taming the dragon - globalcapital...taming the dragon foreign jvs battle it out in china...

March 2016

All change as Oz banks rethink their models

The best capital markettransactions in Asia

China’s best banks and deals celebrated

From the publishers of

Taming the dragonForeign JVs battle it out in China

Cover-r2.indd 1 22/3/16 7:03 pm

Asiamoney Banking Awards 2016China

We are delighted to announce the inaugural Asiamoney China Banking Awards Dinner 2016.

This event is designed to celebrate the achievements of global, regional and domestic financial institutions & corporates in Asia’s biggest financial market

and on the evening, Asiamoney will honour winners of the:

Best Domestic Banks Best Managed Company Awards

China Deals & Investment Bank of the YearRegional Capital Markets Awards

Brokers Poll Cash Management Poll

Corporate Governance Poll Fixed Income Poll

FX Poll

We are inviting all market participants including senior bankers, brokers, corporate executives and their clients to attend this prestigious event.

In order to reserve your table, kindly book your attendance in advance.

To book your table now, please call Danny Cheung on +852 2912 8080 or email [email protected]

AWARDS2016

AWARDS2016

BOOK YOURTABLE NOW!

Thursday, April 21, 2016 Beijing, China

China Awards ad-r5.indd 1 22/3/16 6:42 pm

GlobalCapital March 2016 1

CONTENTS

EDITORIAL OFFICE 27/F, 248 Queen’s Road East Wanchai Hong Kong Tel: (852) 2912 8075 Fax: (852) 2865 6225 Email: [email protected]

DIVISIONAL DIRECTOR, GLOBALCAPITAL John Orchard PUBLISHER, GLOBALCAPITAL Oliver Hawkins ASIA BUREAU CHIEF, GLOBALCAPITAL Lorraine Cushnie HEAD OF RESEARCH Anthony Chan DEPUTY HEAD OF RESEARCH Harris Fan

Contributors to this report: Shruti Chaturvedi, Vivian Chow, William Cox, Lorraine Cushnie, Pete Ellis, Mathew Garver, John Loh, Ben Power, Chris Wright

DESIGN MANAGER Simon Kay

WEBSITE www.globalcapital.com/asia

ADVERTISING DEPARTMENT Advertising Tel (852) 2912 8081 Fax (852) 2842 7071 PUBLISHER Andreas Klimsa DEPUTY PUBLISHER Danny Cheung ADMINISTRATION & EVENTS COORDINATOR Connie Ng

Regional Advertising US PUBLISHER, GLOBALCAPITAL James Barfield INDIA Yogesh Rao INDONESIA Sita Dewanto

SUBSCRIPTIONS

REGIONAL ACCOUNT MANAGERS Alexander Lemm SENIOR MARKETING EXECUTIVE, GLOBALCAPITAL Alex Norman ASIA HOTLINE Tel: (852) 2842 6999 Fax: (852) 2111 0494 UK HOTLINE Tel: 44 (0) 20 7779 8999 Fax: 44 (0) 20 246 5200

Euromoney Institutional Investor PLC Nestor House, Playhouse Yard, London EC4V 5EX, UK Tel: +44 20 7779 8888

Directors: John Botts (Chairman), Andrew Rashbass (CEO), Sir Patrick Sergeant, The Viscount Rothermere, Colin Jones, Martin Morgan, David Pritchard, Andrew Ballingal, Tristan Hillgarth

All rights reserved. No part of this publication may be reproduced in any form without the permission of the publisher. While every care is taken in the preparation of this publication, no responsibility can be accepted for any errors, however caused.

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“Asiamoney” is registered as a trademark.

©Euromoney Institutional Investor PLC, 2016 ISSN 2055 2165

Middle East2 Economic overview Oil prices are central to the economies of the Middle East so the commodity price collapse of the last year has had a big impact. We assess the outlook for growth and government finances.

10 Issuer roundtable We discuss how best to navigate demand and tap new pools of funding, as well as the changing attractiveness of the bond and loan markets.

Also in this report32 Poised for change Australian banks are going through one of their toughest periods as slowing economic growth and greater regulatory oversight cause them to rethink their business models. With new CEOs in place at three of the four big lenders, the industry is set for an overhaul.

48 Asiamoney New Year Awards Dinner Pictures from this year’s Hong Kong celebration of the winners of Asiamoney’s awards and polls.

51 HK Stars Index Cyber risk can take billions off a company's bottom line and valuation. M&E explains how investors can takes account of the risks.

20 Cover StoryChina's foreign JVs come of age After a decade in which they’ve suffered dismal profits, multiple IPOs suspensions and a near-disastrous crash in A-shares, China’s foreign-backed securities houses are finally seeing the fruits of their labour.

Awards25 China Deals and Investment Bank of the Year China has become the biggest and arguably the most important capital market in Asia. In our first China Deals and Investment Bank of the Year Awards, we select the standout transactions and institutions of 2015.

36 Australia Deals and Investment Bank of the Year It was a challenging year for Australian capital markets in 2015 as the fall in commodity prices and volatile conditions made executing deals that much tougher. Despite the hurdles, Australian banks were able to produce standout performances.

42 Best Country Deals It may have been one of the tougher years to execute a transaction in Asia ex-Japan, but there was plenty of innovation and interest in 2015. After considering a bumper selection of awards pitches from firms around the region, Asiamoney has picked the best transactions.

Contents-Masthead-r7.indd 1 22/3/16 7:04 pm

2 GlobalCapital March 2016

Middle East Economic Overview

The Gulf states are steadily coming to terms with a new and most unwelcome reality: sustained low oil prices. Digesting the fact that these

prices appear to be here to stay, in the near term at least, means accepting some difficult home truths about deficits, infrastructure spending, liquidity and market performance.

“The lower oil price has of course made a substantial difference to GCC countries, both in terms of their economies and their mood,” says Chavan Bhogaita, managing director and global head of market insights and strategy at National Bank of Abu Dhabi (NBAD).

“The times of ample budget surpluses and year after year of asset accumulation are over, for now at least. We are now in times of budget deficits and asset depletion.”

Just how bad is it? Nothing disastrous, at this stage. To varying degrees, the Gulf econ-omies enjoy considerable buffers of reserves, whether in sovereign wealth funds or bank deposits; they have mainly run surpluses for years and have little or no debt; and even now, their economies are still growing. The threat is of slowdown, not recession.

Nevertheless, oil at $30 a barrel is well below the break-even budget level for Gulf economies, which NBAD estimates at $48 in Kuwait, $61 in Qatar, $76 in the

UAE, $97 in Oman, $102 in Saudi Arabia and $109 in Bahrain. And while it’s above the cost of extraction — sometimes just a few dollars per barrel — there is no way the region can weather the storm without some pain and adjustment.

“Qatar announced its first deficit budget in 15 years,” says Raghu Mandagolathur at Markaz, the Kuwait-based financial services group. “Saudi announced a $98bn deficit for 2015. The Saudi and Oman [currencies] are under pressure.”

These are big considerations. And it’s not just a problem at the state level. Whatever benefits low energy prices ought to confer to individuals, they are not yet coming through. A low oil price, he says, has led to “anaemic wage growth and a lag in the percolation of benefits to consumers”.

ROOM FOR MANOEUVRE?The response to low oil prices in the Middle

East has not been to cut production, but if anything to ramp up.

“Abu Dhabi, Oman, Saudi Arabia and Kuwait are producing oil at close to full capac-ity in order to expand their oil sectors in real terms and mitigate the impact of the oil price shock in nominal terms,” says Carla Slim, economist for MENA at Standard Chartered. “This strategy has proven effective.”

The proof is in the numbers: 2015 real GDP growth slowed only slightly, is above the global average, and looks reasonably healthy under the circumstances.

“However, applying this strategy in 2016 will prove much more difficult,” says Slim. “There is limited room for manoeuvre.”

Standard Chartered expects oil sector growth to slow to 1%-3% for most GCC econo-mies in 2016.

GCC governments are not blind to what’s happening, and have begun implementing changes. “They’re having to adjust to the new

environment,” says Bhogaita, “and some are considering options such as curtailment of government subsidies, reduction in govern-ment expenditures, and — dare we say it — the introduction of VAT or other taxes.”

DELAYED HIKEStarting with the central bank response, Slim expects tightened monetary policy across the Gulf, with hikes in

Rich states adjust to harsher climate as oil keeps flowingOil prices are central to the economies of the Middle East so the commodity price collapse of the last year has had a big impact. But how bad is the outlook for growth and government finances? Chris Wright assesses the situation.

25

20

15

10

5

0

13.23

11.23

8.9 7.796.58 6.38

20.13

12.349.98

3.82

Fuel Electricity

KSA Bahrain Oman Kuwait UAE Qatar China India Egypt US

ENERGY SUBSIDIES OFFERED (AS % OF GDP), 2015

SOURCE: IMF

ME Economic Overview-r3.indd 2 22/3/16 7:05 pm



Although the Gulf is often considered homogeneous, its econ-omies differ and face a range of different outlooks. Here, GlobalCapital highlights some points of distinction:

BAHRAIN: Has less oil than its peers and the highest budget break-even oil price ($109 per barrel), and has suffered more political unrest than other Gulf states. Nevertheless, GDP grew 3% last year, with the non-oil sector driven by infrastructure, and in particular the expansion of the international airport and construction of new towns. Subsidy reform began later than some other states, in October 2015, and was targeted not at fuel but at meat. Standard Chartered forecasts a 9.5% fiscal deficit in 2016, and debt-to-GDP passing 60%, compared to 28% in 2010. Fitch downgraded it in September 2015 and all three rating agencies have it at the lowest investment grade rating, two of them with negative outlooks.

KUWAIT: Has a relatively low fiscal break-even oil price ($48 per barrel), but is considered to have some of the weakest growth prospects in the region. The IMF estimates 2.5% real GDP growth between 2015-17, and Standard Chartered thinks less still, with just 1% for 2015. The economy contracted 1.6% in 2014. A fiscal deficit of 3% of GDP is expected in 2016. Subsidy reform began with diesel and kerosene prices and is now governed by a Public Financial Management Committee.

Moody’s rates it highly, at Aa2 with a stable outlook, mainly because of the sheer scale of its hydrocarbon endowment, with the sixth largest oil reserves in the world and the fourth-highest per capita GDP in purchasing power terms. But the rating agency warns that “Kuwait’s high dependence on volatile oil exports imparts volatility in economic performance, which is a credit chal-lenge.” Kuwait has been slow to develop its non-oil and private sectors and progress has been slowed in recent years by differ-ences in opinion between government and parliament. However, there are high hopes locally for various new projects underway in the five year National Development Plan.

OMAN: Has less oil than many peers, and higher concerns about the health of the banking sector. Nevertheless, Standard Chartered expects 2.9% growth in 2016 (from 3.5% in 2015), healthy credit growth and contributions from agriculture and fisheries. Its fiscal deficit is expected to reach 15% of GDP in 2016, even after government spending fell 30% year on year to September, along with a 1% current account deficit. Oman is considered particularly exposed to China’s slowdown, as 80% of Omani oil exports go to China.

QATAR: Economically, the bright spot in the Middle East. Consensus forecasts see average 5% growth in GDP over 2015-17, and potentially more if hydrocarbon prices improve. Qatar, as much as anywhere in the region, has built up its non-oil income sources, and this remains a national priority. Oil accounted for only 48% of government revenue in 2015. This is partly a consequence of heavy net migration, and partly infrastructure development, much of it related to World Cup projects. Perhaps because of this relative resilience, Qatar has done the least in terms of subsidy reform among the GCC states. There is, however, some concern about the banking sector, with the loan to deposit ratio hitting 116% in August 2015 and likely much higher by now.

SAUDI ARABIA: Growth has slowed markedly — Standard Chartered expects 2.7% in 2016 — due to of a combination of the oil price and changes in government spending. Saudi has the capacity to push the oil price up if it wants to, given its powerful role within OPEC, but appears to be pumping oil at capacity. The big news in capital markets terms has been Saudi’s opening up of its equity markets to selected institutional capital, but it has been unlucky with timing and not attracted significant flows yet. Its use of the domestic debt capital markets at a sovereign level has been striking, and it has withdrawn heavily from its reserves in the Saudi Arabian Monetary Agency (SAMA), reflected in the agency pulling back a large number of third party mandates. SAMA is expected to raise rates to mirror the US, and its existing liquidity squeeze is predicted to worsen in 2016. Its fiscal deficit is likely to be about 8% of GDP in 2016, and its current account deficit 6%, a twin deficit that will be partly financed by more bond issuance and partly by further use of accumulated savings.

UAE: Likely grew at about 3.8% in 2015, and Standard Char-tered expects it to slow to 2.9% in 2016, with oil sector growth of just 1%. Everything seems to be slowing — government spending, construction, retail, credit growth — but with the

US raising rates, the UAE central bank is very likely to do the same. A long-term significant step was the introduction of a new PPP model announced last year. The UAE took the region’s most strident approach to subsidy reform and has deregulated fuel prices. It has also diversified more than some peers away from hydrocarbons — indeed, Dubai doesn’t really have any oil wealth to speak of and has built its economy on other sectors such as tourism. ◼

GULF OF DIFFERENCE

Nov 09

3,200

2,800

2,400

2,000

1,600

1,200

800

11,000

10,500

10,000

9,500

9,000

8,500

8,000

Oct 10 Sep 11 Aug 12 Jul 13 Jun 14 May 15

Oman

Saudi Arabia (RHS)

Abu Dhabi

000’s barrels per day

GCC OIL PRODUCTION IS EDGING HIGHER

SOURCE: BLOOMBERG, STANDARD CHARTERED RESEARCH




policy rates, albeit with a lag compared to the US. Since GCC currencies are pegged to the dollar, it is common for monetary policy to mirror that of the Federal Reserve.

While the question of these pegs and their durability in a low oil price environment comes up frequently, GlobalCapital is yet to speak to any economist who thinks central banks in the region will allow those pegs to fail. It is, however, likely to remain a topic of conversation throughout 2016.

Then there’s spending. “The challenge for GCC states in 2016 will be to cut government spending in a way that does not substan-tially impact the real economy and results in manageable deficits,” says Slim. “Spending is likely to be adjusted in line with lower government revenues so that fiscal deficits in 2016 and 2017 do not exacerbate debt levels, which are currently relatively low. However, spending cuts could negatively impact growth dynamics.”

There is a balancing act to consider here: the Arab Spring events elsewhere in the Middle East in 2010 prompted an increase in social spending, particularly in Saudi Arabia, as Gulf states sought to keep their populations happy and to head off any threat of upheaval.

Even if finances are now much tighter than they were during the Arab Spring, that sort of spending can’t just be taken away. Conse-quently, Slim says spending on education and healthcare is likely to remain a priority in 2016 budgets, whether that leads to a deficit or not.

ASSET DEPLETIONThat said, the Gulf has more advantages than many places, and for the most part used the good times to set money aside. “There will be a dynamic recalibration of government spending and policies, but one should also factor in the cushions the Middle East governments have

that are not replicated elsewhere in the world,” says Mustafa Aziz Ata, head of debt capital markets for MENA at HSBC.

Bhogaita adds: “Some of the GCC states have substantial reserves, which provide them with a useful war chest that they can dip into during these challenging times.”

That money is proving handy. Gulf sov-ereign wealth is enormous — not publicly disclosed, but clearly well over $1tr between the Abu Dhabi Investment Authority, the reserves of the Saudi Arabia Monetary Agency (not a sovereign wealth fund exactly, but the repository of state savings), the Qatar Invest-ment Authority and the Kuwait Investment Authority, with many other smaller vehicles dotted around the region.

Bhogaita estimates that about $200bn of funds were drawn from sovereign wealth funds and other Gulf state reserves during 2015.

“Such asset depletion, while alarming to some, is also to be expected,” says Bhogaita. “After all, it is one of the main tools that governments have available to them and can arguably be accessed far quicker than the other possible solutions.

“The fact that reserves are being used shouldn’t be interpreted as a sign of panic,” he adds. “Part of the fundamental reason for setting up the SWFs in the first place was to preserve capital for a rainy day.”

SILVER LININGNevertheless, if that $200bn figure is correct, then it’s a heady pace. The depletion of

assets at the Saudi Arabia Monetary Agency in particular is notable. It’s not a problem so long as it is accompanied by other measures, among them cutting expenditure, reducing subsidies, and raising debt.

The toughest measure is probably subsidy reduction, long-discussed and long-delayed over the years, but finally underway, under-lining the sense that some good may come from this period of adjustment.

“By starting to reform energy subsidies, governments have laid the groundwork for better fiscal management in the long run,” says Slim. “This would not have occurred in a high oil price environment.”

This is an interesting and welcome development, and is not confined only to the oil exporters but the importers too. The UAE has taken the biggest step, cutting petrol and diesel subsidies in August. Saudi Arabia has raised water tariffs for industrial entities, and in December announced a series of fuel price reforms. At an individual emirate level, Abu Dhabi has increased tariffs for water and electricity for individuals.

Moves like this are widely welcomed by analysts. “These fuel price reforms are credit positive for the sovereign because they will lower current expenditures and bolster government finances dented by the downturn in global oil prices, while reducing macroe-conomic distortions,” says Moody’s analyst Shirin Mohammadi, speaking specifically of Saudi Arabia.

In a country where hydrocarbon revenues have historically accounted for as much as 90% of government revenues — though only 73% in 2015 — fuel reform is not taken lightly.

“Although fiscal gains from subsidy reform are likely to be moderate this year, we expect gains to accelerate when oil prices increase,” Mohammadi says. “Total subsidies and trans-fers composed about 4.9% of all consolidated expenditures in 2014.”

The IMF has estimated that the opportunity cost from low energy prices in Saudi Arabia amounted to nearly 10% of GDP in 2014. “The price hikes will also lead to efficiency gains, reducing wasteful overconsumption driven by artificially low prices.”

There may also be positives in the develop-ment of local currency bond markets. Saudi has already raised the equivalent of $27bn in riyals in the second half of 2015 after years

THE SAUDI ARAMCO REFINERY IN DHAHRAN:Despite cheap oil, Saudis are paying more for petrol after December reforms.




out of the markets. “This has kick-started the development of local currency debt markets, creating opportunities for market partici-pants,” says Slim. “It also enhances fiscal discipline and helps governments to focus on spending priorities.”

