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Dubai’s sovereign bond will be a winner!
GLOBAL INVESTING / 4 October 2010
It made total sense for the government of Dubai to issue its $1.25 billion dual tranche sovereign bond so soon after the success of Dubai World’s restructuring agreement with its syndicate of creditors.
Dubai’s return to the international capital markets reflects new investor confidence in the emirate’s emergence from the financial netherworld that followed Nakheel’s standstill agreement last November. HSBC, Deutsche Bank and Standard Chartered are joint bookrunners on this bellwether bond, which is dual listed on Dubai’s DFM and London’s LSE.
A non-index emerging bond borrower that can offer investors an almost eight per cent coupon on seven year money will be wildly popular with Western, Asian and GCC institutional investors whose cash and government bond holdings yield almost nothing since the Federal Reserve, in its quest to avert deflation, has deliberately pushed down Treasury debt yields to their lowest level since the 1960’s.
The five to seven year maturity segment, which Dubai’s dual tranche targets, has seen credit spreads compress the most in the proverbial belly of the yield curve since it is so attractive for bank investment managers.
The pricing of the Dubai bond is so generous that I am convinced the issue will be oversubscribed and trade at a premium in the London when issued grey market. As Dubai’s credit healing continues, I can easily envision the Dubai bond trade at 105-107 bid from its current par issue price. The $500 million five-year tranche offers investors a 6.70 per cent coupon and the $750 million seven year tranche offers a 7.75 per cent coupon. These generous coupons will attract a tsunami of buy orders from the spectrum of the global banking village. The timing of the issue is impeccable. DP World was a success. Emaar will issue a $500 million convertible bond. The FOMC is about to goose Uncle Sam’s debt with a new round of monetary/credit easing.
The Dubai five-year sovereign credit spread has compressed an impressive 50 basis points to reflect the emirate’s new renaissance with trade, tourism and credit metrics having bottomed. I do not want to gloss over the $12 billion restructuring of Dubai Holding debt, the extremely high loan to deposit ratios in the banking system or the property market’s myriad woes. However, the credit Black Death that gutted bank, property developer and corporate balance sheets in 2008-09 is, thankfully, history.
As investor confidence in Dubai and its government finances improves, the sovereign CDS could well fall to 350 basis points, meaning investors in the Government of Dubai dual tranche bond will make a significant amount of money as, say, the seven year tranche bond’s yield falls from its current 7.70 per cent to as low as 6 per cent in the secondary market.
As George Soros so often observed, the big money is made when things (investor sentiment?) go from awful to less awful. This is particularly true in the GCC sovereign debt market where the beauty of the credit lies in the eyes of the (leveraged) beholder. The Dubai bond is a winner because it was priced to reflect the point of maximum pessimism so that investors cannot help but make money when optimism creeps back. The moment is now, an inflection point in the financial history of Dubai.
I believe the five-year tranche will be shaped up by regional banks, debt funds and high net worth Gulf investors, with the seven year paper a magnet for pension funds, insurance companies and sovereign wealth funds with an appetite for longer term risk assets. More significantly, a successful benchmark sovereign bond issue will enable state owned companies to launch bond/sukuk issues in the Eurobond market. This will have real world consequences in the Dubai economy, asset prices, EIBOR and bank funding costs. The luxury end of Dubai real estate could rise since the UAE dirham peg and ultra-low Fed rates are an ideal catalyst for asset reflation. Hong Kong condo prices have hit $7,000 a square foot while Palm Jumeirah offers a bargain basement a price tag, a fabulously attractive discount for Asian investors eager to buy trophy assets in the Gulf’s most happening city.
Foreign investors will use the Dubai bond as a proxy for the emirate’s credit healing process. Land prices will rise as the UAE dirham peg imports inflation and attracts capital flows into local real estate and the DFM. International bank syndicates will restructure the debt of DIC, Dubai Holding, Limitless and DIFC Investments.
Of course, bank credit growth will remain sluggish in 2011 as the banking system’s NPL ratios continue to rise while loan to deposit ratios are still above 100 per cent and access to wholesale funding markets remains closed. However, the funding, balance sheet, banking and economic growth challenges are more than reflected in Dubai sovereign risk spreads. The new sovereign bond, dual tranche the first new issue since the Dewa sukuk in April, will make history for Dubai and money for prescient investors in the deal. That much, at least, is certain.
The stock market’s next twist and turn
Don’t worry, be happy was the defining theme of September when the world’s stock markets and gold soared while the dollar tanked. With the S&P 500 index up 120 points since its August lows, I can only feel sorry for the Roubini-esque permabears and death cross technical geeks whose short positions have proved so spectacularly expensive.
