What’s up with the Nationwide? The back office is falling apart it seems. David Rigney and his operations managers, needs to start managing.
Two weeks ago I had a closure statement for a Capitalbond 92 account that I hadn’t even opened. Fortunately, there was no interest shown, but I would love to know where the phantom principal is.
Last week a family member received back her tear off slip in a window envelope, acknowledging that her bond maturity instructions had been received. Unfortunately, stuck behind her slip was a similar slip addressed to a Mr Alexander in Kilmarnock. The stray slip was handed in, same day at the local branch for forwarding to the rightful recipient. Staff at the branch at least took responsibility for sending it on, once I made it clear that it was nothing to do with me. So Sir, it should be with you soon!
And on Saturday, I eagerly opened a plain front envelope expecting a cheque for about 30p from Nationwide – more on this later. But the cheque was only for 2p and payable to a Mistry person. I will pass the wrong cheque to the local branch later today, so I hope the person who has my cheque will do likewise! Mistry will be 2p better off; but how much is First Class mail, even assuming Nationwide gets a bulk discount?
One of Nationwide’s problems is the internet offering. I can do transactions on the internet at home but can't send messages to Nationwide from home, without being timed out on the server. I therefore have to complain over the phone or via the terminal in the local branch.
As for the reason for the 30p cheque. There is a problem affecting people who have access to internet banking but who have not signed up for a FlexAccount. When an e-bond matures, it is automatically transferred into an e-bond maturity account if the final balance, is not reinvested on the bond maturity date. If a few days elapse before the reinvestment decision is made, the internet only gives the option to transfer the maturity date balance into a new account. The few days of accrued interest in the e-bond maturity account becomes orphaned. The actual amount of such interest is not however, displayed.
Nationwide advised me to use the close account option for the e-bond maturity account and the “hidden” interest would appear. Simple, you might think, but the balance from closing an e-bond maturity account can only be sent to a FlexAccount and not to an Instant Saver account, which is deemed to be a branch account. Therefore, on closing the e-bond maurity account, I was internet messaged to inform me that a cheque for the interest was being sent to me.
Why is Nationwide struggling? Are there too many ISA’s being opened now? Has the unemployment rate in Swindon suddenly fallen and they can’t get the staff? (I’ve been out of work for over a year now – I’d be happy to stuff envelopes)
Monday, 29 March 2010
Saturday, 13 March 2010
Repo 105 vs FSA soft touch regulation 101
Two things strike me about the Lehman Brothers accounting for the over-collateralised repos. What did the counterparties do in respect of their own accounting treatments of the repos and what anti-money laundering investigations were made?
If Lehman's booked a sale, how did the counterparties such as Barcap, UBS etc, account for the repos? Were they purchasing the assets on an outright basis or did they regard these as normal repo transactions?
Unfortunately we'll never know. Lehman's year end was November while European banks have December, and Japanese banks March year ends, respectively. Thus banks can readily teem and lade assets and liabilities in order to help each other present the best balance sheet possible at the year end.
Perhaps as part of the global reform of the banking system, all banks should have the same financial year end.
The money laundering angle is simply the case that if I, as a customer of a bank, were happy to accept $100 for liquid assets clearly worth $105, such a suspicious contract should lead to the bank investigating me for potential money laundering.
But then the FSA withdrew its rule book on money laundering in early 2006, relying on banks to use their own code of practice for "know your customer" procedures based on a risk-based approach.
A typical in-house code would require a bank to investigate customers entering loss-making transactions where the loss is avoidable or transactions which have no apparent economic purpose. Also any suspicion of illegal activity or attempts to hide money from law enforcement and tax authorities should be followed up.
What the risk in the risk-based approach has come to mean, is the risk that the activity is found out or that the FSA will admonish the financial institution. The FSA's light touch has been a soft touch as far as the banks are concerned.
If Lehman's booked a sale, how did the counterparties such as Barcap, UBS etc, account for the repos? Were they purchasing the assets on an outright basis or did they regard these as normal repo transactions?
Unfortunately we'll never know. Lehman's year end was November while European banks have December, and Japanese banks March year ends, respectively. Thus banks can readily teem and lade assets and liabilities in order to help each other present the best balance sheet possible at the year end.
Perhaps as part of the global reform of the banking system, all banks should have the same financial year end.
