* Citi’s fourth annual global iron ore book
— We are downgrading our long-run iron ore price forecast to $55/t. This report presents our long-run outlook for supply, demand, and production costs, as well as updated regional views from our global team
* Declining demand
— Perhaps the greatest structural challenge facing the iron ore market is the rolling over of Chinese iron ore demand, driven by declining domestic steel demand and rising scrap availability. As a result, despite growth from other emerging markets, we forecast a decline in global iron ore demand over the 2020s.
* Lower Costs
— After the boom years in which mining industry costs rose sharply, costs are now declining even more rapidly. Partly this is due to the capex and price cycles, and partly due to external factors such as FX, oil, and freight. We examine the sensitivity of longer term operating costs and incentive prices under various cost scenarios.
* Cheap expansions
— For much of the past decade, the market’s focus was on rising costs and decreasing attractiveness of the new iron ore projects. However, the world’s two lowest cost producers – Rio Tinto and BHP – possess a pipeline of extremely low cost projects that should see combined production exceed 900 Mt by 2025, accounting for roughly 70% of global import demand.
* Benchmarking to long-run real prices
— The market has become accustomed to the elevated nominal prices of the past decade. However, inflation adjusted prices have averaged around $55 since 1900 in 2014$. Our forecast for long-run prices thus corresponds to a return to historical industry norms.
* Short-run bearish
— For our short-term outlook, please see our report from May 18, 2015: Iron Ore - Re-engage shorts as froth cools and fundamentals weaken. Our medium term price forecasts remain unchanged at around $40/t for 2016-2018.
Operators and contractors – better together
Our inaugural European Select Conference held in London last week provided one key message for us: The Oil & Gas industry can cope with a period of lower prices, but it does require operators and contractors to work together to improve efficiency and bring down costs. The operators of the assets are starting to implement a different approach to working with the contractors on a “fit for purpose” approach that should simplify and standardize projects. This will take time – a significant amount of capex is already committed and changing working practices across all levels of the companies is not a one month process. Nonetheless, it is clear that the IOCs are committed to change and the industry is likely to emerge from this downturn more efficient than prior to it. Hence, we retain our Positive stances on the European Integrated Oil and European Oil Services. For European E&P, we maintain our Neutral stance.
European Oil Services – investor sentiment ahead of industrial recovery:
With a broad spectrum of activity represented at our conference, not surprisingly there was a stark difference in the outlook of each company. However, they all had one thing in common – all were undergoing drastic corporate actions in the face of tough market conditions. That said, with the recent rally in oil prices, investor sentiment appears to have improved. Even so, relative valuations still support the sector, in our opinion, and thus, we remain Positive
but aware that we are not yet seeing signs of a recovery. The key, we feel, to generating the turnaround, was the widespread talk of co-operation within the oil industry as it works through its troubles. If this holds, then we see a path that could lower cash costs across the oil industry and ultimately re-ignite spending.
European Integrated Oil – standardization over bespoke:
2015 was always set to be a challenging period for the Oil & Gas industry. In the majority of likely scenarios, the
European Integrated Oils face a material squeeze on earnings and cash flows, leaving the group struggling to fund the annual capex bill out of operating cash flows let alone maintain dividends. To adapt to this, the industry will need to bring down both capex and opex bills. The approach to sustainably reducing longer term capex and opex appears
focused on doing things differently and using standardized contractor solutions rather than bespoke company solutions. This “self-help” approach should leave the IOCs better placed longer term as oil prices recover.
European E&P – regaining confidence:
Conversations have moved on from debt covenant levels and cash flow breakeven, which has allowed management teams to begin highlighting the capacity for their typically leaner businesses to deliver material growth in the coming years while retaining greater financial flexibility. The silver lining of lower oil prices is the opportunity for significant capex savings on uncommitted activity (both developments and future exploration). We still believe that rebuilding investor confidence requires consistent project deliveries and a commitment to capital discipline, but we note
that many participants now look to be in a far stronger position than in early 2015.
US authorities are planning to announce criminal charges against several current and former Fifa executives tied to corruption allegations that have consumed the football body for years, people familiar with the matter say.