COLD WAR TO WORRISOME CONTRACTSNaturally, geopolitics must feed into the outlook for GCC economies. War in Syria and Iraq, the rise of ISIS there and in Libya, and rising tensions between Saudi Arabia and a newly reconnected Iran — partly being played out through conflict in Yemen — all have an impact on the economic outlook for the region. In Egypt, the problem is a little closer to home: the threat of ISIS there, particularly in the northern Sinai, is very real (see box below).

IHS Country Risk, the political risk analysis firm, says that four of the 10 major risk environments in the world in 2015 are in the Middle East: the “new cold war” between Saudi Arabia and Iran, the rising threat of ISIS, the potential for more protests in Egypt,

and contract risks in Iran. “These are all risks for businesses operating in the region,” says Keerti Rajan, head of political risk analysis at IHS Country Risk.

“This is a very significant consideration indeed, and we believe it will be front and centre in the minds of GCC governments as they look for feasible solutions,” Bhogaita says. “Geopolitics in the region are often as big a factor in the equation as the econom-ics.”

The reappearance of Iran in the interna-tional fold is an intriguing sub-plot. Although Iran is not considered in this report, it has a clear impact on the rest of the region, in several ways. One is that the resumption of its oil exports adds still more to the supply glut and helps to keep oil prices low; another is that the long-standing friction between it and Saudi Arabia comes much more starkly into focus; and a third, more positive, is that it increases opportunities for intra-regional trade and financial services.

Across the board, the outlook depends largely on what happens to the oil price, and

Saudi Arabian policy will be instrumental in this. Raghu at Markaz notes how Saudi’s strategy around oil has changed.

The old strategy, he says, involved defend-ing the price, reducing production where necessary to push the price up, creating an environment which attracts high-cost producers with an inevitable consequent loss of market share for Saudi itself. The new strategy is the reverse: defending market share by increasing production and driving price decreases, which drive away high-cost producers and leave Saudi with a higher share of a lower value sector. The jury is still out, he says, on whether it is working.

But a rising oil price is the catalyst the region needs. “One of the main problems right now in the global marketplace is uncertainty as to what’s coming,” says Alex Karolev, syndicate banker for CEEMEA at BNP Paribas. “It’s very hard to spot a catalyst for things to improve. With oil, there would need to be a dramatic shift in the supply picture for things to change, and for that to happen, we would need OPEC to act.” ◼

Is Egypt the only Arab Spring nation to move to a sound economic footing and embrace reform? Or a place where autocracy trumped democracy once again and a foreign currency crisis will undo any positive moves?

Egypt is probably both of the above. In the five years since president Hosni Mubarak was ousted, the country has undergone a further change of government — and the threatened execution of much of its previous leadership. But new president, Abdel Fattah el-Sisi has at least used his strident regime to implement many of the economic reform efforts observers have long wanted to see. Its reform agenda has been under way since June 2014, impressing groups such as the IMF and securing vital loans; at the end of last year new loans of $3bn from the World Bank and $1.5bn from the African Development Bank were agreed, to be disbursed over three years.

But Egypt continues to face the considerable threat of ISIS, par-ticularly in North Sinai, and there is concern that its approach to political opposition — banning, incarcerating and even executing members of the Muslim Brotherhood who had been legally elected — does not constitute a long-term solution for the country, nor much of an improvement on Mubarak.

Additionally, the political situation has scared off not only tourists but foreign investors, causing a worsening problem in the country’s foreign currency reserves, which have fallen from $36bn before the 2011 revolution to $16.5bn by the end of January, and

would have dried up completely were it not for frequent donations and loans from Gulf states.

In February, General Motors had to stop production of cars in Egypt because it could not access the dollars to pay for interna-tional components, though it is now believed to have resumed.

The expansion of the Suez Canal, completed ahead of sched-ule and financed almost entirely with domestic money, was an illustration of what Egypt can achieve; at the same time, slowing volumes through the canal because of weak global trade illustrates the challenges the country faces.

Fortunately, other states continue to want Egypt to work. Saudi Arabia agreed to lend Egypt $20bn on January 24, to finance the purchase of oil products over the next five years. China has made $1.7bn in loans to Egypt’s central bank and the National Bank of Egypt, and has announced $15bn of investment in infrastructure.

“The recent financing agreements point to two key trends,” says Steffen Dyck, senior analyst at Moody’s. “First, the donor com-position is broadening. Additionally, financing from traditional donors such as multilateral banks will help improve transparency regarding funding conditions.”

Also, external financial support is shifting, he says, to loans and investment commitments as opposed to predominantly govern-ment grants, “resulting in future repayment obligations”, though Egypt’s external debt is relatively low at about 15.4% of GDP, as of June 2015. Moody’s rates Egypt B3 stable. ◼

HOW TO ASSESS EGYPT?


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Middle East Issuer Roundtable

Global Capital: What do your funding plans look like over the next year?

Samer Jumean, Emirates Global Aluminium: We do not necessarily need to access the capital markets in 2016 or even in 2017. But if a window becomes available, we may pursue it.

We are one of the largest aluminium producers in the world but have an ambition to grow beyond by becoming one of the world’s largest integrated aluminium companies. We’re not just going to grow organically and will be interested in assessing acquisitions on a global basis.

Historically, we have been a company which relied on the commercial bank market and on the export credit agencies to fund

our large projects. Today we are sitting on about $6bn of commercial bank facilities — some of it from ECAs and Islamic sources. As we look to the future it makes a lot of sense for us to diversify our funding sources and optimise our capital structure.

The first of such transactions involved the $4.9bn syndicated bank facility we announced towards the end of November 2015. There were seven underwriters who participated in the transaction, which is expected to close imminently.

Andrew McMichael, Agility: Agility hasn’t been in the bond markets for about 12 years, but we came back into the debt market at the very end of last year and signed our first banking deal for some time — a club

deal with five banks (at about 4.30pm on December 31!). We’re adding a couple of Islamic banks in the next month or so, on broadly similar terms and conditions, both of which are for general corporate purposes.

At the moment, on the financing side, we’ve got eight live or imminent transactions for a total of a little over $1bn.

Those transactions are mostly project-specific. We are working on the funding of the Reem Mall on Reem Island in Abu Dhabi, and the financing for that in total is just under $900m, including an equity portion and a senior debt portion.

There are some other very specific transactions going through — the bigger ones we’re looking to have completed in the first half of this year. The different

Foreign and local demand shifts bond-loan balanceThe drop in oil prices in 2015 prompted Middle Eastern goverments and companies to rethink operations — pulling back on some projects, gobbling up reserves and adjusting subsidies. GCC international bond issuance took a hit as a result — last year $20.8bn was printed, down from $26.3bn in 2014.

Looking forward to 2016, some issuers have announced more bond market issuance to fill funding gaps, others less as they brace for slower growth.

At GlobalCapital’s roundtable, held in Dubai on January 26, representatives from companies, banks and goverments gathered to discuss how best to navigate demand and tap new pools of funding, as well as the changing attractiveness of the bond and loan markets.

Panelists:

Tom Koczwara, director, debt management office, Government of SharjahAmr Mostafa, group head of treasury and capital markets, National Bank of EgyptAndy Cairns, global head of debt origination and distribution, National Bank of Abu Dhabi

John Tuke, head of treasury and asset/liability management, Commercial Bank of DubaiSalman Al Hammadi, Middle East debt capital markets, BNP ParibasAndrew McMichael, group treasurer, AgilitySamer Jumean, head of financing and capital markets, Emirates Global Aluminium

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deals appeal to different banks. The club deal we closed at the end of last year had one regional bank — NBAD — and four internationals. The Islamic tranche of the same deal will be funded by regional banks.

We’re looking at how we take things forward on the loans front, but also starting to review bond market alternatives, given the reduced market liquidity at the moment. We want to put ourselves in a position where we can tap any source of liquidity that’s available.

John Tuke, Commercial Bank of Dubai: CBD is a small to medium-sized bank in the context of the UAE and is domestically focused. We like to match our customer loans with customer deposits, with a target ratio of 1:1. So any funding we do is for balance sheet management rather than for lending to clients.

With the implementation of Basel III, there are various liquidity ratios that we as banks are obliged to comply with. These step up between now and the final Basel implementation dates.

It means we need a certain amount of medium term funding on our books, but the difficulty for us as a local bank is finding investors outside the UAE or outside the region who actually know CBD and feel comfortable with us. Some investors look purely upon the ratings, but there is always a story to be told as well. There’s work to be done to meet our own targets in terms of investor relations and raising the profile of the bank.

We need to have diversified sources of funding, but we also see it as important to have a diversified maturity profile. We have a $2bn EMTN programme and so far we’ve issued twice from that — a $500m deal in 2018 and a $400m bond in November last year.

We’ve also tapped the loan market — we have a club loan from a group of relationship banks of $450m as well and we have one medium term repo transaction which is a bit smaller. But when these instruments have a residual maturity of under one year, they aren’t much good to me in terms of balance sheet management. One area we think we could lengthen maturities in could be the private placement market, where

we can entice individual investors looking for some diversification of their portfolio. And we’re also considering tapping some of the international markets, which some of the larger UAE banks have done quite successfully — we could use the domestic markets of Australia, Taiwan and Malaysia, issuing in local currency and switching back into dollars. There seems to be some appetite in some of those markets at the moment.

The focus for me is diversification of both maturity and investor base — because I imagine that even with the small amount of issuance we’ve done, many of the regional banks probably already hold a reasonable share of our debt.

Tom Koczwara, Government of Sharjah: This year we’ve already done a $500m sukuk, which we finalised in January. We will potentially have further funding requirements as the year goes on. We’ve got a portfolio of our own $2.5bn of debt at the government level, then about another $2bn with regards to government-related entities. So we always have a refinancing requirement as debt is maturing. We haven’t finalised the budget for 2016 yet, but I expect there will be some net deficit which we’ll need to fund as well.

I don’t think we’ll be back to the public markets again this year, because our financing requirement’s not big enough, and also because, frankly, I don’t think people want to see us again this year. We’ve said to people we don’t expect to come more than once a year, maybe once every 18 months.

We’ve found in the past, though, that the private markets have been extremely

favourable for us. We have shied away from syndications at the government level in the past. We found our negotiating power to be best on bilateral deals or bonds placed privately with a single investor.

There are benefits of opening up to a bigger market but in today’s environment I think those benefits may be reduced because the wider global market is much less available to us. On our investor roadshow we got very good feedback from investors in Asia and Europe and in the GCC but our investor base in the final transaction was very heavily focused on the local market, and actually it ended up looking more like a big loan syndication than a true global public deal. If we do go for more large transactions, I think we’ll look again at the loan syndication route, which would be the first time for the government itself. Some of our related entities have done a couple of deals on that basis before. The market environment has changed. We need to be more agile and creative as a result. But taking a slightly longer view, although the market’s very weak compared with how it was three months ago, or six months ago, or a year ago, it’s really not that bad. There is still appetite to lend into the UAE. Rates are still extremely low. Credit spreads are still extremely low by long term historical standards. So we mustn’t beat ourselves up too much as issuers.

Amr Mostafa, National Bank of Egypt: NBE (National Bank of Egypt) is the largest commercial bank in Egypt with a balance sheet size of around $75bn and is owned by the Ministry of Finance. As such, we are the largest player in project finance and mega-

infrastructure transactions. So from time to time we have decent finance requirements in foreign currencies to fund the capex and loan requirements of our clients —private and public sector entities — in importing and building infrastructure projects like roads, railways, electricity and oil and gas projects.

We have been in the bond markets before — for a $600m five year issue that matured in August 2015. We explored the market [around that maturity date] and decided not to go ahead with a new issue until the market conditions are more favourable. We are

TOM KOCZWARA Government of Sharjah




ready with the documentation whenever the market conditions allow.

We have done some bilateral deals and syndications in the past. The latest was announced actually a couple of days ago for a $700m deal with the China Development Bank — an eight year loan.

We also have other loan facilities and bilateral loans with supranationals which we use for balance sheet optimisation and ALM enhancement.

GlobalCapital: Do you see a likely change in the dynamic between the loan and bond markets in this region over the next year? Koczwara, Government of Sharjah: If we had known everything about how things were going to pan out, the deal that we just did would have worked much better as a syndicated loan. We would have been able to control the negotiations better. We would have been able to eliminate the market instability that was making the transaction a little bit difficult, because there was so much market volatility at the international level, even over the days when we were pricing the deal.

However, we achieved an outcome we were happy with through the public issuance route. But what I hope we will see going through 2016 is stabilisation of commodity prices at some level and that really will provide the backdrop for stabilisation of credit markets. In the UAE, where most of us are based, there will be a repricing of credit in the market, but we will likely see prices across the market increasing, which will gradually encourage international liquidity back in.

And at that point I think the international debt capital markets become favourable again as the demand will have increased.

Tuke, Commercial Bank of Dubai: It’s going to be interesting to see how banks look at longer term lending once the new Basel regulations are fully implemented. There may need to be some repricing. For banks, it’s more beneficial to own a bond than it is to have a loan to the same obligor, because it’s more liquid — there’s some ability to sell the bond or repo it far more easily than I would with a loan.

I’m not sure that’s reflected in the pricing yet.

Andy Cairns, National Bank of Abu Dhabi: Over the course of the past nine months, we’ve seen a significant repricing of regional credit. This is most clearly pronounced in the bond space, where we’ve seen levels recalibrate markedly wider. It hasn’t yet manifested itself to the same degree in the loan market. So when I look at pricing for a top tier GRE in five years, a syndicated loan is 100bp tighter than a comparable bond issue.

The investment drivers are quite different in the two markets. For fixed income it’s much more of a clear-cut financial dynamic around relative value and portfolio fit, whereas relationship considerations weigh much more heavily in loans. Koczwara, Government of Sharjah: The approvals process gives you the lead time as well. A bank approves a $500m credit limit to a certain client and that stays in place for some months, whereas in the bond markets everything moves day-by-day.

Cairns, National Bank of Abu Dhabi: This was most clearly apparent over the summer, when we saw sharp moves wider in fixed income secondary levels. The market was very fragile as we came back in September and only a small number of GCC bonds and sukuk were executed in the second half, and at markedly wider levels than where those same credits would have come in June.

However, there were still syndicated loans being done in September at very aggressive

pricing. The loans that were being inked in September were not, however, an accurate representation of where the market was in September. They were more a representation of where those transactions had been negotiated pre-summer in a more favourable liquidity and price environment.

Another factor is the difference in key liquidity providers between the loan market and bond market right now. Recent bonds have had a greater proportion of GCC placement than they would have done if they had been done in the first half of last year. That’s somewhat counterintuitive because regional liquidity has diminished significantly over the same period, as one would imagine, given the correlation with the oil price.

However, in the loan market we’re seeing the opposite. There’s a bifurcation for top tier loan credits, whereby the tight pricing that EGA for example can command is now inside the level at which many regional banks can lend. So more international banks are playing in loan products, while regional investors are dominating fixed income.

Jumean, Emirates Global Aluminium: If you are an issuer from the GCC, it’s pretty clear that you need to look outside the UAE for tight pricing of loans. Because the liquidity situation has significantly reduced here — in large part because of the oil price but also other reasons. But if you are one of those GREs that has access to the loan market and the bond market, it seems to me that you can do a bank deal more cost-efficiently than a bond deal. Do the rest of you agree? Tom, do you think the banks would have been able to give you a deal at lower than 250bp over?

Koczwara, Government of Sharjah: I’m sure they would have done but of course we’re not a corporate, we’re a government. It’s quite a big ship and it turns quite slowly in terms of obtaining approvals and the information needed to document a public transaction. That’s the case today but I’m not sure it was the case when we embarked on the public issuance route.

Salman Al Hammadi, BNP Paribas: For the majority of Middle Eastern fixed income investors in a bond product, all

AMR MOSTAFA National Bank of Egypt




they care about is yield. When banks lend to a strong GRE with a sustainable business line and further ancillary businesses, they look beyond just the yield per se. They look at what fees and revenues they can generate over the longer period. That’s why banks can afford to provide lower spreads than what’s achievable in the bond market.

Koczwara, Government of Sharjah: But it’s interesting that you say investors in bonds and sukuk only care about yield, because actually on our recent deal it was the last thing they cared about. They cared about the immediate secondary trading — they wanted to know if they bought this today, would they gain or lose in the secondary in the next fortnight. We’re talking about asset managers, mark to market investors — people who are desperate not to take a loss on their P&L on this investment in the short term, having been burned on a series of GCC issuances over the last year. For the investors who were really willing to buy to hold and happy to sit on this for five years it was an absolute no-brainer. But that was a very small minority of the investors. Most of them saw buying in this environment as trying to catch a falling knife and so wanted to demand a large new issuance premium to make themselves comfortable.

Cairns, National Bank of Abu Dhabi: The one constant is that, across both bonds and loans, the largest investor constituency is banks. In the loan market currently it’s the international banks and in the bond and sukuk space, it’s the regional banks. But conspicuous by their absence in the regional financing markets are institutional investors. That’s been an Achilles heel of GCC fixed income for some time — we are very reliant upon banks regionally.

That worked well in an era of abundant liquidity, but with the liquidity pressures that the region is experiencing now it’s becoming more of an issue. We would certainly benefit from the development of a larger regional institutional buy side. In almost all of the deals we led in the second half of last year, international accounts said that from a relative value perspective, they didn’t like the spread because the GCC is still

unattractive versus a broader EM complex. So while GCC credit spreads in fixed income are higher than they are in the loan market, and that’s attracting the GCC banks, they’re still insufficiently high to attract international fixed income investors. It’s the bridging of this gap that is going to be the critical driver during the first half of 2016. At the moment, as a borrower, why do you need to look to international institutional liquidity when international bank lending is very attractive for you as the cheapest funding source? And in the absence of that, then it’s regional liquidity in the context of fixed income. But there is a size and duration cap on all of this.

GlobalCapital: Are there differences of the maturities on offer in the bond and loan markets?

McMichael, Agility: The international banks really don’t want us to go above three years. And they are very specific on how any extension options are structured. The regional players, again, are different. Some will accept a modest margin increase for a significant tenor increase. You’d be unlikely to get that extension at that cost from an international bank, which is probably a reflection of the different stages they’re at in Basel III implementation.

The return models within some regional institutions are different compared to the internationals and other regional players.

Tuke, Commercial Bank of Dubai: We’ve seen some aircraft financing of 12 years, but for us it would be an exception as a local bank, and it would need to be a local airline that

we had a relationship with. We raise funding on a bullet basis, whereas a lot of the lending we do is on an amortising basis. Because of that there isn’t much benefit to us in going longer than seven years for funding in either market, which is more easily attainable.

