Banks’ credit research departments are readying themselves for a turn in the credit cycle towards a higher level of defaults and volatility. Florian Neuhof reports on the state of play.

First the bad news: the securities valuation office of the US National Association of Insurance Commissioners (NAIC) has ruled that the very first Lehman Brothers ECAP is equity. Insurers would be required to hold greater amounts of capital against ECAP structures that are regarded as equity rather than preferred securities.

Some bond investors have complained for years about the lack of covenant protection in the event of M&A activity. And during the past 18 months or so the increasing number of leveraged buyouts has heightened the fears of portfolio managers. Although some bond investors are once again trying hard to push for change of control (COC) covenants, many deals have priced recently without including this feature. In certain respects it is a simple matter of supply and demand. When demand for a bond is overwhelming it is relatively easy for issuers to refuse extra covenant protection. However, with the credit cycle widely forecast to turn it is clear that the buy side is becoming more circumspect.

Mexico has long considered itself a groundbreaker in international debt capital markets. But its latest attempt to make history fell rather flat: it was downsized by $2 billion in the face of weak demand for the new debt part of the deal.

Spanish bank forms a joint venture with alternatives specialist Vega to cater for institutional investors.

Plans by International Index Company (IIC) and Eurex to launch a CDS future have yet to resolve the question of how cash settlement will be achieved on reference entities that have defaulted. But once this problem has been solved, the initiative should open up the CDS market to investors that have so far been blocked from trading the OTC market.

US growth companies faced with the increased cost of listing at home are among foreign issuers seeking a home on London’s junior market.

The first wave of easy returns on commodities has passed, while allocations continue to grow. Traditional players are having adapt to a much more liquid market, swimming with a new breed of investors and their active hedging strategies. Peter Koh examines the changes.

Worth only the paper it’s printed on

Chief executive of the Chicago Mercantile Exchange thinks pressure is building for exchange-traded model.

The US hybrid market has suffered a setback following a recent NAIC ruling.

Bank telecom advisory fees are on the up, but that won’t last for long.

NIBC is planning a hybrid capital deal linked to the 10-year constant maturity swap rate. The deal, via lead manager Morgan Stanley, is fixed for the first five years at a whopping 8% before switching to the 10-year CMS plus 10 basis points. The coupon is capped at 8% with no floor. Such deals were extremely popular until a year ago but hybrid capital referenced to CMS coupons has fallen out of vogue since. The sector boomed during 2004 and the first quarter of 2005, with borrowers attracted by the highly aggressive all-in after-swap funding costs. But after the curve flattened many of these securities have traded at prices in the low 80s. With the curve as flat as it is, it seems the view is that the downside is now limited.

Unbundling of commission regulation will increase independent data provision.

An intimate knowledge of the market, a good track record and a favourable cost basis – what more could a credit rating agency ask for?

SuperDerivatives, an option pricing, trading and risk management company, has added a glossary of funky financial terms to its website.

“I see you have the same problem as in my country: prostitutes everywhere!”

It’s a good job that many US investment banks have had such a strong first quarter. They need the cash to keep the regulators at bay.

A report from Ibbotson Associates indicates that the returns reported in hedge fund databases are often much higher than they should be because of backfill bias and survivorship bias.

CLO facilitates the provision of loans to the world’s poorest citizens.

The $67 billion AT&T/BellSouth merger catapults Evercore and Rohatyn up the league tables.

In a sign that Kazakhstan is set to become increasingly visible on investors’ radar screens, a new investment bank has been set up there to offer a full range of corporate finance and brokerage services.

Euromoney meets the chief executive of a specialist financial services firm recently bought out by management. Such deals are rare in a sector where most participants are inherently leveraged through their day-to-day operations. Is the firm’s capital structure not now rather strained? Not at all, says the CEO. It could ask its backers or other third parties for more money tomorrow and get as much as it wanted. Raising money isn’t the problem. Almost anyone can get funding right now. Identifying the right investments to build the business – that’s the tough part.

Argentina's default $800 million more than commonly assumed.

Abu Dhabi Investment Authority is one of the world’s biggest institutional investors. It is also one of the most guarded. It publishes no numbers. It seldom makes any public statements. In a rare interview, two of its most senior officials lift the lid on the organization, revealing the reasons for its success. Sudip Roy reports from Abu Dhabi.

