bondholders’ responsibility for banks: contingent convertibles and Anglo Irish Bank

Europe seems to want to change the culture of their banks and bondholders from one of “gentlemen’s understandings” that governments and equity holders will suffer all the pain in the case of bank failure to one where legal and covenant obligations will be enforced–meaning bondholders, too, will participate financially in bank restructuring.

One vehicle being pushed in the contingent convertible, an instrument that I’ve regarded as a top-of-the-market gimmick that looks good on paper but has the potential to end in tragedy.  European governments appear to be pushing it as a concept, however, because COCOs spell out explicitly what the bondholders’ obligations are in case the issuer has difficulties.  There’s no room for negotiation, no ability for a politically connected holder to put pressure on the bank regulator to take a soft stance on a certain tranche of bonds.

Europe appears to me to be taking this new attitude a giant step farther in the case of debentures of the failed Anglo Irish Bank, a property-oriented institution that proved to be a monument to opacity in lending.

The Irish government is offering to issue new, Dublin-guaranteed, bonds to holders of about €3 billion of various tranches of AIB debentures.  The rate of exchange would be: 1€ of the new issue for every 5€ of the old debt.  Holders of the affected AIB bonds, many of whom will, I think, prove to be hedge funds that bought in the secondary market after AIB failed, have squawked.  Their expectation apparently was to receive new bonds at something more favorable than a 4/1 rate.

Voting on the Dublin/AIB proposal will take place in December.

None of this is too surprising.  The rest of the government’s plan is, however.

According to the Financial Times, Dublin also wants accepting bondholders to agree to change the bonds’ covenants to provide that any holders who do not accept the offer will be forcibly redeemed at .001% of par–basically nothing.

Again, according to the FT, a result in favor of the exchange at the initial meeting requires that holders of two-thirds of the bonds vote and the 75% or more of the votes say yes.  If less than the required two-thirds attend the initial meeting, a second can be called at a lower quorum level.

Bloomberg says that investment bank Houlihan Lokey, representing a large enough proportion of the affected bondholders to defeat the proposal, intends to vote no.  The Irish legislature has also chimed in, suggesting it will pass a law allowing the exchange to occur without regard to the vote results, should bondholders reject the offer.  Houlihan Lokey apparently wants to negotiate with AIB, but the bank has refused.

This should be interesting.  Stay tuned.

Singapore the biggest factor in LVS’ 3Q10 earnings blowout

the report

LVS reported 3Q10 earnings after the close yesterday.  Adjusted EBITDA was $645.2 million vs. $272.3 million in the year-ago quarter.  Revenue was $1.91 billion vs. $1.14 billion.  Diluted eps was $.34 vs. $.03 for the September quarter 2009 and a consensus estimate of $.27.

The stock rose about 11% in aftermarket trading.  WYNN went up in sympathy by 3.7% and MGM by 2%.  There was a significant positive reaction in Hong Kong as well, with 1928 up by about 9%, although 1128 barely budged.

the details

The EBITDA for the quarter breaks down by location as follows (all figures are in US$):

Macau     $307 million vs. $237.7 million in the September period of 2009

Singapore     $241.6 million vs not open

US     $74.4 million vs. $42.8 million.

the conference call

To my mind, the really stunning information came in the conference call.  Chairman Sheldon Adelson began by saying he had been wrong at the company’s annual meeting to say EBITDA for LVS could be $3 billion in 2011.  According to Mr. Sheldon, business in October is running “substantially in excess” of that figure.

In Singapore, where all the elements of the resort complex are not yet in place, October revenues have been running at $8.4 million per day, at a 50% EBITDA margin.  This works out to EBITDA of $130 million for this month alone.  True, October is a holiday month.  But LVS also said that business momentum has been steadily building, with each month in the September quarter better than the previous one.

In Macau, October will also turn out to be a record month.

Las Vegas is slowly improving.  Demand from groups is very strong but massive overcapacity in the city will keep hotel room rates from rising.  Bethlehem, PA will benefit from the introduction of table games and from the hotel LVS is building there.


I don’t know LVS well enough to have an investment opinion, although it does appear the company has decisively turned the corner.  The biggest investment issue is that at the June 10-Q, LVS had about $9.5 billion in liabilities on the balance sheet, even after netting out $3.5 billion in cash on hand.  LVS thinks that when it gets permission to sell apartments at its Four Seasons complex in Macau, they could go for up to $1.4 billion.  Mr. Adelson also believes that LVS will be able to sell its retail space in Singapore for enough to repay all its construction-related debt there.  These sales have the potential to transform LVS’s capital structure.  On the other hand, LVS now appears to be lobbying aggressively to expand into Japan and Korea.

Singapore has an open-ended feel to it.  It’s possible LVS is only scratching the surface of potential demand.

In Macau, Mr. Adelson thinks all the competitors, except for LVS and WYNN, are starting to revert to the traditional way of doing gambling business.  That is to say, they are beginning to in effect rent their casino space to junket operators for a small fee.  Thereby, they avoid the problems of extension and collection of credit.  On the other hand, they lose contact with the high roller customers.  Presumably they become less desirable venues and end up being considerably less profitable than WYNN and LVS.

