November 2008
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LATEST ARTICLES
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In the September issue of Euromoney, in an article about Turkey entitled It’s about the journey, not the destination, we wrongly attributed a quote to Ceren Akdag of Yapi Kredi. We would like to point out that these comments were not made by Ms Akdag nor anyone else at Yapi Kredi, and apologise for the error.
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Mitsubishi UFJ Financial Group closed its $9 billion investment in Morgan Stanley on October 13, ending speculation that the deal might not go ahead. The terms of the deal were more favourable to the Japanese institution than had originally been agreed, reflecting Morgan Stanley’s troubles. Rather than spending $3 billion of the total on ordinary shares at $25.25 each and the rest on convertible preferred shares with a conversion price of $31.25, MUFG will get a total of $7.8 billion-worth of the convertible preferred shares converting at $25.25 and the remaining $1.2 billion in preferred shares. The new deal offers substantially more protection for MUFG on its investment since preferred shares offer a fixed yield and their holders rank above common equity owners.
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63,300,000,000 the amount in dollars of equity capital raised by financial institutions in the third quarter of 2008. The quarterly amount is the second highest on record after the second quarter of 2008, when financial institutions raised a record $109.1 billion. Finance sector ECM deals accounted for nearly half of the total volume of transactions in the third quarter.
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Excuse the cliché, but there is a silver lining in the cloud hanging over hedge funds. Many are destined to shut down. But that means more opportunity for those that survive, argues Neil Wilson.
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Under pressure from investors to put money to work, private equity firms are reconsidering the structure of their investment strategies.
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Seesawing markets set a number of records over the four weeks between mid-September and mid-October, including:
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News that ICE is to relaunch its FX contracts gets a cool reception.
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Russia, Iran and Qatar have signed a framework agreement with a view to establishing a gas cartel. Commenting on the deal, Alexei Miller, chief executive of Russian gas company Gazprom, says: "We have decided to have closer contacts, and it can be said that a large gas trio has been formed." It remains to be seen if the new agreement will extend beyond ensuring commonly agreed production targets into regulating gas prices on the world market as Opec does for the oil market.
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Cash-strapped Pakistan is trying every trick in the book to stave off a humiliating default on its mountain of foreign borrowings and inject some life into its moribund share markets. Mirroring the financial crisis elsewhere, the State Bank of Pakistan on October 16 moved to inject liquidity into the country’s financial system, cutting the cash reserve ratio – the amount banks are required to hold in reserve – by two percentage points, to 6%, and promising a further one percentage point cut by November 15. SBP governor Shamshad Akhtar promised the country’s embattled bankers that the move would immediately inject up to Rs180 billion ($2.2 billion) into the banking system, with a further Rs90 billion in capital to be freed up "at a later date".
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The people of Nigeria’s oil-rich Niger delta have yet to see many benefits of the natural resources under their feet. But Rotimi Amaechi, governor of Rivers State, the most populous delta state, is trumpeting the measures he is taking to improve his state’s infrastructural deficiencies. He tells Euromoney that in Nigeria’s federal system, the 36 states get 30% of government revenue, while the nine delta states get additional cash thanks to their importance in the country’s petrochemicals industry.
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Until now, the most famous thing the small Australian wheatbelt community of Parkes could boast was a massive radio telescope on the outskirts of town known locally, with typical Australian reduction, as ‘The dish’. Nationally recognizable, the dish was the one thing that connected Parkes and, by extension, Australia, to the world and beyond. Moonshots have been traced and tracked from Parkes. Visiting US citizens – astronauts and their counterparts from Nasa – would periodically add foreign dash to Parkes’s determinedly middle-Australia ethos.
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Despite turmoil in the global stock markets, Cambodia is pressing on with its plans to open a stock exchange in late 2009. A note from Leopard Cambodia, a private fund that invests in the country, confirms that the currency of the exchange will be US dollars and that "the newly announced listing criteria include two years of profitability, $1 million paid-up capital or $2 million shareholders’ equity, and 100+ shareholders or 10% free float".
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HSBC is buying 88.89% of Indonesia’s Bank Ekonomi for $607.5 million in cash, almost doubling the bank’s network in the country. The offer of Rp2,452 a share was a 29% premium on the bank’s stock price at the time of the offer; the shares rose rapidly on news of the deal.
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Difficult market conditions cost the hedge fund industry $210 billion over the third quarter, according to Hedge Fund Research. Of that, $31 billion was in outflows as investors pulled money out. The entire industry, which was thought to hit $2 trillion last year, is now at $1.72 trillion, says HFR.
