Thursday 5th May 2016
NEWS TICKER: Moody's says it has downgraded the ratings of Exeltium SAS's €1,000m 15 year floating rate bank term loan (Facility A), €155m 15 year floating rate institutional term loan (Facility B1) and €280m 15 year fixed rate institutional term loan (Facility B2), together, the senior debt, to Baa3, from Baa2. The senior debt matures in June 2030. Moody's has also downgraded the rating of Exeltium's €153m subordinated bonds, the junior bonds, maturing in December 2031 to B3, from Ba3. The outlook on the ratings is stable. The downgrade of the senior debt ratings reflects, says Moody’s, wholesale electricity market price falls in France, resulting in a material risk that Exeltium's customers will opt out of electricity purchases from 2020 to 2024 and a fall in the weighted average credit quality of clients to Baa3, from Baa2 and iii) the weakened credit quality of the put counterparty, a large French industrial rated Ba2 negative that is obliged to purchase 51% of volumes subject to Client opt-out (the Put Option). Moody's has also revised its French wholesale electricity price assumptions downwards, reflecting the current price environment and Moody's assumption that lower prices will be sustained. The industrial logic of the project is significantly weakened in a low electricity price environment. In Moody's revised base case, the rating agency assumes that clients would opt-out of electricity purchases between 2020 and 2024. Over this period, Moody's assumes that just over half of Exeltium's electricity would be sold under the Put Option, with the remainder sold at market rates. - CORPORATE REPORTING - Lufthansa Group says is maintaining its full-year earnings forecast for an adjusted EBIT which is “slightly above” the previous year’s €1.8b, after reducing its operating losses for the first quarter, having introduced substantial cost cuts and despite a decline in revenues. The firm’s adjusted EBIT loss for the three months to the end of March fell by more than two-thirds to €53m ($61m). Revenues fell slightly to €6.9bn because of pricing pressures in the group’s passenger airlines, says chief financial officer Simone Menne. Lufthansa’s passenger airline division improved its adjusted EBIT by €244m and that for Austrian Airlines was up by €23m. However, currency effects, however, dragged on the result at Swiss International Air Lines, where adjusted earnings fell by €28m. However, the firm issued a health warning that its forecast does not take into account any negative effects of possible strike actions and that it does not expect that pricing pressures will ease any time soon. Lufthansa Group turned in a net loss of €8m, compared with a €425m profit last year, but stresses that this included a large benefit from transactions relating to US carrier JetBlue Airways. Taking this into account, it says, the first quarter net result equates to an improvement of €70m. - SOVEREIGN DEBT - THE UK’s DMO says the auction of £2.5bn of 1.5% treasury gilt 2026 says bids worth £4.473bn were received for the offer of which £2.125bn was sold to competitive bidders and £374m sold to gilt edged market makers (GEMMs). An additional amount of the Stock totalling up to £375.000 million will be made available to successful bidders for purchase at the non-competitive allotment price, in accordance with the terms of the information memorandum. Higher priced bids came in at £98.566, providing a yield of 1.653% and the lowest accepts was £98.526, providing a yield of £1/656% - CYBER SECURITY - Global Cyber Alliance, an organisation founded by the New York County District Attorney's Office, the City of London Police and the Center for Internet Security, say they will collaborate with M3AAWG to push the security community to more quickly adopt concrete, quantifiable practices that can reduce online threats. The non-profit GCA has joined the Messaging, Malware and Mobile Anti-Abuse Working Group, which develops anti-abuse best practices based on the proven experience of its members, and M3AAWG has become a GCA partner for the technology sector – ASSET MANAGEMENT JOBS - IFM Investors today announced the appointment of Rich Randall as Global Head of Debt Investments. Mr. Randall takes on this senior leadership role from his prior position as Executive Director of Debt Investments, which he had held since joining IFM Investors in 2013. Randall replaces Robin Miller, who will semi-retire from IFM Investors after a 17-year association with the company. Miller will remain with IFM Investors and will transition to the role of Senior Advisor and Chair of Investment Committee within the organisation. In his new role, Randall will manage IFM Investors’ global debt investment teams and maintain the organization’s global debt investment process and relationships with investors. He will also oversee the sourcing of infrastructure debt opportunities internationally. He will continue to be based in IFM Investors’ New York offices and will report directly to CEO Brett Himbury – ACQUISITIONS - Intercontinental Exchange says it has backed off from its counterbid for the London Stock Exchange. In a statement issued by ICE, chief executive Jeffrey Sprecher says LSEG did not provide enough information to make an informed decision on the value of the merger. "Following due diligence on the information made available, ICE determined that there was insufficient engagement to confirm the potential market and shareholder benefits of a strategic combination. Therefore, ICE has confirmed that it has no current