The US Department of Justice, Federal Bureau of Investigation and Internal Revenue Service are expected to announce a criminal indictment on Wednesday after arrest warrants on several of the executives were executed in dawn raids in Europe, these people say.
The individuals are expected to face multiple charges, including wire fraud, money laundering, tax evasion and racketeering, according to one person close to the investigation.
The charges come ahead of Fifa president Sepp Blatter’s bid for re-election on Friday and tie up a long-running controversy surrounding the sporting body.
Fifa has been consumed by corruption allegations for more than a decade. Controversy flared in 2010 when world football’s governing body awarded the rights to stage the 2018 and 2022 tournaments to Russia and Qatar.
There were immediate allegations of impropriety around the bidding process fuelled by the apparent unsuitability of hosting a summer football tournament in Qatar, where playing temperatures are likely to exceed 50C.
A leaked email from Jerome Valcke, Fifa’s secretary-general, said Qatar had “bought” the World Cup. Meanwhile, Mohammed bin Hammam, a Qatari football official, was suspended by Fifa and later banned for life following bribery allegations during his campaign to become Fifa president.
The votes for the 2018 and 2022 tournaments were held simultaneously. Some Fifa members were accused of offering their votes in return for cash. Fifa subsequently admitted it was wrong to run the two tournament votes together.
The Sunday Times of London published a trove of leaked emails revealing how Mr bin Hammam had generated support through financial payments.
Since Qatar won the rights to stage the tournament there have been allegations of workplace abuse, with scores of immigrant construction workers dying in the intense heat.
Facing intense pressure over the bidding process to award the events to Russia and Qatar, Fifa in 2012 hired Michael Garcia, the former attorney for the Southern District of New York and ex-Interpol vice-president, to lead a wide-ranging corruption investigation.
A lawyer best known for investigating corruption in the oil-for-food programme for the Bush administration and prosecuting Eliot Spitzer, the former New York governor, Mr Garcia seemed the ideal candidate to get to the bottom of the allegations swirling around Fifa.
Mr Garcia compiled a 430-page report over two years. But when, at the end of 2014, Fifa published a 42-page summary, he disowned it. The organisation refused to publish the report in full, claiming it could not do so for legal reasons.
Mr Garcia then quit, accusing Fifa of “lack of leadership” and questioning whether it was capable of changing its culture.
Dow-1.04% S&P-1.02% Nasdaq-1.11% Russell-1.05%
US Market Closed lower, S&P Tested its 50d MA & Hold it, few catalysts pushed the market lower, better us numbers pushing for FED move, Euro Weakness, Greek crisis. Volume were above average @ 792mil. shares. telecom services (-0.4%), consumer staples (-0.7%), and utilities (-0.7%), although the consumer discretionary sector (-0.6%) was one cyclical sector that held up reasonably well. VIX picked up @ 14.06 +16%...US After Hours EHIC +6.6%, TIVO +4.7%, NMBL +2.0%, VNET -9.9%, WDAY -7.7% following earnings/guidance. Shanghai Composite swung in a 100 point range around 4,900 in the morning session but settled up 0.2% going into the break. Some traders had reportedly expressed concerns over the sustainability of the sharp rally on the mainland fuelled by margin debt after a couple of key local brokers raised their margin requirements. The case for expectation of further aggressive PBoC easing were also dented by Stats Bureau.HSBC cut China 2015 GDP target to 7.1% from 7.3% and raised the expected interest rate easing forecast from 25bps to 50 bps. In Japan, Chief cabinet Sec Suga reiterated excessive volatility in FX is not desirable, but the pace of Yen weakness does not yet justify much concern. BOJ Dep Gov Iwata also offered some upbeat remarks on the economy, BOJ minutes from Apr 30th meeting unveiled today saw many members express confidence that easing will persist until 2% inflation is target. Note that meeting featured the formal revision of achieving 2% inflation target at a later date of H1 of 2016. Fed chair Yellen announced she would skip the Jackson Hole summit in August without providing a reason, but may attend the high profile meeting in future years. Note that her predecessor Bernanke had attended the summit every year until the year of his announced retirement. Fed hawk Lacker said it was clear that inflation is heading to 2%, with the weakness in consumer spending counterbalanced by strength in employment.
