The Glencore lovefest

Posted by Neil Humeon Jun 29 10:33.


The IPO research blackout on Glencore International has been lifted this Wednesday, which means the investment banks responsible for the UK’s latest IPO flop are now free to heap praise on the commodities trading house.

From Citigroup:

Glencore (GLEN.L) — Staying the Course

UNITED KINGDOM | MINING – DIVERSIFIED | BUY/MEDIUM RISK We are initiating coverage on Glencore with a Buy recommendation and £5.70 target price. Our Buy recommendation is based on Glencore’s unique market positioning and long term growth opportunities. We forecast the company to generate earnings of $5.9bn in 2011e and $7.4bn in 2012e, we base our 12- month target price on a 9x 2012E.

And from UBS:

Glencore (GLEN.L)
Growth dynamic

Management-driven entrepreneurial approach

This report initiates coverage of Glencore with a Buy rating and 630p price target. Glencore is the world’s largest integrated producer and marketer of commodities by traded volume. The company seeks to maximise ROE in all activities and employs an entrepreneurial approach to managing its assets, listed equity stakes and marketing division. In our view, this sets Glencore a.part from other London listed miners.

And Morgan Stanley:

GLEN.L, Glencore — Initiate at OW /Master of commodity flows

We initiate at OW on Glencore (PT £6.04), one of the world’s largest commodity marketers with 2010 sales of over $140bn – close to half a billion dollars of revenue every day – which would make it the third biggest FTSE constituent by revenue (after Shell and BP). The blended multiple 2011e 8.7x P/E is in line with the large cap mining average, undervaluing its marketing business, which we value at 13x P/E. We also believe the price does not reflect the superior organic growth in its Industrial businesses with a 5-year volume CAGR of c17% vs 6-9% for other diversified miners. Last, its stakes in associate companies (a significant $28bn) are not held for implied value alone, but marketing agreements with these are a significant component of its strategy.

And Credit Suisse:

Initiate with Outperform & TP 600p; Made for a volatile world

We initiate coverage of Glencore with an Outperform rating and a £6.00 target price: An uncertain macro backdrop and uninspiring set of inaugural Q111 results have led to weak trading conditions for Glencore shares in recent weeks. However, we expect Glencore’s unique business model, diversified earnings streams and fast-acting approach to growth to deliver value over the medium term and we expect a stronger trading/demand environment to lend support in H211. Following Glencore’s evolution from a private to public structure, we think the next 6-12 months will be critical for the company in allaying investor concerns around M&A, corporate governance, proprietary trading risk and industrial asset volume growth.

And then Liberum Capital:

Liberum Capital: Unapologetically unique

Following its 18th May IPO we initiate coverage on Glencore – a major integrated producer and marketer of commodities with a track record of producing phenomenally high returns (avg 38% RoE over 10 years). Since IPO shares are down –8%, only marginally underperforming a number of key peers within the context of challenging market conditions. With near-term earnings growth at twice the rate of diversified mining peers we see Glencore outperforming over the next 12 months.

If there’s anything to apologise for, of course, it’s the IPO valuation, which in hindsight was clearly too rich.

Anyway, investors seem unimpressed with today’s Glencore love-in.

At pixel time, shares were just 6.5 pence higher at 492.9p in a rising market.

Nota bene – the float price was 530p.

Related link:
Glencore, an overvalued Japanese throughput manager – FT Alphaville

This entry was posted by Neil Hume on Wednesday, June 29th, 2011 at 10:33 and is filed under Capital markets, M&A. Tagged with , , , .


SocGen’s Q&A on the French proposal

Posted by Tracy Allowayon Jun 29 09:50.

Because … as a French bank, they would be well-placed to discuss it, no?

On Tuesday we got a glimpse of the so-called French proposal to save Greece, resembling a mix of super-complicated SPV and Brady bonds. German, Dutch and Austrian banks are now reportedly backing the plan, aimed at delivering private sector involvement while averting a Greek default

Anyway, here’s Société Générale European rates team on Wednesday:

Q1. Does the plan provide a €30bn participation from the private sector?

