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.

why I think COH may be an interesting stock Continue reading

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.

investment implications Continue reading

Global luxury goods market: the ninth annual Bain study, October 2010

Note:  You can also get my analysis of the 10th Bain Luxury Goods Worldwide Market Study from October 2011.

I’m going to write about this topic in two posts.  Today’s will cover the present structure of the luxury goods market and the effect of the Great Recession on it.  Tomorrow’s will look at growth prospects for the industry, changes occurring to its structure and investment conclusions.

The industry data come from the 9th annual Bain and Company Luxury Goods Worldwide Market Study, directed by the partner who heads Bain’s fashion and luxury practice, Claudia D’Arpizio.  The results were presented at the Fondazione Altagamma conference in Milan earlier this month (thanks to Bain for sending me a copy of the presentation). You can find a summary on the Bain website.

structure of the market


The global luxury market peaked in 2007 at a sales value of €170 billion ($238 billion) in 2007.  Revenues fell during the recession (an unusual occurrence) by about 8%.  Bain predicts that the industry will bounce back to around the former peak this year and exceed it by a few percentage points in 2011.


Bain counts 232 brands in the luxury goods market.  The top 6% of the brands average €1.8 billion ($2.5 billion) each in sales and together control 10% of the market.  The bottom 38% average €300 million each and control only 15% of the market.  It seems to me this segment, which has suffered more than bigger brands from the recession, is ripe for consolidation.


In 2008, 78% of the industry’s sales were made through third parties, notably department stores.  The remaining 22% went through company-owned stores.  Bain thinks that this year 27% of sales will flow through the direct channel, with indirect shrinking to 73%.  The percentage of direct sales will likely continue to increase, for two reasons:  luxury brands continue to open new stores, and company-owned stores tend to exhibit much stronger sales growth than luxury counters in department stores do.

Outlet stores make up about 5% of sales.  On-line comprises somewhat over 2% of the industry.


Sales of luxury goods take place approximately as follows:

Europe     37%

Americas     30%

Asia Pacific (ex Japan)     17%

Japan     11%

Rest of the world     5%

One caveat about location:  Purchases by foreign tourists is a significant factor in this industry.  This is partly because of fluctuation in exchange rates and differences in import and other taxes.  But it is also partly the result of manufacturers’ decisions to price the same item as much as 40% higher in Japan and China as in Europe.

The top cities for luxury goods in the world?  They rank as follows:

New York City     €9 billion ($12.6 billion) in 2009

Paris     €6.0 billion ($8.4 billion)

London     €4.5 billion ($6.3 billion)

Bain estimates that Hong Kong will account for €4.4 billion ($6.2 billion) in sales for 2010, possibly edging it ahead of London in the rankings.  Actually, given that nearby Macau will likely chip in €700 million ($980 million) in sales of luxury goods this year, the two SARs together doubtless already surpass London and likely move ahead of Paris as well within the next year.

Greater China (that is, the mainland plus Taiwan, Hong Kong and Macau) will generate  €17.5 billion ($24.5 billion) in luxury goods sales in 2010 according to Bain, making it larger than any single country market, save the US.


Currently, 62% of purchases are for women, 38% for men.  The numbers are influenced by two factors:  there is a long-term trend of increasing sales to men, counteracted by the much higher cyclicality of the watches and formal wear that men typically buy.

product categories

Apparel     27%

Accessories     24%

Perfume and cosmetics     24%

Hard luxury (jewelry and watches)     19%

Art de la table     4%

luxury in the Great Recession

Bain says the downturn just ended marks the first ever decline in luxury goods sales.

The industry’s customers can be divided into the truly wealthy, for whom luxury goods are everyday items, and a much larger group of what the industry calls “aspirational” buyers, for whom the products also act as badges of wealth, taste and status.  As one might expect, the second group of buyers is much more cyclical than the first.

In addition, in any downturn the indirect distribution channel cuts its new orders back to below the (reduced) level of sales as it tries to shrink its inventories.  This adds to the sales decline for manufacturers.

As one would expect, hard luxury was especially hard hit.  This is due, mostly because of the high price points in this segment, but also to the less-affluent and mostly male composition of the buyers.

Why is gender an issue?  Men’s items tend to be higher-priced and to be purchased less frequently.  As a result, it’s easier to postpone their purchase.  Also, it appears (to me, anyway) that women tend to control the purse strings in most households around the world.  They tend to continue to allocate funds for their own purchases, although they may move down market or buy less frequently, but to zero out their husbands’ allocations.

Surprisingly, and contrary to the Wall Street cliché, cosmetics suffered in this downturn as well. In fact, Bain calls them the “first thing to cut!”  In particular, sales of anti-aging products fell for the first time, as customers turned to non-luxury offerings.

The turn came in the December quarter of 2009, when year on year sales stopped declining.

That’s it for today.  Tomorrow:  the recovery in 2010, growth prospects and investment implications.

Thinking about 2011

it’s time

As the leaves begin to turn bright colors and drop from the trees (at least here in the northeastern US), a professional investor’s thoughts start to turn to preparing for the coming year.

the most important issue

The essential question, though equity professionals would never phrase it this way to clients, is whether stocks are likely to go up or down in the twelve months ahead.

My answer has two parts:

First, for 2011 the answer is relatively easy to arrive at, and

Second, I think stocks will go up, at least modestly.

next in line is…

The next task, in (what is to me the) logical sequence, is to figure out what elements of a successful investment strategy for 2010 will carry over into 2011 and which ones will surprise the consensus by reversing themselves.

This question is a lot harder.  Giving concrete content to a general perception of trends is always difficult.  Today it’s especially so, since the same portfolio-structural keys to a successful sector and individual stock strategy have been in place for almost two years.  They’ve been:  bet on near-death experiences; bet on cyclical sectors; bet on emerging markets–especially Asia, and against the developed world.

Experience suggests that at least some of this is bound have become pretty long in the tooth by now, despite the fact that conviction in them is probably much higher today than it was in March 2009.  After all, the stock market does act to make the greatest fools out of the largest number of people.

…looking for non-consensus ideas

Knowing this, I’ve been casting about for a while for ideas that run counter to the consensus.

…finding one Continue reading