While rivals’ share prices roar ahead, Citigroup’s languishes. Investors love stocks that are easy to understand. So is it time for Citi to develop a clearer strategy?

Deutsche Bank has hired from a private equity firm to expand its presence in the rapidly growing real estate, gaming and lodging sector in Asia. The bank has hired Matthew Mrozinski from Colony Capital, the private equity firm that specializes in real estate investments. There, Mrozinski was vice-president of acquisition and head of Asia-Pacific capital formation. In this newly created role at Deutsche, Mrozinski will report to the bank’s head of M&A for Asia, Douglas Morton, but will also be responsible for the financings of real estate deals.

WaMu for covered bonds

Freddie Mac’s new treasurer, Tim Bitsberger, marks a break with agency tradition in being an outsider. But he reckons his US Treasury experience can only enhance Freddie’s transparent approach to raising money and its stringent risk management standards. Bitsberger’s hope is that these will serve it well as it builds out its retained portfolio again. Kathryn Tully reports.

Research shows an increase in abnormal stock trading in the UK despite recent FSA clampdown. Some of the irregular share price movements may be indicators of insider trading.

“Oh, these are among the most toxic instruments we’ve created. And they’re absolutely a bull market instrument. In a bear market, it’s not a question of maybe losing just a percentage point. You can lose 10 points in a heartbeat.”

Gulf of credibility baulks Aussie banker: Australian banker attempts to avoid jail time and earn enough to repay embezzled funds by taking a position at the National Bank of Kuwait.

Online trading platform MarketAxess plans to launch a client to multi-dealer emerging markets CDS index trading system in the second quarter. The system will be the first of its kind and Latin America-related business is likely to be prominent.

Every market participant has had something to gain from corporate hybrid securities. Bond fund managers have delighted in high yields; issuers have enjoyed cheap equity. Ratings agencies have been paid for their trouble, investment banks have pocketed juicy fees and traders have revelled in the volatility. But what seems a perfect fit might well fall apart at the seams in an unfolding credit downturn. This will either expose the defects in the market and destroy it or validate hybrids as an asset class.

Excellent market conditions, M&A, special situations and heightened insurance activity drove record subordinated supply in the first quarter; more deals are in the pipeline.

Banking sector consolidation continues in Georgia, where Bank of Georgia recently acquired its ninth-largest competitor, IntellectBank.

Although the oil-rich emirate does not need other people’s money to finance big-ticket projects, it has shown an increasing appetite for project finance, reports Mark Ford in Abu Dhabi.

The EU’s emissions trading scheme and Kyoto’s clean development mechanism are succeeding in promoting renewable energy. But electricity utilities are turning out to be surprise beneficiaries. Peter Koh reports.

Joaquim Levy, Brazil’s treasury secretary, tells Lawrence White how the sovereign is restructuring its debt management profile.

The regional real estate investment trust craze has finally sired a pan-Asian Reit, driven from Australia, and to be listed in Singapore. Despite its billing however, Allco Commercial Reit currently boasts just three assets: an office tower and shopping mall in Singapore, a stake in an office in Perth and a minority stake in an existing Australian property fund managed by the same group. That hardly qualifies for the title pan-Asian Reit but the proposed $300 million plus proceeds will certainly provide the capital to acquire more properties. The key to the success of the deal will therefore be whether investors believe the deal’s sponsor, Allco Finance Group, has the ability to find and close sufficient deals to warrant the fund’s pan-Asian billing.

Tough regulations hold back trade volumes.

As if investment banks didn’t compete enough with each other already, London-based employees of Barclays Capital, JPMorgan and Morgan Stanley couldn’t resist the opportunity to swap pinstripes for cricket whites in the chill of February for what has been billed the City Indoor Cricket Championship, held in Docklands.

The US housing boom is set to collapse, with adverse effects on domestic consumption. This, unlike the slowdowns in Australia and the UK, will have a marked effect on global growth.

Urban Vietnamese are leaping on the capitalist bandwagon, driving it as fast as they can in an effort to build a lead on the foreign companies that will inevitably tap a burgeoning market.