Nikkei -0.02% Hang Seng -0.74% Shanghai +0.08%
Eur$ 1.0910 JPY 122.91 GBP 1.5427 ERUCHF 1.0362 CHF 0.95 RUB $50.9288 WTI $58.64 (+1.05%)
S&P -0.08% EuroStoxx +0.33% Dax +0.34% SMI +0.36%
Macro :
- Industrials M&A May Accelerate as 2H Organic Growth Slows: CS
- France Targets EU2.4B Savings Through State Job Cuts: L’Opinion
- Citigroup Cuts Long-Run Iron Ore Forecast to $55/Ton From $81
Keep an eye on :
- SXXP : Add : Aena, Sunrise, Kion, Just Eat, Merlin Properties, Swedish Orphan Biovitrum, Straumann, B&M European Value Retail, Playtech, Regus
- SXXP : Del : Aveva, Mitie, Electrocomponents, Genel Energy, Storebrand, Vienna Insurance, Ladbrokes, Alpha Bank, C&C Group, Havas
- AERL LN : Aer Lingus Holders to Get EU2.50/Shr Cash, EU0.05 Cash Div
- AH NA : Ahold 1Q Netherlands ID Sales Growth Beats Ests.
- AIR FP : Airbus Opposes ANA Support Plan for Skymark, Nikkei Says
- ALU FP : Alcatel Weighing IPO or Sale of Submarine Cable Unit, CEO Says
- BALN VX : Baloise CEO Strobel to Resign Next Year for Personal Reasons
- EN FP : Bouygues Wins EU340M Manhattan Loft Gardens Contract in London
- CWI AV : Conwert Immobilien 1Q FFO I EU12.7m vs EU8.4m Y/y
- CRH LN : Lafarge, Holcim to sell assets with enterprise value of EUR 6.5bn to CRH
- EDF FP : EDF Bids Down for Areva Assets, Stays Cheapest Stock in Sector
- G IM : Generali Sees Cumulative Divs >EU5b, EU1.25b Investments by 2018
- ITV LN : ITV Said to Call Off Weinstein Division Purchase: Hollywood Rep
- JMT PL : Jeronimo Martins Confirms It’s in Talks to Buy Alisuper Stores
- MC FP : LVMH Enters Talks to Buy Le Parisien Newspaper From Amaury
- NN NA : ING Selling 45m NN Group Shrs at EU25.35-EU25.50, 45mil shares offered at E25,35 to mkt price in bookbuilding
- ORA FP : Orange Says Spain Securities Commission Authorizes Jazztel Offer
- QIA GY : Qiagen announces the commercial launch of its QIAGEN Clinical Insight bioinformatics content and software platform
- RBS LN : RBS Considering Bid for GBP13b Northern Rock Portfolio: Sky
- SSPG LN : EQT to Sell Entire 20% Stake of SSP in Accelerated Bookbuild - priced @ 290p/share
>>> Up
*BEAZLEY RAISED TO OVERWEIGHT VS NEUTRAL AT JPMORGAN
*HISCOX RAISED TO OVERWEIGHT VS NETURAL AT JPMORGAN
*NOVOZYMES RAISED TO BUY VS SELL AT UBS
*SWISS RE RAISED TO BUY VS NEUTRAL AT GOLDMAN
*VIENNA INSURANCE RAISED TO HOLD VS SELL AT DEUTSCHE BANK
>>> Down
*MUNICH RE CUT TO SELL VS NEUTRAL AT GOLDMAN
*RED ELECTRICA CUT TO HOLD VS BUY AT DEUTSCHE BANK
*RWE CUT TO HOLD VS BUY AT LIBERUM
*WEIR CUT TO HOLD VS BUY AT DEUTSCHE BANK
>>> PT Change
>>> Initiation
*DARTY RATED NEW HOLD AT KEPLER CHEUVREUX, PT 80P
*SISTEMA RATED OVERWEIGHT AT JPMORGAN; WAS RESTRICTED/NEUTRAL
>>> Call
>> Stock
*TAYLOR WIMPEY EXITS GOLDMAN CONVICTION BUY LIST, STAYS BUY
Asian Mid-session Update: China industrial profits return to growth; Japan taking JPY slide in stride
Wed, 27 May 2015 0:49 AM EST
***Economic Data***
- (CN) CHINA APR INDUSTRIAL PROFITS Y/Y: +2.6% v -0.4% prior (first annual rise since Sept 2014)
- (AU) AUSTRALIA Q1 CONSTRUCTION WORK DONE Q/Q: -2.4% V -1.4%E; 6th quarter of decline
- (AU) AUSTRALIA APR WESTPAC LEADING INDEX M/M: +0.1% V -0.3% PRIOR
- (KR) South Korea Q1 household credit y/y: +7.3% v +6.5% prior; Household loans +7.5% v +6.7% prior
