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CME Inflates Energy Portfolio

Zacks Equity Research

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 ofMoody’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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