The money laundering angle is simply the case that if I, as a customer of a bank, were happy to accept $100 for liquid assets clearly worth $105, such a suspicious contract should lead to the bank investigating me for potential money laundering.
But then the FSA withdrew its rule book on money laundering in early 2006, relying on banks to use their own code of practice for "know your customer" procedures based on a risk-based approach.
A typical in-house code would require a bank to investigate customers entering loss-making transactions where the loss is avoidable or transactions which have no apparent economic purpose. Also any suspicion of illegal activity or attempts to hide money from law enforcement and tax authorities should be followed up.
What the risk in the risk-based approach has come to mean, is the risk that the activity is found out or that the FSA will admonish the financial institution. The FSA's light touch has been a soft touch as far as the banks are concerned.
Sunday, 28 February 2010
AA - desperation from the owners
Having failed to float the company on the stock market, Acromas the private equity joint venture (funded by debt of course) has decided to rake in the cash to help solve its GBP6bn debt problem.
As the very wise, Ian Griffiths pointed out, in a recent Guardian report, Acromas had negative net assets and pre-tax losses of GBP300m in FYE January 2009, but the auditors still signed it off as a going concern. The investment bankers behind the flotation presumably took a dimmer view of the situation or had seen preliminary figures for FYE January 2010.
As for raking in cash, I don't mean that the owners of Saga and the AA are widening the services on offer, such as the AA's home repair and maintenance offering currently mooted, or Saga's attempts to woo the over-50 semi-silvers, or the insurance arm is fighting hard to gain market share, I mean that the AA is top of the moneysupermarket.com best buy savings accounts for internet only banking and the five year fixed rate bonds.
The Icelandic banks also shot to the top of the savings charts before going down, as they tried to suck in as much money as they could before the inevitable crash. So why has the AA has gone for the top spot just after its latest financial year end?
Admittedly deposits in the AA accounts are protected under the FSCS arrangement as the AA uses the Bank of Scotland as its cover. But then if you already have savings in BoS, Halifax or Birmingham Midshires, your GBP50k protection limit under one deposit taker might be quickly reached.
The Lloyds Banking Group (as the owner of BoS) must be quite happy for the AA to steal the show. Lloyds, given its market share and credit rating, does not need to raise money at these unusually high rates. While banks as a whole are still too heavily supported by purchased funds, Lloyds can easily address its need for deposits over time. One is left wondering if Lloyds is a major creditor of Acromas by any chance?
The AA must be hoping that the full-silver haired, retired Saga punters will put their money into the AA account, (they've been reining in their spending horns due to the low returns on their savings until now) and that Acromas survives. Perhaps the old folk now know that if a deposit rate is too good to be true then someone else will pick up the pieces.
As for the home maintenance plan, Centrica, the last real money owners of the AA, didn't seem to think that was synergy between car roadside rescue and British Gas bolier repairs. Perhaps they saw that cars were getting more reliable; we've certainly seen the number of AA patrolmen reduced since 2004.
Finally, as the urbane Mr Peston notes in his recent blog, the remaining 5,000 AA men are seeing their pension benefits come under pressure as the Acromas management target savings. We taxpayers and pension fund members should worry about the GBP190m deficit in the AA pension fund as we know who will pick up the tab for that when the Acromas cambelt breaks.
As the very wise, Ian Griffiths pointed out, in a recent Guardian report, Acromas had negative net assets and pre-tax losses of GBP300m in FYE January 2009, but the auditors still signed it off as a going concern. The investment bankers behind the flotation presumably took a dimmer view of the situation or had seen preliminary figures for FYE January 2010.
As for raking in cash, I don't mean that the owners of Saga and the AA are widening the services on offer, such as the AA's home repair and maintenance offering currently mooted, or Saga's attempts to woo the over-50 semi-silvers, or the insurance arm is fighting hard to gain market share, I mean that the AA is top of the moneysupermarket.com best buy savings accounts for internet only banking and the five year fixed rate bonds.
The Icelandic banks also shot to the top of the savings charts before going down, as they tried to suck in as much money as they could before the inevitable crash. So why has the AA has gone for the top spot just after its latest financial year end?
Admittedly deposits in the AA accounts are protected under the FSCS arrangement as the AA uses the Bank of Scotland as its cover. But then if you already have savings in BoS, Halifax or Birmingham Midshires, your GBP50k protection limit under one deposit taker might be quickly reached.