***Index Snapshot (as of 02:30 GMT)***
- Nikkei225 -0.1%, S&P/ASX -0.8%, Kospi -1.8%, Shanghai Composite +0.2%, Hang Seng -0.7%, Jun S&P500 -0.1% at 2,103
***Commodities/Fixed Income***
- Jun gold +0.1% at $1,187/oz, Jul crude oil +0.5% at $58.34/brl, Jul copper +0.1% at $2.78/lb
- GLD: SPDR Gold Trust ETF daily holdings rise to 715.9 tonnes; first rise since apr 22
- USD/CNY: PBoC sets yuan mid point at 6.1198 v 6.1172 prior setting; weakest Yuan setting since Apr 28th
- (CN) China MOF sells 5-yr bond, avg yield 3.10% v 3.14%e
- (JP) BOJ offers to buy ¥400B in 5-10yr JGBs, ¥240B in 10-25yr JGBs, and ¥140B in JGBs with maturity over 25-yr
- (AU) Australia MoF (AOFM) sells A$700M in 3.25% 2025 Bonds; avg yield: 2.8450%; bid-to-cover: 3.48x
***Market Focal Points/FX***
Shanghai Composite swung in a 100 point range around 4,900 in the morning session but settled up 0.2% going into the break. Some traders had reportedly expressed concerns over the sustainability of the sharp rally on the mainland fuelled by margin debt after a couple of key local brokers raised their margin requirements. The case for expectation of further aggressive PBoC easing were also dented by Stats Bureau reporting April industrial profits returning to annualized growth for the first time since Sept of last year. Despite the better number, NBS said companies remain constrained by weak market demand. Separately, HSBC cut China 2015 GDP target to 7.1% from 7.3% and raised the expected interest rate easing forecast from 25bps to 50 bps.
Japan cabinet officials were unenthused by the latest selloff in JPY amid the rampant buying of the US currency. Chief cabinet Sec Suga reiterated excessive volatility in FX is not desirable, but the pace of Yen weakness does not yet justify much concern. BOJ Dep Gov Iwata also offered some upbeat remarks on the economy, noting virtuous cycle is working and inflation will accelerate gradually. Iwata added that the downward pressure from oil prices will start to dissipate in H2 of this year. Recall the recent Nikkei feature speculated that BOJ Gov Kuroda raised overall economic assessment to forestall concern once inflation turns negative in the summer months. BOJ minutes from Apr 30th meeting unveiled today saw many members express confidence that easing will persist until 2% inflation is target. Note that meeting featured the formal revision of achieving 2% inflation target at a later date of H1 of 2016.
Down under, Australian construction work contracted for the 6th straight quarter and at a faster pace. Engineering component that includes mines saw the most pronounced decline of 20% after a 1% drop in Q4. In New Zealand, NZIER speculated the sharp rise in Auckland property markets would make it too difficult for the RBNZ to announce more easing despite the macroprudential measures taken by the central bank at its last decision.
Stateside, Fed chair Yellen announced she would skip the Jackson Hole summit in August without providing a reason, but may attend the high profile meeting in future years. Note that her predecessor Bernanke had attended the summit every year until the year of his announced retirement. Fed hawk Lacker said it was clear that inflation is heading to 2%, with the weakness in consumer spending counterbalanced by strength in employment.