Hardly. A 49% rollover of the €85.5bn would deliver €42bn. But not all holders will participate (e.g. the ESCB reportedly holds about €25.5bn of the €85.5bn). So at best the private rollover reaches €30bn. We do not have a breakdown per maturity, but assuming that banks own about 30% of the Greek marketable debt, participation by the banks only would bring €13bn – not much! The French government, it seems, is pushing for much broader participation that would include not only insurers but also pension funds and asset management firms.

Q2. Is the plan friendly enough to investors for rating agencies not to declare default?

We would think so, given the appealing structure of the deal for investors. Rating agencies might still argue that Greece is being lent money at a rate that is well below market levels – which may be a case for default. The draft from the Fédération Bancaire Française makes clear however that the deal is conditional to Agencies not declaring default.

Q3. Does the plan address Greece’s solvency problem?

Not at all. The proposal indicates that Greece would pay 5.5% plus the yearly Greek GDP growth capped at 2.5% and floored at 0% – so Greece ends up paying between 5.5% and 8%! The biggest risk here is that Greece plainly rejects Rescue II on such a basis. But there might be room for discussion about the rate charged. In any case, going through the July bump and offering a relatively friendly solution to investors may lead to a relief rally, but in September, December, etc. Greece’s results will have to be assessed again. A failure to reach target would lead to new austerity requests, which at some point will meet a refusal from the Greek parliament. So execution risks will remain high. As we argued before, Vienna-style initiatives – and the smart plan above – do not take us away from the muddle-through strategy. It only buys time and may restore stability for some time, IF and as long as Greece complies with the MTFS.

Q4. What market reaction?

The plan, we reckon, gets the private sector involved – so offers the basis for launching Rescue 2 – but in a rather friendly way. In that sense it may be seen as positive for risk appetite towards banks. We would expect any rally in GGBs and non-core debt to be fairly limited, because of the failure to reduce Greece’s debt load, the large fiscal execution risks in the coming quarters, and the risk that PSI (private sector involvement) may lead to another wave of downgrade of non-core sovereign ratings.

Still, for now, assuming the Greek parliament ratifies MTFS and PSI talks continue to progress:

– We expect follow-through in the positive reaction of bank risk, and this should include a further compression of the basis complex (e.g. Dec FRA/Eonia down some 3bp on Tuesday, but still up 6bp over the past three weeks).

– The maturity of the ZC and new GGB investment still has to be decided, but the bias is for long dates. The exposure, with or without the balance sheet, will create new interest rate risk. This will be partially hedged. This should feed the steepening of the 10-30y slope.

– Assuming contagion towards bank risk does not escalate, the ECB will be free to raise rates in July. July was repriced higher on Tuesday, to now 1.34%. This reflects a lower take-up at the MRO (down from €187bn to €141.5bn, but watch the 3-month LTRO on Wednesday) and hawkish words from Trichet again on Tuesday (‘strong vigilance’). But January 2012 is priced just 20bp above July 2011 – so there is ample room for repricing if US data improves and the sovereign crisis sees a respite. That leaves us with a small 2-10y flattening bias in EUR, and a strong bias for being long 10y vs 2s and 30s.

And finally…

What would professors Jean Tirole, Drew Fudenberg, Eric Maskin and Maureen O’Hara have to say?

The strategic interaction of several decision makers when constructing a framework for the Greece rescue is reminiscent of the search for Nash equilibrium. What is difficult enough in a classroom setting appears to be a tremendous task when applied to a global framework. Aspects of game theory, the economics of incentives, contract theory and market microstructure design need to be taken into consideration. While academics of many disciplines will have plenty of opportunities to analyze the dynamics of the Greece rescue initiative, it is not surprising that many investors prefer to watch how events unfold from the safety of the sidelines. This reduces liquidity in the market and results in a choppy market environment. Gapping 30-year swap spreads, a rapid reshaping of the yield curve and spikes in short-dated volatility have already been plaguing the market in recent days.

Of course, Wikipedia reminds us, Nash equilibrium does not necessarily result in the best pay-off for all the players involved. In the French proposal it looks like banks, including French ones, are (surprise!) getting the better result.