Private-sector company prepares businesses for IPOs.

Ultra-rich investors are seeking out higher-volatility hedge funds. But they will be hard to find until strategies catch up with demand.

Sheikh Mohammed Al-Thani has many roles. As Qatar’s economy and commerce minister he presides over the world’s fastest-growing economy. He is also chairman of the Qatar Financial Centre and the Doha Securities Market. Al-Thani is considered one of Qatar’s most forward-looking policy-makers, a man who has great ambitions for the Gulf state. Talking to Sudip Roy in Doha, he outlines the economic progress of Qatar and argues that it will become the financial services hub for the Middle East.

Bank is making use of its wide geographical experience to build cross-border expertise.

But standard documentation and eight dealers’ involvement might not be sufficient to spark investor interest.

It seems no one has the right returns

The latest public finance initiative funding for UK defence ministry accommodation is Aspire Defence Finance plc, which was launched in late March, via Citigroup and HSBC. The £1.8 billion ($3.14 billion) transaction involves two series of monoline insurance-wrapped fixed-rate notes – series A wrapped by Ambac and series B by MBIA. The triple underlying credit is rated BBB/Baa3.

The Chicago Mercantile Exchange has made no secret of its desire to diversify into Asia. So its agreement with the China Foreign Exchange Trade System & National Interbank Funding Centre (CFETS), China’s interbank foreign exchange and bond market, to provide electronic access to its FX and interest rate products should come as little surprise. “The signing of this agreement is a significant step in implementing our long-term Asian growth strategy,” says CME chairman Terry Duffy. “It is the result of many years of effort by Leo Melamed, our chairman emeritus, to help develop our Asian strategy as well as the contributions of other key individuals including Phupinder Gill, our president and chief operating officer, CME retired chairman Jack Sandner and president Xie Duo and his colleagues at CFETS.”

French bank increases staffing and product offering.

There are high expectations for European public-to-private deals this year but there is much uncertainty in the sector about how many will actually make it to market

The low-key business of advancing tiny loans to the poor in developing countries is not the most obvious starting point for a new asset class on Wall Street. Microfinance has always struggled to develop because of a lack of access to financial markets. But the consistent profitability of microcredit companies is turning heads, according to Acción International, a non-profit organization that promotes small lending programmes worldwide. Its affiliates extended loans of almost $2 billion last year. “Microfinance as an industry is becoming a separate asset class for Wall Street,” says Acción International’s president, Maria Otero.

Treat your back-office staff well lest they take umbrage and run away to a hedge fund.

Ed Mizuhara has left Lehman Brothers where he ran the sovereign, supranational and agency syndicate, to join Credit Suisse. He will report to John Fleming, head of syndicate, who moved fast to find a replacement for Nick Dent. Dent resigned in February to join Merrill Lynch.

Rising personal bankruptcy levels and an uncertain economic outlook in the UK might suggest that non-conforming and sub-prime mortgage lending is not the smartest business line to jump into at the moment. Try telling that to the succession of new entrants now preparing to try their luck in this sector – one in which veterans might suggest that they are already 10 years too late.

52 The percentage growth in Lehman Brothers’ equities business, the investment bank’s fastest-growing sector. After slashing costs and investing in more automated trading during the lean bear market years, investment banks are now making more money from equities than ever before.

What does Merrill Lynch’s $9.8 billion BlackRock deal mean for the European asset management industry?

The ECB’s March 2 rate rise is contra-indicated by the prevailing data, which are apparently distrusted by the central bankers. In their view, recovery is well established in eurozone countries.

US financier Carl Icahn’s audacious move on Korean tobacco and ginseng company KT&G has made great headlines and triggered apoplexy among Korea’s more xenophobic elements. Having amassed a combined stake of 6.72% with fellow investor Steel Partners, and pressed for a spin-off of KT&G’s ginseng division to return more capital to shareholders, Icahn has even mooted a takeover of the company. In March the Icahn camp finally won a board seat in a shareholder vote, the first time a foreign investor has been voted onto a Korean board against management wishes.

Investors were given a faint hope that Yukos might yet escape bankruptcy proceedings last month when Russian oil company Rosneft agreed to acquire $482 million of outstanding debt that Yukos owed to a consortium of international lenders.