In FX, USD majors consolidated greenback gains. EUR/USD traded just above 1.0880, USD/JPY remained just above 123, and AUD/USD traded in a 30pip range below 0.7760.
***Equities***
US equities / ADRs:
- RAI: FTC requires Reynolds and Lorillard to divest 4 brands as merger condition
- WDAY: WDAY: Reports Q1 -$0.02 v -$0.08e, R$251M v $244Me ; Exec: Guides FY16 Rev $1.125-1.14B v $1.14Be; Subscription rev to increase as percent of total over time; GM to fluctuate - conf call; -7.3% afterhours
- HRL: To acquire Applegate for $775M, sees acquisition accretive in 2016; +3.3% afterhours
- FPRX: Enter into License Agreement with bluebird bio for Novel Antibodies to Develop Chimeric Antigen Receptor T Cell Therapy; will receive milestone and upfront payments; +20.1% afterhours
Notable movers by sector:
- Consumer discretionary: Thorn Group Ltd TGA.AU -1.0% (FY14 results); Belle International Holdings 1880.HK +3.6% (FY14 results); Cofco Biochemical Co 000930.CN -2.5% (stock exchange warning)
- Financials: Programmed Maintenance PRG.AU +3.4% (FY15 results); Cheung Kong Holdings 1.HK -25.6% (ex-spin off)
- Industrials: China Shipbuilding Industry Company 601989.CN +5.2%, China First Heavy Industries 601106.CN +7.2%, CITIC Heavy Industries 601608.CN +10.0% (China unveils military whitepaper); Shanghai Construction 600170.CN +10.0% (to jointly set up railway transport PPP fund)
- Technology: Bright Oceans Inter-Telecom Corp 600289.CN +10.0% (private placement)
- Materials: Adelaide Brighton ABC.AU +3.1% (update outlook); Marubeni Corp 8002.JP -0.5% (to construct plant in Myanmar); Zijin Mining 601899.CN +9.9% (private placement, jv with Barrick); Citic Resources 1205.HK -4.6% (profit warning)
- Energy: Strike Energy STX.AU +8.3% (Orica to make payment)
- Healthcare: Minsheng Investment Management Co 000416.CN +10.0% (to acquire wealth management business)
- While EM assets have bounced from March lows, structural headwinds face EM FX…
- …and EM equity faces a potential correction of EM Banks "overshoot".
- EM banks continue to contribute an increasing portion to aggregate EM corporate profits…
- …where most EMs have seen greater EPS growth in Banks than in other parts of the market.
- Going forward, the expectation that US rates may rise in the coming quarters is a challenge for EM banks…
- …as tighter liquidity conditions poses a potential risk to further profit growth.
EM equity rally has stalled; have we not adjusted enough for structural outperformance?
EM equities posted a formidable rally between mid-March and late-April (+13% vs. DM +4%, in USD terms), which we believe was caused by the combination of a dovish Fed, improving growth views on the back of China easing policy, and a bounce in commodity prices. However, over the past month, EM equities have fallen 3% as DM rates have risen and China growth data continues to disappoint. Under the surface, the cyclical, commodity-exposed EMs, which had been substantial underperformers over the past year, have posted the strongest gains since the mid-March lows, including Brazil (+18% in USD, 11% in BRL) and Russia +27% in USD, 3% in RUB). We have preferred EM equity to currency, given the necessarily macro adjustments will probably require FX weakness in several EMs (not to mention our bullish view on the USD).
As we wrote last week, a decline in commodity prices has clear negative implications for EMs with direct commodity exposure (see EM Weekly 15/13: Oil - low for long; EMs polarisation to prolong, May 22, 2015), but perhaps more worrying is the outlook for EMs where banks' profit growth has apparently "overshot", which we discuss below.
We have long noted that aggregate EM corporate profits have been stagnant since 2010 (see EM Strategy: What happened to the EM growth story, March 24, 2015), and below we separate out EM Banks, highlighting their relative strength. In simple terms, EM bank earnings have grown 47% since 2010, EM commodity companies have seen earnings decline 48%, and the "rest of EM" has posted 15% profit growth. Put in a different context, EM banks used to generate roughly 20% of overall EM profits (in 2010), but now represent over 30% (2014). In our view, this is an "overshoot" that has been driven by a strong credit cycle in recent years, and will ultimately need to be corrected. Conversely, commodity companies have historically tended to generate 32% of EM profits and currently represent only 17%. Going forward, risks to banks’ profits seem much more worrying than further potential declines in commodity-related profits.