Related links:
An indecent (Greek) proposal – FT Alphaville
The French proposal
– FT Alphaville

This entry was posted by Tracy Alloway on Wednesday, June 29th, 2011 at 9:50 and is filed under Capital markets. Tagged with , , , .

Is Betfair ex-growth?

Posted by Neil Humeon Jun 29 09:35.

There’s a distinct lack of ambition at Betfair.

The online betting exchange has on Wednesday announced plans to start a share buyback, barely nine months after listing:

Betfair Group plc (“Betfair” or “the Company”) (LSE:BET), the world’s biggest betting community and one of the world’s leading online betting and gaming operators, today announces that it intends to commence a share buy-back programme to make market purchases of up to £50 million of its ordinary shares (“Ordinary Shares”) over the next 12 months.

Outgoing CEO David Yu says the buyback is part of a plan to deliver long-term shareholder value through “a combination of accelerating our revenue growth, driving further margin improvement and returning excess cash to shareholders”.

Anyway, it’s true that Betfair is a highly cash-generative business which did return £112m to investors in 2008. But this is hardly the plan sketched out at the time of flotation last October.

Back then the talk was of growth and expansion into new markets. Buybacks didn’t get a mention.

From the Betfair IPO prospectus:

Growth strategy
The Directors believe that Betfair has multiple opportunities to secure future growth in both the short and the long-term through:

a continuing focus on extending Betfair’s leadership in sports betting, which is the largest segment of online gaming with high levels of forecast growth;

• further expanding Betfair’s portfolio of products and cross-selling these products to Betfair’s loyal customer base in order to maximise customers’ lifetime value;

• taking advantage of the proliferation and convergence of new channels such as mobile, social media platforms, interactive television and its API;

• geographic expansion—both in the near term in Betfair’s core European and Australian markets, and in the longer term through the possibility of liberalisation of large markets such as the USA, India and China; and

• developing Betfair’s technology platform to address new markets and/or new verticals, as Betfair already is seeking to do in the financial markets with LMAX

So is the share buyback in fact a sop to shareholders who have seen the value of their investment fall by 40 per cent since flotation?


But it’s also an admission that Betfair’s efforts to address new markets have failed — LMAX, the financial markets spin-off has, for example, flopped — and its overseas ambitions are being thwarted by regulators.

This, at least, is something the company recognises.

From Tuesday’s maiden annual results statement.

In the short term, there will inevitably be challenges as we aim to bring our disruptive, consumer-friendly technology to new markets. We recognise that we could need to adapt our product in the short term to comply with regulation in jurisdictions that may look to restrict exchange betting in the first phase of licensing. The development of our integrated Exchange and sportsbook product will give us additional flexibility to react to changing regulatory requirements.

A wide variety of European countries are currently taking political and legislative steps to implement online gaming regulation for the first time. They include Cyprus, Denmark, Germany, Greece, Ireland and Spain. The process is at a different stage of development in each country but is likely to result in online gaming legislation being implemented in the next six to 24 months. It is currently difficult to say what the final regulatory framework in each country will look like: there may be significant variation between countries in the products that can be licensed and the taxation structures to be applied

But to look at things from another perspective, here’s Paul Leyland of Investec Securities:

While we see the £50m share buy-back as an accretive use of cash, we do not believe it is the action of a growth company with lots of M&A potential. Equally, once over, it will reduce the potential cash on the balance sheet for valuation (or even operational) support.

That’s not what shareholders signed up to when they backed the flotation at £13 a share, and also not what the tarnished UK IPO market needs right now.

Related links:
David Yu to step down as Betfair chief – FT

This entry was posted by Neil Hume on Wednesday, June 29th, 2011 at 9:35 and is filed under Capital markets, M&A. Tagged with , , .

Nordea hunts down a Norwegian interest rate typo

Posted by Tracy Allowayon Jun 29 09:09.

Price action in the Norwegian krone on Tuesday:

Last week Norway’s central bank said it was holding interest rates at 2.25 per cent, but indicated through various data sheets and background material that an interest rate rise could come in either August or September. August had an overwhelming 68 per cent chance, and September 32 per cent.

Small problem — apparently that was a mistake.