The market’s momentum has been so consistent that the 50-day moving average will soon tweak the 200 day MA in a golden cross. Eureka, will the bears will magically be transformed into bulls and the index then catapult higher to the 1,250 pre-Lehman level? If only making money in the markets was so easy!
The Q3 earnings season will be a critical litmus test for the stock market. If operating margins, guidance and revenue growth fall below expectations, then all bets are off for El Torro Bonito. The non-farm payroll data on October 8 will hit the markets exactly twenty four hours after Alcoa kick starts earnings season. Not that stellar profit growth cannot surprise the markets on the upside, particularly in Big Oil, banking, industrials and software/networking.
Yet a slow growth economy and the end of cost cutting does not exactly make me feel warm and cuddly about unhedged, high beta longs when the market has posted its best September since the Battle of Britain. Yet if earnings do not disappoint, all is well with the index since the Fed wants easy money and valuations (12 times forward earnings) are still modest.
One caveat. The stock market prices a Republican victory in the midterm elections. If Obama, and the Dems stage a comeback, Wall Street will be horrified and the index could well drop 100 points on the tape.
Oil has broken out of its $70-80 trading range, with $81 spot and the $7 billion sale of Repsol’s Brazil assets giving a bid to energy shares on Friday. The Philly OSX oil service index has risen five points for the week and the NYSE Oil Index is at its highest levels since May, with even natural gas shares having a dead cat bounce. I had recommended Schlumberger in the summer in the 54-56 range and see no reason to sell it at 62 — au contraire, buy Schlumberger on any correction.
Big Oil colossi Exxon, Chevron and Occidental are at least 15 per cent undervalued high dividend yield plays. If the Obama White House lifts the offshore drilling moratorium in November, it will most benefit. Noble, Diamond Offshore and even Transocean (who operated the doomed Deepwater Horizon rig for BP). Energy is going to be my white knight in Q4.
What could spook the markets between now and Christmas?
A lot, as usual. The unemployment rate could spike up to 9.8-10 per cent and housing prices, hit by foreclosures, weak end demand and an inventory glut, could begin to drop again. The US-China trade spat could hit the monetary brakes too hard and trigger a growth scare, though Chinese PMI rose and goosed copper above $8,000 a metric tonne on the LME last week.
What if Apple misses its earnings estimates? The last month has been a money making feast in large cap shares on Wall Street. However, unless booked paper profits just lull me into a false sense of complacency. It is prudent to take out insurance when premiums are cheap with the VIX at 20-22, half its level six months ago, There is no point buying insurance when the markets go ballistic and the price of protection soars.
Don’t worry, be happy, buy cheap, no problem put options as a nappy!
October angst, currency wars
The global currency markets are now in month end, illiquidity mode, the reason why bid/offer spreads have gone ballistic. This mode will continue until our Bloomberg screens light with the next non-farm payrolls bombshell on October 8. September/October are months that suffuse my soul with bitter speed nostalgia.
I was a neophyte (wannabe) Bud Fox trader on Black Monday, October 19, 1987 on LaSalle Street in Chicago, home of the Treasury bond futures trading pits. On September 15, 1992, Black Monday, I was in the trading room at Chase Manhattan in New York while George Soros’s FX maestro Stan Druckenmiller made his billion-dollar killing forcing the British pound out of the ERM and the subsequent speculative assaults against the Italian lira and the French franc.
I was chief dealer in Abu Dhabi’s UNB in October 1998, when Southeast Asia’s currencies went into a freefall. I was sitting on a panel with Asean finance ministers at a Barclays Capital Conference on September 15, 2008, the day Lehman Brothers died (or was murdered, as ex-Gorilla alpha CEO Dick Fuld insists!).
The desert air has turned snappier in Dubai, the mist wreaths St Paul’s and the banking towers of the City, the leaves turn russet gold on the campus of Wharton in my beloved Philly, the wicked witch of Wall Street appears in the dreams of the humbled Masks of the Universe and BSD — human piranhas on bulge bracket dealing desks in downtown Manhattan or in the yuppie wastelands of the Upper East Side or even, (ugh, how could you Morgan Stanley?), a gentrified Times Square, which in my salad days in New York was full of peep shows and cabbie filled Curry in a Hurry fast food joints.
October fills me with dread. Something big, really really big, is brewing in the world of international finance and politics. Something that could lead to another FX market nervous breakdown. I know. I feel the auguries. I was there.
The US consumer confidence data slammed the dollar and DXY is now well below 80. The trade war between Beijing and Washington has now begun. The Americans are evacuating their embassy dependents from Beirut (why?). An Al-Qaeda strike on London and Paris, another Mumbai style massacre, was narrowly averted by British intelligence. The Bank of Japan is on the verge of a 40 trillion yen money printing spree now that PMI is below 50. Spain is downgraded by Moodys, Greece and Ireland are bankrupt but the Euro is still bought like crazy by panicky sovereign wealth funds as the most liquid anti-dollar. Inflation and international banking risk is non existent but gold is $1,300 and silver almost $22.
