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January 14, 2009 Charting New Territory. 2 Strength and Stability n Wells Fargo continues to be one of the strongest and best capitalized banks n Our.

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Presentation on theme: "January 14, 2009 Charting New Territory. 2 Strength and Stability n Wells Fargo continues to be one of the strongest and best capitalized banks n Our."— Presentation transcript:

1 January 14, 2009 Charting New Territory

2 2

3 Strength and Stability n Wells Fargo continues to be one of the strongest and best capitalized banks n Our unchanging vision, values and time-tested business model will guide us into the future and arenow more than evera competitive advantage as our industry evolves n Our capital ratios and credit ratings are among the strongest of our industry peers n Our average products per retail and commercial customer are at record highs n Were known and admired for our conservative financial position n As a testament to our strength, Wells Fargo was able to raise $12.6 billion of equity in the largest non-IPO offer ever Based on third quarter results for peers.

4 About Wells Fargo Energy Group Year Established: Lending to the Energy industry for 30+ years Office Locations: Houston, Dallas, Denver, Charlotte, New York 13 in-house engineers and technicians Total Commitments: exceed $20B Complimentary Strengths: Investment Banking Capabilities Strong Private Capital Focus

5 Powerful Combined Platform 5 On a pro forma basis, the Wells Fargo and Wachovia platforms form a leading platform in the energy sector: #3 oil and gas lead arranger of leveraged loans #5 bookrunning manager of high yield transactions Balanced platform serving the midstream, upstream, and services sectors

6 Risk/Return Matrix Target Rate of Return % 5 10 15 20 25 30 35+ 0 Equity Mezzanine Debt (including sub debt and development loans) Bank Loan ----------- Development/Exploitation ----------- (Engineering Risk) ----------- Exploration ------------ (Geologic/Geophysical Risk) PDPPDNPPUDProbablePossible Reserve Risk

7 Source: Various news articles Current Market Update Sub-prime mortgage crisis hits CLO market in June / July, causing one of the largest corrections in 20 years Bear Stearns, BNP and other institutions freeze funds; bank run on Northern Rock Strong credit borrowers tap CP back-up facilities as a result of instability in the credit markets Banks report billion dollars of write-downs, with UBS and Merrill leading the pack, and raise capital from foreign sovereign funds, hedge funds and money managers to bolster their capital bases Crude= $82.80/ NatGas= $6.57 (Average) Bear Stearns, once the fifth largest investment bank in the U.S., collapses and the Fed intervenes to support JPMorgans purchase of the failed institution Fed cuts the Federal Funds target rate by another 200 bps collectively over three occasions and opens the discount window to investment banks Banks continue to report huge write-downs, with Citis $18 billion and UBSs $18.4 billion write- downs sending shock waves to the financial markets Auction rate security market fails, sending both holders and issuers of ARS scrambling for funds Crude= $97.91/NatGas= $8.66 (Average) Loan defaults rise to 2.58% as of June 30, up 232 bps since end of 2007 Financial institutions sell off assets at prices significantly below par, cut dividends, and raise more capital to shore up their capital bases Credit ratings of Morgan Stanley, Merrill, Lehman, MBIA and AMBAC get cut Crude oil prices rise exponentially (up 44.55% YTD), as investors flee to the commodities market to combat inflation, causing more stress on the U.S. economy Crude= $124.06/NatGas= $11.39 (Average) 2 nd Half 2007 Panic and Losses Start to Show 2 nd Half 2007 Panic and Losses Start to Show Q1 2008 Losses continue to rise Q1 2008 Losses continue to rise Q2 2008 Officially in Bear Territory Q2 2008 Officially in Bear Territory

