That UCF Moment

 Mint – Bill Blain’s Morning Porridge  -   March 12 2013

I was walking with the chief ranger when lightning struck way off. The chief said, 'I'll see you later.

This morning: more of the same in Europe, UK vs France, OECD Leading Indicators, New Issue Market and the UCFM!

Bit of a slow, slow, quick day yesterday with a somnambulant morning followed by a US uptick. Lots to worry about what next in Europe, but nothing we haven’t heard a trillion times already: Italy, Cyprus, etc etc etc.. yawn… With Germany posting recovery and Europe still sliding, you’ve got to wonder how the Bundesbank/ECB plays that one through this year – easing in the face of German growth will be a challenge!

But things must be picking up. It’s the first day of the Cheltenham Festival, (horse racing girls), and a staggering number of market participants are off attending.  Well… it either means everyone is making so much money they can afford to blow some, or everyone is so broke they’re off to gamble the last few pennies on a three-legged nag with a bad sense of direction (you will know which one that is when you see me place a fiver each way..)

Otherwise it’s intriguing to watch European peripheral yields – Italy and Spain edging together. We propped that trade a while ago – buy Spain, sell Italy – but now wondering how much further it has to go. That really depends on how much worse the Italians can make their ongoing election travesty. Don’t underestimate their capacity to make a bad situation worse. New Pope up for election just in time to become a peacemaker!

My macro-guru, Martin Malone, pointed me this morning to the latest OECD Composite Leading Indicators report – his conclusion is Japan, US and Germany (one-third of global GDP) are driving global growth. Other economies are less strong – the best that can said of Italy and France is the CLIs point to no further declines in growth (not sure) and a slowing momentum in the UK. (Take a look on: http://www.oecd.org/std/clits/CLI_Eng_March13.pdf )

Last few days I’ve been asked a number of times to explain the difference been UK and France and which one would I choose. Love both. But got to choose UK on basis both countries have strong industrial sectors and much to be massively proud of, but the French economy remains just too closely intertwined with government – as long as government remains effectively beholden to the workforce and industry, real structural change is going to be slow to impossible – as Mr Hollande is discovering as his electoral popularity sinks faster than a lump of lead.

On the other hand, while the UK retains the advantage of its own currency and the key to the printing press, I’m not convinced the UK will see the same Yen/Nikkei economic upside. Unlike Japan, where we see the lower Yen beginning to translate into strong corporate earnings potential from exports, the UK economy looks sticky. If we don’t see a massive rise in exports during this period of sterling weakness, time to worry.

New Issue Markets and UCFM       

Now regular readers of the morning porridge will know my concerns about the new issue market. We continue to see an absolute deluge of deals and $35bn plus new issue days! Frothy? Some sectors are doing extremely well – UK real money and funds are deep buyers of the new power and infrastructure deals (even disliked names going relatively well). Buyers have money to spend and are busy absorbing new supply.

High-yield deals are also in demand despite the spread compression we’ve seen. Many buyers are more than content to simply load up on new deals to hold. But, our new issue team tell me they are seeing a few signs the new HY supply is getting “toppy” in secondary market, but are very engaged with the new deals.

More worrying to my mind is the corporate hybrid sector with new deals still coming (around €15bn this year already). We’re not convinced the retail type accounts that are buying completely understand the risks of non-senior subordinated corporate debt. That said, corporate balance sheets are generally in superb shape, so perhaps I’m being overly cautious. In the senior corporate space, even short-dated auto deals for French firms – hardly anyone’s top pick – are performing strongly!

But in financials, no-one is particularly keen. Although we’re working with a number of buyers on sub/senior/covered strategies, there is very little bank new supply unless you count US names – which have the advantage of being perceived as “fixed” relative to European names. Instead there is a very choosy approach to bank capital, ongoing suspicion of CoCos (but selective buying) and an ongoing worry about “what next”. The SNS expropriation still weighs heavy on the market.

However, the key test for the primary market has arrived! Regular readers will be familiar with the UCFM – the Ukrainian Chicken Farm Moment.

This was a market inflection point we recognised years ago (sometime in the early 2000s). In a frothy new issue market the tulip-mania mood meant everything and anything is possible. Every deal was oversubscribed and was flying out the door. It was just as the Asian Bird Flu scares started. A Ukrainian Chicken Farm announced it was doing a roadshow. The rooms were packed. You could not get in. We launched the deal, and it was massively oversubscribed even though the company blithely said “we don’t insure against bird-flu, because if it happens it’s all over anyway..” Fair comment…

The order book was huge. Allocations were cut to fractions and investors were screaming at us for better treatment. My colleague, Jim, (then running the syndicate desk) handled it superbly and told angry buyers: “you will thank me later”. The deal came right at the top of the new issue froth. The market then tanked. Weeks later it was trading in low 80s.. hence the “UCFM”.

Guess what. A Ukrainian chicken farm has just announced it is coming to market. Now we make no comment on its creditworthiness, and I’m sure it will be a great deal. After all light ning never strikes twice! ? (Tell that to Roy Sullivan, a US park ranger hit seven times!!)

On that flash of inspiration… Out of time..

Bill Blain

0207 786 3877

[email protected]

[email protected]