Given that most EM banks are in the savings and loans business (Diversified Financial Services comprise 8% of EM Financials float capitalization) and are economic "middlemen", we are surprised by their impressive growth rates in recent years when the rest of EM corporates seem to be facing significant growth headwinds. Historically, EM banks have generated an average 18% of overall profits, which, even after taking stock issuance and index changes into consideration, suggests their earnings outperformance is unlikely to continue. For comparison, Financials have generated an average 16% of profits in the S&P 500 since 1974.
From a strategic perspective, an EM banks "overshoot" poses a challenge to our EM vs. DM framework, which is centered on the "growth differential" view. Given their 1/3 share of overall EM profits; banks may keep overall EM growth rates subdued relative to DM if they indeed face headwinds in coming quarters. Furthermore, the probability of a banking crisis is much higher following a significant credit accumulation cycle (see Untangling China’s Credit Conundrum: Deleveraging after a credit boom requires years of adjustment, January 27, 2015), which suggests that investors may discount bank stocks’ valuations in coming quarters. As we discuss below, not all EMs face the same banking challenges, but this is a key issue preventing us from adopting a strategically positive view on EM equity relative to DM at this point.
Bank earnings have outpaced the market across most EMs: Brazil and ASEAN appear risky areas
Markets have been focused on the banking sector in China for a number of years now, given the size of the sector and headlines regarding potential non-performing loans since the 2009 stimulus package. However, we find that the "EM bank overshoot" issue is one that extends well beyond just China. As we show below, banks have posted much higher EPS growth rates than the rest of the local market in almost all EMs.
A stark example of this is found in Brazil, where we have noted that credit growth has proven to be surprisingly stable, likely emanating from public banks through non-market operations (see Latin America Economic Analyst 15/10: Brazil: BRL should depreciate further to facilitate macro adjustment, May 15, 2015). Brazil faces a challenging macro backdrop, with low growth, high inflation, and a significant current account deficit, yet the equity market has posted a strong relief rally, as we noted earlier. These macro imbalances are a key driver of our bearish view on the currency (BRL at 3.45 in 12-mo), but we would note that this "micro" imbalance is an important challenge to adopting a favourable view on the equity market at this point.
Other areas of potential vulnerability are the south-east Asian markets that have likely benefitted from significant liquidity injected into their economies as a consequence of unconventional monetary policy in the DMs. These include Thailand and Indonesia, where banks have averaged EPS growth in the high teens since 2010 and where our Asia strategy team remains relatively cautious (see Asia-Pacific Strategy: Parsing the Growth/Rates debate, March 29, 2015).
Interestingly, two of the vulnerable markets in the CEEMEA region, Turkey and South Africa, do not appear particularly at risk by this metric. In Turkey, the banking sector has already stumbled – with earnings falling 6% in 2014, likely driven by tight liquidity caused by 2013’s taper tantrum. While the Turkish economy still faces a number of challenges, reflected in its falling productivity and debt accumulation (see CEEMEA Economics Analyst 15/17: An anatomy of Turkey’s economic slowdown, May 15, 2015), we believe the equity market has reflected these risks more transparently here than in other EMs, such as the ASEAN markets. In terms of valuation, Turkish banks trade at 9.0x forward EPS and 1.1x book value, whereas ASEAN banks trade at 12.2x forward EPS and 2.3x book value. Separately, China banks trade at just 6.5x forward earnings, which suggest there is significant "left-tail" risk priced into these stocks; and the current administration’s reform agenda may help lower the risk premium embedded in China bank stock valuations and drive their shares even higher.
EM Bank earnings at risk in a tighter liquidity world
Looking forward, our expectation that DM rates will likely rise in coming quarters poses a challenge for EM banks’ profits. As we have noted previously, EM local rates are largely influenced by US rates (see Emerging Markets Weekly 15/10: The Fed grants a reprieve, for now, March 24, 2015), and, accordingly, the Fed’s "lift-off" remains an event risk.