But I’d like to revert to a point that was made earlier — is it just that corporate borrowers feel obligated with regards to the handing out of peripheral business or are there actual agreements at the point of lending with regards to who you do your peripheral business with? And do you feel that you satisfy the banks’

requirements?

Jumean, Emirates Global Aluminium: We take our relationships with our banks extremely seriously. We don’t promise and then turn our backs. We have found that over the years this approach has paid off. When your banks know that you commit to what you say, these relationship banks stand behind you when you really need them to, and they will go the extra mile for you.

We never commit to any of our banks by saying that if you come into this deal then we will do something. We won’t guarantee a lead manager role on an upcoming bond, or a financial advisory mandate. Absolutely not, but we do make sure we give more credit to banks that support us in challenging markets — that’s how we separate the men from the boys. Banks are in the business to make money. They will scratch your back as long as you scratch theirs and everybody knows that we are fair and equitable in the way we award the business.

McMichael, Agility: We like to think we pay a sensible market price for our loans — not the top and not the bottom — because the level of ancillary business we have available for lenders varies. In any one year I can’t come in and say I have a wallet of $1m, $5m, $20m or $50m that’s going to the banks, because I just don’t know what size that wallet will be.

However, if the banks are willing and ready to support us on general corporate facilities, they’ll absolutely be the banks we will go to for other services if they are capable of delivering the service we need, or

SAMER JUMEAN Emirates Global Aluminium




try to combine them with another bank that has the full capability.

GlobalCapital: Do you see the local UAE banks as being as capable for most capital markets business as the international houses?

McMichael, Agility: It depends on the product. I don’t think any of the regional banks today have got the M&A capability to complete a transaction in Europe or the US or in parts of Asia. But in other regions, yes. We’ve had certain discussions with NBAD in the past where they have said: look, this is outside our area of expertise. That’s fine. But we can still pick their brains and may very well still put them on their first mandate for this kind of business, jointly with another bank that’s more of a guru in that area.

We signed a 13 year ship financing deal recently for which we brought in three regional banks out of four senior lenders. For one, they were new to shipping and to that sort of structure. But we worked with them and took them through it — we probably ended up paying more to the lawyers to talk them through the deal than for the structuring, but that was a worthwhile investment.

But in terms of lending, we priced a loan in the autumn of last year and the range of pricing we were offered from the banks was huge — from 1.1% to 3%, depending on which of the banks we were dealing with. At the lower and higher ends were regional banks, the international banks more closely clustered in the lower to middle range. The middle range — which is where we ended up pricing — was dominated by international banks, despite the international banks funding themselves at rates of Libor minus, and the local banks getting in funding anywhere from a few basis points, to 250bp over Libor. So there was almost no correlation. Some local banks funding at Libor plus 150bp were quite prepared to lend to me at Libor plus 160bp, whereas an international bank, funding at sub-Libor won’t lend to me at under 2% because their return models and calculations are different in terms of the way they measure their returns on the transaction.

Cairns, National Bank of Abu Dhabi: From 2011 through 2014, in a hyper-liquid regional environment, we saw regional banks in increasingly prominent league table positions in both GCC bonds and GCC syndicated loans.

Many of these regional players competed on balance sheet appetite, duration extension, margin compression and covenant relaxation and many of the international banks consequently stepped back. In the second half of last year we started to see a reversal in this. As pricing now ratchets up, it is becoming more attractive for international banks to play in the region.

Jumean, Emirates Global Aluminium: Yes. We see some of our local banks as very important and capable players. I would actually question whether the international banks have the ability that the local banks have in accessing local and regional investors.

We see part of our mandate as helping to expand the capacity of our financial institutions in the UAE. If there’s any role we can play to assist in that, we want to do it, so we are very keen to use the expertise and the capabilities of banks like NBAD or DIB. We see them as being as good as anybody else.

GlobalCapital: To what extent is Asia becoming a more important player in funding for the Middle East?

Mostafa, National Bank of Egypt: If you take a step back from the banking industry and look at the political environment among

the GCC countries and the Asian countries, you’re seeing a lot of collaboration, be it recent visits from China to Saudi Arabia or from Japan to Bahrain. Those political connections lay the road for the Asian banks to collaborate with these countries and their GREs. These players are up and coming within the GCC region.

Cairns, National Bank of Abu Dhabi: In late 2015 we saw the participation of Chinese banks in several GCC syndicated loans for the first time. That’s an important development. As regional pricing recalibrates wider, I’m optimistic that we’re going to see a greater internationalisation of the GCC funding markets.

Mostafa, National Bank of Egypt: In the bond and the private placement markets, one of the biggest pools of investors for the GCC region are Asian investors. They’ve got liquidity that’s available for them to invest in both shorter tenors and longer tenors and any currency across the spectrum.

Tuke, Commercial Bank of Dubai: I agree. We did two roadshows in Asia and the biggest focus for both was on yield. They didn’t seem to be quite so concerned about the structure itself. We got some interest but not as much as we had hoped for. But now yields are a bit higher maybe it will be a little bit different.

Mostafa, National Bank of Egypt: We’ve had a fruitful experience with the Chinese banks. But the Japanese banks are always very sensitive to structure — they don’t look at yield only. But they also look beyond that

and in certain cases will look at the long term relationship.

But in general I think our best bet is going to be focusing on European banks and investors — these are the ones that are likely to show the most interest in issues from the GCC and MENA.

What we see as most interesting is what’s going on regionally, though. We’ve seen certain Saudi institutions walk away that have traditionally been very much involved. And we’re seeing other Saudi banks that have not been in deals before coming in. The same thing is happening with Kuwaiti banks.

ANDY CAIRNS National Bank of Abu Dhabi




The reason is that there’s a big opportunity for commercial banks that have not been present in the past to come in and start building up ancillary business. Because some institutions that have relied on certain local or regional banks to support them in the past are now finding that these banks are having liquidity issues.

Koczwara, Government of Sharjah: We were in Malaysia at the end of November, and then we did Hong Kong and Singapore on the official deal roadshow this year. We got a pretty positive reception all around. But I think there was limited understanding of the GCC political, economic and fiscal situation. Many came away from our discussions with a different picture from how they started.

In terms of how that translated into demand for the transaction itself, we saw pretty healthy demand from Malaysia — a strong Islamic focus of course — and a real interest in the credit. They are long term partners of the UAE debt market. From Hong Kong and Singapore demand was limited this time round. One driver of demand there is that a lot of the accounts there are actually deploying liquidity that comes from the GCC.

I think there is still a huge job to do in educating people there as to the fundamental nature of the local economy here, the real health of the financial sector, and the true economic trajectory.

Mostafa, National Bank of Egypt: That lack of education is why only a small portion of GCC bonds are sold to Asian investors — only ever around 5%-10% of any issue.

Al Hammadi, BNP Paribas: For Asian asset managers in particular, there’s constant recent discussion about whether the lack of liquidity with Middle Eastern investors is a concern.

Previously in bond transactions you had ample demand from Middle Eastern banks that put in large orders in new transactions, which doesn’t just lower pricing but also creates secondary support.

With the lack of that liquidity within the Middle East, international investors, and Asian investors in particular, are worried

about participating in Middle Eastern bonds. Is that something you have heard during your roadshows, specifically in Asia?

Koczwara, Government of Sharjah: Not so much in Singapore, but it was a strong message in Hong Kong and it was shouted from the rooftops in London. The concern of investors in London was that if this bond is not going to perform literally next week, why should I buy it?

GlobalCapital: Do you think the liquidity concerns were exacerbated because you were looking to print sukuk rather than a conventional bond?

Koczwara, Government of Sharjah: Not at all, as there were quite a few factors contributing to it. The expected persistence of a downward macroeconomic trajectory for the GCC. An expectation that globally investors would be pulling liquidity out of the GCC rather than putting liquidity in. An expectation that GCC bank liquidity would continue to be constrained for longer than I actually think it will. Lack of demand in secondary. And lastly, much less momentum on the trade than we’d seen in previous transactions. So when investors were asking how the soft order book was going, we couldn’t tell we’ve got a soft order book of $5bn, because we hadn’t. We heard repeatedly that people liked the fundamentals, but the technicals were more difficult.

Tuke, Commercial Bank of Dubai: I had the same experience on our issue in November. It’s interesting, though, that when we did

our first bond issue a few years ago, which was five times oversubscribed, we met investors in Europe and in Asia, but the major demand was the Middle East.

But we were still encouraged to allocate bonds to international investors even though they were likely to sell them the day after back to the Middle East anyway. So how much buy-and-hold demand is there really among Asian investors in GCC bonds?

Cairns, National Bank of Abu Dhabi: Part of the problem is the fundamental disconnect around the assessment of relative value between indigenous

investors and international investors. Different capital treatments go some way in explaining this, but also there is a different assessment of risk.

If you are sitting in London or New York or Hong Kong and you are viewing this region through the lens of CNN or one of the other international media providers, you get a very different perspective on what is happening than you do if you live here.

I also think there’s an unfair expectation among international investors as to the quantum of indigenous demand they should expect for a GCC transaction because the bar has been set unrealistically high in the last few years of a hyper-liquid environment.

The issue of how we bridge the gap in assessment of fair price within the region and outside the region is increasingly relevant. John asked how much real money participation there is internationally versus regionally? I think a very modest amount.

When I moved here from New York, I would speak to issuers that were issuing in 144A format and would suggest to them that because of their format selection and their intent to diversify placement by targeting North America, they were often incurring an unnecessarily high credit spread versus issuing in Reg S format and focusing their placement on GCC and European investors.

We have an especially good view of this, because as one of the largest secondary market liquidity providers in the region, NBAD is the conduit through which much of this paper comes back. Today, the differential between what US accounts require versus European or Asian investors has markedly compressed. So I’m now

SALMAN AL HAMMADI BNP Paribas




encouraging discussions around 144A as the size and duration advantages of the US market are increasingly valuable.

Mostafa, National Bank of Egypt: And those GCC investors have limits on any name. Several frequent issuers tried to come to the market in 2014/2015 but could not actually print because the majority of investors had reached their limit on such needs in the couple of years previously.

Andy is right — it is the time to start upgrading documentation from Reg S to 144A, so we can knock on different doors and mitigate that lack of liquidity.

Cairns, National Bank of Abu Dhabi: But it’s important to remember that the effect of lower liquidity isn’t linear. If you look at issuance outstanding, there’s a very heavy skew towards GCC financials. That’s probably unsustainable in the volumes we’ve seen, and is where I expect to see the greatest pricing pressure.

However, we saw only $2.5bn of GCC sovereign issuance during 2015, so there’s still significant capacity for GCC sovereign supply to be bought indigenously. Similarly, there’s been scarce issuance by corporates, particularly from the top tier.

GlobalCapital: We’ve talked a lot about local liquidity but what’s the view from the ground in terms of other big risk factors for the GCC? What are you most focused on when considering your funding strategies? Is it the oil price, or politics, or something else?

Mostafa, National Bank of Egypt: It’s all of this plus global growth, because that’s affecting the oil price and so filters through to affect liquidity. You won’t see appetite for corporates unless there is real interest in the business model you have, and it’s the same for financial institutions.

Jumean, Emirates Global Aluminium: As a corporate, one of our challenges is the depressed commodity prices and there is an expectation that these may persist for some time. We cannot continue operating as if commodity prices are going to pick up in six months, 12 months or even three years from now.

So we have revisited our cost structure. We have looked at all our liabilities over the next three years and taken all actions necessary to withstand a situation where low commodity prices continue for some time. Because if they do, and companies do not take action today, they’re going to find themselves in some serious trouble.If low commodity prices persist, we’re going to see a lot of corporates slashing capex, which means financing needs will be postponed.

Koczwara, Government of Sharjah: The authorities will have an enormous role to play in how smoothly GCC financial markets recover from the current situation. Now would be a bad time to panic and an inappropriate time to panic. The GCC is still strong. The UAE is in the top 10 wealthiest countries in the world, we have a $400bn GDP, and we’re the 10th biggest exporting economy in the world in dollar terms. The trade is surplus a quarter the size of China’s. We’ve got sovereign wealth at 300% of GDP.

There is absolutely no reason whatsoever for the authorities to pull back from anything. Oil prices are at 2003 levels. Was the UAE some provincial backwater in 2003? No, they were about to lay the foundation stone of the Burj Khalifa. Plans were literally soaring into the sky.

It is extremely important for the author-ities in the UAE, and more importantly the GCC as a whole, to be confident and to act in a co-ordinated way — a way that is mindful not only of government fiscal priorities in the short term but also of the market and the wider economy. Because if the market loses confidence and the wider economy stalls,

that will have a far bigger impact on government fiscal positions than any short term changes in receipts and expenditure.

I hope the authorities realise that this is the time to flex the muscles that they’ve been building up over the past 20 years. There is a real possi-bility that corporates will scale back capex over the next two years. If that’s the case, governments can’t be scaling back capex as well because the econo-my will not grow without investment. If the private sector’s not going to do it, the government has to do it.

Tuke, Commercial Bank of Dubai: I think if the oil price stays low for quite a while, international investors will be expecting a lot more issuance from governments in the region to help with their budgets. Because of that there is a risk that they will sit on the sidelines and demand higher and higher margins.

Looking at different pockets of funding is increasingly important to mitigate against that and we intend to pursue those as and when we need funding — using private placements, different currencies etc.

However, I’m concerned about using bonds for long term financing via repos, because it opens an opportunity for those who take the bonds on to sell them and create a vicious circle of widening spreads.

GlobalCapital: And in terms of timing – do you think it’s better to jump in before the market worsens or wait?

Tuke, Commercial Bank of Dubai: We don’t need any funding or capital at the moment. But opportunistically, it depends. If market appetite comes back for tier one capital, at a certain level that may be a cheaper way of raising capital than perhaps going to shareholders or doing IPOs. So we’ll see how that market develops as well. Are there many mandates out for this kind of business?

Al Hammadi, BNP Paribas: Yes, we have some bank capital mandates for additional tier one, which is very dependent on there being appetite in the region and to some extent in Asia, as we’ve seen significant upward pressure on spreads there.

JOHN TUKE Commercial Bank of Dubai

ME Roundtable-r2.indd 18 23/3/16 7:48 am



It’s easier to get an AT1 trade done in Islamic format at the moment because there’s demonstrable price tolerance there from Shariah-compliant investors. But that’s a tough sell conventionally at the moment.

GlobalCapital: The private placement market seems to be exploding in popularity and some issuers in this region have been using it to great effect. Will that strength continue and do you see it as a good testing ground for finding other pockets of demand in different currencies, or different formats, for example, SRI or green bonds?

Tuke, Commercial Bank of Dubai: Our balance sheet is predominantly in dirhams, then dollars, but nothing else really, perhaps a small amount in euros. So raising money in other currencies is only beneficial to us if we can swap it back into dollars at a favourable rate. That’s a market-driven situation, but we do need to be ready, if the market is there, to be able to issue at short notice. We haven’t previously done private placements at CBD, it’s certainly something we want to consider going forward.

We will look at anything as long as there’s no damage to our reputation, the documentation is watertight, and we can raise term funding at an acceptable price.

GlobalCapital: How do you view the attractiveness of Islamic financing versus conventional issuance?

McMichael, Agility: We’d look at the loan terms, but I see it as another pocket of liquidity to tap. We used the same commercial terms in both deals, one on a conventional Loan Market Assiociation structure, the other on a commodity murabaha structure. That was our first major foray into Islamic financing.

One of the other larger transactions we talked about earlier is also likely to be Islamic as well. It’s a great source of liquidity for the right project, so why not tap it?

Al Hammadi, BNP Paribas: The entire sukuk market can be summarised in three words: supply, demand and imbalances. Islamic investors have a

limited number of investment opportunities so there is always ample demand. This creates the price tension that we used to see even in volatile times. For any investment grade issuer, the sukuk market is open, though market volatility and the transaction itself still need to be carefully managed.

In late 2015, we had two issuers from the same sector coming to the market around the same time. One tried to issue something in conventional format and the other in sukuk. The one that tried to issue conventional postponed while the sukuk tightened by 10bp before printing a benchmark.

Mostafa, National Bank of Egypt: But how does liquidity in the secondary market for sukuk compare to the conventional bond market?

Cairns, National Bank of Abu Dhabi: The secondary market for sukuk is less liquid than the secondary market for GCC conventional. That is largely explained by the lesser granularity of buyside participation in sukuk, and the buy and hold nature of many Islamic accounts. The average investor order size for a sukuk will be larger than in a comparable conventional transaction.

The total volume of international sukuk outstanding is around $90bn, of which the top five most frequent issuers account for around one third and the top 10 account for approximately 45%. It’s a very concentrated market.

So Islamic investors are motivated to buy new credits to achieve asset diversification

and will demonstrate price tolerance in return for being able to do so. This same dynamic applies to the murabaha loan market as well as the sukuk market.

In terms of secondary market performance in sukuk, there is an inverse correlation between measures of volatility and sukuk trading. When markets are more volatile, sukuk outperforms conventionals, and when markets tighten, sukuk underperforms. It’s a very defensive asset class.

For us at NBAD, Islamic finance is a critical cornerstone of our financing proposition, as I think it has to be for anyone in this part of the world. Our approach is self-serving. If 70% of my buyers are conventional and will buy bonds or sukuk and 30% are Islamic and will only buy sukuk, then wherever possible, I structure deals Islamically to maximize my buyside audience. In this region, conventional investors don’t differentiate between a murabaha loan or a sukuk versus a conventional loan or a conventional bond.

But that is different as you get further away from the GCC — there is still a lack of understanding internationally around sukuk.

Koczwara, Government of Sharjah: The only caveat I would put on this is that if you go Islamic, you have to take care of your Islamic investor base and you can’t be completely blind to the fact that you’re doing an Islamic transaction. You have to see your Islamic investors and structure your issuance so that they get time to get their approvals in place —Islamic investors

often take longer to get internal approvals than the conventional investors because it’s more of a rarity.

Cairns, National Bank of Abu Dhabi: There are also some added complexities for the borrower, particularly around asset identification — particularly for sukuk but less so on the murabaha loan side.