On Tuesday, SEB fixed income strategist Erica Blomgren pointed out that Norges Bank had changed its interest rate path to signal a 100 per cent probability for an August hike. But they appear to have done so without a press release indicating the change. It wasn’t until Nordea analysts highlighted the alteration to the data series early on Tuesday, that the market became aware of the switch.

The central bank eventually confirmed to Reuters:

OSLO, June 28 (Reuters) – Norway’s central bank said on Tuesday it had corrected its interest rate path projection, making an August rate hike more likely than indicated after its rate-setting meeting last week and angering some economists.

There was a typo in the original spreadsheet, which we then corrected,” Norges Bank spokesman Oeystein Sjoelie told Reuters.


Now the analysts at Nordea reckon the mistake was more than just a single typo, there were other (presumably embarrassing) errors in the data. That might help explain why the central bank tried to quickly and quietly correct the information. According to Reuters, the change was actually made just two hours after Norges Bank’s rate decision announcement last Wednesday… So market-sensitive information was sitting on the central bank’s website for a full five days or so, without anyone noticing.

And they would’ve gotten away with it too…

… if it weren’t for those pesky Nordea analysts.

Related link:
Goldman makes an expensive typo – FT Alphaville

This entry was posted by Tracy Alloway on Wednesday, June 29th, 2011 at 9:09 and is filed under Capital markets. Tagged with , , , .

Further reading

Posted by Tracy Allowayon Jun 29 08:10.

Elsewhere on Wednesday,

– Morgan Stanley’s breakeven burn.

– Proudly a G-SIFI.

– The pre-announcement of risk.

Correlation, currencies and the S&P 500.

– Not that 70s show – why UK stagflation is unlikely.

– Andrew Sheng says sustainability means caging godzillas.

– The Isle of Man. The Cayman Islands … Cheyenne, Wyoming?

– It’s fiscal exam time!

– Why Wall Street went for gay marriage.

– Further, further reading.

This entry was posted by Tracy Alloway on Wednesday, June 29th, 2011 at 8:10 and is filed under Capital markets, Commodities, Hedge funds, People.

Pink picks

Posted by Tracy Allowayon Jun 29 08:00.

Comment, analysis and other offerings from Wednesday’s FT,

Martin Wolf: Why austerity alone risks a disaster
Enjoy the coming slump, says the FT columnist. That is not what the Bank for International Settlements says to the US and other overindebted economies. But it is what its latest annual report implies. I admired the warnings of monetary and financial excesses that the BIS gave under its former economic adviser, William White. I respect Stephen Cecchetti, his successor. But I disagree with the thrust of this report. It understates the obstacles to across-the-board austerity.

The A-List: Mohamed El-Erian – How Lagarde can rescue the IMF
Christine Lagarde – who following Tuesday’s public backing from Tim Geithner, US treasury secretary, will assume the post shortly barring any legal complications – must move on five key issues in her first few months at the helm, writes the chief executive and co-CIO of Pimco.

Jean Pisani-Ferry: Holiday homework for European leaders
European leaders agreed again last week to “do whatever is necessary to ensure the financial stability of the euro area as a whole”. But they did not say how, notes the director of the Bruegel think-tank. Even if the coming vote in Greece’s parliament averts crisis, they would be well advised to make use of the long European summer season to turn this unspecified commitment into an action plan – with the following suggestions.

Analysis: Walmart – a thinner throng
America’s most dominant retailer and the world’s most domineering is facing questions as to whether it is past its peak, writes the FT’s Barney Jopson.

Westminster blog: Should government borrowing powers be capped?
Sajid Javid is putting forward a 10-minute rule bill next month proposing that the government legally caps the UK’s national debt, says the FT’s Elizabeth Rigby. Javid, who climbed the ranks at Deutsche Bank before joining in the Tory 2010 intake last May, wants the coalition to set net government borrowing at a certain percentage of GDP.n

Women at the top: Queen bee in the office – who gets stung?
Female bosses get a bad rap. There’s even a word for them. No, not that word. I am talking about the term “queen bee”. But according to a new study by Belle Derks of Leiden University in the Netherlands, such behaviour may not necessarily be her fault. Rather, it is the product of an inherently sexist work environment, writes the FT’s Rebecca Knight.