The Lloyds Banking Group (as the owner of BoS) must be quite happy for the AA to steal the show. Lloyds, given its market share and credit rating, does not need to raise money at these unusually high rates. While banks as a whole are still too heavily supported by purchased funds, Lloyds can easily address its need for deposits over time. One is left wondering if Lloyds is a major creditor of Acromas by any chance?
The AA must be hoping that the full-silver haired, retired Saga punters will put their money into the AA account, (they've been reining in their spending horns due to the low returns on their savings until now) and that Acromas survives. Perhaps the old folk now know that if a deposit rate is too good to be true then someone else will pick up the pieces.
As for the home maintenance plan, Centrica, the last real money owners of the AA, didn't seem to think that was synergy between car roadside rescue and British Gas bolier repairs. Perhaps they saw that cars were getting more reliable; we've certainly seen the number of AA patrolmen reduced since 2004.
Finally, as the urbane Mr Peston notes in his recent blog, the remaining 5,000 AA men are seeing their pension benefits come under pressure as the Acromas management target savings. We taxpayers and pension fund members should worry about the GBP190m deficit in the AA pension fund as we know who will pick up the tab for that when the Acromas cambelt breaks.
Monday, 16 November 2009
QE and inflation denial
What's Mr Bootle taking? As a leading proponent of Quantitative Easing and one of the world's inflation deniers, his piece in yesterday's Daily Telegraph came as a shock. It seems that he feels that there is a risk of inflation in 2011 after all!
Better late than never, this shift of stance, but I would suggest that we are already past the "minor uptick" he refers to; RPI has run at an annualised rate of 3.7% since January. I don't expect today's figure to halt this trend.
A key plank of Mr Bootle's argument for persistent deflation, is that of "spare capacity" in the economy. Unfortunately, there are few idle machines because in a service-based economy, there were few active machines prior to the downturn.
The argument thus hinges on labour availability. I would suggest that employers have little demand for workers at the minimum wage of #5.80/hour and the associated red-tape headaches of employment, equal opportunity and anti-discrimination etc. legislation - (it's a miracle that anyone is employed). In fact they would rather employ immigrant "gang" or other cheap manual labour to staff the leisure and food production sectors or outsource the job overseas, if it is an indirect service.
The same service industry skew means that sterling weakness does not boost exports to any great extent compared with past crises. It may serve to increase tourism levels in the UK, if the elevated oil price doesn't deter potential visitors, but for all the imported food, goods and energy, sterling's weakness is inflationary.
Back to the spare capacity argument, what about the supply of labour at #5.80/hour? It is perhaps not that great after all. Many of the unemployed would seem to be better off on benefits at a higher equivalent hourly rate. Furthermore, despite the internet, the plethora of databases and employment agencies, the ability to match buyers and sellers of labour has not noticeably improved. Systemic unemployment may well be higher than many think.
On the other side of the inflation equation, I haven't seen anything to threaten the pricing power of retailers, energy suppliers or tax gatherers.
QE at #200bn will be about 10% of money supply as measured by M4. Unfortunately, M4 still hasn't grown to reflect the QE already smouldering away. It has been totally useless because unlike national stimulus schemes that have targeted the borrower, such as in Singapore and Australia, throwing money at the banking system will never work if their potential customers remain too scared to borrow.
So more QE and more loose money until after the election next May. But what if inflation takes hold and the world tires of sterling before then, will we get a rise in interest rates to defend sterling? What about the capital loss on the government's holdings of debt which will be dramatic given the long duration of their holdings?
So will it be an IMF rescue or a surge in UK interest rates? Probably both.
Better late than never, this shift of stance, but I would suggest that we are already past the "minor uptick" he refers to; RPI has run at an annualised rate of 3.7% since January. I don't expect today's figure to halt this trend.
A key plank of Mr Bootle's argument for persistent deflation, is that of "spare capacity" in the economy. Unfortunately, there are few idle machines because in a service-based economy, there were few active machines prior to the downturn.
The argument thus hinges on labour availability. I would suggest that employers have little demand for workers at the minimum wage of #5.80/hour and the associated red-tape headaches of employment, equal opportunity and anti-discrimination etc. legislation - (it's a miracle that anyone is employed). In fact they would rather employ immigrant "gang" or other cheap manual labour to staff the leisure and food production sectors or outsource the job overseas, if it is an indirect service.
