Magna Entertainment's race may be run

By J. Sturgeon | Financial Post | Feb. 19

Frank Stronach's debt-plagued Magna Entertainment Corp. appears on the verge of financial collapse after the money-losing horse racetrack business said it may not be able to repay looming obligations, adding to the Canadian entrepreneur's woes as his car-parts company struggles to weather the crisis hammering the auto industry.

The Toronto Stock Exchange placed MEC under review on Thursday for a possible delisting on an "expedited basis" signalling the company is at or nearing insolvency, according to the bourse's listing rules.

The review comes in the wake of a collapsed plan that would have seen MEC's controlling shareholder, MI Developments Inc. (MID), spin off its majority stake in exchange for additional capital support in the form of temporary loans.

That plan disintegrated this week after MID said new debt financing for the deal was "unlikely" to be found, given "current global economic conditions [and] the continued disruptions in the financial markets."

As a result, US$274-million in outstanding loans that MEC owes MID will be called in next month, potentially triggering a feeding frenzy among MEC's other creditors.

If it is unable to repay that sum alongside an outstanding balance on a US$40-million credit facility to an unnamed Canadian chartered bank, "substantially all of its other current and long-term debt will also become due on demand," the company said.

MEC reported in its latest quarterly results it has more than US$600-million in debt sitting on its balance sheet. MEC has been attempting to sell assets including several racetracks for months to service debt.

MEC, the largest owner of horse racetracks in North America including Santa Anita in California, said negotiations with MID are continuing, which may include an extension on the repayment date of Mar. 20.

The possibility of a reprieve does exist.

"Look who the lender is and look at what the lender has done in the past," said an analyst that follows the company on Thursday. "Payment dates have come and gone."

MID has pumped hundreds of millions into MEC, which has lost at least US$500-million since 2003, and routinely granted extensions on loan repayments.

The latest came in October when MEC's board approved an extension on a $125-million bridge loan.

"The question you have to ask is, is the lender going to continue to?" the analyst said.

Minority shareholders in MID have grown intensely hostile toward the seemingly unbridled financial support it has given the gambling and horse-racing business.

The collapsed deal was designed to rid MID of its interests in MEC and place stringent rules on any future transactions between the two firms.

Shares in MEC plummeted more than 24% to an even 50¢ on the TSX on Thursday. MID's stock price fell 6% to $7.87. Calls to MEC and MID were not returned. Mr. Stronach is the chairman of both companies.

MEC's precarious situation is compounding the magnate's difficulties as Magna International Inc. faces off against the worst crisis to hit the auto industry in the post-war period.

The company, which he founded, reported its first quarterly loss in 17 years in November and said it was braced for a lengthy auto-sales slump in North America and Europe.

Magna, which has shuttered plants and initiated layoffs to combat the crisis, is set to report fourth-quarter results next week.

Card-card issuers told to tighten up lending as defaults rise

By J. Sturgeon | Financial Post | Feb. 4, 2009

Credit-card issuers are being advised to run regular credit checks, reduce limits on certain cardholders and even close inactive accounts after a report yesterday said delinquencies are on the rise.

Unpaid credit-card bills have been piling up since the financial crisis morphed into recession in the fall, a new report from accounting giant Deloitte says, putting as much at $800-million in jeopardy of being written off.

Households have glutted themselves on debt for the past half-decade, increasing total credit-card liabilities by 40% to $80-billion. As the jobless rate climbed and income generation began to grind to a halt late last year, delinquent accounts jumped by 5% to 10%, said the report's authors.

Now, the spectre of a wave of delinquencies hangs over issuers' balance sheets.

"Canadian consumer debt levels are higher then they were in previous cycles," said banking analyst Robert Sedran of National Bank Financial, adding that he has forecast loss rates to climb higher in 2009.

Historically, Canadian credit-card issuers which include the chartered banks, credit unions, U. S. subsidiaries such as Amex Bank of Canada and big retailers, absorb losses of about 4% annually, the report said.