Beyond brics: Come get your MBA in Cuba?
Havana may not yet rival Harvard, but an MBA course is shortly to be launched in the communist-ruled Cuban capital. Che Guevara might be turning in his grave, writes the FT’s Ron Buchanan.

News analysis: China’s old bad banks run new risks
Years ago, when Industrial & Commercial Bank of China was getting ready to list, it went through its own spring cleaning of its balance sheet. It established Huarong Asset Management, a platform to take all its bad debts, while the Ministry of Finance recapitalised the bank itself, writes the FT’s Henny Senders.

This entry was posted by Tracy Alloway on Wednesday, June 29th, 2011 at 8:00 and is filed under Uncategorised.

Snap news

Posted by Neil Humeon Jun 29 07:57.

Breaking pre-market news on Wednesday,

– Betfair launches shares buyback nine months after IPO; to start dividend payments — statement and statement.

– Aegis in exclusive talks with Ipsos on Synovate sale — statement.

– Mallet assigns lease on its very expensive New Bond Street store to Fendi — statement.

– Corporate: Kazakhmys, British Land, 3i, Rank Group, Hunting, Lamprell, New World Resources, Exillon Energy, Stagecoach, Senior, Brainspark, M&C Saatchi, Photo-Me, Anite, Cineworld.

This entry was posted by Neil Hume on Wednesday, June 29th, 2011 at 7:57 and is filed under Capital markets, M&A. Tagged with , , , .

Further further reading

Posted by Cardiff Garciaon Jun 29 07:36.

For the commute home,

Intrade odds for Republican control.

– China will solve its US-listed Chinese stock problem.

– And small companies feel the pain in China.

– Wall Street loves Linked-in –: buy ratings all around.

Financial press getting very scary: good thing?

– China firms face research armies.

– Chart of the day, busts getting bigger edition.

This entry was posted by Cardiff Garcia on Wednesday, June 29th, 2011 at 7:36 and is filed under Capital markets.

Moody’s on Spanish regional debt

Posted by Cardiff Garcia on Jun 28 21:18.

Because what the world needed, as Europe stumbles toward some kinds of resolution for Greece, was another Moody’s warning.

Today’s edition is on Spanish regional debt (we’ve highlighted the main bits):

In the absence of credible commitments by Spanish regions to take further steps to achieve sustainable improvements in their fiscal positions, we believe that the regions’ ratings will come under downward pressure. Our assessment is based on the following observations and expectations:

» We expect several Spanish regions to exceed the 2011 deficit target of 1.3% of GDP. This was confirmed by Catalunya’s recent 2011 budget plan, which foresees a deficit that is twice the size of the target. Similarly, the incoming new government in Castilla-La Mancha recently announced that the budget deficit and the commercial debt to suppliers (mainly in the healthcare sector) are much larger than previously assumed.

» Our expectation of fiscal slippage among Spanish regions is driven by their overly optimistic budgeted revenue forecasts; the difficulties they face in controlling rigid spending in healthcare and education; and the unwillingness among some regions to take fiscal consolidation measures prior to the May 2011 regional elections.

» If the regions do not implement new measures, we estimate that the overall regional deficit would deviate by an additional 0.75% of GDP from the initial target of 1.3%. Moreover, longstanding payment arrears in the healthcare sector and the need to alleviate liquidity tensions in the current funding environment have resulted in growing payables in many Spanish regions, which we view as credit-negative.

» Like last year, we expect the Moody’s-rated regions to fall into two groups: (i) the single- A-rated regions (Castilla La Mancha, Catalunya, Murcia and Valencia) that deviated widely from the deficit limit last year and are expected to again face significant difficulties in controlling their deficit in 2011; and (ii) the Aa-rated regions (Andalucia, Castilla y Leon, Extremadura, Galicia, Madrid and Basque country) that either complied with deficit targets last year or registered only a limited deviation from them, and are in a reasonable position to meet this year’s target. However, some in the latter group are also likely to face tighter liquidity positions and growing commercial debt, thus adding pressure to their ratings.