The same service industry skew means that sterling weakness does not boost exports to any great extent compared with past crises. It may serve to increase tourism levels in the UK, if the elevated oil price doesn't deter potential visitors, but for all the imported food, goods and energy, sterling's weakness is inflationary.
Back to the spare capacity argument, what about the supply of labour at #5.80/hour? It is perhaps not that great after all. Many of the unemployed would seem to be better off on benefits at a higher equivalent hourly rate. Furthermore, despite the internet, the plethora of databases and employment agencies, the ability to match buyers and sellers of labour has not noticeably improved. Systemic unemployment may well be higher than many think.
On the other side of the inflation equation, I haven't seen anything to threaten the pricing power of retailers, energy suppliers or tax gatherers.
QE at #200bn will be about 10% of money supply as measured by M4. Unfortunately, M4 still hasn't grown to reflect the QE already smouldering away. It has been totally useless because unlike national stimulus schemes that have targeted the borrower, such as in Singapore and Australia, throwing money at the banking system will never work if their potential customers remain too scared to borrow.
So more QE and more loose money until after the election next May. But what if inflation takes hold and the world tires of sterling before then, will we get a rise in interest rates to defend sterling? What about the capital loss on the government's holdings of debt which will be dramatic given the long duration of their holdings?
So will it be an IMF rescue or a surge in UK interest rates? Probably both.
Saturday, 25 July 2009
UK Financial mis-selling at its worst
I am one of 20 or so people who made written representations to the FSA after the members of the Britannia Building Society had voted to approve the merger of the society with The Co-operative Bank Ltd.
Setting aside that the transaction is strategically wrong – why does the UK’s #2 building society by assets need help when it complies with the FSA’s capital requirements? – the transaction was mis-sold.
The bulk of documentation and all the publicity surrounding the “merger”, referred to a merger between the society and Co-operative Financial Services Ltd. This is incorrect and misleading. The CFS is the owner of the eponymous bank, but as anyone in business knows, a holding company is a separate legal entity from a subsidiary. The transaction was described as a merger with the holding company; the vote was for a merger with its subsidiary.
Merger implies that the parties merging are broadly equal and that shareholders in each party will end up with an ownership interest in the merged entity. This is not the case here as Britannia members will have no interest in the enlarged bank. Society members are being offered membership of the Co-op Group but this is the holding entity for CFS. Returns to society members will therefore be diversified and diluted not only by the Insurance business of CFS but also by the returns from Somerfield/Co-op supermarkets, housing development, undertakers and pharmacies, to name but a few.
The accounting for the transaction is a straightforward transfer of the net assets from the Society to the Co-op bank. At the end of December 2008, the net book value of the Society was GBP881 million – and this, in effect, is simply being given to the Co-op Bank’s shareholders. I am not expecting a windfall payment but for the Society’s board to imply that giving away the Society at a cost of over GBP200/member (assuming 4 million members) was the best deal they could get, is suspiciously mendacious.
Of course the representations to the FSA will be considered – but ignored. The documentation for the deal was passed to FSA for its prior approval. But just in case someone there has forgotten the definition of mis-selling, I attach the link to the FSA’s website.
http://www.fsa.gov.uk/Pages/Library/Communication/PR/2003/052.shtml
Should it still be signed off by the FSA, it will no doubt be discussed at a higher place. The Treasury Select Committee will bare its teeth and get to the bottom of the matter and then, led by its Chairman, John McFall MP, decide that apart from a couple of slapped wrists, it is all hunky-dory.
Did I mention the Co-op Party? Society members after years of no political donations will now find that the new owners of their assets are funding the Labour party. The Co-op Party has 29 MPs who stand as Labour Co-op members.
Labour Co-op is abbreviated to Labour even on official documentation. How do I know? The published list of members of the Treasury Select Committee describes the following:- Rt Hon John McFall MP (Chairman), West Dunbartonshire, Labour.
Society members are being undertaken to the cleaners.
Setting aside that the transaction is strategically wrong – why does the UK’s #2 building society by assets need help when it complies with the FSA’s capital requirements? – the transaction was mis-sold.
The bulk of documentation and all the publicity surrounding the “merger”, referred to a merger between the society and Co-operative Financial Services Ltd. This is incorrect and misleading. The CFS is the owner of the eponymous bank, but as anyone in business knows, a holding company is a separate legal entity from a subsidiary. The transaction was described as a merger with the holding company; the vote was for a merger with its subsidiary.