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Costa Rican pension funds are in desperate need of more local investable securities, according to senior bankers in San José.
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Hungary reached agreement on a $25.1 billion rescue package last month from a number of multilaterals, including the IMF. The money will be used to help Hungary shore up its financial system, battered by the international crisis. Hungary’s reliance on external debt has made it especially vulnerable with the forint down 20% against the dollar and euro in the past month.
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In late October, the upper house of parliament in Kazakhstan passed the latest amendments to a law designed to bolster confidence in the central Asian republic’s banking sector, which has been buffeted by the global credit crunch. This, in turn, has choked off the supply of cheap foreign currency debt that had fuelled the rapid expansion of Kazakh banks’ networks and lending portfolios in recent years.
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Giulio Tremonti, Italy’s finance minister, caused something of a PR nightmare when he announced at a G8 meeting in Washington that he would consider banning hedge funds in Italy. He added that hedge funds were opaque and problematic. "Clearly he is crazy," says the head of a prime brokerage. The Alternative Investment Management Association and the Managed Funds Association were more diplomatic, responding jointly: "It is too easy to point a finger at an industry that is misunderstood; hedge funds are not an appropriate scapegoat during a crisis that was caused by failures in the regulated banking system. The hedge fund industry in Italy is a model of successful regulation, provides excellent risk-adjusted returns for investors and is an important source for job creation. It would be a serious mistake to consider eliminating these innovative private pools of capital that are, in fact, an essential source of capital to investors, to Italy and to the global economy."
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Citadel has hired Rohit d’Souza, former global head of equities and alternative investments at Merrill Lynch, to expand the firm’s capital markets business. Citadel’s capital markets businesses execute and route more than 30% of average US listed equity options trading volume, and more than 8% of average Nasdaq and NYSE equities volume.
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The collapse of Lehman Brothers has made investors wary of derivatives-based investments, but the US structured notes industry remains confident the market will grow.
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Almost two-thirds of asset managers at buy-side firms in the US believe the continuing credit crisis is having a big impact on the trading of over-the-counter derivatives, according to research and consultancy firm Tabb Group. Meanwhile, 57% say the leading impact of the credit crisis is an increased focus on counterparty risk.
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The Loan Market Association held its inaugural conference in London on October 16. It was packed meeting of market participants looked for reasons to be optimistic amidst the gloom. The programme featured panel discussions designed to shine some light in the darkness: how to revitalize the primary market; where the liquidity safe havens are; how to invest in distressed debt.
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Rage against the dying of the light
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Apparently, you can learn everything you ever wanted to know about investment banking in just four weeks.
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Governments worldwide have moved to recapitalize banks. But the amounts injected will only be sufficient to avert a great depression; they are not enough to sustain lending and avert a global recession.
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Central bank governor reveals the extent of intervention required by the FX losses of a Mexican retailer.
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Venezuelan President Hugo Chavez said last month that oil prices, which have dropped by half in the last few months, will probably keep falling as the US falls into recession.
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Japan’s largest banks are mulling the possibility of more capital raising after the Nikkei 225 stock index plunged to a 26-year low and left them looking vulnerable. Mitsubishi UFJ Financial Group, the country’s largest bank, announced on October 27 that it will issue up to ¥600 billion in common shares and up to ¥390 billion in preferred. Mizuho Financial Group and Sumitimo Mitsui Financial Group have been reported by local media to be considering similar measures.
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Commerzbank has confirmed market rumours that two senior figures from Dresdner Kleinwort will not now be joining it. Staff were told that Eddie Listorti, Dresdner’s head of FICC, and Stefan Gütter, its head of sales, would have senior roles at the new, enlarged bank when the takeover is completed in Q3 of 2009. The two were involved in pre-integration planning. Their decision will no doubt lead to a good deal of uncertainty among their existing staff at Dresdner.
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The credit crisis could leave in its wake rich pickings for Middle East sovereign wealth funds. But what about private-equity-style government groups that rely more on leverage to fund their investments?
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Hedge funds are resorting to fee cuts in an attempt to discourage investors from redemptions. Ramius Capital, which has two funds totalling $11 billion in assets, reduced its incentive fee last month from 20% to 15% for current investors who agree to leave their money in its funds. Those investors would enjoy the lower fees until the end of 2010. Investors that add capital won’t pay an incentive fee on the additional funds until the beginning of 2010.
