Gazprom, Puerto Rico and Ackman
Stock-Markets / Financial Markets 2014 May 06, 2014 - 10:05 AM GMTBy: Bloomberg
Jim Grant, Editor/Founder of Grant's Interest Rate Observer, spoke with Bloomberg Television anchor Stephanie Ruhle from the Sohn Investment Conference in New York today.
Grant talked about why he's long Gazprom when many are shying away, saying, "the beginning, middle and end of the bull case on Gazprom is that good things happen to cheap stocks. Gazprom is by acclimation the world's worst company managed by the worst kleptocrats ever assembled on one continent. So - and - and Jay Carney, the president's own press secretary, advised us all as a nation, regardless of individual suitability, to go short this stuff, Russia. So how can one not at least investigate the contrary side of that proclamation."
Grant on Ackman's Valeant partnership bid for Allergan: "Now something great conceivably could happen with respect to the proposed Valeant-Allergan merger, which I say may not happen. Maybe they're going to cure cancer.... Maybe they're going to cure ugliness. All the people they haven't fired yet in the lab - in the white lab coats, they're going to cure ugliness in the next five minutes. Okay, fine. That's great for the stockholders....We at Grant's have issues with Valeant's acquisition accounting and with its lack of GAAP-sanctioned earnings power and the like. But with respect to the credit markets, with respect to Valeant debt holders, what's in it for you?"
STEPHANIE RUHLES: Jim, you just made news. You made waves. Long Gazprom at a time when natural resources and Russia, many people are shying away from. Why are you in?
JIM GRANT: Well Stephanie, the beginning, middle and end of the bull case on Gazprom is that good things happen to cheap stocks. Gazprom is by acclimation the world's worst company managed by the worst klepe (ph) of kleptocrats ever assembled on one continent. So - and - and Jay Carney, the president's own press secretary, advised us all as a nation, regardless of individual suitability, to go short this stuff, Russia. So how can one not at least investigate the contrary side of that proclamation by -
(CROSSTALK)
GRANT: Yeah. So this is - first of all, it's a huge company. Revenues of $150 billion. The market cap is immense. They earn a lot of money even after, as my friend (inaudible) even after stealing they earn a lot of money. They pay a 5 percent dividend. As recently as 2006, the stock changed hands at 10 times the estimated earnings. So now it's at 2.5. And why is that? Well, because people know that there will be even more extreme and costly sanctions imposed on Russia. They know that something terrible is going to happen with the Ukraine election in a couple of weeks. And well it might. There is certitude about outcomes that is notable given that so few people saw the current set of outcomes approaching some months ago. So in addition to the epigram that good things happen to cheap stocks, I will offer this epigram. This too will pass.
RUHLE: Really? So what's the time horizon though? For those who are so panicked about Ukraine, Russia, rule of law -
GRANT: Okay, here's - here's - here is a - here's - here's a test of suitability for this investment. You can't care about the time.
RUHLE: You can't care about the time.
GRANT: You must - even if you don't actually - if you're - if not actually indifferent as to the amount of time that goes by, you must profess to because we can't know whether it's going to work out. But we do know, I think we know, that - that solvent companies - by the way, interest - you okay, Stephanie? Interest payments are covered by operating cash flow about 40 times over. This is - this is a terrifically solid balance sheet. So there's not a click ticking on the business by dint - by dint of debt. And we know I think that solvent businesses don't trade at 2.5 times yielding 5 percent forever. So in the fullness of time is what - is my - is my horizon.
RUHLE: All right. In your last note you wrote about Puerto Rico. What's your current view?
GRANT: We are now a little on the bearish side with respect to Puerto Rico. We had been - well we started out a year ago -
RUHLE: Ay dios mio, Jim Grant. Bearish on Puerto Rico.
GRANT: Well we started out a year ago saying how is it that this thing trades at about par when so clearly the credit fundamentals are cracking. Then the - the whole - the bond market got - somehow somebody's alarm clock went off and people woke up and said the credit is terrible, which indeed it was, and the bonds traded to 80 and we got bullish on a speculative basis. We have reexamined the - the new prospectus and we have taken a measure of the rumors and the substance of the talk of restructuring. And what we think is that there will be a restructuring of one or more of the Puerto Rico issues and that the municipal bond market is let us say not the most wide awake branch of the credit markets.
RUHLE: Oh really?
GRANT: Yes. And that when news of the restructuring finally hits the municipal bond buying public, this will be about six weeks after it actually happens, when that moment of fractionalization occurs, people will not be happy.
RUHLE: The snoozing muni investors. Al right. I need your take. Ackman, Valeant, Allergan. Bill Ackman is in there speaking right now. I'm not sure on what yet, but last week he was all over the news with this Valeant partnership bid for Allergan.
GRANT: Let me talk about - about the - the Valeant jet (ph). There is a 6.375 note which I think matures in the year 2020 and the bonds are priced to 5-point-something percent. This is a weak - a middling junk credit I think. The bonds are priced to 5 something to maturity and at much less, to a 4 something to the first call a few years before maturity. Now something great conceivably could happen with respect to the Valeant - proposed Valeant-Allergan merger, which I say may not happen. Maybe they're going to cure cancer. All the guys they haven't fired yet from the research department --
RUHLE: I don't think they're going to cure cancer. They're in the market of (inaudible) botox and breast implants. I don't (inaudible).
GRANT: Maybe they're going to cure ugliness. All the people they haven't fired yet in the lab - in the white lab coats, they're going to cure ugliness in the next five minutes. Okay, fine. That's great for the stockholders. It might work. For the --
RUHLE: Great for ugly Americans.
GRANT: What's in it for the note holders at a 4-point-something yield to worse for the junk bond holders? What possibly is the upside? These are - the bond holders are the tools or the - the - they are being used by the corporate financial engineers. Now we have also issues - we at Grant's have issues with Valeant's acquisition accounting and with its lack of - of - of GAAP-sanctioned earnings power and the like. But with respect to the credit markets, with respect to Valeant debt holders, what's in it for you?
GRANT: That is a question for all junk bond holders these days, especially the ones involved in corporate transactions (ph).
RUHLE: They don't seem to be paying attention. They're short-term investors.
GRANT: I know. They should be tuning in to you.
RUHLE: Or listening to you. Jim, thank you so much.
Courtesy of Bloomberg Television
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