Historically, EM banks' earnings have flowed with the broad EM credit cycle (illustrated below using M2 growth). Although higher local rates may provide some net-interest-margin support for EM banks, we believe the volume story is the more compelling one, and that slowing credit growth due to higher rates would trump potential margin improvement. Furthermore, liquidity conditions could tighten across EMs if capital outflows result from a Fed lift-off or expectations thereof.
In conclusion, we highlight that equity remains our favoured asset class across the EM complex, but even equities face risks from macro imbalances that are generally tied to the currency and rates story in EM. Global markets have seemingly swayed back and forth in terms of their expectations of lift-off, which has in turn pulled EM assets up and down. In order for EM equity to outperform DM on a structural basis, we believe the banking sector, which now represents 30% of earnings and 19% of float capitalization, will first need to discount a potential credit growth slowdown.
U.S. Prepares Criminal Indictment Alleging Corruption at Soccer Body FIFA
Charges against multiple individuals expected to be unsealed in Brooklyn court as early as Wednesday morning
U.S. authorities are preparing to unveil a criminal indictment against officials of soccer’s international governing body that will detail allegations of widespread corruption, according to people familiar with the matter.
The indictment against officials of the International Federation of Association Football, known as FIFA, was expected to be unsealed in Brooklyn federal court against multiple individuals as early as Wednesday morning, the people said.
Authorities were gearing up to raid FIFA’s offices in Zurich, according to a person familiar with the matter. As many as 12 officials were expected to be arrested, the person said.
A FIFA spokesman couldn’t immediately be reached for comment.
Prosecutors expect to announce the case at a news conference at the Brooklyn U.S. attorney’s office, which is leading the investigation. U.S. Attorney General Loretta Lynch, Federal Bureau of Investigation Director James Comey and Internal Revenue Service criminal chief Richard Weber are expected to appear in Brooklyn to announce the case, the people said.
The indictment is likely to roil the governing body of the world’s most popular sport, which has been dogged by allegations of corruption and bribery for years.
The development comes less than 72 hours before the organization’s annual congress in Zurich where FIFA is expected to elect Joseph “Sepp” Blatter to a fifth consecutive term as president. Mr. Blatter, a 79-year-old former watch company executive, has presided over FIFA, the nonprofit custodian and organizer of the World Cup, since 1998.
Mr. Blatter has overseen the World Cup’s growth into a quadrennial cash cow for Switzerland-based FIFA through the shrewd sale of television and marketing rights. As of 2014, its cash reserves stood at $1.52 billion. During the 2011-14 cycle, it generated $5.72 billion of revenue, according to FIFA’s most recently published financial results, the most in its history.
The organization has faced controversy in recent years. There have been allegations of bribery surrounding the 2022 World Cup in Qatar, a high-profile lawsuit by MasterCard in New York federal court and the ousting of at least eight members of FIFA’s executive committee, along with public-relations faux pas on topics from fan racism to women’s soccer uniforms.
Brooklyn prosecutors and agents in the FBI’s New York field office have been investigating FIFA for years, according to the people familiar with the matter. Investigators reached a turning point in their probe in 2011 when an American member of the FIFA Executive Committee, Charles “Chuck” Blazer, began cooperating with them, one of the people said. Mr. Blazer, a Queens, N.Y., native, began providing FBI agents with information about alleged fraud and money laundering within FIFA’s ranks, according to the person.
Mr. Blazer, who from 1990 to 2011 was the general secretary of the Confederation of North, Central America and Caribbean Association Football, or Concacaf, agreed to record conversations with other FIFA executives after authorities threatened to bring tax evasion charges against him, the person said.
Mr. Blazer is gravely ill and couldn't be reached for comment.
In December 2010, FIFA’s executive committee voted to award the hosting rights for the 2018 and 2022 World Cups to Russia and Qatar, respectively. That decision is still controversial nearly five years later. At least eight of the members of that executive committee have since resigned or been removed from it.