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As the global financial crisis begins to take its toll in Latin America, several banks are starting to look towards private equity opportunities. "Investment banks are very creative at finding ways to charge fees," says Matt Cole, managing director at North Bay Equity Partners, a Latin America focused private equity house. "In 2006/07 the investment banks encouraged companies to list on the stock exchange. Now the banks are starting to pitch private equity deals rather than public equity deals." Antonio Neto, debt banker at HSBC, says: "It makes sense for the investment banks to consider private equity investments when the capital markets are so quiet."
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"This is worse then a divorce – I’ve lost half my net worth but I still have my wife!"
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The huge losses being reported by corporates from emerging markets around the world suggest that not all is as rosy in FX as might have been reported.
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The BBC has launched a new series in the UK that seems eerily well timed considering the current financial situation. Little Dorrit, which premiered on Sunday October 26, is the story of a family that has fallen into debt and lost its house thanks to the overly aggressive lending policies of banks on the brink of world recession.
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"This is a profound ethical issue. These are very sophisticated operations where the counterparty was not a hedge fund – it was not even a financial institution. Should a grocery chain be selling volatility protection?"
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IMF loan may not be enough to stave off banking and currency collapse.
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Pension system nationalization announced last month brings country ‘closer to the abyss’.
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Russia’s mega-rich are fast emerging as victims of the global credit crunch.
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Mid-caps starved of operational and growth capital have new lenders.
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China’s cabinet has approved a capital injection into ailing state lender Agricultural Bank of China, priming it for an initial public offering in late 2009 or 2010. In addition, $150 billion to $200 billion of failed loans will be sucked out of ABC, which was set up in 1979 to provide financing to China’s 800 million farmers, and stored in one or several of the country’s leading asset management companies. In a year full of record bail-outs, the capital injection will be provided by Central Huijin, a division of China Investment Corporation (CIC), Beijing’s sovereign wealth fund, ABC vice-president Pan Gongsheng told a press conference on October 22. Set up in 2005 to oversee the bail-out of other leading Chinese banks, Central Huijin will take a 50% stake in ABC, with the remainder to be held by the country’s finance ministry. The bank will also seek further capital – as well as much-needed management and risk-control expertise – from one or more foreign lenders, who will buy a strategic stake in the lender before its IPO.
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Investors in convertible bonds have been washed out by the storm in debt, equity and derivatives markets, so potential issuers are having to look to other buyers.
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Bank of America is due to close its acquisition of Merrill Lynch in March 2009 but it is still not clear what it plans to do with Merrill’s Latin American business.
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A good deal has already been written about the relatively high cost, at least when compared with many other markets, of processing trades in foreign exchange.
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The credit crisis has crossed the Pacific and hit home in Asia and is now even being felt in the streets of Kuala Lumpur, the capital of oil-rich Malaysia.
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Corporates can see the potential of shared service centres for reasons including compliance and costs, increased back office efficiency and labour arbitrage. However, there is no one-size-fits-all solution.
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When structured products started turning into four-letter words, investors should have taken heed.
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But Barclays deal reprices agency sector.
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The government bail out packages unveiled across developed countries last month may have prevented the collapse of a host of banks with more toxic assets than equity.
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Martín Redrado, president of the Central Bank of Argentina, tells Sudip Roy why the banker should get through the global crisis intact.
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When it comes to mergers and acquisitions, Turkey’s banking sector remains a land of opportunity. UniCredit analyst Matteo Ferrazzi says: “In central and eastern Europe, opportunities for mergers and acquisitions are few and far between. Most banks are already in solid hands or owned by foreign players. But in Turkey, it is a different case and there are still banks to be privatized.”
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With CDS prices at unprecedented levels, the crisis shows no sign of abating.
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The substantial help afforded financial institutions across the globe has failed to support spreads outside the financial sector. Corporate credit was responsible for the widening in both Europe’s iTraxx (Series 10) and the US CDX (Series 11) to 172bp and 225bp respectively – outside the previous wides seen in March. Confirmation that a global recession is on its way was the main factor driving the move.
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Amendments made to accounting rules by the International Accounting Standards Board (IASB) in mid October could allow banks to write back billions in losses incurred in trading books.
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In an attempt to boost liquidity to financial institutions the US Federal Reserve has unveiled a scheme to support money market investors. Money Market Investor Funding will buy $540 million of short-term (up to three months) bank paper from funds. The Fed has created 10 private sector SPVs that can buy paper issued by up to 10 financial institutions – with concentration limits of 15%. Funds that sell into this programme receive 90% of the purchase price in cash and the rest as ABCP – which is effectively a first loss tranche for the individual SPV.
