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MONDAY MORNING RISK MONITOR: DOMESTIC POSITIVES HELPING OFFSET EU WOES

Takeaway: Tightening muni swaps and widening yield spreads are two notable positives helping to offset modestly growing weakness in Europe.

Key Takeaways:

 

* U.S. Financial CDS -  Bank of America, Citi, Morgan Stanley and Goldman all widened by 8-13 bps, reflecting the marginal deterioration in EU conditions. On the other side, we again saw mortgage insurers tighten, reflecting the ongoing positive perception around housing's recovery.

 

2-10 Spread – Last week the 2-10 spread widened to 174 bps, 2 bps wider than a week ago.

 

* Markit MCDX  – Last week spreads tightened 7 bps, ending the week at 100.49 bps versus 107.83 bps the prior week. 

 

Euribor-OIS spread – The Euribor-OIS spread widened by 2 bps to 12 bps. 

 

High Yield (YTM) Monitor – High Yield rates rose 15 bps last week, ending the week at 6.11% versus 5.96% the prior week.

 

MONDAY MORNING RISK MONITOR: DOMESTIC POSITIVES HELPING OFFSET EU WOES - summary

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 3 of 12 improved / 3 out of 12 worsened / 7 of 12 unchanged

 • Intermediate-term(WoW): Positive / 6 of 12 improved / 4 out of 12 worsened / 3 of 12 unchanged

 • Long-term(WoW): Positive / 8 of 12 improved / 0 out of 12 worsened / 5 of 12 unchanged

 

1. American Financial CDS -  Swaps widened for 20 out of 27 domestic financial institutions. Bank of America, Citi, Morgan Stanley and Goldman all widened by 8-13 bps. This was the largest week-over-week increase we've seen in some time among the large cap U.S. financials, reflecting the marginal deterioration in EU conditions. On the other side, we again saw mortgage insurers tighten, reflecting the ongoing positive perception around housing's recovery.

 

Tightened the most WoW: MBI, HIG, RDN

Widened the most WoW: MS, BAC, C

Tightened the most WoW: GNW, AGO, MBI

Widened the most MoM: COF, BAC, MTG

 

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2. European Financial CDS - Swaps were mostly wider among European financials last week. No individual companies stuck out, but broadly speaking the Spanish, Italian, and, to a lesser extent, French banks were all wider.

 

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3. Asian Financial CDS - There was relatively little movement among Asian financials last week, with the exception of Daiwa, which tightened 21 bps.

 

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4. Sovereign CDS – Sovereign swaps were mixed last week. We saw modest further widening from Italy and Spain, while Ireland tightened. Italy and Spain have widened 46 bps and 42 bps, respectively, over the past month. The U.S., Japan, Germany and France were all essentially unchanged. 

 

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5. High Yield (YTM) Monitor – High Yield rates rose 15 bps last week, ending the week at 6.11% versus 5.96% the prior week.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -3.8 points last week, ending at 1765.43.

 

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7. TED Spread Monitor – The TED spread fell 0.3 bps last week, ending the week at 22.4 bps this week versus last week’s print of 22.75 bps.

 

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8. Journal of Commerce Commodity Price Index – The JOC index fell -0.1 points, ending the week at 11.45 versus 11.5 the prior week.

 

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9. Euribor-OIS spread – The Euribor-OIS spread widened by 2 bps to 12 bps. 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. 

 

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10. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

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11. Markit MCDX Index Monitor – Last week spreads tightened 7 bps, ending the week at 100.49 bps versus 107.83 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1. 

 

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12. Chinese Steel – Steel prices in China rose 0.9% last week, or 35 yuan/ton, to 3790 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

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13. 2-10 Spread – Last week the 2-10 spread widened to 174 bps, 2 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

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14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 1.5% downside to TRADE support.

 

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Joshua Steiner, CFA

 



CZR: THE REDUX

No doubt the news from NJ is positive but the value will likely accrue to the bondholders.  Interactive Spin-off?  The answer is the same as last time.

 

 

It feels like a broken record, a movie sequel, a television rerun, Las Vegas companies claiming the Strip is in recovery…well you get the idea.  Investors are hoping for a spin-off of CZR’s Interactive assets that would unlock equity value for shareholders.  As we began discussing almost a year ago, any unlocked value would have to accrue to the bondholders, not the equity holders.    Caesar’s stock is up 64% since February 6th on the high likelihood of NJ passing I-gaming legislation and speculation by investors that they will be able to spin off Caesar’s Interactive division to the benefit of stockholders.  The New Jersey news is, indeed a positive, not worth a 64% move, but positive.  However, the idea of an Interactive spin-off boosting equity shares is an unlikely one.  A misleading article titled “Caesars Rises on Plan to Sell Stake in Online, New Casinos” printed on February 4thand redistributed by AGA Smartbrief the following afternoon added to the hype.  