I phone banks in Geneva, Singapore, London and New York to exchange the latest market gossip on the Great Game of Gnomes we play each day from sunrise in Sydney to sunset in San Francisco. The latest conspiracy theory is that the Chinese Politburo ordered a euro buying spree to force dollar/yen down so the Bank of Japan would lose face and intervene. Can the euro rise to 1.40? Surely but only after the month ahead, with the caveat that private payrolls should not disappoint.
The Japanese look foolish since the BoJ failed to defend 85 on dollar yen. The Battle of Britain was won by the RAF, not the Luftwaffe, even if Londonium took a pounding in the blitz. Yet in the FX blitz of 2010, sterling will whack the euro, possibly down to 0.8890. The Swiss central bank has been unable to defend the euro/Swissie, though 1.30 will hold. Aussie-Canada on a roll since RBA is hawkish while Looney Tunes looks lost. Despite Canada’s national wealth (oil, timber, desi immigrants), it cannot be much fun being a wholly owned subsidiary of Uncle Sam under Obamacare, the Tea Party crazies and Barney Frank’s legal Gestapo. The Caesar is dying. Sharpen the knives, Brutus!
Winners and losers in global big pharma
The world’s Big Pharma colossi have been heartbreak for investors, down an incredible 50 per cent in some cases in the past decade. Patent expirations, mediocre revenue growth, Obamacare, unimaginative capital management and pricing/regulatory pressures have all wrecked havoc on Big Pharma shares. Yet I am now Bob Dylan on Big Pharma for the times they are a changing.
Take Pfizer (PFE), where I have been long via option strategies since July and have amassed 20 per cent returns as PFE moved up from 14 to 17.50. I bought Pfizer for its joke valuation, its business mix potential after the Wyeth deal (vaccines, animal health, biologics), its huge dividend (six per cent when I went long) and, above all, my conviction that the CEO is going to restructure the empire via a succession of spin offs that will goose (OK, accrete in Bankerese) EPS.
Mark my words. The Street will in love in Pfizer (as I did in July) because its non-biopharma division spin outs will make global headlines in 2011. Pfizer 15 calls for January 2012 expirations could well triple if my base scenarios become empirical reality. Who says playing cerebral three dimension chess on the NYSE is no fun, particularly if the GOP House votes a tax repatriation holiday that will be wildly bullish for Pfizer and Fed quant easing makes its dividend irresistible. The coalmine of complex conglomerates enables me to mine for hidden diamonds.
Sanofi’s takeover bid for Genzyme and the Roche/Genentech, and Novartis/Alcon deals have ignited an obsessive interest in European Big Pharma for me. Sanofi has deep pockets, a bidding war is possible and Genzyme’s endgame is a take out that I believe is inevitable at a price that could well exceed $85 a share. The ancient proverb haunts me. Do not wish for anything too badly. You may just get it. Love marriages and Wall Street takeover deals have a lot in common. Switzerland’s Roche is an Old World large-cap pharma with a five per cent dividend whose undervalued pipeline in oncology, melanoma and Alzheimer’s operating margin spike could well trigger a rerating that will surely gore the grizzly gnomes of Zurich. Roche deserves a 12 multiple, below historic benchmarks. My call? A 200 Swiss franc share price sometime by end 2011 as Mr Market forgives Roche for the Avastin debacle.
Novo Nordisk is one of the world’s most exciting growth stories, the world’s largest producer of synthetic insulin in a world where diabetes is, alas, also correlated with the exponential wealth creation in China. I do not need to be an intellectual cheerleader for Novo Nordisk — after all, the shares have risen by 30 per cent since May 2010 alone in Copenhagen and New York. The Little Mermaid has a huge smile on her face. I would take profits for now on Novo as the easy money has been made in 2010, with the shares 50 per cent from their recent bottom in only eight months and the multiple a nosebleed 28X. The risk-reward no longer work. Mylan is the Cinderella of generic pharmaceuticals with multiple catalysts to be a significant money maker in the next twelve months. A new launch pipeline in oral contraceptive generics, a cheap nine times forward valuation for potential 17-18 per cent EPS growth FDA product approvals, accretion from the Bi niche acquisition and the surge in the euro-dollar FX rate.
The Bioniche Pharma takeover deal makes total sense as it gives Mylan an unassailable lead in injectable drugs. Mylan also bought Merck’s German generic business biologic specialist Matrix Labs. Mylan is a global generic cash machine that is dissed by Wall Street. A “show me the money” stock, definitely yes. Yet I’ll say it again as I said it before, Mylan baby will hit 24.
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