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Whisper it quietly, but Sarkozy’s bail-out plan looks the most market-savvy.
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The central bank has begun to address the financial crisis but must take more action.
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Can Gulf financial centres’ high ambitions be fulfilled in a post-credit crunch world with falling oil prices?
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Unprecedented high spreads between European government bonds are prompting some radical – and frankly unworkable – new ideas.
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Predicting corporate default rates on the basis of historical experience is a futile pastime.
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What was previously a winning model has become instantly bereft of merit in the eyes of investors.
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The list of badly flawed financial institutions is long: Barclays (crumbling shareholder value), Société Générale (poor controls), UBS (total mismanagement), Lehman Brothers (vainglorious leadership), Bear Stearns (dereliction of management).
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Corporate FX losses are already running into billions. The problem, as the dollar’s rally continues, could be endemic.
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It seemed like such a no-brainer. This time last year asset managers of every hue were falling over each other to establish debt opportunity funds – the obvious response to the looming liquidity crunch in the credit markets. Indeed, the number of firms setting up funds as early as 2005 showed how clearly they were seen as the next big money-spinner. Fast forward a year and, along with many other investment strategies across the capital markets, things have not quite panned out as planned. Credit opportunity funds that were poised to pile into the hung LBO pipeline last year were initially frustrated as many banks stubbornly refused to sell and secondary prices remained in the mid-90s. Several big sales in the second quarter of this year – such as Citi’s sale of $12 billion loans to Apollo Management, Blackstone Group and Texas Pacific Group and Deutsche Bank’s $5 billion deal with Apollo and Blackstone – were seen as a sign that the long-awaited deluge of distressed buying opportunities had arrived.
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Christian Wait, global head of sales at Lehman Brothers, has moved to Standard Chartered where he will head global markets. He reports to Lenny Feder, global head of financial markets. Wait, who was European head of DCM before he moved back to the US to head up structured credit sales in 2005, will be based in Singapore. Meanwhile, Ben Katz, a former senior FIG structuring banker at Lehman, will join Barclays Capital in London. He reports to Richard Boath, head of FIG. Lorenzo Frontini who spent 11 years at Lehman, mostly in syndicate, before moving in June to run Italian FIG DCM, has moved to a similar position at Deutsche Bank. He reports to Renato Grelle, who runs Italian DCM.
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The economy has reached an inflection point. Change is coming that suggests the socialist republic will not only survive but, relatively speaking, could thrive, so long as investors are patient. Chloe Hayward reports on efforts to inject capitalism into the state-controlled economy.
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The acquisition of the European and Asian arms of Lehman Brothers means that the Japanese firm is now the world’s largest independent investment bank. The deal shocked many who had expected a western buy-out. Lawrence White speaks to Takumi Shibata and Sadeq Sayeed, the architects of the deal.
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The witch-hunt of Dick Fuld is wrong. But that doesn’t mean it won’t continue.
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The inclusion of the Pfandbrief in the German government’s banking guarantee marks a turning point – not just in the financial downturn but in the product’s entire history. Jethro Wookey reports.
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A tightly regulated and fast growing market looks attractive, but tightening solvency regulations and gummed-up credit markets mean smaller insurers are finding life tough. That may create a rare chance for brave foreigners to enter the market. But global uncertainty could be advantageous for better-capitalized home banks. John Rumsey reports.
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A wave of corporate defaults will follow the onset of a vicious global recession as sure as night follows day. But this time, that night will see zombie companies stagger the earth, dragging their uncovenanted leverage multiples behind them. Louise Bowman explains.
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A three-way merger of Costa Rica’s largest state-owned banks to help deal with desperate funding shortages and reduce their operating expenses is not without its drawbacks. Chloe Hayward reports from San José.
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In October the credit crunch finally devastated global equity markets as investor panic threatened to bring down all but the very strongest banks. Alex Chambers was pounding the sidewalks of New York just as the crisis entered its most tumultuous period and perhaps its denouement.
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The credit crisis is prompting corporate treasuries to make efficient use of their cash. But it has also thrown up doubts about how secure short-term investment vehicles such as money market funds are. Laurence Neville reports.
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For the hundreds of hedge funds caught up in the collapse of Lehman Brothers International’s prime brokerage, it might take years to claw back securities entrusted as collateral. Some face destruction through rehypothecation. It’s the first case of its type, and now the entire structure of prime brokerage is under scrutiny.