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NOVEMBER 19, 2007
Edited by Jeffrey M. Laderman DEFAULTS The Mortgage Resets Will Keep On Coming Some mortgage market commentators have noted that the peak months for "resets"—when the vast number of those adjustable subprime notes with initial "teaser" rates of 2% or 3% rise to a much higher rate for the duration of the loan—are December through March. They're arguing that subprime defaults will pick up in coming months but then taper off. But subprimes are not the whole story. Factor in the myriad other forms of adjustable-rate mortgages written at the height of the housing bubble—when lenders relaxed their standards—and resets are going to be a problem for the next four years, according to Zelman & Associates, a New York institutional research firm. The reason? More than $400 billion of recently written "option ARMs" and "Alt A" loans have five-year teaser rates that will likely reset to much higher payments in 2010 and 2011. "There could be even more trouble then," warns CEO Ivy Zelman. "If housing prices drop, these [borrowers] won't be able to afford the higher rates, but won't be able to sell their homes without taking a loss." By Dean Foust STOCK ISSUES The Older the Company, the Better the IPO It's best to respect elders when it comes to initial public offerings. A recent Ernst & Young study says the IPOs with the best stock performance in their early months are those of companies that have been around awhile. Researchers at the firm examined 110 companies that did IPOs in 2006 and the first half of 2007. Then they identified those that beat the Russell 2000, a small-cap stock index, in the first half of 2007, with 65 making the cut to be deemed outperformers. Most of the strong performers had eight or nine years under their belts prior to going public. "Preparation is unquestionably the key to success in both the short and long term," said Maria Pinelli, the Americas director for Ernst & Young's Strategic Growth Markets. Only 11% of outperformers were public within their first two years. Just as experience matters in a company's initial success, it matters for CEOs, too. The age group for the CEOs of market-beating companies was 50 to 54. By Jessica Silver-Greenberg   CAPITAL COMPETITION Corporate Bonds: Why Europe Is Outpacing the U.S. Fears that the U.S. is losing its competitive edge in the capital markets have abounded ever since tougher regulations took hold in the wake of the Enron and WorldCom scandals. The fear has become a reality in the corporate bond market, where Europe's lead over the U.S. is widening, according to data compiled by Thomson Financial (TOC ). In 2006, issuance in the Eurobond market topped $1.6 trillion, vs. $1.1 trillion in the U.S. That's a change from 2002, when America counted $619 billion to Europe's $554 billion. "Europe's corporate bond market has developed at an extraordinary pace," says Colin Mayer, dean of Britain's University of Oxford Said Business School. Europe's rise is partly due to regulatory overhaul that cut transaction costs to roughly U.S. levels. By unifying the Continent's disparate markets, Europe is now a larger financial market than the U.S. This dominance coincides with the growing strength of the euro, which has made the market more attractive to non-U.S. and even some U.S.-domiciled companies. By Mark Scott CAPITAL COMPETITION 
HOT MARKETS Now You Can Buy a Piece of Dubai The initial public offering of government-controlled ports operator DP World expected at the end of November is a landmark event partly aimed at boosting Dubai's fortunes as a regional financial center. It could also be the first of a wave of privatizations that would be welcomed by cash-rich Middle East investors. About 20% of DP World is expected to be listed on Nov. 26 on the Dubai International Financial Exchange (DIFX), giving the company a market capitalization of $18 billion. "It will be the only pure-play port asset of this size in the world to be listed," says Mustafa Abdel-Wadood, a partner in Dubai private equity firm Abraaj Capital. "It is operating in the highest-growth markets in the world." Dubai officials say more of the companies informally known as Dubai Inc. will go public, too. Among the possibilities: Emirates Airlines, Dubai Aluminum, and Nakheel, a local real estate developer. By Stanley Reed
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