8 Source: Various news articles Current Market Update Third quarter will be remembered for the final weeks of September: Sept. 9 th the government bails out Fannie Mae and Freddie Mac Sept. 15 th Lehman files for bankruptcy Sept. 15 th Bank of America acquires Merrill Lynch Sept. 16 th the Fed lends $85 billion to AIG Sept. 18 th Lloyds acquires HBOS Sept. 19 th U.S. Treasury announced a temporary guarantee on money market mutual funds Wells Fargo agrees to buy Wachovia Failure to pass $700 billion Troubled Asset Repurchase Plan (TARP) causes unprecedented turmoil in the financial markets. Crude= $124.06/ NatGas= $11.39 (Average) Fourth quarter began with Congress passing the $700 billion Troubled Asset Repurchase Plan Passing of the TARP lead to the end of the Investment Bank era as Goldman Sachs and Morgan Stanley applied to become bank holding companies in order to tap in to the government funds In a coordinated move, the Federal Reserve and other central banks reduced lending rates around the world The Feds benchmark interest rate was cut to the lowest in history at 0.0% to 0.25% S&P downgraded credit ratings of eleven top global banks Autos look to tap into TARP plan, with GMAC receiving $5 billion in funds Primary loan syndication market essentially closed Wells Fargo officially acquires Wachovia as of December 31, 2008 Crude= $60.44/ NatGas= $6.67 (Average) Q3 2008 A Bad Market gets WorseQ3 2008 A Bad Market gets Worse Q4 2008 A Bad Market gets WorseQ4 2008 A Bad Market gets Worse

9 U.S. Overall Syndicated Loan Issuance by Purpose 1Q05-4Q08 Credit Crisis Effect

10 Pro-rata (primarily bank only) volume. With institutional volume trending downward even more quickly than overall activity, pro rata loans grabbed 61% of total loan volume in the fourth quarter –up from 53% in the third quarter and from 53% during the first half. For the full year, the pro rata loan share jumped to a six-year high of 53%, from a record- low 28% last year. Institutional volume -down 94%. For all of 2008, institutional activity dropped 82%, to a six-year low of $71 billion, from the record $387 billion established in 2007. LBO transaction volume. Total transaction volume fell to $3.2 billion in the fourth quarter, a 97% drop from the final three months of 2007 Amendments. While new-issue volume has fallen, amendment activity has exploded. Amendments have caused spreads to increase by an average of 200.0 bps. Current Market Update Source: LCD Quarterly Review

11 Crude Oil Price Deck Comparison Top 5 Banks

12 Natural Gas Price Deck Comparison Top 5 Banks

13 Of the 23 banks we spoke to: Only 14 are in the market for new deals Of those 14, 10 say that they are open to deals only if priced very well Comments heard across the board include: More selective on first lien names, needs to be middle of fairway, no to stretch Accommodate existing loans and not encouraged to grow book for new lenders until gets more direction in 2009 Can't see anything changing/improving until at least the second half 2009 (not like in past where each January gets a clean slate and a new budget) Concerned about next Borrowing Base Redetermination season and tight liquidity for some borrowers. Very high hurdles Even if return meets hurdle, needs ancillary business out of the blocks; leaning more to public deals since more capital markets opportunities Bank Market Update (as of 2008)

14 Where we are today: Hearing much of the same from last month Many lenders are conserving their capital to support only existing clients It is now an understood that pricing will go up Lenders with more levered borrowing bases being told that the price deck could severely limit availability in 2009 Beginning to see expected covenant breaches for 2 nd and 3 rd quarters Relative value continues to be a hot topic Our View on the 2009 Bank Market

15 What we are expecting from lenders still doing new money deals in 2009: 3 year is the max on E&P (and likely for midstream) due to tenor premiums Big unknown unused commitment fees due to tenor premiums: Euro banks are expecting 20- 30% of drawn margin….37.5 to 50 bps may be the new floor. Price Decks for crude are down approximately 30% from September and 17% for natural gas. For next redetermination season, we expect significant decreases in borrowing bases…some property sets will be hit more than others. E&P up front expectations are in the 75-125 range Pricing grids for E&P companies based on usage are up 75-100bps for new money deals (L+200-300 for lenders that can actually do new money). Expect midstream to range from 350-450 bps Upfront fee for E&P 75-125 bps, Midstream 100-200 bps upfront Undrawn fees are up. Other structural aspects have tightened across the board (i.e. more and tighter covenants). Conclusion

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