Merger implies that the parties merging are broadly equal and that shareholders in each party will end up with an ownership interest in the merged entity. This is not the case here as Britannia members will have no interest in the enlarged bank. Society members are being offered membership of the Co-op Group but this is the holding entity for CFS. Returns to society members will therefore be diversified and diluted not only by the Insurance business of CFS but also by the returns from Somerfield/Co-op supermarkets, housing development, undertakers and pharmacies, to name but a few.
The accounting for the transaction is a straightforward transfer of the net assets from the Society to the Co-op bank. At the end of December 2008, the net book value of the Society was GBP881 million – and this, in effect, is simply being given to the Co-op Bank’s shareholders. I am not expecting a windfall payment but for the Society’s board to imply that giving away the Society at a cost of over GBP200/member (assuming 4 million members) was the best deal they could get, is suspiciously mendacious.
Of course the representations to the FSA will be considered – but ignored. The documentation for the deal was passed to FSA for its prior approval. But just in case someone there has forgotten the definition of mis-selling, I attach the link to the FSA’s website.
http://www.fsa.gov.uk/Pages/Library/Communication/PR/2003/052.shtml
Should it still be signed off by the FSA, it will no doubt be discussed at a higher place. The Treasury Select Committee will bare its teeth and get to the bottom of the matter and then, led by its Chairman, John McFall MP, decide that apart from a couple of slapped wrists, it is all hunky-dory.
Did I mention the Co-op Party? Society members after years of no political donations will now find that the new owners of their assets are funding the Labour party. The Co-op Party has 29 MPs who stand as Labour Co-op members.
Labour Co-op is abbreviated to Labour even on official documentation. How do I know? The published list of members of the Treasury Select Committee describes the following:- Rt Hon John McFall MP (Chairman), West Dunbartonshire, Labour.
Society members are being undertaken to the cleaners.
Wednesday, 15 July 2009
British Airways gliding to oblivion
I came away from yesterday's BA AGM feeling that this company is headed the way of the old US carriers. Its cost base is simply too high. It is the airline equivalent of GM; its pension liabilities (but a relatively modest healthcare liability) prevents it from competing effectively with its Asian counterparts or domestic greenfield operations. And this focus on the pension deficit and wage cost is almost to the exclusion of everything else, including ways that revenues might be increased.
BA provides nothing in the way of segmental financial information other than revenues by regional source. At least the monthly operating statistics split the world into four geographic area. No further disclosure is provided in case it is of potential help to competitors. So when asked at the AGM about the relative profitablility of its european and international operations, there was some obfuscation. There was no clear answer according to management, due to the high level of transfer traffic, up to 60%, filling the long-haul flights.
However, when the relative profitablility of Calcutta and Hyderabad services was discussed or the reasons for reducing flights to Poland, the Board claimed to have the numbers to know that they were doing the right thing.
If the transfer traffic muddies the revenue picture then BA's costs are equally shrouded in cloud as the variable element of total is relatively small compared with other airlines. Allocating fixed costs to particular routes or services becomes an art.
One shareholder suggested that BA should price closer to its marginal costs in order to fill its aircraft and at least get some contribution towards its massive fixed costs. Perhaps the problem here is that Ryanair and Easyjet are already pricing at these levels and making a profit. BA cannot compete with the low-cost carriers.
BA cannot sensibly compete with other premium operators. On page 21 of the latest annual report and accounts, there is a picture of an Airbus A380 in BA livery. The report notes that three airlines are operating this aircraft into Heathrow and that "the aircraft offers them the chance to enhance their products". But the picture is misleading; BA is not operating the A380. It is in fact delaying the entry into service by at least 5 months. When it eventually enters service in 2012, that will be a mere 4 years later than its key competitors on eastern long-haul routes.
So if the A380 is so good and BA wants to be a leader in premium traffic, why defer it? Why not instead sell some of the mothballed B747 and try and get some earlier slots on the A380 delivery schedule? It is a good passenger aircraft compared with the B747; in economy the seats are wider, legroom can be longer and cabin pressure higher (about 5,000ft equivalent vs 8,000ft). If the A380 is not as profitable as a B777-ER, for example, as may well be the case in the current market environment when bigger means harder to fill, then cancel the orders. If it is a viable proposition, buy it sooner rather than later. Even Singapore Airlines is now finding use for them on sub-four hour regional sectors in competition with LCCs.