intention to make an offer for LSEG – POLITICAL RISK – Global risk analysts Red24 reports that political parties, including the National Movement for the Organisation of the Country (MONOP) and the Fanmi Lavalas party, held a series of demonstrations in Port-au-Prince, yesterday. The action was launched to show support for the Commission to Evaluate Haiti Elections (CIEVE), a body established to verify the 2015 elections. The latest call to action came amid heightened tensions between the aforementioned political parties and former president Michel Martelly's Parti Haitien Tet Kale (PHTK), which launched general strikes against CIEVE on 2 May. Further opposition party-led demonstrations are expected to continue in the near-term due to the indefinite postponement of the country's 24 April run-off election and issues surrounding the evaluation of the 2015 elections – INDEX TRADING – Investors have not yet leant into the wind as a ruff of mixed data discombobulated markets yet again, with a lacklustre Asian trading session. More pertinently perhaps, investor sentiment is hanging in advance of tomorrow’s US labour market report. Peter O’Flanagan ClearTreasury reports that uncertainty around Brexit has impacted business sentiment in the UK and “if we are seeing this filter through into Q2 data there may well be additional downside for UK data until we have a referendum result. That may not be an end to the uncertainty as the “Out” campaign appears to be gathering some momentum. Depending on what poll you look at, it would appear the “uncertain” portion of the polls is narrowing, and while the position is currently still far too close to call by looking at the polls, bookies are still favouring the ‘In’ campaign with a 75% probability of remaining”. In the Asian trading session meantime, Japanese stock indexes fell to three week lows, and in line with sentiment this year, the yen has touched yet another 18-month high against the dollar, no doubt testing the resolve of the central bank not to act, despite stating that the yen is way over-priced. The Nikkei225 was down 3.11% today. The Hang Seng ended down 0.37%, while the Shanghai Composite rose marginally by 0.23%. The ASX All Ordinaries ended 0.17% higher, though the Kospi fell 0.49% and the FTSE Bursa Malaysia dropped 0.75%. The Straits Times Index (STI) ended 0.53 points or 0.02% lower to 2772.54, taking the year-to-date performance to -3.82%. The top active stocks today were SingTel, which gained 0.53%, DBS, which declined 2.22%, OCBC Bank, which declined 1.06%, UOB, which declined 1.04% and Wilmar Intl, with a 0.57% advance. The FTSE ST Mid Cap Index declined 0.27%, while the FTSE ST Small Cap Index rose 0.01%. OIL PRICES RISE - The story today was oil as prices climbed in the Asian session, with the Brent crude price breaking through $45; wildfires in Canada were behind the rise. Wildfires look to be burning out of control in the Alberta oil sands region of Canada, which mines and ships heavy crude to the US. Oil companies there have reduced operations as non-essential employees are evacuated. Moreover, US oil output fell last week by more than 100,000 barrels a day to 8.83m, its lowest level since September 2014, though inventories continue to rise. US benchmark West Texas Intermediate for delivery next month was up $1.19, or 2.7%, at $44.97 while Brent prices for July supply rose 94 cents to $45.56. The price of oil has rallied recently because of the 400,000 bpd cut in US oil output (IEA data), US dollar weakness and Asian demand optimism. The next OPEC meeting scheduled for June 2nd will likely be another watershed, as all recent meetings have been. One beneficiary of the recent rally in oil prices is Russia, where the ruble has appreciated 14% against the US dollar this year. As well, investor sentiment towards Russia risk is highly influenced by the oil price. Year-to-date the dollar-denominated Russia RDX equity index is up 25%, and that compares with a gain of 6% for the MSCI EM Index and 1% for the S&P 500 Index reports Chris Weafer at Weafer says the current oil price also makes the removal of financial sector sanctions less urgent for 2016 and eases both short-term geo-political and economic pressure on the Kremlin and reduces social stability concerns. “Oil should rise by [the end of the decade] but be less important by mid-next decade. Medium-term, an oil price rally to over US$100 per barrel is perfectly feasible due to the combination of steadily rising Asia demand (in particular) and the lack of investment by the oil majors since late 2014. Longer-term, the age of oil, or the importance of oil, may already be over or significantly in decline. The strong growth in alternative energy and the commitments made as part of the Paris Agreement make that a very high probability”. Gold is still seen under pressure this morning, say Swissquote’s Michael van Dulkin and Augustin Eden in their morning note today, which they attribute as usual to “pre Non-Farms trading (or lack thereof). We’re of the opinion, however, that employment is OK in terms of the US economic picture such that while there will be short term volatility around it, there’s little point giving this print much attention. Better to concentrate on US inflation data which, if it starts rising, could boost Gold (an inflation hedge) much more efficiently. There is, after all, a fair amount of concern that current easy US monetary policy could lead to inflation overshooting the 2% target when it does finally pick up.” In focus today, UK Services PMI (flat).