Yet the delinquency rate has increased by between 50 and 100 basis points since October, with the likelihood that losses will grow, said Mr. Sedran.

Canadian Imperial Bank of Commerce, for example, has already witnessed its loss rate climb above 5% last quarter, the analyst said.

"Where they get to, that's the big question for the year."

The advice Deloitte gives issuers looking to preserve their balance sheets include more credit checks, the ending of automatic account increases and, in some cases, reducing limits or eliminating accounts "where there has been a deterioration in the credit score."

The report also advises institutions to establish a "watch-list" on accounts with "unusually high" use of cash advances.

"Circumstances for cardholders are changing quickly," said Pat Daley, partner at Deloitte and one of the report's authors. "Customers who had impeccable credit scores six months ago may be in trouble today."

Some of the more than 23 issuers in Canada have already moved to tighten standards.

Canadian Tire Corp. said this week it was raising the general interest rate on late payments from its retail cardholders

to 19.5% from 18.99%, annualized. Toronto-Dominion Bank changed agreement terms at the beginning of December, raising rates to almost 25% on overdue accounts.

The report follows measures outlined in last week's federal budget to kick-start the flow of credit back to cash-strapped consumers, including easing pressure on indebted cardholders. Jim Flaherty, the Minister of Finance, said the budget would enhance disclosure requirements on banks and institutions that offer credit cards to help determine costs, revenues and profit margins on services, information institutions are not compelled to divulge under current legislation.

Critics have charged that the proposals specific to credit-card issuers are just too vague.

National Bank's Mr. Sedran said he has not received any tangible guidance that banks are implementing more stringent measures yet, but said he expects them to in the near future.

"You tend to relax some of your lending standards when the economy is performing well and you tend to tighten them when the economy isn't performing well because obviously the risks are rising."

GM loosening consumer credit as bailout funds flow

By Jamie Sturgeon | Financial Post | Dec. 30, 2008

General Motors Corp.'s lending arm, GMAC Financial Services LLC, said Tuesday it has immediately loosened consumer access to credit in the U.S. after Washington bought US$5-billion worth of preferred equity in the company.

The U.S. Treasury waded further into the waters in which the American automotive industry is treading late Monday, using cash originally set aside to aid failing banks to buy the 8%-dividend paying stake in GMAC "as part of a broader program to assist the domestic automotive industry in becoming financially viable."

"The actions of the federal government to support GMAC are having an immediate and meaningful effect on our ability to provide credit to automotive customers," said Bill Muir, president of GMAC, in a statement. "We will continue to employ responsible credit standards, but will be able to relax constraints we put in place a few months ago due to the credit crisis."

General Motors Crop. said in a conference call it would begin offering 0% financing up to 60 months on certain 2008 and 2009 models in an attempt to turn plummeting U.S. sales around. The company also signalled it could resume leasing.

"It is something we are looking at," said Mark LaNeve, chief executive of North American sales.

The implications for Canada, where governments have already extended $4-billion in taxpayer-backed loans to GM and Chrysler, are uncertain.

"This is a positive situation, but I don't know how positive it is," said Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc. in Richmond Hill, Ont. "U.S. consumers aren't buying, fixing GMAC should help them come back to the marketplace."

It is another sign though that Washington is unwilling to let GM, Chrysler LLC or Ford Motor Co. fail.

Treasury officials said money for the equity purchase in GMAC has come from a new, separate fund within its Troubled Asset Relief Program dedicated wholly to the auto industry.

More than US$17-billion has already been made available to the Detroit Three from TARP funds as they restructure, a move that received proportionate backing for their Canadian operations from Ottawa and the province of Ontario on Dec. 20.

Most analysts say it likely isn't enough to see the companies through their restructuring as market conditions continue to slump, meaning more capital will be needed from Washington, and in turn, Ottawa.

Still, Himanshu Patel, auto analyst at J.P. Morgan said the GMAC bailout reduces the chances of a bankruptcy filing at GM.