Three stalwarts of the European RMBS market have recently established medium-term note programmes, a sign of the cost savings that such shelf issuance can offer. ABN Amro issued a €3.9 billion partial synthetic transaction from its European Mortgage Securities Compartment vehicle, backed by loans to employees or former employees of the bank. And two non-conforming lenders have also established multi-issuance programmes: GMAC RFC has established RMAC Securities with an inaugural £1.2 billion ($2.1 billion) deal and Mortgages plc with its £575 million launch issue. The Mortgages plc platform is called Newgate Funding, and has been arranged by parent Merrill Lynch.

Singapore has proposed a puzzling initiative, supposedly designed to attract more hedge fund money to the Lion City. In March, the Stock Exchange of Singapore issued a consultation paper outlining its plans to list hedge funds locally. Quite why a hedge fund would want to list on SES is not explained. What is clear is that such a move would not create extra liquidity: the suggested guidelines state that there will be no dealings in listed hedge funds. The only feasible reason to list would be for prestige. But hedge funds don’t work that way and their predilection for discretion suggests that few of them would be interested.

Venezuela’s president is planning to buy assets in Uruguay, according to the local media. Hugo Chávez is considering investing in Pluna, a small Uruguayan airline, through a state-owned Venezuelan airline. Conviasa is mulling over buying Brazilian airline Varig’s 49% stake in the Uruguayan outfit.

Further reformis essential if the region’s stock exchanges are to come under the steadying influence of institutional investors.

The introduction of a covered bond law in the UK is meant to sound the death-knell of RMBS. But the traditional financing vehicle of UK mortgages still offers greater leverage, diversification and liquidity. That’s why banks such as HSBC are considering setting up both covered bond programmes and new RMBS master trusts. Louise Bowman reports.

Record liquidity stymies growth of securitization.

The London Stock Exchange’s shareholders clearly have a lot to gain from Nasdaq’s bid for the market, especially if, as is widely expected, the New York Stock Exchange joins in the fray and pushes up the price even further. But what, if anything, users stand to gain is far from clear.

HK euphoria hit by rapid short circuit

Economic pressures and government policies are driving investment inland, but many of the so-called second cities already boast powerful economies. Banks see a new frontier of opportunity. Chris Leahy reports from the cities of Chengdu, Wuhan and Qingdao.

Deutsche Bank has reshuffled the pack in two of its Latin American operations. In Brazil, it has appointed Alexandre Aoude as managing director and country manager. He succeeds Roger Karam, who has become a member of the bank’s advisory board in the country. Jose Miguel Alcalde is Deutsche’s new country manager for Chile. He succeeds Rodrigo Pérez, who is retiring from the firm.

After its success with the sale of BCR late last year to Erste Bank, Romania’s government seems determined to press ahead with the sale of one of the few remaining banks of any size in central Europe, CEC. The final bidding deadline for the 85% stake is April 26, with six European banks – National Bank of Greece, Monte dei Paschi di Siena, Dexia Bank, EFG Eurobank, OTP Bank and Raiffeisen Bank – having shown an interest by mid-March. The decision to go ahead with the sale surprised many bankers, given that the government had an alternative proposal to restructure the bank over two years to boost its value, with some suggesting until recently that CEC might never be sold.

The volume of European equity capital market deals from the real estate sector has been growing strongly over the past two years and is expected to increase again this year.

5 The number of years it has taken the S&P 500 and the FTSE100 share indices to reach levels last seen in 2001. On March 15, the S&P 500 crossed the 1300 mark for the first time since May 2001. This is still about 15% below the index’s March 2000 all-time high. The FTSE 100 crossed the 6000 mark for the first time since March 2001 but is still almost 1,000 points shy of its December 1999 all-time high.

There has been a lot of talk about the use of computerized trading in foreign exchange. Discussions at a recent seminar in London suggest that there is real substance, not just hot air, behind the chat.

Investor demand for US commercial property-backed debt is rapidly increasing, with strong bids coming from Europe and Asia. An exciting new range of structured finance and derivatives products is on offer, but issuers and investors might be biting off more than they can chew. Kathryn Tully reports.