Jumean, Emirates Global Aluminium: And it becomes even more of a challenge if you’re a holding company, as we have no assets to base a sukuk on! ◼

ANDREW McMICHAEL Agility



China JVs

The existing crop of Sino-foreign JVs can trace their history to the mid-2000s, when Goldman Sachs and UBS inherited the licences of

Hainan Securities and Beijing Securities after lending a hand to their bailouts. That gave them majority control of the firms known today as Goldman Sachs Gao Hua and UBS Securities.

A clutch of similar ventures followed suit, including from Citi, Credit Suisse, Deutsche Bank, JP Morgan and Morgan Stanley. But unlike Goldman and UBS, they were limited to a minority interest in their JVs and prohibited from carry-ing out brokerage activities.

Today a number of those firms are thriving, and they have the numbers to show for it. Goldman Sachs Gao Hua and UBS Securities have broken into the ranks of the top 10 bookrun-ners in A-share equity capital markets, according to Dealogic.

UBS Securities finished 2015 at third place, behind only Citic Secu-rities and Guotai Junan Securities. It earned league table credit for deals worth $5.85bn – more than half of Citic’s total. Goldman Sachs Gao Hua was in eighth place with $3.87bn.

The JVs figured less prominently in onshore debt capital markets, with the top 10 list dominated by domes-tic securities houses in 2015. But Morgan Stanley Huaxin Securities

pulled ahead of the competition, bringing deals worth $12.83bn and a 18th placing on the league table.

EYES OPENThat solid performance against strong local competition is due in part to the fact that the JVs went in with their eyes open, say industry officials.

“The JVs have done as well or better than expected based on a realistic understanding

of the competition and the areas they can play in,” said Matthew Phillips, PwC’s China and Hong Kong financial services leader. “They had no illusions about the size of the opportunity or the length of time needed.”

But to get to where they are now has required no small amount of patience. For the first 10 years, the Sino-foreign JVs struggled to be consistently profitable. For example, in 2012, five of the 10 JVs lost money.

Then in October that year, the China Securities Regulatory Commission (CSRC) announced a moratorium on IPOs that lasted 14 months. The freeze took a toll on deal flow, and with most of the JVs restricted to underwriting trades in primary, they had little respite.

Hammering out partnerships was a challenge too. A senior source with an international bank in Hong Kong recalls that while the international firms may have been keen to access China’s clois-tered securities industry, their domestic counterparts were less so.

“After the 2008 global financial crisis hardly any of the Chinese institutions were interested in setting up a JV,” he said. “They saw no reason to give away a third of their equity, and some even asked for guaranteed revenues, which of course the banks refused.”

Yet many persisted with the belief that a China JV was essential and con-tinued sniffing out partnerships.

China’s foreign JVs come of ageAfter a decade in which they’ve suffered dismal profits, multiple IPO suspensions and a near-disastrous crash in A-shares, China’s foreign-backed securities houses are finally seeing the fruits of their labour. Now a pair of banks, including HSBC, are joining the fray with a new type of joint venture, setting the stage for another industry shake up. John Loh reports.

KENNETH KOOdeputy general manager and Citi's chief representative at Citi Orient.

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China JVs

“Having a great onshore JV is like being able to wave a flag for your brand,” said Keith Pogson, Ernst & Young senior partner for financial services, Asia Pacific. “If you want to be a global bank with a credible franchise in China, how can you not be onshore?”

According to data from the Securities Association of China, in 2014 UBS Secu-rities posted Rmb118.1m ($18.2m) in net profit, Goldman Sachs Gao Hua Rmb58.1m and Citi Orient Securities Rmb52.2m. This rose to Rmb235.6m for UBS Securities and Rmb162.8m for Citi Orient in the first half of 2015 — the latest period for which figures are available — buoyed by the bull market in A-shares and corporate bond issuance. Goldman Sachs Gao Hua raked in Rmb31.9m.

BOUNCE BACK For Citi, which agreed to form Citi Orient in mid-2011 but only got the business up and running a year later, the suspension on IPOs could not have come at a more trying time.

Its response was to diversify its offering and pour resources into areas including corporate bond issuance, M&A and securiti-zation, said Kenneth Koo, deputy general manager and Citi’s chief representative at Citi Orient.

The securitization aspect was key. After China put A-share IPOs on ice, banks were forced to diversify and fast. Citi Orient pushed into a then-burgeoning market for asset-backed securities, which allowed it to earn higher fees compared with traditional equity products because of the complexity involved.

In a transaction that cemented the JV’s reputation in securitization, Citi Orient led the issuance of an Rmb3bn microloan ABS in 2013 for e-commerce giant Alibaba. The underlying assets were unsecured microloans to micro enterprises and sole proprietors.

“It was a landmark deal,” Koo said of the Alibaba ABS. “Because of several novel structural features, including the first ABS based on microcredit to consumers and merchants, we were not sure if the CSRC would approve it. Today Citi Orient punches above its weight in the securitization market.”

The figures would seem to back this up. Citi Orient ranked seventh for onshore asset and mortgage-backed securities in 2015 with five deals worth $2.11bn, according to Dealogic. Following closely behind was JP Morgan First Capital Secu-rities, which brought seven deals worth $2.06bn.

PwC’s Phillips agrees that the JVs must find a niche. “Being one of 10 or more banks on a high profile outbound deal or listing is good for rankings. But just as important are the mid-sized deals the JVs nurture themselves and are uniquely placed to execute because of their local connections and global relationships. Here they take the lion share of the healthier fees on offer.”

Like Citi, UBS Securities also found ways to weather the IPO suspension. To make up for fewer listings, the firm turned to fol-low-on issuance and debt capital markets. It helped that UBS Securities had access to

an equity trading and brokerage business through the licence it inherited.

But UBS had the added advantage of being among the earliest to qualify as a Qualified Foreign Institutional Investor (QFII) in 2003 with a quota of $800m. That quota came in handy during the 2012 moratorium, as the Swiss bank leveraged it to become the market leader in A-share trading for QFII clients.

QFII was the first official programme allowing foreign fund owners and fund managers, typically long-only investors, to gain entry into China’s capital markets. It remains the largest of the inbound invest-ment schemes and total quotas now stand at $91bn, according to data from CEIC.

NEW PLAYERS But while the incumbents are now on a strong footing after weathering various crises, the end of 2015 brought news that is set to shake up the sector again.

CHINESE A-SHARE BOOKRUNNER JV RANKING 2015 Deal value Bookrunner Rank ($m) No. % shareCITIC Securities 1 10,279 37 9.0Guotai Junan Securities 2 8,541 27 7.5UBS Securities 3 5,847 9 5.1China Securities 4 5,737 29 5.0China Merchants Securities 5 4,928 27 4.3Southwest Securities 6 4,862 20 4.3Huatai United Securities 7 4,331 25 3.8Goldman Sachs Gao Hua Securities 8 3,868 4 3.4Morgan Stanley Huaxin Securities 27 1,261 5 1.1JP Morgan First Capital Securities 34 901 2 0.8Citi Orient Securities 41 619 6 0.5SOURCE: DEALOGIC

CHINESE ONSHORE DCM BOOKRUNNER JV RANKING 2015 Deal value Bookrunner subsidiary Rank (Proceeds) ($m) No. % shareCITIC Securities 1 62,330 193 9.6China Securities 2 39,371 124 6.1Industrial & Commercial Bank of China – ICBC 3 36,725 189 5.7China Construction Bank Corp – CCB 4 28,085 167 4.3Guotai Junan Securities 5 27,491 115 4.3China Merchants Securities 6 23,265 103 3.6Morgan Stanley Huaxin Securities 18 12,826 45 2.0UBS Securities 24 9,136 28 1.4Citi Orient Securities 29 6,685 21 1.0Goldman Sachs Gao Hua Securities 32 5,740 13 0.9JP Morgan First Capital Securities 39 4,065 15 0.6SOURCE: DEALOGIC

MAKING THEIR MARK

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China JVs

In November, HSBC started the ball rolling on a JV of its own. The struc-ture it has chosen, however, will break with the past.

Instead of the 33% shareholding limit imposed on older JVs, HSBC’s agreement will give it a 51% stake in the venture. The bank also aims to offer a broad spectrum of investment banking services, including the ability to trade in the secondary market.

In addition, it will not be tying up with another Chinese brokerage but Shenzhen Qianhai Financial Hold-ings – a state-owned entity that has a government mandate to promote and develop the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooper-ation Zone, a special economic zone in Guangdong.

“This JV is further evidence of HSBC’s determination to be part of China’s economic development, grow our business in the Pearl River Delta and throughout the country and support the innovative approach to reform and liberalisation that policymakers are under-taking,” HSBC group chief executive Stuart Gulliver said in a statement in November.

The onshore venture was made possible thanks to an amendment to Supplement X of the Mainland and Hong Kong Closer Economic Partnership Agreement (CEPA) last August.

The agreement, signed in 2013, allows Hong Kong or Macau-funded institutions to set up one JV in each of Guangdong, Shanghai and Shenzhen with a maximum shareholding of 51%. At the time however, the criteria for which firms were eligible was unclear.

Then in August 2015, the CSRC said that an investor must be a licenced financial institution or financial holding company registered and headquartered in Hong Kong. Also, the investor or its controlling entity must be listed in Hong Kong, with at least 50% of pre-tax profits derived from the city.

HSBC qualifies as its Asian unit, the Hongkong and Shanghai Banking Corp, is headquartered and funded in Hong Kong. But it was not the only one to jump on the opportunity. In December, the Bank of East Asia said that it would also be starting a

fully licenced securities JV with Qianhai. Both ventures are still subject to regulatory approval.

Credit Suisse also announced in November that its JV Credit Suisse Founder Securities won approval to provide brokerage services in Shenzhen Qianhai from CSRC.

These are all signs the regulator is becoming more comfortable with foreign ownership in the financial sector, said an analyst. “It echoes the central government’s stand on reform and efforts to introduce more foreign participation in the capital markets,” he said.

Nicole Yuen, vice chairman for Greater China and head of Greater China equities at Credit Suisse, said its JV’s brokerage licence will not only give Credit Suisse Founder a new revenue stream but also build on the Swiss bank’s key strength in China – equity research.

Credit Suisse’s research coverage spans over 1,200 A-share companies in Shanghai and Shenzhen, the biggest for a foreign bank, said Yuen. The trading licence means it can now broke to clients offshore, which it had been doing via the Shanghai-Hong Kong Stock Connect, and also locally in China via the JV.

For HSBC, when the JV is approved, one of its first priorities will be to launch an

onshore debt business, amid a boom this year in renminbi bond issuance on the Mainland on the back of falling interest rates. Bonds is also HSBC’s strongest suit offshore with the bank regularly topping the leagues tables for Asia ex Japan. Its Hong Kong arm was also one of the first issuers to sell a Panda bond when the onshore ren-minbi market was reopened to foreign issuers in September.

“We are excited about this,” Gordon French, head of global banking and markets, Asia Pacific for HSBC told Asiamoney. “It’s a great entry point into China but we are also cognisant that we are building this business for the long term.”

CURIOUS TIMING In many ways the JV is a natural fit for HSBC, which traces its roots to Hong Kong and Shanghai. But the timing of the venture, set against

major upheaval in China’s financial markets, means the new JVs could face an even tougher challenge than their predecessors.

Investor sentiment has soured on China after a series of policy gaffes by the gov-ernment, including the boom and bust in A-shares and a surprise devaluation of the renminbi that stoked fears of a recession. Last year was the most tumultuous in a decade for Chinese equities.

“The renminbi issues are very serious, perhaps even more than the A-share crash,” the senior banker said. “It’s causing lots of angst and poses fundamental questions about China’s economy. The big risk is how policymakers will respond. If they dial back on reforms we could see more outflows.”

Adding to the concerns was Moody's decision on March 2 to change its outlook on China's Aa3 government bond rating to negative from stable, citing weakening fiscal metrics and the continued fall in for-eign exchange reserves. “Without credible and efficient reforms, China's GDP growth would slow more markedly as a high debt burden dampens business investment,” the ratings agency said.

Still, Credit Suisse’s Yuen thinks now is a good a time as any to build out its China franchise.

GORDON FRENCHhead of global banking and markets, Asia Pacific, HSBC.



China JVs

“In a bull market it’s often difficult to expand into a new business because everyone is busy chasing their existing business,” she said. “But the market has given us a breather now, and there are clear benefits, such as the availability of talent and resources. China is a strate-gic market for Credit Suisse, so we will expand regardless.”

HSBC’s French also believes the right talent may be easier to attract in a chal-lenging market.

Its JV, he added, is an important com-ponent of HSBC’s Asia pivot and China strategy. The model the JV will seek to emulate is that of its own global banking and markets unit in Hong Kong, and HSBC plans to build similar capabilities onshore so that it can offer clients an equivalent choice of offshore and domestic services.

In the meantime, the bank has been keen to manage expectations. With the JV still at the pre-approval stage, there is little indication as to when it will begin operations.

The analyst said that with or without a securities JV, HSBC has always been one to watch in China because of its onshore commercial banking presence, the largest of any foreign bank.

“HSBC’s onshore bank and JV could be a powerful combination, but it boils down to execution,” the analyst said, adding that market participants will be waiting to see how HSBC puts its vast balance sheet to work as a secu-rities house.

In addition, there may be disad-vantages to entering the securities industry without an established partner, reckoned the analyst. On the flipside, starting from scratch means HSBC will not have to inherit the legacy issues that come with part-nering an established business. Few would also doubt the strength of its partner, which as an arm of the state exudes considerably more clout than a private entity.

“What we aim to build is an unprecedented JV that isn’t based on any legacy platform,” said French. “We want to create a business that lasts a long time, is relevant to clients and sustainable.”

SECRET SAUCE That commitment to investing for the long term is an approach echoed by many others. “There is no silver bullet,” said PwC’s Phillips. “But if you are willing to take a longer-term view and bring the best of what you have to offer clients onshore and offshore, then the JV has a good chance of being successful.”

Another key to success for the JVs is integration between onshore and offshore. But avoiding messy turf wars is easier said than done. The senior banker said JVs often suffer from a silo mentality where onshore bankers push their products at the expense of everything else.

Some firms have done a better job of collaborating than others. A source close to Goldman Sachs Gao Hua said that internally, the firm does not distinguish between its A- and H-share teams.

That kind of synergy was what helped Goldman Sachs Gao Hua execute, on a sole basis, the Rmb12.7bn secondary placement in Shanghai-listed Industrial Bank Co in February 2015. The trade, which saw Gold-man pull off the first ever institutionally marketed A-share block sale in China, was a coup for the bank and the JV.

Eugene Qian, president and country head of UBS’ China business, said its corpo-

rate client solutions (CCS) teams in the Mainland and Hong Kong work as a single, fully integrated function to serve Chinese clients.

“Since many clients have both A- and H-shares listed in Shanghai, Shenzhen and Hong Kong, they prefer to deal with a bank that can offer an integrated service onshore as well as offshore,” Qian said.

Moreover, having management control means it can ensure the quality of staff is on par with UBS’ global standards. Its bankers rotate regularly between the Main-land and Hong Kong so that the bank has virtually one platform onshore and off.

REFORM QUESTION Still, with global financial markets in flux, Qian reckons that 2016 will be a year of adjustment for China’s economy and capi-tal markets. The entire process could take more than 12 months, he said.

“However, China remains determined to execute the reform agenda and will continue with renminbi internationalisation. The government will no longer provide stimulus for all industries, but it is offering support to industries which are sustainable.”

For its part, UBS is sticking to its com-mitment to China. CEO Sergio Ermotti said last year that the Swiss lender is aiming to

double its staff strength in China over five years and add about 600 people across wealth management, invest-ment banking, equities, fixed income and asset management.

As always with China, the sands are constantly shifting. Bankers at the JVs say they are cautiously optimistic about the future, but many are also counting on Chinese companies to continue venturing abroad and grow domestically, all of which is positive for capital markets.

The trick, for some, is to keep their eye on the prize. “We are feeling good here and are busy,” said Citi’s Koo.

“Without being on the ground in the form of a JV, it’s hard for people to truly understand the significance, direction and speed of transformation in China’s domestic financial markets. An onshore presence is crucial. We have hardly scratched the surface of China’s potential.” ◼

EUGENE QIANpresident and country head of UBS' China business.



China Deals and Investment Bank of the Year Awards

China has become the biggest and arguably the most important capital market in Asia. The size and scope of transactions combined with the fast pace of reform is influencing capital markets well outside the country’s borders. In our first China Deals and Investment Bank of the Year Awards, we select the standout transactions and institutions of 2015.

BEST PROJECT FINANCINGSino-American Energy $250m loan due 2021Mandated lead arrangers: Bank of Communications, HSBC, Société Générale and Standard Chartered

BEST IPOChina National Nuclear Power Co Rmb13.2bn IPOJoint bookrunners: Citic Securities and UBS

BEST FOLLOW-ON/ACCELERATED BOOKBUILDIndustrial Bank Co Rmb12.7bn secondary placement by Hang Seng BankSole bookrunner: Goldman Sachs Gao Hua Securities Co

BEST EQUITY HOUSEUBS

BEST SECURITIZATIONChina Construction Third Engineering Bureau Co Rmb3.015bn ABS due 2018Sole bookrunner: China International Capital Corporation

BEST LOCAL CURRENCY BONDRepublic of Korea's Rmb3bn bond due 2018Joint bookrunners: Bank of Communications, Citi, Goldman Sachs, HSBC and Standard Chartered

BEST INTERNATIONAL BONDBank of China four-currency six-tranche $3.5bn One Belt, One Road bondJoint global co-ordinators for all tranches: Bank of China, Barclays, Citi, DBS and HSBCJoint bookrunners for dollar tranches: Commonwealth Bank of Australia, Goldman Sachs and JP MorganJoint bookrunners for the euro tranche: BNP Paribas, First Gulf Bank, Société Générale and UBSJoint bookrunners for the Singapore dollar tranche: OCBC and Standard CharteredBookrunner for the offshore renminbi tranche: First Gulf Bank BEST BOND HOUSEIndustrial and Commercial Bank of China

BEST INVESTMENT BANKChina International Capital Corporation

The Mainland event: China’s best banks and deals

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BEST PROJECT FINANCINGSino-American Energy $250m loan due 2021 Mandated lead arrangers: Bank of Communications, HSBC, Société Générale and Standard Chartered

The $250m reserve based lending facility for Asian American Gas (AAG) was a win for both the client and the lending group. It demonstrated that international banks were willing to take a view on onshore gas assets in China, while providing a level of accom-modation that would allow for expansion of the company’s reserves in the future.

