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LIZ: Improving the Balance Sheet

 

LIZ is taking a step towards reducing earnings volatility by announcing it will retire nearly half (€100mm) of its €221mm Eurobond exposure per an 8K filing that hit this morning. While the notes aren’t due until July 2013, this tranche is among the company’s highest priorities of debt to settle due to the volatile hedging associated with it that’s been accounted for in the Other Income line on the P&L. This is clearly a positive for the company. But what about the stock relative to investor expectations? Here are a few thoughts:

  • The company is taking action (something we’re now growing accustomed to seeing) in order to reduce earnings volatility – positive.
  • The Eurobonds pay interest on an annual basis so the accrued interest re this transaction will amount to nearly $3mm for a total payment of ~$135mm.
  • Management stated as recently as its Q3 conference call (11/9) that it expects to 1) have $0mm drawn on its revolver, and 2) have enough cash to ultimately settle the Eurobond in full by year-end. This move adds some clarity as the company appears to have the cash now to settle the rest, but question remains how?
  • The direct purchase of 45% of the outstanding Eurobonds from a single bond holder at reasonable rates is essentially a best case scenario. As for the balance, it can be retired a number of ways as outlined at LIZ’s Analyst Day back on April 28th(see below). Essentially, the company can make additional purchases directly, through the open market, or tender an offer.
  • While direct or open market purchases would be most cost effective for shareholders, we think that the company will retire the rest its outstanding Eurobonds early in the 1H of next year.
  • Keep in mind that until then, Fx rates are moving in the company’s favor. Take a look at the table below. Since the analyst day back in April, the strength of the US dollar has cut the USD/Euro rate to 1.32 from 1.48 effectively reducing the cost of the Eurobonds by more than 10%, or $35mm. Looking forward, every $0.05 swing in the USD/Euro exchange rate will account for another ~$6mm change in the balance of the company’s €121.5mm outstanding Eurobonds. At this rate, with the continued strength in the USD there's simply no rush.

All in, we think this move should be viewed positively as yet another step in LIZ's transformation in to a growth company as it sheds legacy debt concerns. We didn't expect the full retirement of the Eurobonds by year-end, but we do expect the company to remain committed to this goal near-term in order to fully reduce related hedging volatility.

 

 

Casey Flavin

Director

LIZ: Improving the Balance Sheet - LIZ Eurobnd

 

(Slide #175 from 4/28 LIZ Analyst Day):

LIZ: Improving the Balance Sheet - LIZ Slide re Eurobond



LIZ: Improving the Balance Sheet - LIZ EUR USD chart


Trade Update: Covering France (EWQ)

Keith covered France via the eft EWQ in the Hedgeye Virtual Portfolio today.  Keith is trading risk around the position, covering it on red days, and shorting it on green days.  We remain bearish on French stocks for the intermediate term TREND, with the CAC broken on TREND at 3404 (see chart below). 

 

Trade Update: Covering France (EWQ)  - 1. cac

 

We remain bearish on France over the intermediate term due to:

  • Pending downgrade of France’s AAA Sovereign Credit rating in T-3 weeks
  • Public debt rising through the 90% (as a % of GDP) next year
  • Slowing growth (below the government’s 1% 2012 projection) alongside Austerity’s Bite
  • Banking risk, including any difficulties for its major banks (BNP, Credit Agricole, SocGen) to raise capital to the 9% Core Tier 1 ratio, and sovereign risk as France is the largest holder of Italian public debt and private debt, according to BIS
  • EFSF and IMF are undercapitalized to materially aid any potential sovereign and banking bailout needs of France
  • High unemployment rate of 9.8% (versus 7% in Germany); 22.8% among the French youth
  • Smaller export profile (versus Germany), so there’s less benefit to grow via exports 

Matthew Hedrick

Senior Analyst


European Banking Monitor

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor"

 

If you'd like to receive the work of the Financials team or request a trial please email sales@hedgeye.com.

 

As Josh points out in his commentary below, the Euribor-OIS spread and the ECB liquidity deposit made new highs in the last week.  This demonstrates that risk in the system has not abated in the slightest. Bank swaps were wider week-over-week and the SMP drastically reduced its secondary bond purchases w/w. 

 

 

Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk.  The Euribor-OIS spread tightened by 3 bps to 96 bps versus last week’s print of 99 bps.

 

European Banking Monitor - 1. euribor

 

 

ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  The ECB pays lower rates than the market, so an increase in this metric demonstrates increased perceived counterparty risk and liquidity hoarding.

