Strengthening its position in the energy space, the operator of
regulated future exchanges -
CME Group Inc.
(
CME
) announced a comprehensive set of new natural gas and power
markets. All the products from this suite will be listed on the New
York Mercantile Exchange (NYMEX).
Accordingly, CME Group will now offer 164 natural gas contracts
and 48 power contracts for the four most liquid North American ISOs
within its new natural gas and power portfolio. Moreover, the
contracts will be accessible at 52 trading hubs and will be listed
as futures on CME Globex, NYMEX and CME ClearPort.
Additionally, these energy futures contracts will also be
available at CME Direct - a new technology that aids parallel
trading of exchange-listed and over-the-counter (OTC) markets.
Launched in May 2012, CME Direct already offers a basket of
standard energy products including Henry Hub Natural Gas.
The launch of new energy futures and expansion of the portfolio
is another attempt by CME Group to evolve through its hedging
strategies, product modification and innovation, thereby supporting
volumes and the top-line growth in the long run. Additionally, such
products enhance transparency and risk-management features to the
trading, which should help in gaining the confidence and attracting
the untapped customer-base.
The business development also appears crucial given that
arch-rival
IntercontinentalExchange Inc.
(
ICE
) offers more than 730 cleared OTC energy contracts, including more
than 640 new cleared OTC contracts since the launch of ICE Clear
Europe in November 2008. Hence, over the past several quarters, the
futures exchanges have launched multiple new coal, natural gas, gas
oil and crude oil futures contracts, in order to extensively
penetrate the rapidly expanding energy sphere. We believe that the
latest offering will further enhance CME Group's market retention
capacity, also reflecting sound utilization of its capital.
CME Raises $750 million Via Notes
Last week, CME Group announced the sale of unsecured senior
notes worth $750 million. The proceeds of these notes are expected
to be utilized to enhance its business operations and redeem its
5.4% notes that are slated to mature in August 2013.
Accordingly, the $750 million ten-year fixed-rate notes are
issued at a price of $99.691, bearing a coupon rate of 3.00% and
yield rate of 3.036%. These notes are slated to mature on September
15, 2022. These callable notes are projected to have a spread of
145 basis points (bps) over the US Treasuries. Interest on the
notes will be paid semi-annually, in equal instalments.
Meanwhile, CME Group appointed
Barclays Capital Plc
(
BCS
),
UBS AG
(UBS) and Merrill Lynch, Pierce, Fenner & Smith Inc. of
Bank of America Corp.
(
BAC
) as the underwriters. Alongside,
Citigroup Inc.
(
C
),
Mitsubishi UFJ Financial Group Inc.
(
MTU
) ,
Wells Fargo & Co.
(
WFC
), BMO Capital Markets Corp. and Lloyds Securities Inc. are the
joint book-running managers for the sale.
The above-mentioned set of fixed-rate notes carry a rating of
"Aa3" and "AA-" from Moody's Investor Service of
Moody's Corp.
(MCO) and Standards & Poor's (S&P), respectively.
The increased activity on the business development front
elucidates the requirement for increased capital, whereas the
company's liquidity is well-cushioned with higher cash and cash
flow position in the first half of 2012. The latest long-term notes
mitigate any cautious outlook in the near term, although higher
interest expenses will continue to weigh on the financials.
Conversely, CME Group is considerably exposed to interest rate
volatility and rising competition, which again demand for strong
capital requirements to better manage any fluctuations. Yet, we
believe that a gradual economic recovery and stable debt ratings
are expected to drive volumes further. Moreover, the company's
efforts to promote, expand and cross-sell its core exchange-traded
business through meaningful acquisitions, a strong portfolio along
with its global presence will generate a decent upside in the long
run.
CME Group carries a Zacks Rank #3 that implies a short-term Hold
rating, while the long-term recommendation stands at Neutral.
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CME GROUP INC (CME): Free Stock Analysis Report
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