But a host of challenges had to be over-come to deliver the best package for both parties. The borrower, Sino-American Energy, a subsidiary of Hong Kong-listed AAG Energy, operates in the upstream oil and gas sector. That meant syndication took place amid extreme volatility in the price of energy commodities.

The team also had to overcome regula-tions limiting the amount of security that is allowed to be pledged against gas assets in China and there was no recourse to the parent, an internationally recognised name. If that was not challenging enough, keeping the loan under wraps was critical as AAG was due to IPO in June 2015, shortly before the financing was signed.

But a smart and lean syndication strategy meant the deal was completed successfully.

Only a handful of banks had expertise in upstream oil and gas project finance in Asia, and underwriter HSBC decided to focus its efforts on this select group. The cushion of regulated gas prices in China also gave the loan a leg-up.

The fundraising revealed new liquidity for Sino-American Energy and also gave banks a chance to form a relationship with the company.

BEST IPOChina National Nuclear Power Co Rmb13.2bn IPO Joint bookrunners: Citic Securities and UBS

There can be few deals in any market that dominated the landscape quite as much as China National Nuclear Power Co’s IPO did in China’s equity market last year. The listing was the first A-share IPO for the country’s nuclear industry and attracted the largest frozen funds in subscription since 2009.

The demand for shares was such that the offline tranches, which were allocated 30% of the approximately 3.89bn shares on offer, were 121.22x oversubscribed before clawback. The take up of the online tranches was even greater at 142.99x over-subscribed before the clawback.

Investors certainly had to wait some time to get their hands on the shares. CNNP first announced its plans to list in May 2014. At that time IPOs in China were under one of their many suspensions as new reforms were brought in.

This meant the leads needed to work closely with the issuer to provide feedback to the regulator and resolve issues so that the IPO preparation would be complete when listings resumed again.

BEST FOLLOW-ON/ ACCELERATED BOOKBUILD

Industrial Bank Co Rmb12.7bn secondary placement by Hang Seng Bank Sole bookrunner: Goldman Sachs Gao Hua Securities Co

Of the hundreds of block trades that priced in Asia this year, none did it quite like Industrial Bank. Hang Seng Bank sold down a 5% stake in Industrial Bank in February, in a trade that broke barriers.

Hang Seng was looking to cash in on the 953m A-shares it held in Industrial Bank, mandating Goldman Sachs for the job. But there were huge challenges to overcome, not least the fact that an A-share block had never been distributed on a large scale before.

This was because block trades on the Shanghai Stock Exchange had only pre-viously been sold on a piecemeal basis to one or two buyers at a time, and onshore

market participants were not used to the kind of broad-based price discovery this deal was trying to achieve.

So Goldman set out to pioneer the first ever institutionally marketed A-share block sale in China, aided by the Shang-hai-Hong Kong Stock Connect. The platform was key to sealing the deal as it created a bridge between China’s hard-to-access onshore market and institutional investors offshore.

But being the first mover also had its drawbacks. In order for the trade to be a success, Goldman had to educate a wide array of parties, including the stock exchange and regulatory bodies.

And because Goldman’s own QFII quota was too small to accommodate all the orders, it quickly pooled together about $3.5bn worth of QFII with the help of several banks.

Even when it came time to execute the block, there was plenty working against the lead. It had less than two weeks between kick-off and pricing. And with only a 30-minute window to cross the shares, time was not on its side. Goldman got around this by working on a min-ute-by-minute schedule with the brokers, detailing each crossing to make sure the trade went off without a hitch.

And it paid off handsomely. The block priced at Rmb13.36 a share, or a 7% dis-count to its last close. The trade also won our award for Best follow-on/accelerated bookbuild in Asia.

BEST EQUITY HOUSEUBS

Navigating China’s equity capital markets is never an easy task especially in a year when important structural reforms went head-to-head with political and social considerations and often came out on the losing side.

Regulators certainly put plenty of obstacles in the way of equity market practitioners in 2015. Yet again IPOs were suspended, this time between July and November, as Chinese authorities battled



to stop a stock market rout that had knocked trillions of dollars off the value of the country’s stock markets and off the wealth of its electorate.

For UBS, whose main strength onshore is bringing eye-catching IPOs to the market, this could have been a real setback. But in reflection of the strength of its franchise, the bank was the third biggest bookrunner for ECM activity in 2015, with league table credit of $5.8bn, according to Dealogic. While this is just over half of market leader Citic Securities’ $10.2bn, it was way ahead of its nearest international competitor Goldman Sachs in ninth place.

UBS worked on a number of major deals including the year’s second largest IPO, the Rmb13.19bn listing for China National Nuclear Power Co, which wins our award for Best IPO. It also led the Rmb1.8bn listing for Spring Airlines — the first A-share IPO of a low cost carrier and the first for a privately owned carrier. These landmark transactions helped make UBS

the leading IPO underwriter in 2015. All the more impressive when the number of IPOs it worked on compared with its rivals is that much less.

While it does not boast the same market leading position for follows-on, UBS nevertheless worked on some noteworthy deals including a Rmb16.8bn trade in Industrial Bank of China, which is the country’s largest ever A-share accelerated book build.

Not that the bank is resting on its laurels. At the end of last year it moved to further strengthen its equity business by swapping senior members of its onshore and offshore teams to boost collaboration. Always keen to emphasise the impor-tance of what it calls its dual platforms, the changes will see Ding Xiaowen and Bi Xuewen, co-heads of UBS Securities’ corporate client solutions (CCS) move to the CCS China team in Hong Kong, while Jiang Guorong, vice-chairman of Asia and head of China for CCS in UBS, will transfer to UBS Securities.

UBS wins our award for Best Equity House in China for its ability to capture market share and innovate in a market that presents unique challenges in terms of regulatory obstacles and strong compe-tition from domestic rivals.

BEST SECURITIZATIONChina Construction Third Engineering Bureau Co Rmb3.015bn ABS due 2018 Sole bookrunner: China Interna-tional Capital Corporation

A lot is made about how much the role of timing can contribute to a deal’s success or failure so the fact that the record asset backed securitization for China Con-struction Third Engineering Bureau Co (CSCEC 3B) managed to price in the quiet period between Christmas and New Year is




testament to the work that went into the transaction.

Sole bookrunner China International Capital Corporation certainly had plenty to contend with. The timing was a result of the originator wanting to proceed soon after receiving the relevant approvals.

Adding to the complexity was the fact that construction receivable ABS was a relatively new product in China and was still in its development stage at the time this transaction was done. And the deal for CSCEC 3B was going to be by far the largest transaction in the asset class as the issuer is a subsidiary of China’s third largest construction company China State Construction Engineering Corp.

But using the construction receivable ABS rather than another form of fund-ing allowed CSCEC 3B to meet its goals. Firstly, it allowed the company to recycle the revenue from its business and receive cash upfront rather than have to wait for the receivables to be paid. It also meant the receivables were moved off balance sheet, a vital element as construction companies in China are subject to strict limits on their debt-to-asset ratios.

The final deal was split between a Rmb2.56bn 4.19% three year senior tranche and a Rmb455m subordinated tranche.

BEST LOCAL CURRENCY BONDRepublic of Korea's Rmb3bn bond due 2018 Joint bookrunners: Bank of Com-munications, Citi, Goldman Sachs, HSBC and Standard Chartered

There was plenty of excitement when the Panda bond market reopened in September but with the first few trades coming from institutions with strong China links it was not until South Korea made its debut that the market showed it could attract a broader issuer base.

When the Korean government announced its plan to become the first sovereign issuer in the Panda bond market, it was not sure if the deal would materialise by the end of 2015. The plan to issue the bond only began to develop after the visit of Chinese premier Li Keqiang to Korea at the end of October and the approval process was known to take a long time.

But keen to secure the first sovereign Panda bond issuance, China’s National Association of Financial Market Institutional Investors (Nafmii) gave the go ahead on December 8 and the borrower set out on a three day inves-tor roadshow in Shanghai and Beijing.

A few days later South Korea raised Rmb3bn for the 3% three year deal after orders of Rmb12.4bn poured in.

The successful transaction marked the next phase in the opening up of China’s onshore renminbi market to foreign issuers and paved the way for the Province of British Columbia to sell a Panda bond in January 2016.

BEST INTERNATIONAL BONDBank of China four-currency six-tranche $3.5bn One Belt, One Road bond Joint global co-ordinators for all tranches: Bank of China, Barclays, Citi, DBS and HSBCJoint bookrunners for dollar tranches: Commonwealth Bank of Australia, Goldman Sachs and JP MorganJoint bookrunners for the euro tranche: BNP Paribas, First Gulf Bank, Société Générale and UBSJoint bookrunners for the Singa-pore dollar tranche: OCBC and Standard CharteredBookrunner for the offshore ren-minbi tranche: First Gulf Bank

Bank of China’s One Belt, One Road trans-action set a new standard for complexity in the bond market, raising $3.5bn from an ambitious four-currency, six-tranche trade.

While it would have been easier to execute the tranches separately, that was not what the Chinese lender had in mind. Instead, it wanted to make a statement that reflects one of the most talked about global developments of last year – China’s One Belt, One Road initiative.

The scheme aims to recreate the ancient Silk Road that connected Asia with Eastern Europe. And to underline this theme, four different BoC branches issued the bonds – Hong Kong, Singapore, Abu Dhabi and Hungary.

As a result, it was paramount that the banks involved were able to execute it in one fell swoop, which was easier said than

Pandas made their mark in 2015


ACI.indd 1 22/3/16 7:16 pm



done given the unstable market backdrop in June because of the Greek debt crisis.

Still, those running the trade were able to get things together thanks to a well-choreographed strategy. The leads announced the dollar, CNH and SGD tranches in the Asia open while at the same time gauging indications of interest for the euro portion.

That shortened the bookbuilding time for the euro floater to just three hours once the leads started accept-ing orders when Europe opened.

If that wasn’t enough, the transaction also broke a bunch of records. It holds the Asian record for being the largest Reg S only bond, the first four-currency trade and the most number of tranches. It is also the first euro floater as well as the first public SGD bond from a Chinese bank. The deal is also a winner of our Best Financial Bond in Asia.

BEST BOND HOUSEIndustrial and Commercial Bank of China

Industrial and Commercial Bank of China managed to stand out from many of its com-petitors for its ability to combine a strong onshore business with the ability to service its Chinese client base across the globe in a diverse set of markets.

Large transactions are of course a feature. Highlights include Rmb20bn each of bonds for PetroChina Co and China National Petroleum Corp, which rank as the largest drawdowns from a domestic MTN programme.

On a smaller scale but also significant is a Rmb2bn three year bond for Ford Auto-motive Finance (China), the borrower’s China debut and the first senior bond since 2013 from an auto finance company.

The bank also took a lead in innovating in China’s nascent securitization market last year, pricing Bank of Communication’s first transaction to be backed by credit card receivables.

As well as its work onshore, ICBC has also priced deals for Chinese issuers in dol-

lars and renminbi and was quick to take advantage of the trend for euro funding, placing bonds for China State Shipbuilding Corp, China Three Gorges Corp and Shang-hai Baosteel Group Corp among others.

In China, ICBC has proven that it has broadened out from its core client base of state-owned entities to also price deals for private and international companies looking to raise funds in China’s capital markets. But it is also increasingly able to offer a full range of services for its SOE clients abroad including structuring, road-show logistic and ratings advisory across multiple currencies and markets. For these reasons it was the natural choice for Best Bond House.

BEST INVESTMENT BANKChina International Capital Corporation

China International Capital Corporation was always going to be a strong contender for this award. As the country’s first joint venture investment bank, it has been in the market longer than anybody else so has a natural advantage. But in an increas-ingly competitive environment, what gave CICC the edge this year was its ability to grow its market share in serving China’s burgeoning ranks of world class privately owned companies. The bank has also been at the forefront of China’s M&A boom

advising a glittering array of jumbo deals in and outside the country.

While the state-backed sector has always been a natural client base for CICC, over the past few years the bank has worked hard to build relationships with private sector firms as they play a bigger role in the country’s economy. That work has paid off and in 2015 almost half the bank’s business came from the sector.

CICC has been especially successful in capturing work from the technology sector. During the year, it advised Alibaba on a Rmb43.3bn strategic investment in privately owned retail investor Suning Commerce Group and was the sole bookrunner on Beijing Kunlun Tech Co’s Rmb1.4bn IPO, the largest ever A-share listing by an online gaming company.

The bank’s strongest suit remains M&A where it leads the league table with a market share of 12.6%, according to Dea-logic. Its work included China Tower’s jumbo Rmb231.4bn acquisition of network assets from three telecom companies as part of the restructuring of the country’s SOE sector.

It cannot boast the same strength in equities onshore where it is outshone by Goldman Sachs and UBS but it has a stronger platform when advising on Chi-nese listings overseas and sits just outside the top five.

But for its success in riding the M&A wave and winning business from China’s burgeoning private sector, CICC is Asia-money’s pick for investment bank of the year. ◼

ICBC stole a march in bonds


26 May 2016 • Bangkok

TheGreaterMekongInvestment Forum

Euromoney is delighted to announce the Greater Mekong Investment Forum will return to Bangkok on 26 May 2016. This year’s conference is entitled Sustainable Economic Growth in the Greater Mekong Subregion and will be opened by HE Veerathai Santiprabhob, Governor, Bank of Thailand. The conference will examine the impact of a slowing Chinese economy, falling rates and declining oil prices on the resource-rich Greater Mekong Subregion. Over 700 delegates from Cambodia, China, Laos, Myanmar, Thailand, Vietnam and internationally will be in attendance to discuss the financing opportunities from this region. In addition, panel discussions will focus on what the recent government changes in Laos, Myanmar and Vietnam will mean for the region’s investment climate as well as the growing economic ties between China and the GMS.

For further information about this event, please visit our website

www.euromoneyasia.com/mekong or email us at [email protected].


Australian Banks

Earlier this year, two men posed as a gay couple and toured the western suburbs of Sydney pretending they were house buyers. The two

were actually hedge fund manager, John Hempton, chief investment officer at Bronte Capital, and economist and Variant Perception founder, Jonathan Tepper.

What they found shocked local banks, regulators and markets and has become known locally as the “Big Short” issue, in a reference to the recent film about the global financial crisis. Their conclusions were stark: Australia faces a massive hous-ing bubble propped up by dodgy loans. It was a repeat of the disastrous US housing bubble. And when the bubble bursts, those lending Australians money to buy houses — the major banks ANZ, NAB, Westpac and Commonwealth Bank of Australia (CBA) — will be pummelled.

Tepper predicted a doomsday scenario for Aussie banks with dividends cut entirely, forced capital raisings and stock-price crashes of 80%.

The report was the latest front in a savage attack on Australia’s major banks by hedge funds and short sellers which has pushed their share prices to multi-year lows.

The world has certainly changed for Australia’s big four banks. They face slow-ing domestic economic and credit growth, which is expected to crimp earnings, margins and dividends.

As one senior banker who did not wish to be named told Asiamoney: “We continue to generate business, but it’s tough out there from a loans perspective and margins

are falling. People aren’t borrowing like they used to across the board; there’s been a tightening up of investment loans and housing loans.”

And significant risks do remain, par-ticularly in Australia’s overheated housing market and a regulatory crackdown that is boosting capital requirements and diluting returns on equity.

But the doomsday scenarios hedge funds tout is wide of the mark and the banks are responding to their new environment. Three of the four have appointed new style conservative CEOs who are focused on running tighter ships, with a strong domestic focus, and winding back their predeces-sor’s grand global ambitions.

“No one is running around panicking,” the banker said.

STRANGLEHOLDAfter the global financial crisis, Australia’s major banks became market darlings as local and interna-tional investors bought them as rare high-yielding safe havens.

Offshore banks, burnt in their home markets, retreated from Australia and smaller lenders struggled to get funding. The big four banks, protected by government deposit guarantees, tightened their stranglehold on the local market. The China-driven commodities boom also kept

the Australian economy and the housing market buoyant, fuelling banks’ record profits and dividends.

But around March last year, things started to change as investors reassessed the banks’ risks. The depth of the commod-ities slowdown had become apparent as prices for the likes of iron ore crashed when Chinese growth faltered.

CLSA bank analyst, Brian Johnson, says the four-year rally in Australian bank stocks had been fuelled by “near relentless buying from structurally underweight inter-national institutions chasing dividends

Poised for changeAustralian banks are going through one of their toughest periods as slowing economic growth and greater regulatory oversight cause them to rethink their business models, especially when it comes to overseas activity. With new CEOs in place at three of the four big lenders, the industry is set for an overhaul. Ben Power reports.

ANDREW THORBURNchief executive, NAB.

Australia Banks-r3.indd 32 22/3/16 7:09 pm


Australian Banks

SHORT TERM MAJOR BANK SHORT INTEREST AS A PERCENTAGE OF EQUITY

SOURCE: CLSA; BLOOMBERG

Jan15 Mar15 May15 Jul15 Sep15 Nov15 Jan16

ANZ NAB3.0

2.5

2.0

1.5

1.0

0.5

0

CBA Westpac%

as funds have flowed into international income funds”.

But with the weakening Australian dollar, he says the banks are now being caught up in an unwinding of that “Austral-ian dividend yield carry trade”.

Concerned about the banks’ too big to fail status, the Federal Government also hit the banks with a regulatory crackdown at the end of 2015 following a ‘root and branch’ look into the Australian financial system headed by former CBA boss David Murray. In anticipation of higher capital requirements, the major banks last year tapped markets to the tune of A$18bn ($13.6bn), diluting their return-on-equity, which according to KPMG in a report called Courage Required fell from 15.5% to 15% in 2015, with more falls likely.

Adding to the concerns, the banks’ shares crashed as hedge funds, particu-larly, attacked with most bank stocks falling around 35%.

As Johnson notes, net open short positions have increased substantially for Australian banks, particularly for ANZ, CBA and Westpac (see chart below).

The banks have also been hit by a raft of scandals in trading, financial planning and insurance that has severely damaged their reputations. Earlier this year, a sacked ANZ executive claimed there was a toxic culture of sex, drugs and bullying in the dealing room of ANZ’s global markets division. In a statement at the time, ANZ said the executive making the allegations

had been dismissed for serious breaches of its Code of Conduct and it would be vigorously defending the court application. Then in early March, financial regulator the Australian Securities & Investments Commission (ASIC) launched legal action in the Federal Court alleging ANZ rigged interest rates.