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LME goes east

Tuesday, 24 July 2012
LME goes east In the latest manifestation of China’s rising economic power, Hong Kong Exchanges & Clearing (HKEX) has agreed to buy LME Holdings, the parent company of the London Metal Exchange, for £1.388bn, an eye-popping 58.3x net profits for 2011 even adjusting for a higher fee schedule implemented only on July 2nd this year. It is a trophy price for a trophy property: the largest base metals futures and options exchange in the world, with an estimated 80% market share. If the transaction receives shareholder and regulatory approval—not a racing certainty, given the unusual voting rights of LME shareholders—the new owners of a traditionally western capitalist bastion reflects the relentless eastward shift in capital flows, driven by China’s rapid economic growth.

In the latest manifestation of China’s rising economic power, Hong Kong Exchanges & Clearing (HKEX) has agreed to buy LME Holdings, the parent company of the London Metal Exchange, for £1.388bn, an eye-popping 58.3x net profits for 2011 even adjusting for a higher fee schedule implemented only on July 2nd this year. It is a trophy price for a trophy property: the largest base metals futures and options exchange in the world, with an estimated 80% market share. If the transaction receives shareholder and regulatory approval—not a racing certainty, given the unusual voting rights of LME shareholders—the new owners of a traditionally western capitalist bastion reflects the relentless eastward shift in capital flows, driven by China’s rapid economic growth.

The imperative to secure ownership of the LME by Chinese entities will come as no surprise. The Middle Kingdom now accounts for 42% of global metals consumption; Chinese companies already trade on the LME through member firms; and several LME members have opened offices in Hong Kong. Newedge, whose 15% to 18% market share by volume makes it the largest LME ring-dealing member, even has a joint venture with Citic, the Chinese financial conglomerate, through which qualified customers can trade on the Shanghai Metals Exchange, the regional market for the same metals that dominate trading on the LME: ­aluminium, copper, zinc and lead.

John FayJohn Fay, global head of fixed income, currencies and commodities at Newedge.Shanghai still takes its opening cue from LME closing prices, but the relationship between the two exchanges has evolved into a two-way street—traders now track closing prices and trends in Shanghai before they set opening prices in London the next day. If the Shanghai market were to open up to foreign participants, John Fay, global head of fixed income, currencies and commodities at Newedge, expects overall trading volume would grow but does not see business migrating from London to Shanghai. “Liquidity moves to where the capital is created,” he says. “The markets in China will continue to grow, but it will be complementary to growth on the LME. It will be additional volume.”

Unlike other futures exchanges, LME operates three trading systems that work in parallel: a continuous electronic trading platform open 24/7, ring dealing sessions on the exchange floor, and OTC trades negotiated off the floor. No matter where trades take place, they are centrally cleared by LCH.Clearnet, at least for now. The LME plans to set up its own clearing house by 2014, an initiative HKEX supports and to which it can bring its own expertise in clearing (albeit not in commodities). Self-clearing will give the LME greater flexibility to launch new products and may enable the exchange to take as eligible collateral assets not acceptable to LCH.Clearnet for initial and/or variation margin.

