Friday, 20 July 2018

Upfront: Learning lessons

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Russia’s forthcoming US dollar Eurobond issue is the most eagerly awaited emerging markets deal so far this year. Let’s hope the sovereign makes a better fist of it than its previous transaction in the international market.

Two years ago, Russia’s “us and them” approach towards investors led to overly-aggressive pricing. As a result, the bonds initially performed poorly.

Those levels have tightened significantly since but Russia should not use that as a reason to bulldoze its way through another deal, even though it knows plenty of investors will buy given the sovereign’s rare visits to the international domain.

With the Brent crude oil price at nearly US$125 a barrel, Russia does not need to raise the funds for its own sake, although there are growing structural weaknesses in its public finances.

Rather, the deal should be part of an issuance programme that develops the sovereign’s yield curve and from which its corporates and state-owned companies can benefit. That requires thinking beyond the short term.

For that reason, Russia should take the opportunity to issue a liquid long-dated bond, irrespective of whether that costs a few extra basis points.

Certainly, there’s plenty of investor interest in a 30-year bond. Currently, the sovereign’s longest-dated bond issue is a 2030 notes offering but as it’s an amortiser, its duration is more like a 2018.

The deal’s five lead managers will come under great scrutiny too. The last time there were stories – vigorously denied – that the leads had little autonomy over the deal. This time, the banks need to make clear their authority and expertise.

This new Eurobond issue might not have the same gravitas as the deal that arrived in 2010 – Russia’s first in more than a decade. But it’s still a defining event. Let’s hope Russia has learnt from its past mistakes.

The chosen few

The lot of ECM syndicate bankers is not always an easy one. When deals are struggling, they have too many shares to allocate and too few people wanting them. When fortunate enough to be in the opposite position, they have been so excited that pretty much everyone walked away with some shares.

It is an approach that has largely backfired, with investors either holding firm on their meagre allocations or flipping positions too small to care about. A failure to top up led to some poor aftermarkets in 2011.

The situation last week for those handling the IPOs of DKSH and Ziggo was therefore a massive test. Investors were clamouring for paper and syndicate jockeys this time opted to treat them mean to keep them keen. So much so that hundreds of investors in both deals walked away empty-handed.

In the case of Ziggo, the deal was increased on the final morning, yet the extra stock went to the favoured few rather than others that hadn’t been allocated at all.

In the case of DKSH, it turned out that one-on-one meetings during the sales process were not an opportunity for investors to kick the tyres and test out management, it was an audition to be a shareholder. Those that did not impress management were cut out. The book totalled 800 accounts, but allocations were centred on fewer than 30.

With what result? Stellar debuts where trading was far more active than normal and both posted significant first-day gains. The same approach may not work on the next deal, after all investors will quickly learn where they are not wanted, but for the first time in more than six months ECM bankers across Europe went into the weekend smiling.

Don’t make the same mistakes

Singapore’s plans to allow companies to sell shares denominated in renminbi are raising the stakes in the battle for business in the fast-growing currency.

For Singapore, luring renminbi listings would be something of a coup, marking a victory of sorts over Hong Kong. But Singapore needs to avoid the same mistakes made by its perennial Asian rival in the dash to renminbi listings.

In fact, Hong Kong’s own experience with renminbi IPOs has been an enormous disappointment. The city rushed to put in place rules to allow companies to sell renminbi stock, and the first deal was already on the slate before anyone stopped to worry about secondary trading.

Designed as the first showcase for renminbi listings, the IPO of Cheung Kong’s Hui Xian REIT was a flop and those involved now admit they overestimated demand for the product.

Hong Kong has since introduced a trading support facility to make it easier for Hong Kong dollar investors to buy and sell renminbi stock. However, almost a full year after Hui Xian’s debut, the second renminbi listing has still to materialise – and that in a city awash with more renminbi deposits than any other outside mainland China.

As Hong Kong showed, allowing a company to rush to market with a mispriced offering before the right infrastructure is in place will do more harm than good.

The fact that Singapore has attracted its first renminbi listing before it has even named a clearing bank for the currency should set alarm bells ringing.

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