Not that the other banks are immune. CBA has been hit by a raft of financial planning scandals, and again in early March, chief executive Ian Narev was forced to apologise after a media investigation found the bank had been using unfair and outdated methods to assess some claims from insurance customers.

NEW WORLD ORDER But amid the dramas, the banks have been quietly adapting to the new world, chang-ing their leadership style and scaling back ambitions.

Alphinity Investment Management’s Andrew Martin notes that three of the major banks have relatively new CEOs.

“They’re all very different characters to what came before them,” he said. “But they’re all experienced bankers and they have all been through a lot. In general, they’re reasonably conservative guys. They’ve been able to set themselves for the times and that’s probably a good thing.”

At ANZ the flamboyant Mike Smith, who drove the bank into Asia, made way for his chief financial officer, Shayne Elliott, in January.

Meanwhile, Westpac’s previous CEO, Gail Kelly, was one of the country’s great busi-ness icons, becoming the first female chief executive of one of Australia’s big four banks in 2008. In February last year, she was replaced by Brian Hartzer, a seasoned banker who had held senior roles at ANZ and was most recently chief executive of British retail for Royal Bank of Scotland.

CBA’s New Zealand-born Narev is the CEO with the longest tenure, taking over from Ralph Norris in December 2011.

One of the first things the new CEOs have done is to halt or unwind the grand global ambitions of their predecessors, and put a greater focus on domestic operations.

NAB’s Andrew Thorburn, who became CEO in August 2014, taking over from Cameron Clyne, has continued dismantling the company’s UK failed expansion, which saw the destruction of billions of dollars of shareholder funds.

Thorburn, like Elliott, typifies the new breed. When seeking to replace Clyne, Thorburn’s pitch to the NAB board centred on reorienting the bank’s culture to become more customer-centric and exiting the UK to focus on home markets. He has acted and announced a structure to leave the UK via a demerger of Clydesdale Bank.

ANZ’s Elliott has also flagged a new domestic focus, and is scaling back the bank’s Asian presence and abandoning Smith’s goal of driving 25% to 30% of ANZ’s earnings from Asia (see box on page 34).

The new CEOs are also putting their stamp on the banks through management restruc-tures, particularly at ANZ and Westpac, with a view to greater operational efficiencies and to position certain units for sale.

The banks have already started offload-ing assets. NAB announced the sale of its life insurance business to Nippon Life, and ANZ sold its Esanda dealer finance busi-ness to Macquarie Group. Analysts expect more sales in the future.

The restructures are also designed to facilitate staff reductions and cost cuts. After creating a new consumer bank-ing division last year as part of a major restructure, Westpac’s Hartzer is now overhauling Westpac’s investment banking division, Westpac Institutional Bank (WIB), which is suffering from tighter regulation and margins.

Dec14 Jun15 Jan16ANZ 0.68% 0.96% 2.19%CBA 1.27% 1.23% 1.82%NAB 0.38% 0.33% 0.64%Westpac 1.13% 1.03% 1.84%

Australia Banks-r3.indd 33 23/3/16 8:00 am


Australian Banks

Since being elevated from chief financial officer to the top job in January, new ANZ chief executive Shayne Elliott has restruc-tured ANZ’s management and been forced to deal with a series of scandals. But investors are focused on the future of the bank’s ambitious ‘super-regional’ Asian-expansion strategy.

The strategy was the brainchild of Elli-ott’s predecessor, Mike Smith, who sought to differentiate the bank from its less adventurous local peers.

But in the wake of tough competition and falling margins in Asia, the strategy has stalled, and Elliott has been forced to undertake a major strategy reset.

“While we have built a strong Asian franchise in a short period of time, driving value from Asia in the foreseeable future is not about expanding and doing more. It will be about refining what we already have,” Elliott told Asiamoney. “This means that in some areas we’ll continue to grow but in others we’ll be smaller and more focused than we are today.

“I cannot conceive of an ANZ where Asia is not an important part of why we offer customers, any more than I can conceive of a time where ANZ is not in New Zealand or Western Australia or Queensland,” Elli-ott added.

ANZ watchers say Elliott couldn’t be more different from the high-profile Smith. “He’s very open,” said one person who has had significant interactions with Elliott in his role as chief financial officer. “There’s less bullshit about him.”

Under Smith, ANZ’s Asian strategy was simple: grow at all costs. But CLSA’s bank analyst, Brian Johnson, says ANZ suffered from what he calls a fundamental rule of the universe: “When a new player comes into the market, their quality of new loans and business is lower than the incum-bents.”

Johnson says the incumbent banks don’t fight very hard to keep their bad loans and business, and ANZ was left to pick up the scraps of business left.

ANZ’s timing was also bad. Johnson says massive QE stimulus saw liquidity

end up in the few pockets of demand for credit growth, particularly Asia trade finance. That, inevitably, saw margins fall; and that dynamic happened to coin-cide with a structural fall in Asia trade finance.

Alphinity Investment Management’s Andrew Martin says Australian investors have lost patience. “ANZ took a long-term view and were prepared to make lower returns than what their shareholders wanted,” he said. “But they’re competing for investment dollars with the likes of CBA and Westpac which are producing pretty good ROEs [return-on-equity] on domestic mortgages. The market could see benefits of the Asian strategy, but [ANZ] tried to do too much too soon and threw a lot of money at it.”

Given the difficult market ANZ faces in Asia, Elliott’s options are limited. “It’s not like a sinking ship,” said Martin. “It’s about operating the business more prudently. The focus now is on generating better returns.”

Elliott is acting. He has abandoned Smith’s goal of generating 25%-30% of earnings from Asia. “We are not focused on a number,” Elliott said. “35% or 15% – I don't really care, so long as the business is driving value for our customers and shareholders.”

He’s also shaken up management, with the exit of Andrew Geczy and appoint-ment of Farhan Faruqui as group execu-tive of international, with responsibility for ANZ’s institutional business in Asia, Europe and America.

Elliott is also scaling back operations in Asia to focus on ANZ's institutional business. The bank has closed its emerg-ing corporate business that leant to small and medium-sized enterprises in Singa-pore, Vietnam, Hong Kong, Indonesia and Taiwan. Some 100 jobs were lost.

And asset sales are likely with reports ANZ is trying to sell its 39% stake in Bank Pan Indonesia.

“We will continue to look at the allo-cation of resources and capital to ensure we are getting the best return from our Asian operations,” Elliott said, declining to comment on specific sales. “While it’s no secret we are looking at some of our partnerships, these are still generating a return for shareholders so there is no need to be rushed.”

CLSA’s Johnson says write downs are likely and he notes the book value of ANZ’s equity accounted Asian partner-ship minority investments is a staggering A$5.54bn, which he estimates is at least A$1.3bn above present market values.

Elliott would not comment directly on the potential for write downs but said, “the carrying value of our partnerships has always been kept under close review”.

Martin says Elliott is the right person to stabilise ANZ’s Asian presence, which will be helped by his institutional bank-ing background. “It will be a hard slog for him,” he said. “But his rhetoric is the right rhetoric.”

Still, it’s not easy to flick the switch and find a solution. “Margins are thin. That makes life tough no matter what you do. They will focus a lot on cost and the type of business they’re writing. But at the end of the day you’re in the market you are in,” said Martin.

But Elliott said he remains committed. “Asia is a real differentiator for ANZ and will continue to be an important part of our future success.” ◼

ANZ: RETHINKING ASIA SHAYNE ELLIOTTchief executive, ANZ.



Australian Banks

The WIB restructure is expected to see 80 jobs cut out of a total headcount of 1800. That is symptomatic of what’s been taking place across the industry. In the second half of last year the major banks are estimated to have jettisoned around 3,000 staff, but are avoiding the politically explosive, head-line grabbing mass layoffs that have tarnished their reputations in previous credit-cycle downturns.

INVESTOR ANGSTBut investors are fretting that the new breed of CEOs will also become tight with dividend payments with some fearing that payments will be cut.

“There is likely more pressure on divi-dends,” agrees Alphinity’s Martin. “While I don’t think there is going to be wholesale cuts to dividends across the banks at all unless we enter a worse than-expected credit cycle — which I just don’t see near term — we are likely to see much lower dividend growth in the foreseeable future.”

“Some banks (the business banks) are already at the top, or even above, payout ratio targets,” Martin added. “This is OK if all goes according to plan and they can grow into it, but does leave them more vulnerable to any [economic] hiccup.”

The problem with hunkering down is the banks become even more exposed to domestic economies and regulation.

According to a recent PwC survey, regula-tion is the greatest concern for Australian banks, ahead of macroeconomic factors. Bank regulator the Australia Prudential Regulation Authority (APRA) is finalising its stronger capital requirements this year in the wake of the Murray-led Financial Services Inquiry, which is expected to trig-ger another round of ROE-dilutive capital raisings.

And CLSA’s Johnson says there are still concerns that Australian banks are under capitalised relative to global peers even after the 2015 capital raisings.

“We estimate the four major banks are still around A$32bn short of capital,” he says. Another analyst who did not wish to be named believes the Australian banks need to raise A$40bn in total, but have raised just A$18bn.

Asiamoney asked all four major banks if they had plans to raise further capital,

or to cut their dividend payments, and all declined to comment.

But it’s easy to forget the Australian banks’ enormous pricing power, particu-larly in the home mortgage market, and the banks have shown a willingness to use this power to protect against higher capital requirements and lower growth.

The four major banks control 80% of Australia’s owner-occupied lending market and have exposure to almost $1.2tr of mortgages, according to bank regulator APRA. The housing market is particularly important to CBA and Westpac, which have 27.2% and 23.8% of the owner-occupied lending market respectively.

CLSA’s Johnson notes that banks have been using upwards repricing of home loans to offset the dilutionary impact of capital raisings.

That pricing power has worked in a buoy-ant housing market, but that could change if Australia’s housing market bursts, as Hempton and Tepper predicted in the Big Short report.

In the wake of the report, the banks and regulators have vigorously defended their major banks’ lending practices. A NAB spokesperson told Asiamoney: “Home loan applications made through NAB’s branches, digital channels or mortgage broker network are considered on a case by case basis taking account of individual circumstances. We continually review our risk settings, considering a range of eco-nomic factors to manage the risk for our customers and our business.”

One senior banker at the big four said: “If there was any problem in the housing market, it would well and truly have been

exposed by now”. He notes the debate that the housing market is overvalued has been going on since 2003.

Ultimately, the housing market, and the major banks, will only become vulnerable if Australia tips into recession. For now, the economy is showing surprising resilience despite the strong downturn in the resources sector, which makes a GFC-style implosion remote. Growth in the December quarter was a better-than-expected 0.6%, taking annual growth to 3%. That puts growth ahead of any other G7 country and gave banks a relief rally at the start of March.

AMP Capital’s chief economist Shane Oliver says a recession is unlikely, because while mining investment has fallen, that is being offset by stronger non-mining activity including tourism and education. “Of course if the global economy went into recession it may be a different story but that seems unlikely to, albeit the risks have increased this year,” he said.

And while households remain highly geared, which increases the risks to banks should unemployment rise, corporate Australia has successfully deleveraged and their “ability to service debt is phenomenal on average”, Martin says. “It’s hard to see how you have a serious credit cycle in that environment.”

But what is clear is that both earnings and credit growth will certainly slow. The test now for Australian banks is whether they can adapt to the new environment and how much time investors will give the new CEOs before they expect to see a meaningful improvement in share price and earnings. The challenge is only just starting. ◼

HOUSEHOLD DEBT TO DISPOSABLE INCOME (%)

SOURCE: RBA, UBS ESTIMATES

Jun88 Jun90 Jun92 Jun94 Jun96 Jun98 Jun00 Jun02 Jun04 Jun06 Jun08 Jun10 Jun12 Jun14 Jun16

200%

180%

160%

140%

120%

100%

80%

60%



Australia Deals and Investment Bank of the Year Awards

It was a challenging year for Australian capital markets in 2015 as the fall in commodity prices and volatile conditions made executing deals that much tougher. So it is testament to the depth and breadth of banks in Australia that so many were able to produce standout performances. Our thanks to all those firms that took the time to pitch.

BEST SYNDICATED LOANSouth32 $1.5bn loan due 2020Joint bookrunners: Barclays, Mitsubishi UFJ and Westpac

BEST PROJECT FINANCINGWestConnex A$1.5bn loan due 2022 Mandated lead arrangers and bookrunners: Commonwealth Bank of Australia, Crédit Agricole, National Australia Bank and Westpac

BEST LEVERAGED FINANCING TPG Telecom A$1.96bn multi-tranche financingMandated lead arrangers and bookrunners: ANZ, National Australia Bank and Westpac

BEST LOANS HOUSEWestpac

BEST INTERNATIONAL BONDAPT Pipelines $2.3bn dual currency three tranche bondJoint bookrunners: BNP Paribas, HSBC, National Australia Bank and RBS

BEST LOCAL CURRENCY BONDAsciano Finance A$350m bond due 2025Joint bookrunners: ANZ, Citi and Westpac

BEST SECURITIZATION Latitude Financial Services A$6.7bn deal due 2018Arrangers: Deutsche Bank, KKR and Värde Partners BEST BOND HOUSENational Australia Bank

BEST IPOLink Administration Holdings A$946.5m IPOJoint bookrunners: Citi, Deutsche Bank, Macquarie Capital and UBSSole financial adviser: Rothschild

BEST FOLLOW-ON/ACCELERATED BOOKBUILDCaltex Australia A$4.725bn secondary placement by Chevron CorpSole bookrunner: Goldman Sachs

BEST EQUITY-LINKED AMP A$275m wholesale capital perpetual notesJoint bookrunners: JP Morgan, National Australia Bank and UBS BEST EQUITY HOUSE AND BEST INVESTMENT BANK UBS

The winners of Oz: Best banks and deals in Australia

Australia Deals-r3.indd 36 22/3/16 7:10 pm



BEST SYNDICATED LOANSouth32 $1.5bn loan due 2020 Joint bookrunners: Barclays, Mitsubishi UFJ and Westpac

If you had to pick an ideal credit story for a syndicated loan it would not have been South32. The resources company wanted funding to support its initial debt and liquidity requirements after being spun out from mining giant BHP Billiton.

Unfortunately, all the press around the merger was that BHP was dumping the assets it didn’t want and its hunt for funding coincided with falling commod-ity prices. Add to that the complexities of detangling from one of the country’s biggest corporates and it was clear a successful syndication was not a forgone conclusion.

But leads Barclays, Mitsubishi UFJ and Westpac put the company through a rigorous credit process and took time to explain the company as part of the syn-dication process. That gave confidence to the 12 domestic and international lenders that came into the transaction with the $1.5bn loan ending up oversubscribed.

BEST PROJECT FINANCINGWestConnex A$1.5bn loan due 2022 Mandated lead arrangers and bookrunners: Commonwealth Bank of Australia, Crédit Agricole, National Australia Bank and West-pac

Ask an Australian bank if they want to lend money to a toll road project and the answer is likely to be no. Toll road projects do not have a good track record in Australia. With a few exceptions, they have failed to meet their target traffic numbers, struggled to make repayments and banks that have lent to them have had to take control of the project.

It was against that backdrop that West-Connex wanted to raise A$1.5bn for stage two of a project to reduce congestion on the main road links around Sydney.

As one of the bankers who led the trans-action told Asiamoney, his first response was to turn it down. But what eventually got the mandated lead arrangers onside was the unique nature of the project. Firstly the syndicate would have access

to cash flows from an existing toll road that fed into stage two of the route. It also benefited from $3.3bn of equity provided by the governments of Australia and New South Wales.

Even then the leads knew they would have their work cut out in syndication as some banks had got their fingers burnt in the past, but such was their confidence they underwrote the whole facility and later managed to syndicate the loan among a number of banks.

BEST LEVERAGED FINANCINGTPG Telecom A$1.96bn multi-tranche financing Mandated lead arrangers and bookrunners: ANZ, National Australia Bank and Westpac

When TPG Telecom needed to secure a funding package in the quickest possible time for its transformational acquisition of iiNet, it brought in ANZ to solely underwrite A$1.96bn in syndicated loan facilities to back the bid.

In less than two weeks, ANZ was able to put a together a package comprising a A$1.25bn partially amortising facility, a A$400m bullet facility, A$260m bridge and a A$50m working capital facility.

Once the package was in place, ANZ decided on a two phase sell-down strategy. Firstly the transaction was significantly de-risked via a sub-underwritten phase within two weeks from original underwritten commit-ment. This was then followed by a successful general syndication to a group of onshore and offshore banks.

And despite the volatile market back drop during the syndication period, 14 of the 16 banks invited to participate took up the offer with substantial pockets of liquid-ity coming from Asian, European and North American lender, much of it from banks new to TPG’s credit. This was in addition to

No congestion for WestConnex




large holds from National Australia Bank and Westpac.

The transaction was Aus-tralia’s largest syndicated loan in 2015 and one of the largest sub-investment grade underwrites in recent years.

BEST LOANS HOUSEWestpac

Westpac put in an impres-sive performance in the loan market during 2015 despite a market backdrop that meant that syndica-tions faced some of their toughest challenges in recent years.

Despite the caveats about league tables not telling the whole story, bankers at Westpac have a right to be pleased to have dislodged long-time loan powerhouse ANZ from the top bookrunning spot. Westpac received league table credit for 34 deals worth $9bn to firmly cement its place at number one.

And it did so while acting as the sole bookrunner for 11 transactions such as CBH Grain’s A$950m facility. Westpac says the sole mandates show that clients have confidence that it will be able to successfully syndicate a transaction. This has certainly been the case, which Westpac in part attributes to its reputation for a having a stringent credit process. If a company makes it through Westpac’s watchdogs, this is usually enough to provide confidence to lenders who want to join. This was a strong plus against a backdrop of falling commodity prices and volatile global markets.

Westpac was also in nimble in providing financing for the uptick in M&A situations in a year where refinancings provided fewer opportunities.

And it can boast a bookrunning spot on all three of the loans we have rewarded as part of this awards process: South 32’s $1.5bn syndication, WestConnex’s

A$1.5bn project financing and TPG Telecom’s A$1.96bn leveraged financing. Westpac is a well-deserved winner of best loans house.