In the current quest for revenue, as several shareholders pointed out, BA does a good job of scaring customers away. If it's not the unions threatening some action then it's Mr Walsh suggesting that the business might fail (make sure you buy tickets with credit cards if you have no trip insurance).
So what supports the great company. It doesn't believe in government subsidies but it is quite happy for other barriers to entry to persist such as landing rights or for others to build infrastructure on its behalf. BA are rightfully delighted with Heathrow Terminal 5 and the improvements in service levels are palpable according to their statisitcs. (I've not used T5. Since SQ introduced the A380 and coupled with a change in occupation, I've not flown with BA since 2006. Anyway pressure on T3 seems to have abated with the opening of T5). Furthermore, it is probably only BA that wants the third runway at Heathrow.
Nevertheless, BA's western long-haul business is also under the cosh. Following the end of the cosy foursome arrangement on the UK-US routes in March 2008, rival airlines are considering new point to point transatlantic routes or even new hub opportunities. Perhaps it is fortunate that the EU-US open skies agreement happened at a time of declining air traffic, making it more challenging for new players to start a new route, but it is once again forcing BA to look for a partner(s) such as American and Iberia.
As for the financials. For some reason shareholders were asked to approve special resolution 7, the allotment of new shares by placing or rights issue before special resolution 8 which created the headroom in authorised capital - cart before horse? Never mind, all resolutions were passed.
And the rights issue. The Board insisted that a rights issue was not planned and that a convertible bond was being considered instead with institutional investors. It seeks to maintain liquidity equivalent to 15% of revenues and it is already above this level. (1.38bn cash and equivalents at FYEMar09 vs revenue of GBP9.0bn.) However, the CB - diluting existing equity by no more than 7.5% if a shareholder meeting is to be avoided, would help to cover any further deterioration in operating conditions.
But 7.5% of the shares in issue is only 86.5million new shares. Based on a current share price of 128p, the conversion premium would need to be very large just to raise GBP200m. The issue of 9.75% convertible capital bonds (2005) in FY1990 raised GBP320m and represented a potential 18.3% of the then issued share capital. It looks like the proposed CB may need to be on a rights basis in order to raise a sensible amount of money at a sensible price.
But all is not well; we are still in a period of rising unemployment, rising oil prices and with BA's unions fighting to minimise job losses (3,700 further losses in the current FY). On top of that, there is the result of the triennial pension funds valuation after which the company's contribution level will be reassessed. The rating agencies are on top of the situation for once - both coming down a notch in the last few months to Ba1/BB. The company thinks the rating downgrades will have limited impact on its access to funds; it has committed facilities and adequate cash for 12 months of operations. However, the cost of hedging will now reflect a higher counterparty risk.
The company is in a stall but it is trying to regain control simply by pushing the cost stick forward. A stall can be recovered this way, but having a few revenue generating ideas to power the recovery might make the difference between meeting the ground hard and scraping the paint on the belly. Time to ring the broker and make sure that I'm not permitted to attend next year's AGM.
Wednesday, 3 June 2009
Avis Europe - try smarter not harder
Avis Europe - we try harder - but it's a dumb business model
I inherited a few shares in Avis some 8 years ago. Since then (FY 2000) Avis has managed to destroy value in spectacular fashion. Revenues have grown at 1.1% pa over this time, wage costs at 3.2% pa, staff numbers are now 2.3% higher and dividends declined prior to cessation in 2004. Debt continues to climb.
It's a relatively straightforward business which is why small, independent operators with a few cars and vans in their fleets can compete with the vast 100,000+ fleets of the big players - Avis, Hertz and Europcar.
In essence, Avis buys new cars and sells them a few months later at a loss. As all motorists know, you lose thousands of pounds the moment the car leaves the showroom, although one would expect Avis to get much larger discounts than most buyers, to mitigate the impact. In between it hires out the vehicles and seeks to make enough money to offset the asset depreciation, to cover the cost of finance and to cover staff and vehicle maintenance costs. It is the classic perishable goods business - so the ability to maximise revenue is crucial and yield management (charge out rates x utilisation) is key.