 

As we wrote about on February 28, 2012, “SPIN-OFF OF CAESARS INTERACTIVE? NOT SO FAST…” and again on March 16, 2012, “CZR INTERACTIVE SPIN MAY BE JUST “SPIN”, we do not believe that CZR can spin/split off the Interactive assets to benefit equity holders.  Issues include tax consequences and upstream guarantees to Caesar’s Entertainment Corporation (CEC) from the Interactive subsidiary.  That’s not to say that CZR’s cannot monetize their asset, just that the benefit will not go to shareholders. 

 

In fact, that’s exactly what CZR is doing in their most recently proposed $1.5BN note issuance.  In order to raise new debt, CZR’s is contributing some unencumbered and “under” encumbered assets as collateral.  HIE Holding’s stock (a CEC subsidiary) in Caesar’s Interactive, the Baltimore option, Planet Hollywood (which is only 4.5x leveraged), and the bonds they bought back at a huge discount and currently clip a healthy coupon are being contributed as collateral to back the $1.5BN note offering.  This is probably not exactly what stockholders had in mind when reading the title: Caesars Rises on Plan to Sell Stake in Online, New Casinos”.  In fact, this diminishes the probability of any spin-off as Caesar’s Interactive will no longer be an unencumbered asset.  What shareholders viewed as a big option is getting “liened” up.

 

On a separate note, we think that the market is over-valuing the size and profitability of a legal NJ online gaming market.  Nevada legalized online gaming back in June 2011 and we have yet to see any impact.  Same goes with Delaware.  New Jersey has a larger population but it would still need to pool with other States to accumulate enough liquidity.  Legal hurdles will prevent that from happening any time soon.  More states will have to legalize gaming before any pooling becomes meaningful.

 

This huge rally looks like it needs to be faded.


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THE M3: CHANGI EXPANSION

The Macau Metro Monitor, February 11, 2013

 

 

SINGAPORE AIRPORT TO GET BILLION-DOLLAR TERMINAL BOOST Reuters

Singapore's Changi Airport said it will boost passenger handling capacity by around 25% with a fourth terminal that will cost an estimated S$1.28 billion ($1.03 billion).  Completion date is expected in 2017.



MACAU: JANUARY PROPERTY DETAIL

As you already know, Macau GGR grew 7% YoY to HK$26.1 billion or US$3.364 billion.  We’ve now got the property detail and the Mass/VIP mix.  Mass once again drove most of the YoY gain and although slower than the last 4 months, still grew 29%.  December’s 16% VIP revenue growth may have been an anomaly as January VIP was almost exactly flat YoY.  VIP hold was slightly lower than last year but still slightly higher than normal.  VIP volume eked out a 2% gain.  Surprisingly, slot revenue grew only 1%, the slowest pace in 3 ½ years.  Remember that the Chinese New Year celebration occurred in January of last year but in February of this year.

 

 

Here are some individual company commentary:

 

Sands China (LVS)

  • For the first time in 6 months, LVS didn’t lead the market in growth as MPEL was the top dog.  LVS did manage YoY GGR growth of 18%, good for 2nd place.
  • Mass revenue grew 55%, which was the highest in the market
  • VIP hold was modestly below normal and last year was modestly above normal
  • Market share dipped to its lowest level since September 2012 due in part to lower hold

Wynn

  • Wynn GGR fell for the 4th consecutive month, down 4% YoY
  • VIP hold Wynn was slightly above normal but well below last year
  • Wynn’s Mass business did grow slightly YoY but at a rate (+5%) that was the slowest in the market
  • VIP volume fell a whopping 15%
  • Market share grew sequentially but was in-line with recent trend

MPEL

  • Another strong month for MPEL, leading the market with 20% YoY GGR growth
  • However, Mass grew “only” 20%, trailing the market
  • VIP hold was a little above normal but in-line with the prior year
  • VIP volume was very strong with market leading 24% YoY growth
  • Market share was good driven by VIP – Mass share was disappointing 

Galaxy

  • Galaxy grew in-line with the market but better in Mass and worse in VIP
  • Hold was modestly above normal and above last year
  • Market share of 18.6% was solid and sequentially better than the last few months

MGM

  • Tough month for MGM due somewhat to low hold as Mass revenue growth was in-line with the market
  • VIP hold % was well below normal (last year was also well above normal)
  • VIP volume was up a solid 9% although some of that may have been induced by players winning at a better rate
  • Market share dipped 170bps sequentially (high hold to low hold) and Mass share was the lowest in almost a year

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