» Overall, we believe that there is a significant need to address the structural pressures on the regional budgets in a sustainable and systematic way through a greater reduction in the regions’ operating expenditure. In particular, we believe that securing a broad agreement across the political spectrum on issues such as healthcare spending are also important factors for maintaining the current ratings of Spain’s regional governments.

And of course, here’s what you’re really curious about — the potential impact on the sovereign rating:

The close credit linkages between the sovereign and sub-sovereign issuers in Spain implies that fiscal slippage at the sub-sovereign level has the potential to affect not just the ratings of Spanish regional governments but also that of the Kingdom of Spain. Our current rating on the Spanish government (Aa2 with a negative outlook) depends critically on the following factors:

(i) the achievement of the fiscal targets as set out by the government for itself, for the regional and local governments and for the social security system;

(ii) a successful reorganisation of the savings bank sector with limited financial impact on the sovereign’s balance sheet; and

(iii) continued market access at a reasonable cost.

Moody’s believes that the central government can probably accommodate some regional slippage by decreasing its own deficit more than the target – as it did last year. Budget execution data up until April 2011 indicate that the government is on track to achieve its own budgetary target for the year, with the deficit declining by 50% compared to the same period in 2010. The target for the year as a whole is 4.8% of GDP in cash terms, representing a reduction of 15.7% compared with 2010. However, the rise in funding costs that started in May last year will begin affecting the budget numbers in the coming months. We therefore do not expect progress to be quite as positive for the remainder of the year. The 0.75% slippage (or €8 billion versus €4.5 billion last year) that we currently anticipate at the regional government level equates to 7.6% of the central government revenues and 5% of government expenditure which may prove difficult to achieve without additional fiscal measures.

Therefore, in the absence of credible commitments by the regions to take the steps needed to achieve sustainable improvements in their fiscal positions, we believe the central government will find it very hard to achieve its overall fiscal targets. This is likely to exert further downward pressure not only on the ratings of the fiscally weak regions but also on the sovereign’s rating as it risks derailing the country’s fiscal consolidation plan.

This entry was posted by Cardiff Garcia on Tuesday, June 28th, 2011 at 21:18 and is filed under Capital markets. Tagged with , .

Debt ceiling dealing

Posted by Cardiff Garcia on Jun 28 19:49.

Politics isn’t exactly our strong suit, but we’ve believed for some time that the incentives for the two US political parties to arrive at a deal on the debt ceiling are skewed against reaching an agreement until the last few moments before the August 2 deadline.

In addition to the substantive disagreements over long-term spending cuts and tax hikes, the Republicans in particular seem keen not to be perceived by their tea party wing of having conceded too early and agreeing to a suboptimal deal.

But even assuming that a deal is reached before the deadline and also that any kind of markets freakout is avoided, there’s actually a decent chance that we’ll have to deal with the problem again sooner rather than later.

And “sooner” could well be the middle of the next election year.

Have a look at this helpful chart from a new SocGen note (thanks to Greg White for the pointer):

And a brief explainer:


We believe that the most likely outcome is for a small increase in the debt ceiling, less than $1trn, and that it would not be accompanied by any long-term deficit reduction plan. In our view, the probability of this event occurring is around 65%, with a 20% chance of it occurring before mid-July and a 45% chance of it occurring after.

Well. Given the expected borrowing needs of the US for the rest of this year and next…

… an increase in the debt ceiling of less than $1 trillion means the government will be covered only through the end of March 2012. This is SocGen’s base case scenario, and it’s also a concern that’s been floated to us by other strategists in the last few weeks.

Another debt ceiling debate assuming we get through the current impasse, but next time just as the 2012 presidential race is kicking into gear. Oh, joy.

(Full note, which includes a discussion of the possible outcomes, in the usual place.)

Related links:
The impossible debt ceiling rollover – FT Alphaville
Moody’s thinks about thinking about the US debt rating – FT Alphaville
The T-bill that broke America’s credit – FT Alphaville

This entry was posted by Cardiff Garcia on Tuesday, June 28th, 2011 at 19:49 and is filed under Capital markets. Tagged with , , .