Suspicions of vote-buying around the process grew so loud that FIFA appointed an independent investigator, former federal prosecutor Michael J. Garcia, to look into it. FIFA hasn't published Mr. Garcia’s report, which was completed last fall.
While it found some wrongdoing on the part of the Qatari and Russian bid committees, FIFA’s ethics judge concluded it wasn't enough to question the entire process.
Mr. Garcia subsequently resigned from his role as investigator in December to protest the organization’s handling of his report.
Ahead of the controversial vote for the 2018 and 2022 World Cup, Mr. Blazer, who is 70, publicly expressed support for Russia’s bid to host. In the run-up to the 2011 election for FIFA president he revealed that Mohamed bin Hammam of Qatar had offered leaders of football associations in the Caribbean thousands of dollars in brown envelopes, supposedly for soccer development projects when he met with them to seek support for the election. Mr. bin Hammam resigned his position as head of the Asia Football Confederation and was later barred from FIFA. He denied wrongdoing throughout FIFA’s investigations of him.
An investigation into Concacaf’s business dealings ordered by Concacaf itself and released in 2012 concluded that Mr. Blazer failed to file income tax statements and pay taxes on behalf of the organization and its marketing unit between 2004-10. In addition, the report revealed that Mr. Blazer defrauded the organization by filing false financial statements on the organization’s behalf and misappropriating funds.
The report, overseen by the law firm Sidley & Austin, stated that Mr. Blazer had the organization pay him more than $15 million in the form of commissions, fees, and rent expenses without obtaining proper authorization. It also said Mr. Blazer used Concacaf funds to finance his personal lifestyle including paying his rent on his residence in the Trump Tower in New York, purchasing apartments at the Mondrian, a luxury hotel and residence in Miami. He was suspended from FIFA, and resigned from the board in 2013. Mr. Blazer has said little publicly about FIFA matters since the controversy surrounding the 2011 FIFA election.
After Hours Summary: EHIC +6.6%, TIVO +4.7%, NMBL +2.0%, VNET -9.9%, WDAY -7.7% following earnings/guidance
After Hours Gainers:
Companies trading higher in after hours in reaction to earnings: EHIC +6.6%, TIVO +4.7%, NMBL +2.0%
Companies trading higher in after hours in reaction to news: EOX +67.0% (co elected not to proceed with public offering of common stock; reiterates previously announced 2015 guidance for CapEx of $65 mln), RSYS +20.1% (announced follow-on order of ~$11 mln for MediaEngine product from a large Asian carrier), XBIT +11.5% (announced it has successfully isolated and cloned an anti-Ebola product candidate using its True Human antibody discovery platform), NSPH +7.9% (Perella Weinberg Partners Capital Management disclosed 9.3% passive stake in 13G filing; SWK Holdings Corporation disclosed 6.4% passive stake in 13G filing), OXGN +6.5% (announced issuance of a U.S. patent for OXi4503 in acute myeloid leukemia), TIVO +4.7% (acquired Cubiware, a provider of cost-effective software solutions for emerging market Pay-TV operators; co also reported earnings), HA +3.7% (to replace OZRK in the S&P SmallCap 600), HRL +3.3% (to acquire prepared meats provider Applegate, for $775 mln; with expected EPS accretion of $0.07-0.08/share in 2016), ZSPH +2.3% (submitted an NDA to the U.S. FDA for ZS-9, to treat Hyperkalemia), YELP +1.3% (Eminence Capital discloses 5.1% passive stake in 13G filing), WB +1.1% (disclosed it has agreed to invest $142 mln in Didi Taxi and Kuaidi Taxi in their latest round of equity financing)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings: VNET -9.9%, WDAY -7.7%
Companies trading lower in after hours in reaction to news: COT -4.1% (announced a bought-deal offering to underwriters led by CIBC and Barclays, of 14.1 mln common shares at $9.25/share, for proceeds of ~$130.4 mln), VPCO -3.3% (received deficiency letter from Nasdaq), PLAY -2.1% (announced a secondary offering of 8.5 mln shares of common stock, by selling stockholders), FEYE -1.6% (announced a $600 million convertible notes offering)