"While an eventual GM Chapter 11 cannot be entirely dismissed if various stakeholders fail to meet required concessions, federal aid to GMAC suggests the government is probably now so entangled ... a Chapter 7 liquidation seems highly unlikely," he wrote in a note to clients.

Financial difficulties at GMAC as well as Chrysler Financial have directly hit GM and Chrysler sales, Michael J. Jackson, chief executive of AutoNation Inc., told the Wall Street Journal.

GMAC, which engaged in pushing riskier adjustable-rate mortgages that fueled the U.S. subprime housing boom, has restricted credit and raised lending standards in recent months as its own finances have deteriorated.

The lender, which was approved by the U.S. Federal Reserve last week to become a bank-holding company therefore qualifying for TARP, is the traditional source for many GM buyers.

GM of Canada sales were down 23% in November. Sales were off more than 40% year-over-year in the U.S.

"Consumer credit is the jet fuel of the auto business," Mr. Jackson said in a recent interview. "The majority of consumers can't buy a car without getting a loan."

The U.S. Treasury said it would also give an additional US$1-billion to GM to allowing it to participate in an equity offering by GMAC as it tries to raise more capital. The loan adds to the US$9.4-billion the U.S. Treasury is lending GM, the largest automaker in North America.

News: Investors yank even more from mutual funds

Jamie Sturgeon | Financial Post | 11.05.08

September's record rush for the exits by Canadian mutual fund investors grew to a full-on stampede last month as they pulled more than $8.2-billion of their savings out of volatile financial markets, preliminary data showed Tuesday.

Net redemptions from mutual funds for October are estimated to total between $8.2-billion to $8.7-billion, the Investment Funds Institute of Canada said, far exceeding the $4.5-billion redeemed in September.

IFIC estimated that net assets across the mutual fund industry fell 10% to $633.6-billion.

The news Tuesday came just hours after new data from mutual fund research firm Morningstar Canada showed virtually every mutual-fund category suffered sharp declines of 10% or more in October.

"These are some of the ugliest numbers," said Philip Lee, a fund analyst for Morningstar, who said most fund categories suffered their worst drops since the Russian financial crisis in 1998 and market crash of 1987.

"Some of the funds could have been uglier if we didn't get that big currency move."

All but four of 43 fund indexes -- a basket of mutual funds within one category such as U.S. equity or real estate-based funds, for example -- tracked by Morningstar suffered losses, as markets tumbled and credit circulation "came to a grinding halt," Morningstar said in a report measuring the change in funds' net asset values per share.

Twenty fund categories in all declined more than 10% over the 31-day period.

Indeed, a rally to the U.S. greenback followed by some respite on American equity markets in the last four trading sessions of the month staved off even deeper declines in some categories, Mr. Lee said.

The historic run-up in the interbank lending rate, or Libor, through the first half of October exacerbated investor anxiety, Mr. Lee said, triggering massive sell-offs among mutual funds. "Credit essentially came to a grinding halt in the middle of the month," he said.

Indexes that tracked financial funds - once the definition of stability in equities - as well as other blue chip stocks absorbed declines between 13-18%, Morningstar's data showed. The domestic financial services index fell 15.1% led by an almost identical fall in the category's biggest fund, the iShares CDN Financial Sector Index.

Precious metals and other commodity-laden fund indexes witnessed declines of 30% or more in October as investors fretted that demand in energy and base materials was evaporating. "[The declines] certainly didn't play out well for the Canadian equity market, which is heavily influenced by energy and materials stocks," Mr. Lee said.

Not surprisingly, the four fund indices that did not lose ground were global fixed-income, which actually earned 4.5% "primarily on currency moves" in the month, Mr. Lee said; Canadian short-term fixed-income, advancing 0.6%; and Canadian and U.S. money market funds, with almost negligible returns of 0.04% and 0.02%, respectively.

The 12.9% rise in the greenback against the Canadian dollar in October benefited "any fund that owned a U.S. bond," Mr. Lee said. "You're getting that currency kick."