Deadline Day Blues

6 September 2013


Sports analogies often enough, have a way of finding themselves into the world of finance. “Hitting below the belt,” “home run,” “behind the eight ball,” “breaking his/her duck” are a few that immediately come to mind. With the new football season back in full swing across Europe, I’m writing this on transfer deadline day aka the end of the ‘silly season.’ I thought it useful to ascribe some sort of parallel between some of the summer’s major signings and how their values match up with a few fixed income names in the region. However, there’s no need to “go the distance” with this analogy, as I’ll attempt to make the examples relatively concise.

1. Gareth Bale (From Tottenham Hotspur to Real Madrid)

1. Gareth Bale (From Tottenham Hotspur to Real Madrid)

For a mere £85.3million, Real Madrid has finally unveiled their new star. While he may have a few years on both (Cristiano) Ronaldo and Messi, many will agree that he’s yet to ascend to their heights. Will he spur his new team to European glory for an unprecedented 10th time? Or, will Madrid look to recoup their world record transfer fee in some part from a merchandising extravaganza? I’m leaning toward the latter personally, but let’s see if I will be proven wrong.

Value synopsis: Overvalued. Bale in this writer’s opinion is probably not worth half that amount. While very quick, he’s one-footed and best able to express himself in a free/central role which is Ronaldo’s favoured position as well.

Fixed Income ‘Twin’: TRITOB 20. These are overvalued for a number of reasons; infrequent issuance by GOTT, tiny issue size, and statutory fund needs of insurance companies. Even with these in mind, a meagre ~28bp pick-up over the 7-year UST (chart below) is not justifiable in my opinion. 

UST 7yr Trend

UST 7yr Trend

Alternatives: BERMUD 20, CAYMAN 19. The chart below shows just how TRITOB stacks up from a yield and maturity perspective.

TRITOB - Relative Value

TRITOB – Relative Value

 

 

2. David Villa (From Barcelona to Atletico Madrid)

2. David Villa (From Barcelona to Atletico Madrid)

With Villa seeking first team football to cement a spot for Spain’s World Cup squad, £4.4million to me is an absolute steal. While already 31, the ever-clinical “That’s why they call him deadly – Villa”, was a relatively late, but core element of Messi & Co.’s wrecking crew, which garnered more domestic and regional success than any other team in Europe over the past 10 years. Seen as expendable to his previous employers, I feel confident that he will ferociously bite the (perhaps ungrateful) hand that once fed him.

Value synopsis: Grossly Undervalued. A transfer to England would have seen his fee trebled at the very least.

Fixed Income ‘Twin’: Digicel (DLLTD) 8.25% 20s. Maybe one for the daring, but the consensus around the market is that Digicel should be rated somewhere in the “BB” context. The 17s are attractive, but can also be a potential liquidity headache given the 250mm issue size. The 8.25% 20s provide a yield of over 6.80%, which can provide a material lift to your portfolio’s weighted average return, even with a small position.

Digicel - Relative Value

Digicel – Relative Value

“The Digicel Group posted a US$1.2 billion in trading profit for its March 2013 year end, 11 per cent higher than the prior year, despite a flat subscriber base. 

The rise came amid the roll-out of new services, including its faster 4G data. The company, which operates in 30 markets throughout the Americas and the South Pacific, reported revenues of US$2.78 billion, or eight per cent more year-on-year.” 

–       Jamaica Gleaner

This is more than admirable for a company that has a very large footprint in the region after only 12 years of existence. I wouldn’t be surprised if they climb the ratings ladder very quickly and I’d look at 105 and 110 as entry and exit points for this bond.

3. Christian Eriksen (From Ajax to Tottenham Hotspur)

3. Christian Eriksen (From Ajax to Tottenham Hotspur)

Yes, Tottenham involved once again … they’ve splashed the cash from the Gareth Bale sale proceeds (ahead of time to boot!). The 21-year-old Denmark international has made the move to the Premier League after the clubs agreed a fee believed to be in the region of £11.5m – Skysports. Spurs’ 7th signing of the transfer season, I think has tremendous upside. While not delivering enough goals from an advanced midfield position, his vision and passing ability belie his age.

Value synopsis: Fairly Valued. I’m almost tempted to say this was a cheap buy in a very distorted market, but probably dead on for a player with a lot to prove still.

Fixed Income ‘Twin’: First Citizens (FCBTT) 2016. Why not? Short 3-year exposure that trades (if you can find paper) around 187bps higher than the 3-year Treasury. While a 2.65% – 2.80% yield may not scream out at you, we still like the name, and have recently seen street buyers of size. Their recent IPO essentially usurped the last GOTT bond issue which came in heavily undersubscribed. This was a case of people knowing value when it ‘slapped’ them in the face.

Analogies aside, value in the current market environment is not easy to spot. To make your job and those of portfolio managers, fund administrators or investment advisors increasingly difficult, we are all waiting on some sort of definitive timeline for the “tapering” of stimulus from the Fed. Are rates set to spike further, or has the expectation already been adequately priced in? Many of you would have read the views of one PIMCO strategist; which may lead one to think that the mass disposal of safe-haven investments was premature. Your speculation is as good as mine, but existing scenarios do allow for averaging-down in EM names e.g. Caribbean, Brazil & Colombia sovereigns and corporates. Not a bad way to go, rather than sitting on your hands!

Let Firstline “tackle” your nagging questions and show you the goalposts to help you score those crucial points. Please contact us at 1 – 868 – 628 – 1175 or email us at info@nullfirstlinesecurities.com to share your views or ask any questions.

Gerard Stephens

Account Executive

Sales and Trading

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