As part of its marketing, Avis has coat-tailed the major flag carrier airlines such as BA. Indeed almost one half of Avis’s business is derived from airports. However, the national, full-service airlines are being slowly massacred by the low-cost carriers, such as Ryanair and Easy Jet. Avis is unlikely to find a suitable way to work with these more aggressive airlines, so the slow death will continue.
Similarly its purchasing policy has been linked to the walking dead for much of this period. GM has now entered Chapter 11. Hopefully Avis is not too heavily exposed as a creditor of GM in terms of the residual value guarantees or vehicle buy-backs the manufacturer undertakes. Even if there is no monetary loss now, the depreciation costs on discontinued vehicles will need watching in the future.
Avis is broadly stuck with its 6 to 9 month holding period. Its customers want the new car smell, and beyond 9 months the pre-resale rectification work on the vehicles becomes more material in nature and cost. Furthermore, Avis may well need to pay extra mileage costs if the agreed limit with the manufacturer has been exceeded.
Meanwhile, our small operator with a dozen cars or so has flexibility on his car holding period and indeed on the marques he buys. If the local Nissan dealer has some sales targets to meet and wants to sell a few cars at a keen price, the independent operator can take quick advantage.
Similarly, in day to day operation, the small independent probably has a white board or production ticket arrangement to show him his vehicle status. Other than the accounts system and the website, there is no massive investment in IT.
In Avis’s annual report there are some data on market shares albeit untimely. In 2006, the share were Europcar group 23.7%, Avis 18.3% and Hertz 15.2%. In 2007, the figures were 25.6%, 17.7% and 15.3%, respectively. In the current year it claims to be maintaining market share. Let’s hope so.
So what works for Avis? The licensing income is small but growing. This are the fees paid by third party operators for using the Avis name and charged on top of any fees for using the Avis marketing system. Should the whole business go to an "asset-lite" brand management operation like a hotel? Do these licencees have the fire in the belly that the agent or corporate outlets perhaps lack?
Looking at the finances, the deterioration in the Parent Company P&L follows an impairment charge of GBP113m. This has reduced the P&L reserve to GBP11m as at FYE 2008 and we are almost headed for a re-run of mid-2005. In June 2005, a 4 for 7 rights issue at 35p raising GBP117m gross and a share premium release were needed to patch up the GBP335m deficit in the Parent P&L reserve following a GBP396m writedown in 2004 of Avis Parent’s investment in its subsidiaries.
The rights issue may not happen this time as the writedown is based on a discount factor applied to future cashflows. It’s great what you can do with discount factors to come up with the answer you want!
Debt-wise, there is nothing major to pay back until next year when the first USD48m tranche of US private placements fall due. The last four years have seen an increase in net debt from operating activities. In 2005, the reported EUR35m decrease in net debt was after tapping shareholders for EUR175m while in 2007, the sale of the Greek business released EUR196.7m, leading to an overall EUR27m improvement in net debt that year. Therefore, the only strategy for now is to reduce the fleet size in order to release cash, and to raise prices to maximise contribution.
Interestingly the covenants on the debt facilities are based on EBITDA interest cover and net debt to EBITDA. Given the high level of operating leases in the business and the scope for large variations in the level of profits on disposal of the vehicles, the ratios don’t seem to catch much at all. Some measure of fixed charge coverage to include the usual financial expenses plus the cash operating lease payments would seem more appropriate accompanied by some debt to total assets calculation.
What next? For the business, a healthy dose of inflation would help it reduce the nominal loss of value on its fleet transactions. As a shareholder, my hope is for the D’leteran group, the 60% shareholder, to put me out of my misery. Dealing charges would consume a large slug of my holding’s current value! It’s good to see Odey asset management taking an interest but with 3+% (as of March 2009) they cannot do much. Avis may be a global brand in some people’s eyes, but flipping a penny stock is probably the main route to a half-decent return for investors such as Odey.
I inherited a few shares in Avis some 8 years ago. Since then (FY 2000) Avis has managed to destroy value in spectacular fashion. Revenues have grown at 1.1% pa over this time, wage costs at 3.2% pa, staff numbers are now 2.3% higher and dividends declined prior to cessation in 2004. Debt continues to climb.
It's a relatively straightforward business which is why small, independent operators with a few cars and vans in their fleets can compete with the vast 100,000+ fleets of the big players - Avis, Hertz and Europcar.