BEST INTERNATIONAL BOND

APT Pipelines $2.3bn dual currency three tranche bond Joint bookrunners: BNP Paribas, HSBC, National Australia Bank and RBS

The management of Australia’s largest natural gas infrastructure company cannot be accused of wasting time. The company was looking to raise debt funding for its $5.11bn acquisition of the Queensland Curtis LNG Project and was on the road meeting investors for a bond deal before the transaction had reached financial close.

The acquisition was being funded by a mixture of debt and equity and with such large sums involved APT Pipelines knew

any bond would require targeting investors in multiple jurisdictions. So management went on a roadshow to Asia, Europe and the US to explain the credit and the rationale for the acquisition.

Feedback from the European leg of the roadshow was particularly positive and resulted in substantial lead orders. And with European markets performing particularly well the leads decided to launch — opening books for seven and 12 year euro tranches and a 15 year sterling tranche.

Books built quickly with all three tranches heavily oversubscribed after just a few hours, allowing the leads to tighten pricing. The €700m seven year priced at mid swaps plus 100bp, the €650m 12 year at mid swaps + 130bp and the £600m 15 year at 142bp over Gilts.

This was despite the fact that the acquisition was yet to be completely signed off. But investors were reassured by a put option that allowed them to return the notes if the deal fell apart.

As well as securing funding for its acquisition, the borrower also made its debut in euros at a level comfortably under where it would have funded in the US dollar market.

APT Pipelines sealed the deal




BEST LOCAL CURRENCY BONDAsciano Finance A$350m bond due 2025 Joint bookrunners: ANZ, Citi and Westpac

In a booming year for Australia’s local currency bond market, there was a strong roster of noteworthy deals making this a tough category to judge. What tipped the balance in favour of Asciano Finance’s A$350m 10 year note was how it changed the market perception of what is possible for triple-B rated credits.

The transaction was the first public 10 year deal for a BBB-rated issuer since 2010. No mean feat considering the freight logistics company was also making its debut in the domestic market.

Not that Asciano had no track record as it had issued bonds in the international debt market and this was reflected in its marketing strategy which took in meet-ings in Japan and Singapore as well as Australia. It ended the roadshow with two large anchor orders that took 45% of the

final book and helped drive order momen-tum for when books for the trade opened.

Asciano was able to price its bond com-fortably inside its offshore comparables at a coupon of 5.25% and in a further sign of development in the domestic market it issued the transaction under a light covenant package that was in line with its offshore debt.

BEST SECURITIZATION

Latitude Financial Services A$6.7bn deal due 2018 Arrangers: Deutsche Bank, KKR and Värde Partners

The financing package that accompa-nied the acquisition of GE Consumer by Deutsche Bank, KKR and Värde Partners from its parent was a first of its kind for the Australian market.

The challenge was devising a structure that worked for GE Consumer’s asset portfolio. It had more than A$7bn of receivables across point of sale finance, credit cards and personal loans.

Another hurdle was that most warehouse lines of credit in Australia are only available for typically 12-24 months. Given that GE Consumer was being spun out and would have new systems and organisation, the consortium wanted funding that would cover at least the first 12-18 months.

And of course timing was key considering the competitive nature of auctions.

The solution saw the consortium identify the portions of GE’s business that banks would be most comfortable underwriting and then they were able to negotiate a rare three year warehousing tenor. The innovative solution delivered in a matter of weeks was key to the consortium winning the bid for GE Consumer, making it a worthy winner in this category.

BEST BOND HOUSENational Australia Bank

The bond franchises of banks operating in Australia tend to bifurcate between those with very strong domestic operations and those with better international expertise.

But National Australia Bank wins this award for the ability of its bond team to both service the local Australian dollar market and act for Australian companies who want to raise funds offshore.

While it is true NAB does not dominate either in AUD or for inter-national issuance — sitting outside the top three for both — it is the balance of its franchise which gives it an edge. In 2015, the bank was fourth for Australia domestic DCM and sixth for Australian interna-tional debt.

This breadth is reflected in the range of transactions NAB worked on throughout the year. In the domestic market a A$700m bond from Rabobank opened the Kanga-roo bank for Basel III compliant debt while a A$1bn note for BHP Billiton Finance was the largest domestic corporate bond since 2012.

Work in recent years to building teams Hong Kong, London and

A balanced approach




New York means NAB has also increasingly been able to help raise funds offshore for Australian corpo-rates. This includes the $2.3bn equivalent three tranche bond for APT Pipelines which saw the issuer make its debut in euros and is Asiamoney’s pick as international bond of the year.

The widespread expertise NAB is able to demonstrate on Australian debt mar-kets both at home and abroad is what makes it a natural candidate for the country’s best bond house. BEST IPOLink Administration Holdings A$946.5m IPO Joint bookrunners: Citi, Deutsche Bank, Macquarie Capital and UBSSole financial adviser: Rothschild

The biggest deal in a market is always eye catching but what makes the IPO of Link Administration Holdings an award winner is the successful execution of the marketing and pricing strategy.

From the start the deal was going to be large. The company was raising money to allow existing shareholders to realise some of their investment and also pay down debt. As the largest provider of fund administra-tion services to Australia’s superannuation industry, the company already had a strong story to tell but the leads also decided to pitch the future value of the company based on its acquisition of Superpartners a year earlier. Link is expected to extract plenty of synergies from the acquisition over the next few years that meant investors that got into the company at the time of the IPO knew that the company would benefit from that future growth.

So the leads embarked on a global roadshow that targeted close to 230 inves-

tors through one-on-one meetings in six countries across Australia, Asia, Europe and North America. That process was also used to identify potential cornerstones and the deal was launched having already secured $100m from fund AustralianSu-per.

The IPO ended up pricing at the top of its A$5.41-A$6.37 range with institutional tranche more than 10x subscribed, driven by long-only institutions, causing the shares to pop 11% on their first day of trading.

BEST FOLLOW-ON/ ACCELERATED BOOKBUILD

Caltex Australia A$4.725bn secondary placement by Chevron Corp Sole bookrunner: Goldman Sachs

When Chevron Global Energy wanted to sell down its stake in Australia’s biggest petroleum distributor Caltex, secrecy was

paramount. Chevron had been associated with Caltex since 1900 and has been a public shareholder since the IPO in 1980 so the fact it was making its first sell-down had the potential to seriously negatively affect the share price.

Chevron brought in Goldman Sachs to discuss the best options including whether it should do a full or partial sale. The details were hammered out over an eight week period including providing timetables for multiple sale options to provide the greatest flexibil-ity. In the end Chevron decided to exit from Caltex, selling 135.0m shares. The sale was underwritten at a floor price of A$34.20, a 9.7% discount to the last close but thanks to the confidential nature of the discussions Caltex share price had remained comfortably above that level in the run up to the transaction and the deal closed at A$35.00 per share, or a 7.6% discount.

Adding to the deal’s award winning cre-dentials, it ranks as the largest ever block trade in Australia, the largest ever sole bookrun equity transaction in Asia ex-Ja-pan and the largest sole bookrun trade globally since 2011.

There were no leaks on the Caltex sell-down




BEST EQUITY-LINKEDAMP A$275m wholesale capital perpetual notes Joint bookrunners: JP Morgan, National Australia Bank and UBS

Capital hybrid trades in Australia have typically been sold more like an equity transaction. The bonds open for subscription, investors including retail accounts place orders and then the bond is listed on the Australia Securities Exchange (ASX) in what is a rather lengthy process.

Asset manager AMP wanted to raise capital in a way that minimises the market risk associated with such a long bookbuild-ing process and decided to sell its debut additional tier one issue into the wholesale market which is only open to institutional investors.

Once the mandate had been announced, AMP held a series of one-on-one meetings with investors in Sydney and Melbourne. Education was key. Not only was it the borrower’s debut capital outing, it was the first non ASX-listed capital transaction and also the first non-listed franked instru-ment.

Positive feedback from the meetings gave the leads confidence to launch the deal at a size of A$150m but such was the

demand that the trade eventually raised A$275m and priced in line with guidance at BBSW plus 400bp. Following the suc-cess of AMP, Bank of Queensland followed up with its own wholesale capital notes a few months later.

There were far bigger equity-linked transactions in Australia last year but AMP’s notes take the title for breaking the mould and opening up a new avenue for capital funding.

BEST EQUITY HOUSE AND BEST INVESTMENT BANKUBS

UBS proved it was a force to be reckoned with in Australian markets during 2015. Its list of M&A deals reads like a who’s who of corporations in Australia, it regained the top spot for ECM and retained a strong presence in the domestic bond market.

Its performance has been an impressive return to form for the bank after a few years when its rivals showed more impressive gains and mounted credible challenges to its position.

UBS worked on a number of standout deals last year. In M&A, it advised BHP

Billiton on its A$9.4bn spin-off of South32 as part of the mining giant’s reorganisation to focus on its core divisions. It is also a financial adviser to a consortium compris-ing Qube Holdings, Global Infrastructure Partners, the Canadian Pension Plan Invest-ment Board and CIC Capital on a $9bn bid for rail logistics company Asciano. It was held off from the top of the league table by Macquarie but came a close second for com-pleted deals with $29.2bn of league table credit.

In equities, UBS made a strong return to the top of the league table this year, securing $9.37bn of league credit and a 21% market share that gave it a comfortable lead over its market rivals.

And in a period that featured a bunch a blockbuster deals, UBS was more often than not in the driving seat. It worked on four of the year’s largest IPOs including the leading contender — Link Administration Holding’s A$946.5m listing which is also Asiamoney’s pick for IPO of the year.

The bank also has bragging rights as the leading dealer of follow-on transactions for the year, a feat it ascribes in part to its strong brokerage unit which gives it an insight into where investor demand lies and the ability to quickly bring those investors into a trade. One consequence of this is the increasing number of sole mandates UBS won for sizeable block deals. Its roster of solo achievements includes a A$945m block trade in Healthscope and an A$406m sell-

down in Sydney Airport.Not that UBS does not face

an impressive challenge from its rivals. Last year’s winner Macquarie Bank continues to dominate in IPOs while Goldman Sachs has scored a number of marquee transactions across products, but they also serve to highlight the strength of the resurgence in UBS’ equity capital markets business.

For its strong M&A capability, its resurgent ECM business and an ability to working on a large breadth of transactions while continuing to innovate and create value for investors and companies, UBS is a deserving winner of best equity house and best investment bank. ◼

UBS impressed in ECM and investment banking



Best Country Deals

It may have been one of the tougher years to execute a transaction in Asia ex-Japan, but there was plenty of innovation and interest in 2015 across loans, equities and bonds. After considering a bumper selection of awards pitches from firms around the region, Asiamoney has picked its standout transactions. Our thanks to all those firms that took the time to pitch.

MONGOLIATrade & Development Bank of Mongolia $500m bond due 2020 Bookrunners: Bank of America Merrill Lynch, Deutsche Bank and ING Bank

PAKISTANHabib Bank Prp102.4bn ($1bn) divestment by the Government of PakistanBookrunners: Arif Habib, Credit Suisse, Deutsche Bank and Elixir Securities

PHILIPPINESMonde Nissin Corporation’s £550m ($768m) loan due 2018 Mandated lead arrangers: Bank of the Philippine Islands, BDO Unibank and Metrobank

SINGAPORESTATS ChipPac $425m bond due 2020Bookrunners: Barclays, DBS and ING Bank

SOUTH KOREAKookmin Bank $500m covered bond due 2020Joint bookrunners: BNP Paribas, Citi and Société Générale

TAIWANUnited Microelectronic Corporation $600m convertible bond due 2020Joint bookrunners: Credit Suisse, HSBC and Morgan Stanley

THAILANDMizuho Bank Bt3bn ($84m) bond due 2018Sole bookrunner: Siam Commercial Bank

VIETNAMHome Credit Vietnam Finance Company $50m senior secured loan due 2018Mandated lead arrangers and bookrunners: Credit Suisse, Maybank, Vietnam Joint Stock Commercial Bank for Industry and Trade

Winning ways: Asia's best capital market deals

BANGLADESHBangladesh Power Development Board – Chapainawabganj 100MW HFO Power Plant $112m multi-ECA financingMandated lead arranger: HSBC

HONG KONGGF Securities Co HK$32bn ($4.13bn) IPOJoint sponsors: GF Capital (Hong Kong) and Goldman Sachs. Joint global co-ordinators: Bank of America Merrill Lynch, BoCom International, Deutsche Bank, GF Securities (Hong Kong) Brokerage, Goldman Sachs and Morgan Stanley. Joint Bookrunners: ABCI Capital, CCB International Capital, China Merchants Securities, China Securities, CIMB Securities, Guosen Securities, Huatai Financial Holdings, HSBC, ICBC International, Industrial Securities and Sun Hung Kai Investment Services

INDIACoal India Rp225.6bn ($3.3bn) offer for saleBookrunners: Bank of America Merrill Lynch, Credit Suisse, Deutsche Bank, Goldman Sachs, JM Financial, Kotak Securities, SBI Capital Markets

INDONESIAAeronautic Investments 18 $143.7m bond due 2025Sole bookrunner: BNP Paribas

MALAYSIAPetroliam Nasional (Petronas) $5bn conventional and sukuk bond – $1.25bn due 2020, $750m due 2022, $1.5bn due 2025 and $1.5bn due 2045Active joint bookrunners: Bank of America Merrill Lynch, CIMB, Citi, JP Morgan, Morgan StanleyPassive joint bookrunners: Deutsche Bank, HSBC, Maybank, MUFG

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Best Country Deals

BANGLADESHBangladesh Power Development Board – Chapainawabganj 100MW HFO Power Plant $112m multi-ECA financing Mandated lead arranger: HSBC

Bangladesh has an ambitious target for power generation and the Chap-ainawabganj 100MW HFO Power Plant was probably its most difficult project to date in terms of location in the North West of the country.

It also provided a number of fund-ing challenges for mandated lead arranger HSBC. China’s Sinosure and Finland’s Finnerva were the export credit agencies for the project and as is standard, they were only able to provide guarantees for 85% of the financ-ing. But as this project needed to have 100% of the financing in place, HSBC provided a loan for the remainder.

The reason for a full financing package is because in Bangladesh, payment for the equipment for the project has to be done through letters of credit (LC). But getting Bangladesh banks to provide LCs for such large amounts is difficult. But having 100% of the funding in place mit-igated the risk for the banks and allowed them to get comfortable enough to issue the LC.

Adding to the complications, Sinosure’s rules also required a Chinese bank to pro-vide a minimum of 70% of the funding it was backing so HSBC brought its affiliate lender Bank of Communications into the transaction.

HONG KONGGF Securities Co HK$32bn ($4.13bn) IPOJoint sponsors: GF Capital (Hong Kong) and Goldman Sachs. Joint global co- ordinators: Bank of America Merrill Lynch, BoCom Inter-national, Deutsche Bank,

GF Securities (Hong Kong) Brokerage, Goldman Sachs and Morgan Stanley. Joint Bookrunners: ABCI Capital, CCB International Capital, China Merchants Securities, China Securities, CIMB Securi-ties, Guosen Securities, Huatai Financial Holdings, HSBC, ICBC International, Industrial Securities and Sun Hung Kai Investment Services

Financials dominated equity activity in Hong Kong last year and GF Securities Co’s HK$32bn ($4.13bn) juggernaut was the one that started it all.

But the journey was far from smooth. The mandate for the IPO had been sitting on bankers’ desks for the better part of four years, as the issuer bided its time to make the jump from A-share to dual list-ing. When 2015 rolled around, it finally got its chance.

The IPO is a landmark on a number of counts. At the time of pricing, it was the largest IPO for a securities firm globally, the largest IPO in Asia ex-Japan since 2011, and the largest overseas IPO by a Chinese broker. In all, 15 new listings from the finance and insurance sector raised $16.22bn in Hong Kong in 2015.

GF’s success was down to the concerted effort of the leads to reach out to inves-tors early in the process. The move helped drum up $1.9bn worth of demand from 18 cornerstone investors, who mopped up over 50% of the shares even before bookbuilding started.

From there it was only a matter of time before hundreds of global accounts flooded into the trade. Pricing, unsur-prisingly, came in at the top of its HK$15.65-HK$18.85 guidance.

While larger IPOs followed, by coming first GF Securities became the standard bearer for Hong Kong. The deal also won our award for Best IPO in Asia.

INDIACoal India Rp225.6bn ($3.3bn) offer for sale Bookrunners: Bank of America Merrill Lynch, Credit Suisse, Deutsche Bank, Goldman Sachs, JM Financial, Kotak Securities, SBI Capital Markets

Bankers had been hoping 2015 would be a bumper year for equity activity in India. The government’s divestment programme and a pick-up in corporate

Firing up India’s equity markets



Best Country Deals

activity meant the pipeline was strong. And it was Coal India’s Rp225.6bn offer for sale that got the year off to a good start in January.

Launched at a base size of 315.82m shares, the trade closed at double that thanks to overwhelming demand from institutional investors. Asian and US funds bagged most of the trade with the institutional book subscribed 1.22x. This demand came despite the deal pricing at a discount of 4.5% to its last close and the transaction being 205 times the stock’s average daily trading volume.

As well as setting the tone for the year, getting this deal right was key to the government’s strategy of selling down stakes in state-owned companies to boost its coffers. The Coal India deal certainly met this goal as the 10% stake accounted for 93% of the divestment programme in the 2015 fiscal year. At the time of pricing, the trade was also the biggest equity market transaction in India since the global financial crisis.

INDONESIAAeronautic Investments 18 $143.7m bond due 2025Sole bookrunner: BNP Paribas

Southeast Asia is one of the fastest growing regions for airlines but that also means it is an area where there is strong competition for financing.

To solve this problem, BNP Paribas has been using a structure from Europe and the US that uses guarantees from export credit agencies to fund aircraft purchases. What makes Aeronautic Investments 18 $143.7m bond standout is it is the first transaction to be targeted at and sold into an Asian investor base.

Indonesia’s Lion Air Group was looking for financing for affiliate Transportation Partners to fund the purchase of turbo-prop aircraft. It was buying 10 aircraft from ATR, a joint venture between France’s Airbus and Italy’s Finmeccanica.

By while previous deals for Lion Air had used credit guarantees from Export-Im-

port Bank of the United States, the fact that this transaction involved buying air-craft from a part French company allowed BNP Paribas to reach out to France’s ECA Coface.

The use of Coface brought its own challenges. The presence of US Exim meant that US accounts had bought the previous deals but Coface backing the bond meant that BNP Paribas had to find a new investor base and so spent time educating Asia investors about the ECA structure and also Coface. Also, carrying out extensive investor education meant that Transportation Partners did not need to get a rating for the bond which was sold by special purpose issuer Aeronautic Investments 18.