LVS has “mixed feelings” about Las Vegas.  Overcapacity won’t go away soon.  Even if smaller operators go into bankruptcy, the hotels and casinos will be acquired by entrepreneurs who will reopen them.  Bethlehem has the problem of competition from nearby states that are sponsoring casino gambling as a way to address budget woes.

We’ll get more information on Las Vegas and Macau when WYNN reports next Tuesday.



Coach is starting off fiscal 2011 with a bang

COH reported earnings results for the first fiscal quarter of 2011 (the company’s fiscal year ends in June) before the market opened in New York yesterday morning.  The news was strong enough to push the stock up by about 12% that day.

the results

Sales for the quarter were $912 million, up 20% year on year.  Earnings per share were $.63, up 43% vs. the comparable period in fiscal 2010.  This was far ahead of the analysts’ consensus for the quarter, which was $.55.  Wall Street expects the company to earn about $2.75 for the full fiscal year, although I would imagine that number is even now being revised up.

Two “unusual” factors helped performance a bit.  The weak US currency turned sales in Japan from a 3% gain in ¥ ( impressive itself, in a market that’s shrinking) to a 14% increase in $.  Also, US department stores are restocking in anticipation of a better holiday season, so their orders were very strong.  Still, the COH figures were very good.

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The future of luxury goods: the Bain study (II)

This is the second of two posts on the latest Bain report on luxury goods.  Here’s a link to the first.

the recent past

If you were to characterize the dominant consumer of luxury goods over the past thirty years, the description would be:



–European or Japanese.

In all likelihood, she would have done the bulk of her spending in a department store.

That’s starting to change.

For a long time, Japan was considered the holy grail of luxury retailing.  A much larger segment of the population there than elsewhere was interested in luxury goods.  Customers wanted the highest quality (read: most expensive).  They purchased often and were relatively insensitive to price.  In fact, luxury retailers routinely set their Japanese retail prices 40% above the European level.

For some years, however, the Japanese luxury star has been waning.  Why?  The market may finally be saturated.  Twenty years of weak economic performance may have robbed consumers of the means to afford luxury goods.  Younger Japanese are clearly not interested in emulating their elders in this–or in much of anything else, for that matter.  In any event, Japanese luxury retailers, whose business was stagnating beforehand, were especially hard hit during the recession.  Business hasn’t been recovering, nor is it expected to.

Europe, although it declined less than the US in 2009, has been a laggard in recovery during 2010.  Damage from toxic financial instruments, questions about the stability of the EU and collective decision among countries to take the path of fiscal austerity as the road to recovery.

In the US, in contrast, the rebound has been surprisingly strong.

China‘s luxury goods consumption grew by 20% during the recession and has accelerated to what Bain estimates to be a 30% advance in 2010.

the new face of luxury…





He is more likely to shop in a brand-owned shop at home, or in Macau or Hong Kong.  That way he is assured the merchandise isn’t counterfeit.  He is, I think, more apt to travel to Europe than the US because the States makes it hard for him to get a visa.  But he’ll do luxury shopping while on vacation, since the prices are much lower.

elements of growth

outlet stores

Long a staple in the US, outlet stores have been expanding rapidly in Europe in recent years.  They’re just about to hit Asian shores as well.  Outlets sell three types of merchandise:


–seconds and

–products made specifically to be sold in outlets, typically a lower standard of quality than the branded goods sold in front-line company shops or in department stores.

Bain estimates that outlet sales will be up by €2.2 billion ($3.1 billion) vs. 2008 results, at €8.2 billion ($11.5 billion), or just under 5% of total luxury sales.


Bain estimates that luxury sales on the internet are growing at about 20% a year.  The consultancy thinks online revenues will total €4.2 billion ($5.9 billion) in 2010, and will comprise about 2.5% of all luxury goods sales.

That’s €1.2 billion ($1.7 billion) ahead of the 2008 level.  The largest part of the increase from two years ago (€700 million) comes from off-price business done on “private sale” websites.  These sites–like Gilt Groupe, RueLaLa or Buy VIP–now account for 30% of online revenues, up from nothing three years ago.

company-owned stores

Distribution of global luxury goods is gradually shifting from indirect to company-owned stores.  Branded retail stores will likely account for 27% of total sales this year, up from 23% just two years ago–a result of increasing new store openings and same store sales growth that’s much faster than the department store channel’s.  At the very least, the luxury goods manufacturers are picking up the wholesale to retail markup–less their costs, of course.  And it’s possible that the larger number of sales locations is expanding the overall market, as well.


Bain puts China’s luxury goods purchases at €9.2 billion ($12.9 billion) for this year.  That’s €3.3 billion ($4.6 billion) more than in 2008.  Add €8.3 billion ($11.6 billion) from the combination of Hong Kong, Taiwan and Macau, and “Greater China” accounts for €17.5 billion in luxury sales.  That would be good for third place among individual countries, just a tad below Japan, whose luxury goods sales are projected to be unchanged at €18 billion ($25.2 billion) this year.

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