In essence, Avis buys new cars and sells them a few months later at a loss. As all motorists know, you lose thousands of pounds the moment the car leaves the showroom, although one would expect Avis to get much larger discounts than most buyers, to mitigate the impact. In between it hires out the vehicles and seeks to make enough money to offset the asset depreciation, to cover the cost of finance and to cover staff and vehicle maintenance costs. It is the classic perishable goods business - so the ability to maximise revenue is crucial and yield management (charge out rates x utilisation) is key.
As part of its marketing, Avis has coat-tailed the major flag carrier airlines such as BA. Indeed almost one half of Avis’s business is derived from airports. However, the national, full-service airlines are being slowly massacred by the low-cost carriers, such as Ryanair and Easy Jet. Avis is unlikely to find a suitable way to work with these more aggressive airlines, so the slow death will continue.
Similarly its purchasing policy has been linked to the walking dead for much of this period. GM has now entered Chapter 11. Hopefully Avis is not too heavily exposed as a creditor of GM in terms of the residual value guarantees or vehicle buy-backs the manufacturer undertakes. Even if there is no monetary loss now, the depreciation costs on discontinued vehicles will need watching in the future.
Avis is broadly stuck with its 6 to 9 month holding period. Its customers want the new car smell, and beyond 9 months the pre-resale rectification work on the vehicles becomes more material in nature and cost. Furthermore, Avis may well need to pay extra mileage costs if the agreed limit with the manufacturer has been exceeded.
Meanwhile, our small operator with a dozen cars or so has flexibility on his car holding period and indeed on the marques he buys. If the local Nissan dealer has some sales targets to meet and wants to sell a few cars at a keen price, the independent operator can take quick advantage.
Similarly, in day to day operation, the small independent probably has a white board or production ticket arrangement to show him his vehicle status. Other than the accounts system and the website, there is no massive investment in IT.
In Avis’s annual report there are some data on market shares albeit untimely. In 2006, the share were Europcar group 23.7%, Avis 18.3% and Hertz 15.2%. In 2007, the figures were 25.6%, 17.7% and 15.3%, respectively. In the current year it claims to be maintaining market share. Let’s hope so.
So what works for Avis? The licensing income is small but growing. This are the fees paid by third party operators for using the Avis name and charged on top of any fees for using the Avis marketing system. Should the whole business go to an "asset-lite" brand management operation like a hotel? Do these licencees have the fire in the belly that the agent or corporate outlets perhaps lack?
Looking at the finances, the deterioration in the Parent Company P&L follows an impairment charge of GBP113m. This has reduced the P&L reserve to GBP11m as at FYE 2008 and we are almost headed for a re-run of mid-2005. In June 2005, a 4 for 7 rights issue at 35p raising GBP117m gross and a share premium release were needed to patch up the GBP335m deficit in the Parent P&L reserve following a GBP396m writedown in 2004 of Avis Parent’s investment in its subsidiaries.
The rights issue may not happen this time as the writedown is based on a discount factor applied to future cashflows. It’s great what you can do with discount factors to come up with the answer you want!
Debt-wise, there is nothing major to pay back until next year when the first USD48m tranche of US private placements fall due. The last four years have seen an increase in net debt from operating activities. In 2005, the reported EUR35m decrease in net debt was after tapping shareholders for EUR175m while in 2007, the sale of the Greek business released EUR196.7m, leading to an overall EUR27m improvement in net debt that year. Therefore, the only strategy for now is to reduce the fleet size in order to release cash, and to raise prices to maximise contribution.
Interestingly the covenants on the debt facilities are based on EBITDA interest cover and net debt to EBITDA. Given the high level of operating leases in the business and the scope for large variations in the level of profits on disposal of the vehicles, the ratios don’t seem to catch much at all. Some measure of fixed charge coverage to include the usual financial expenses plus the cash operating lease payments would seem more appropriate accompanied by some debt to total assets calculation.
What next? For the business, a healthy dose of inflation would help it reduce the nominal loss of value on its fleet transactions. As a shareholder, my hope is for the D’leteran group, the 60% shareholder, to put me out of my misery. Dealing charges would consume a large slug of my holding’s current value! It’s good to see Odey asset management taking an interest but with 3+% (as of March 2009) they cannot do much. Avis may be a global brand in some people’s eyes, but flipping a penny stock is probably the main route to a half-decent return for investors such as Odey.
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