The resulting $143.7m 10 year bond managed to price at three month Libor +0.87%, substantially lower than the borrower’s outstanding export credit loan. The trade is also Coface’s first guaran-teed bond transaction for an Asian client and is the first ECA bond in Reg S format targeting Asian investors.

MALAYSIAPetroliam Nasional (Pet-ronas) $5bn conventional and sukuk bond – $1.25bn due 2020, $750m due 2022, $1.5bn due 2025 and $1.5bn due 2045 Active joint bookrunners: Bank of America Merrill Lynch, CIMB, Citi, JP Morgan, Morgan StanleyPassive joint bookrunners: Deutsche Bank, HSBC, Maybank, MUFG

In a crowded field, Petronas is our pick for best Malaysia deal as it demonstrated top-notch timing and execution that allowed the borrower to navigate through the unfavourable conditions surrounding the sector and the country.

The weak commodities market meant the state-owned oil company found itself in a tough position ahead of its first dollar outing in five years.

But A1/A- rated Petronas had to come to the market as the sovereign wanted it to

In pole position



Best Country Deals

set a good benchmark for its own upcom-ing dollar bond. While it is more typical for a sovereign to go first, Petronas carries a higher rating than the sovereign’s A3/A-.

With a plan to raise $5bn in conven-tional bonds and sukuk, each tranche had a different tenor – five year sukuk as well as seven, 10 and 30 year conventional notes.

And despite the company’s long hiatus, orders poured in with the 30 year proving the most popular thanks to demand driven by Taiwanese insurance compa-nies. Petronas eventually sold the bonds at 110bp over Treasuries, 130bp over, 150bp over and 190bp over across the four tranches, repricing its existing sec-ondary yield curve by 15bp-25bp. It also set a solid foundation for the sovereign to return one month later. The deal also won our award for Best Investment Grade Corporate Bond in Asia.

MONGOLIATrade & Development Bank of Mongolia $500m bond due 2020 Bookrunners: Bank of America Merrill Lynch, Deutsche Bank and ING Bank

Selling Mongolia credit has been a tough ask in recent years and things were not looking good at the start of 2015 after the government reached out to the International Monetary Fund for support in February.

But when leads Bank of America Merrill Lynch, Deutsche Bank and ING Bank opened books for Trade & Development Bank of Mongolia’s five year bond in May, they were confident about the deal’s chances. This was despite the borrower fail-ing to print a deal the year before and the absence of Mongolian credits from the bond market since 2013.

The confidence was thanks to the inclusion of a government guar-antee, the first under a new Debt Management Law that meant the trade carried 100% state backing.

The gambit worked and the leads were able price the bond at 9.375%, 40bp under initial price thoughts. While Asian investors showed muted interest in the deal, there was strong demand from Euro-pean and US accounts which drive the order book to over $2.3bn and allowed the borrower to raise $500m.

PAKISTANHabib Bank Prp102.4bn ($1bn) divestment by the Government of PakistanBookrunners: Arif Habib, Credit Suisse, Deutsche Bank and Elixir Securities

The divestment of a 41.5% stake in Habib Bank by the Government of Pakistan is a genuine landmark in capital markets. The trade is the largest ever equity offering in Asian frontier markets and has been singled out as one of the catalysts for a possible rerating of Pakistan into the MSCI Emerging Markets index.

But the leads had to work hard to get the transaction to that point. First, they had to overcome investor fear that the government might back out of the transaction after it pulled a divestment for Oil & Gas Development Corp (OGDCL)

in November 2014 when investors were less than happy with the pricing. To get investors on board the Habib Bank team conducted extensive investor education to calm fears and also identify key accounts to anchor the trade.

There was also a debate about whether to do the transaction as a GDR. While a GDR may have been easier, the leads felt a domestic placing would be better for the development of Pakistan capital markets and from the roadshow they were confident about the ability to get foreign investors to buy into the country’s domes-tic markets.

While the government always wanted to raise the full amount, it was decided to launch the trade at a base size of 250m shares or 17% of the bank’s equity, with an upsize option for another 359m shares.

But 26 hours before the sale was due to close that confidence was looking mis-placed. While the base size was covered, some key investors had yet to place order which meant that there was little chance of the upsize option being exercised.

Thankfully, with 12 hours to go the orders started to come in and the book closed with enough to raise the full Prp 102.4bn with foreign investors taking 80% of the trade, more than double the total net foreign inflows into Pakistan in 2014.

A genuine Pakistan landmark



Best Country Deals

PHILIPPINESMonde Nissin Corporation’s £550m ($768m) loan due 2018 Mandated lead arrangers: Bank of the Philippine Islands, BDO Unibank and Metrobank

Monde Nissin’s decision to buy UK based Quorn Foods was a real landmark for the company. While it is one of the biggest food companies in the Philippines the agreed price of £550m made it one of the biggest overseas acquisitions ever under-taken by a southeast Asian company.

Yet while the M&A is noteworthy, this award goes to a £550m three year loan used to back the purchase.

Mandated lead arrangers Bank of the Philippine Islands, BDO Unibank and Metrobank funded the loan as a club which meant the money was committed quickly, allowing Monde Nissin to win the acquisition ahead of other private equity and trade bidders.

While the size of the lending facility may not seem big by global or even Asian standards, the fact that the whole loan could be funded by Philippine banks shows how far that market has come and the ability of local lenders to fund the growing ambitions of its major corporates.

SINGAPORESTATS ChipPac $425m bond due 2020Bookrunners: Barclays, DBS and ING Bank

When Singapore semiconductor manufac-turer STATS ChipPAC agreed to be taken over by Jiangsu Changjiang Electronics Technology it had to offer to buy back its 5.375% 2016s and 4.5% 2018s at 101% due to the change of control.

But because the change of control buy back was not guaranteed to clean up all the outstanding deals, at the same time STATS ChipPAC launched a cash tender offer to purchase all the notes at 101.25%

To partly fund the repurchase STATS ChipPAC secured a $538m bridge loan from DBS which it then planned to refi-nance with a new bond.

But just as a window opened to sell the bond, China’s National Development and Reform Commission announced a new set a rules for foreign debt issued by Chi-nese borrowers that requires registration of any deal prior to launch. With STATS ChipPAC now under Chinese ownership, the bond was put on hold while it got the new documentation in place.

With all the boxes finally ticked, the borrower went on a dual-team global

roadshow in November. However, halfway during the process the Paris bomb-ings took place, putting markets back into risk off mode.

After weighing up the options, the leads decided to go ahead with the trans-action after receiving strong indications of interest before any price guidance was announced.

The decision was the right one, with the $425m 8.5% five non-call three deal nearly twice subscribed by over 120 accounts, estab-lishing STATS ChipPAC in the capital markets under its new ownership.

SOUTH KOREAKookmin Bank $500m covered bond due 2020Joint bookrunners: BNP Paribas, Citi and Société Générale

It had been a long time in the making but Kookmin Bank’s $500m five-year covered bond from October was a genuine water-shed for the country. The bond was the first under the Covered Bond Act as well as the first triple-A rated covered bond from the country.

It was in June 2015 that the A1/A/A rated Korean lender first started sounding out investors for a possible trade and set up an $8bn global covered bond pro-gramme. But as volatility spiked during the summer, joint bookrunners BNP Paribas, Citi and Société Générale advised the issuer to wait a while longer.

The delay proved fortuitous as in the interim Fitch raised South Korea’s rating from A+ to AA-. That meant the country had double-A ratings from the three main agencies, leaving the way open for Kook-min’s covered bond to get the top rating.

When books finally opened the bor-rower received around $800m of demand including investors who were buying into Korea for the first time.

Meat free but full of substance



Best Country Deals

TAIWANUnited Microelectronic Corporation $600m con-vertible bond due 2020Joint bookrunners: Credit Suisse, HSBC and Morgan Stanley

Some deals impress with their size and others the technical and structural challenges they have to overcome. United Microelectronics Corp (UMC) convertible bond impressed on both fronts.

Asia’s CB market was far from booming in 2015 but that did not stop UMC ventur-ing out with a deal that would really test investor appetite for its product and its name.

The deal was launched as a zero coupon, negative yield transaction which might have been challenging enough but as the transaction was to be settled in US dollars and UMC shares are dominated in Taiwanese dollars, the leads had to use a currency linked structure setting an exchange rate of NT$30.708 to the US dollar.

But UMC’s strong credentials, the lack of issuance in the market and the positive backdrop when the deal launched meant that UMC got enough demand to raise $600m with a yield of minus 0.25%.

When it priced, the trade was the larg-est Reg S CB that year, the first negative

yield CB in the region from a non-sov-ereign issuer since 2006 and the first currency linked structure since UMC’s previous deal from 2011.

THAILANDMizuho Bank Bt3bn ($84m) bond due 2018Sole bookrunner: Siam Commercial Bank

Mizuho Bank scored a number of firsts with its Bt3bn 2.33% three year bond from September.

Top of the list is the deal’s positon as the first trade under the Asean+3 Mul-ti-Currency Bond Issuance Framework (AMBIF). Set up in March 2015, AMBIF is part of efforts to create a single capital market in southeast Asia. Under AMBIF an issuer can use one document to sell a bond in all jurisdictions that have imple-mented the framework.

As a result, Mizuho’s bond was a real test case for the new scheme. Sole bookrunner Siam Commercial Bank worked extensively with Securities and Exchange Commission Thailand (Thai SEC), the Stock Exchange of Thailand (Thai SET) and Bank of Thailand (BoT) as well as investors to get all the parties comfortable with the transaction.

The bond was also the first gauge of investor demand, both for the framework

and for Mizuho, as it was the bank’s first bond in Thai baht. But thanks to its AAA rating by Fitch Ratings Thailand and the credit diversification it offered investors, the bond was 1.5x subscribed.

Not that the deal went off without a hitch. Bookbuilding was postponed by five days as Mizuho waited for one of its main asset manager investors to get approval to buy the notes. But once the trade got underway it was plain sailing.

The trade is also the first Thai baht transaction to be listed on the Tokyo Pro-Bond market.

VIETNAMHome Credit Vietnam Finance Company $50m senior secured loan due 2018Mandated lead arrangers and bookrunners: Credit Suisse, Maybank, Vietnam Joint Stock Commercial Bank for Industry and Trade

The small size of the loan for Home Credit Vietnam belies its significance as a trend-setter in the consumer finance sector in the region.

Sourcing foreign liquidity for a non-re-course facility in a country that has as trying a regulatory set-up as Vietnam was not going to be an easy task. Moreover, the borrower, being a consumer finance company, could not offer banks any tangi-ble assets as security.

This meant using a different approach, so lead Credit Suisse came up with the novel idea of giving banks access to receivables underpinned by the borrow-er’s loan portfolio. It also anchored the deal by taking $35m at the outset.

Not only did the financing ease the burden of debt on parent Home Credit Group, its success prompted the Czech Republic-based company to ask Credit Suisse to mimic the structure for bor-rowings of other subsidiaries across Asia Pacific too.

The loan has also unleashed an impor-tant source of liquidity for consumer finance companies in Vietnam, which find it hard to get credit from local lenders. ◼

Mizuho brought some welcome diversification



New Year Awards Dinner

Issuers, bankers, brokers and analysts gathered in Hong Kong on February 12 to celebrate the achievements of those who were top-ranked in Asiamoney polls in 2015 or who had won deal or bank awards.

We presented more than 200 awards on the night, including winners in the Brokers Poll, the Fixed Income Poll, the Corporate Governance Poll, the Regional Capital Market Awards and the Best Country Deals.

A tremendous turnout meant the evening was a great success, and we were particularly delighted to welcome so many issuers who had travelled to Hong Kong to celebrate their recognition in the deal awards.

Our thanks to all those who attended and we look forward to welcoming you at our next event later this year.

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HK Stars Index

Have you considered the exact impact of unknown cyber risks on your investment or company? Most cyber crime aims at stealing the intellectual property (IP) of companies, which can change the competitive

position of a company by giving rivals decisive advantages. The company value then declines massively and quickly, not to mention the disruptive effects of cyber crime on opera-tions.

Estimates put damages from cyber crime worldwide in 2014 at between $375bn and $575bn, which is more than the GDP of most countries, with some estimates as high as $1tr, according to the

Center for Strategic & International Studies (CSIS). Cybercrime is valued at 1.6% of German GDP, 0.63% of Chinese GDP and 0.64% of US GDP. And the problem is only getting worse.

A 2015 study of 350 large companies in 11 countries by the Ponemon Institute shows an increase in the cost of cyber breaches of 23% between 2013 and 2015.

Not that only large companies are at risk. In the UK, 93% of large companies and 87% of small companies reported cyber breaches in 2014, with each cyber event costing a large company $1.4m and small companies over $100,000 on average, accord-ing to CSIS data.

Is cyber safety the biggest risk for investors? Cyber risk can take billions off a company's bottom line and valuation. Vivian Chow, William Cox and Mathew Garver explain how investors can take account of the risks.

M&E BDO ASIAMONEY HONG KONG STARS INDEX VS HANG SENG INDEX, HANG SENG COMPOSITE INDEX AND HANG SENG CORPORATE SUSTAINABILITY INDEX

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That said, some industries are more vulnerable than others. Sixty two percent of cyber attacks are concentrated on three sec-tors: finance and insurance, information and communications, and manufacturing.

And the costs of recovering data and restoring operations can be 10x that of the initial damage. For example, the US retail chain Target is said to have incurred losses of $420m from a recent cyber-attack, according to CSIS.

INVESTORS IN THE DARKCyber crime often not only steals IP, it can compromise the data and lives of hundreds of millions of individuals worldwide. In December 2015, three million accounts of the Hong Kong-based hosting company Sanrio Digital were attacked. A company spokesperson told Reuters at the time that: "It would have been extremely easy for a bad guy to take the data," he said. "Extremely easy. Almost as easy as downloading a web page."

This is not an isolated case. The Hong Kong Productivity Council’s Computer Emergency Response Team Coordination Centre (HKCERT) claimed a 103% jump in cyber breaches in Hong Kong in 2014.

But unlike the example above, most cyber breaches are not made public, which leaves investors in the dark about the real condition of their investments. This is perhaps not surprising as CSIS calculates that when breaches are made public, stock prices normally drop by 1% to 5%. Yet given the long term effects of cyber crime, par-ticularly if valuable IP is stolen and given to a competitor, a company's stock price is likely to suffer long term and substantial damage.

Cybercrime probably extracts 15% to 20% from the entire value added generated by the internet, making it a huge and growing added tax. Therefore, one general way to calculate the value-at-risk to a company from cyber crime would be to subtract 15%-20% of the economic value produced by the internet and cyber networks for that company. In the cases of retail companies, the risk level could easily be higher than the entire value of a company.

UNKNOWN DOWNSIDEAgainst this background, conventional approaches to calculating the risk and return of companies and investments break down. What is worse, most cyber breaches go undetected. Companies often do not even know if they have been compromised or whether their data is being stolen. Never have unknown risks been greater for investors and executives. In addition, cyber breaches, govern-ance and internal process risks can easily multiply the required return on capital several times over.

While technology is needed to avert attacks, the main risk comes from people. IBM cites that 31.5% of the bad guys com-

mitting cyber crimes are malicious insiders with an axe to grind. Employees have knowledge of a company's security systems and can access its data so as a result their attacks are the least likely to be detected.

Indeed, most cyber breaches are rooted in or facilitated by weaknesses in the management and governance structures of the attacked companies. An American client of M&E with operations in Asia was severely breached because its governance policies only covered opening hours in the US and not those of its Asian subsidiary.

As a result, the market for policy and compliance measures addressing cyber crime has grown at over 20% annually, accord-ing to CSIS.

Cyber security needs to be a strategic priority of top manage-ment, assigning a C-level officer to co-ordinate between the IT,

governance and compliance areas of the company. Moreover, that person needs to speak both languages — that of the IT spe-cialists and of management. The first step should be to calculate the value-at-risk of all assets in danger, particularly IP.

SHUNNING THE CYBER SECURITY ISSUEYet executives often shy away from tech-nological issues, referring them to the IT department. In a survey of Indian execu-tives by KPMG last year, 94% of executives believe cyber crime is one of the major threats being faced by organisations. However, only 41% state that it is part of the board agenda even though 63% of cyber attacks are known to have led to financial loss.

One likely reason for executives' failure to act on such a significant threat is that cyber threats are often not expressed in

financial data such as value-at-risk or return-on-investment (RoI) covering cyber risks, costs and the upside of cyber security efforts.

The benefactors of cyber breaches are not only the cyber crim-inals themselves. The International Data Corporation estimates that the market for cyber security products had already grown to $58bn in 2013, with $10bn being added annually. For exam-ple, the specialists who developed and implemented software after 9/11 to effectively detect cyber breaches within the US Government recently set up their own shop called Punch Cyber. The software is supposed to detect close to 100% of all historic breaches and indicate weaknesses in companies' systems. ◼

William Cox is CEO of Management & Excellence and received his PhD from the London School of Economics. Mathew Garver is Pres-ident of Management & Excellence Global Inc., a company which specialises in calculating Cyber R0I. Vivian Chow is an executive at BDO Financial in Hong Kong, which works with M&E to offer various RoI services.

While technology is needed to avert attacks, the main risk comes from people. IBM cites that 31.5% of the bad guys committing cyber crimes are malicious insiders with an axe to grind.

HK Stars Index-r2.indd 52 22/3/16 7:12 pm

Join us on 22 March to meet with over 500 business leaders, investors and policymakers and to listen to what they have to say about the economic and investment outlook for Indonesia in 2016.

Topics include:• Economic Outlook of 2016 and Indonesia’s Response• The Changing Trade and Investment Landscape• Banking Sector Development• The Rupiah Bond Market• Indonesia’s Consumption Story• Analysis of Indonesia’s Infrastructure Financing Options

For further information about this event, including the full agenda, please visit our website:

www.euromoneyconferences.com/Indonesia or email us at [email protected].

Investment Forum22 March 2016 • Mandarin Oriental, Jakarta

Confirmed keynotes:HE Agus Martowardojo, Governor, Bank IndonesiaHE Bambang Brodjonegoro, Minister of Finance, Republic of IndonesiaHE Muliaman Hadad, Chairman, Indonesia Financial Services Authority

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