The LME also offers a wider range of delivery dates than other futures exchanges: daily “prompt dates” out to three months, weekly out to six months, and thereafter monthly to 15, 27, 63 or 123 months forward depending on the metal. HKEX has committed to retain this structure at least until 2015, but Fay is keen to see it preserved in perpetuity. “It is the model our customers want because it is built for size or speed,” he says. “They want to go to the floor for price discovery and liquidity, to be able to trade electronically or over the counter (OTC), and they want it all cleared.”

The LME model is unique, but may not remain so. In fact, it offers a viable template for trading financial OTC derivatives on an exchange: the prompt date flexibility eliminates the mismatch between quarterly contract expiration dates and the dates to which commercial participants need to hedge. “The LME model is an answer to Dodd Frank,” says Fay.

HKEX intends to help the LME expand in Asia through a combination of enhanced data distribution, the introduction of futures contracts denominated in renminbi (RMB) and additional warehouses. LME operates a network of more than 600 licensed warehouses around the globe in which market participants can deposit ­deliverable material in exchange for a bearer warrant for the number of contract lots the metal represents at that location. None of the existing warehouses are in mainland China, however; Chinese companies typically deliver to warehouses in South Korea if need be, which is typically in times of tight supply.

Michael Overlander, chief executive of Sucden, a ring-dealing LME member that accounts for between 10% and 15% of trading volume, says past efforts to license warehouses in China have foundered on doubts about the rule of law in the country. If someone presented a bearer warrant to the warehouse at an inopportune moment, would the operator honour the obligation?

“In countries where the LME does have warehouses the warrant would never be questioned,” says Overlander. “I think fear of the unknown legalities has prevented the LME from putting warehouses on the ground in China.” Local warehouses would no doubt improve liquidity and attract more Chinese participants to the LME, but while HKEX can help the LME cut through bureaucratic red tape it may not be able to resolve the legal difficulty.

HKEX wants to leverage its existing renminbi-based trading and settlement infrastructure in Hong Kong to support new LME futures contracts denominated in the Chinese currency. Although these products would be another step toward the internationalisation of the renminbi, Overlander does not see them as an immediate precursor to free convertibility. “The Chinese government has shown a great reluctance to take the handcuffs off the RMB,” he says. “It will first have to relax the controls to get people excited about a currency with limited uses.”

Michael OverlanderMichael Overlander, chief executive of Sucden.Both Sucden and Newedge own shares in the LME but, at just under 3%, their holdings are far smaller than their market shares of exchange ­business. Maintaining the business model should be more important to both firms than the price at which they can sell LME shares, but few people are altogether immune to the lure of money. “I would be lying if I said the equity isn’t important,” says ­Overlander. “It would be hard to see the value of our shares topped in the foreseeable future. It was a relatively easy decision for us to support the transaction: we were satisfied with the buyer and the price.”

The losing bidders—Intercontinental Exchange and CME Group—must now explore alternatives if they wish to expand in base metals. For ICE, it would be a new business line, while CME has a copper contract traded on the Comex that competes directly with the LME. Apart from copper, CME has historically focused on precious metals—gold, silver, platinum and palladium—that do not overlap with LME products.

The LME’s dominant position represents a significant barrier to entry, however. Market participants have great confidence in price discovery on the LME, so much so that prices for physical contracts (which are not traded on the LME) are usually based on LME prices. The LME warehouse infrastructure would be hard to replicate too. “Virtually anywhere in the world, metal can be stored in exchange for a negotiable LME warrant. Warrant holders can have almost instant access to material on whatever day they want,” says Overlander. “The warehouse network is just one example. It would be tough to knock the LME off its pedestal.”

The reaction in some quarters to the LME sale—another British champion passes into foreign hands—may be more Sinophobic than xenophobic. Nobody claimed that American interests would interfere with price discovery in London when ICE bought the International Petroleum Exchange or NYSE Euronext took control of LIFFE. Chinese influence in London is likely to grow if Chinese companies do more business on the LME but ­Overland insists Chinese ownership will not affect market operations. “Whatever the rationale for buying the LME, it was not to manipulate prices in favour of Chinese buyers,” he says. “The LME will still have to comply with FSA rules that govern regulated investment exchanges, which are designed to make sure the market has the confidence of users.” 

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