The Australian’s Bryan Frith welcomes the structure of the ASX’s capital raising, which really sets the standard of fairness (as it should, being the market operator and all). Not only can shareholders renounce their rights if they don’t want to buy (rather than be diluted, as per a non-renounceable issue), Frith explains that the ASX has also opted for the PAITREO structure, “which is perhaps the most equitable form of equity raising yet devised”.

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