 

European Banking Monitor - 2. ECB

 

 

European Financials CDS Monitor – Bank swaps were wider in Europe last week for 25 of the 40 reference entities. The  median widening was 14.4%.

 

European Banking Monitor - 3. banks

 

 

Security Market Program – The ECB's secondary sovereign bond purchasing program bought 635 Million EUR in the week ended 12/9 (versus 3.7 Billion EUR in the previous week) to take the total program to 207.5 Billion EUR.

 

European Banking Monitor - 4. smp

 

 

Matthew Hedrick

Senior Analyst

 


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

Short Covering Opportunity: SP500 Levels, Refreshed

POSITION: Long Healthcare (XLV), Long Consumer Discretionary (XLY)

 

The range we’ve been giving you for the last few weeks continues to hold. If 1232 breaks, that will change – and then, it will probably change again. Embrace Uncertainty. It’s not going away.

 

Across all 3 risk management durations in my model, here are the 3 that matter most right now: 

  1. Long-term TAIL resistance intact up at 1270
  2. Immediate-term TRADE resistance developing at 1248
  3. Immediate-term TRADE support = 1232 

Since the US Dollar Index is immediate-term TRADE overbought (within its Bullish Formation) today, I think the highest probability scenario is that my 1232 holds and we see a re-test on the upside of 1248. The more obvious observation is that it’s much less likely now that the SP500 gets back above its lower-long-term-high from October (1281) before year end.

 

Net net, today’s call is a Short Covering Opportunity. On the long side, we like Consumption stocks (Healthcare and Consumer) as a way to play Strong Dollar – not the Financials, Basic Materials, or Energy Sectors.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Short Covering Opportunity: SP500 Levels, Refreshed - SPX


SOLID WEEK IN MACAU

December projection of HK$21.5-22.5 billion (+17-23% YoY growth)

 

 

 

Table revenue per day last week climbed to HK$719 million, up from HK$668 million in the first 4 days of December, and in-line with November.  Our full month projection is HK$21.5-22.5 billion, which would represent YoY growth of 17-23%.

 

There were big market share shifts from last week which is understandable since last week contained only 4 days in December.  Surprisingly, LVS lost 210bps from last week but still almost 200bps over its recent trend.  Clearly, the new junket relationships at Four Seasons/Venetian are paying top line dividends.  SJM, WYNN, and MPEL moved up toward trend after unsustainably low share in the first 4 days.  However, WYNN remains well below its post Galaxy Macau share.  Interestingly, all of the operators are fairly close to the post Galaxy averages thus far in December with the exception of LVS and WYNN – LVS up and WYNN down, both approximately 200bps.

 

SOLID WEEK IN MACAU - macau111


THE HBM: YUM, MCD

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Comments from CEO Keith McCullough

 

Europe failed to deliver on a consensus failure to understand what they could deliver. Back to reality.

  1. INDIA – all the Growth Slowing on the East side of the world continues - China (down another -1% to a new low last night, down -18.4% YTD) and India put up their worst Industrial Production print in 28 months last night (down -5.1% y/y) = Sensex dropped another -2.2% (crashing, down -23% YTD)
  2. EURO – get the USD right, you’ll get the big beta moves generally right and that’s what’s shaking out there this morning w/ the EUR/USD testing 1.32 again. All European stock markets making consecutive lower-highs and now testing immediate-term TRADE lines of support (the only lines left) of 5845, 3071, and 15102 on the DAX, CAC, and MIB, respectively.
  3. COPPER – the Doctor is ill this morning, trading down -2.7% moving back into a Bearish Formation as Gold fails at $1743 TREND resistance ($1683/oz last) and Brent Oil’s TAIL remains broken ($110.11/barrel) – all this started breaking down again on Thursday morning after the ECB press conf call where it was clear that there would be no ECB backstop (bond buying).

Interconnectedness should insulate the risk management of ranges. We like US Consumption stocks (Healthcare and Consumer Discretionary) as the USD strengthens and Deflating The Inflation becomes more and more obvious.

 

KM

 

SUBSECTOR PERFORMANCE

 

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QUICK SERVICE

 

YUM: Pizza Hut acquired almost 50 of its Southwest Ohio locations from a local franchisee.  Details of the transaction have not been disclosed. 

MCD:  McDonald’s was reiterated “Buy” at UBS and the PT was raised to $106 from $98.

 

THE HBM: YUM, MCD - stocks 1212

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


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