The UAE capital markets received a boost last month when National Bank of Abu Dhabi (NBAD) issued a Dh2.5 billion ($680 million) tier 2 convertible bond through a private placement. It is the first time this type of hybrid security has been issued in the UAE.

CLSA rebrands and beefs up its private equity operation.

More opco/propco deals are likely given rising real estate values and investor interest in secured debt.

Hedge funds returns are rising; does this mean volatility is back?

The future for UniCredit and HVB’s merged operations in central and eastern Europe has been determined, with HVB’s subsidiary, Bank Austria Creditanstalt, set to become the sub-holding company for CEE operations within the UniCredit group.

There is a consensus view that European equities are cheap and that M&A will continue to drive the market up and keep the liquidity flowing. This rosy vision is built on the assumption that earnings will remain strong, that global growth is re-accelerating, that the risk from inflation is minimal and that interest rates are therefore likely to remain low.

The covered bond market is developing in a way that few could have hoped for a few years back. Everywhere there is evidence of vitality. In addition to established relatively new sectors such as Ireland and the UK, issuers from Portugal, Italy, the Netherlands, Norway, Sweden and even Turkey are expected to join in. Alex Chambers reports.

Icelandic bank spreads, which had been drifting wider late last year, moved out sharply in early March.

Corporate restructuring dominance makes GE personnel rich quarry for banks boosting leveraged finance teams.

Domestic criticisms of Deutsche Bank’s international focus have not passed it by, prompting plans to develop its business at home. But as Jürgen Fitschen, who leads the initiative, tells Philip Moore, his bank does not intend to imitate rivals’ indiscriminate wooing of medium-size companies.

For some FX traders the prospect of an extended holiday seems to be the deal clincher for switching jobs.

Connecticut-based currency manager Tradex Capital Markets has been awarded the management of UBS’s external allocation programme for FX-only investments. Tradex will assume responsibility for portfolio construction, maintenance and manager negotiations on behalf of UBS. Steve Jury, chief investment officer at Tradex, says: “In addition to the continued growth of our conservative, low-volatility fund, Tradex aims to move aggressively into the business of building customized multi-adviser platforms for asset managers, pension funds and government institutions. The unique funding possibilities in FX allow for the creation of portable alpha strategies that can be created with very low cash requirements. The firm is researching new ideas including notes, swaps and index development that we will likely market jointly with large financial institutions. Our wealth of FX market experience allows us to assess and quantify currency managers. This edge will enable us to help investors build return and avoid the pitfalls in a difficult and developing asset class.”

Dealers say the backlog of unconfirmed credit default swap trades has been reduced by 54% since September 2005. The New York Fed is asking for a further reduction by the end of June this year. How near is the market to having an infrastructure able to cope with massive growth and a broadening of the uses of CDS? Helen Avery reports.

Raising capital adequacy requirements from N2 billion to N25 billion has freed Nigerian banks from reliance on public sector funds and better equipped them to finance bigger projects within the oil, gas and telecommunication sectors.

French chemicals company Rhodia has announced several initiatives that will help Rhodia Energy Services optimize the value of its carbon emissions receipts, which have been generated from projects to reduce emissions at Rhodia’s plants in South Korea and Brazil. In its first hedge using carbon emission receipts, it has sold 8 million tonnes of CERs, of which 6.5 million will be sold at €15 a tonne, to be spread over 2007 and 2008.

Vietnam’s stock market is roaring as speculative money chases the few listed stocks. Reform is on the way and the potential for growth is clear. Meanwhile, the market remains over-hyped, poorly regulated and lethal for the uninitiated. Chris Leahy reports.

HSBC is in the vanguard of foreign banks’ invasion of China and its partnership with Bank of Communications means that it is well positioned to expand. Chris Leahy speaks to HSBC’s China chief and his counterpart at Bocom about their businesses and the way they are working together.

Finance minister’s resignation leaves investors feeling cautious.

Are hedge fund databases trustworthy...

Introducing a light-hearted look at the financial markets players as well as the issues that keep bankers up at night. In this piece Abigail brings us commentary on Deutsche Bank, HSBC, M&S tomatoes, and Sandy Weill's sweater.