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International banks working on the SR90bn-SR96bn (US$24bn-$26.5bn) Tadawul IPO of Saudi Aramco have yet to find out what, if anything, they will be paid in fees and expenses after years of work. Previously agreed fees included a guaranteed 35bp payment, but this was ripped up when the international leg of the IPO was cancelled in favour of a domestic-driven offering. Marketing is now focused exclusively on Saudi and GCC investors, leaving even global co-ordinators of the IPO with nothing to do and without being able to bring in orders that would justify payment. "It will be a brave banker who goes knocking on their door saying 'pay up!'," said one banker involved in the IPO. FRIENDS & FAMILY After over three years of preparation that has seen layers of secrecy stripped away to reveal the most profitable company in the world, the oil giant is still on track to complete the largest-ever IPO. But the Saudi government's distaste for syndicate banks' valuations has resulted in the deal most ECM specialists expected from the start: a local deal that relies on Aramco's friends and family paying an artificially high price. The sweet spot for international investors was a valuation of US$1.2trn-$1.5trn, bankers told the company in a price setting meeting, stating that the state's desired US$2trn valuation could be achieved only with domestic investors. The state seemingly took some of that advice on board when shifting to a US$1.6trn-$1.7trn valuation in a regional offering, a decision bankers learned of only when flying home. MASSIVE CALL In the price range of SR30-SR32 per share just 1.5% of the company will be sold, of which a third is allocated to retail. There is still provision for a 15% greenshoe. The float falls at the lower end of expectations of a 1%-3% offering, but represents a massive call on Saudi individuals and institutions. The largest IPO ever was the US$25bn float of Alibaba Group in 2014 that saw the Chinese firm list in the US, ensuring access to two large pools of capital. The Aramco float is sure to be the largest from the EMEA region, easily topping the US$16.6bn-equivalent IPO of Enel in 1999. One banker close to the company said that the investment decision for domestic investors is very different as they do not share the environmental, social and governance concerns of overseas accounts. He said there were several very wealthy Saudis who could write cheques of US$1bn. By Thursday evening demand totalled SR73bn, with the institutional portion almost covered at SR58.39bn and the retail leg just under half sold at SR14.59bn of demand from 1.8m individuals. PAY DAY For bankers, the Aramco trade was always about being part of the largest deal ever, though they had expected to pick up a decent fee due to the enormous volume of any trade. Previously, a base fee of 35bp and an up to 55bp incentive fee was on the cards with the large performance component to be based on demand brought in. But that has now been abandoned. A senior ECM banker at one of the global coordinators suggested it is now akin to an Asia trade, where banks battle over fees based on allocations. "It's impossible to know right now if we will make any money," said the senior ECM banker. "Some banks have been working on this for years, others for several months. If Aramco said they are not paying any travel or hotel costs, those are real, significant expenses, and that's before you get to the opportunity cost." HSBC, JP Morgan and Morgan Stanley were mandated on an IPO of around 5% of Aramco (US$100bn at the US$2trn valuation) on Tadawul and an international exchange in March 2017, shortly after Evercore and Moelis were given advisory slots. All had to re-pitch in the summer when other banks were added. Evercore missed out after two years of work, an early warning of the risks of winning the mandate. TWIDDLING THUMBS In addition to cancelling the international roadshow, foreign banks have been told not to market the float in any way, with no outg

EQY

7 min read

Emerging Markets

IFR 2310 - 23 Nov - 29 Nov

Robert Venes

IFR 2310 - 23 Nov 2019 - 29 Nov 2019

Turkey turns to China as Western banks cut back

As foreign banks pull back from Turkey amid an ongoing financial crisis that has wiped off half the value the lira and brought economic growth in the country to a halt, companies there are turning to an unexpected source of finance as they seek to roll over their debts. Chinese lenders are increasingly stepping in to fill the gap left by US and European banks, which have trimmed their activity in Turkey as the crisis – now more than three years old – continues to rage and as talk grows about potential financial sanctions against political targets in the country. ICBC, the world's largest bank by assets, is leading the charge. Since buying local outfit Tekstilbank in 2015, it has expanded its Turkish loan book when almost every other foreign bank has been retrenching, turning it into one of the biggest corporate lenders in the country. Before the Tekstilbank acquisition, ICBC did barely any deals in the country. By contrast, over the last year, it has participated in a US$4.4bn loan for the North Marmara Highway, a debut US$1.4bn loan for Turkey's new sovereign wealth fund and several large refinancings for local banks. Bank of China and the Asian Infrastructure Investment Bank have also been increasing their presence. Turkish bankers see the move as politically led, a way for China to capitalise on the retrenchment of Western banks and simultaneously push its Belt and Road initiative in the country. "Turkey sits right on the Silk Road," said one senior local banker who works for a US investment bank. "It makes a lot of strategic sense for the Chinese, demonstrated by high-level conversations between the governments. So far, investments have all been in debt, but we could see equity too." WELCOME ARRIVAL The arrival of Chinese capital comes at a opportune time for Turkey's private sector, which has almost US$200bn of loans from foreign banks outstanding – up from US$130bn a decade ago. About a quarter of that total comes due this year or next, creating something of a refinancing cliff. Reliance on external credit has long been a problem for Turkey. But the problem has worsened since Ankara decided to loosen its rules in 2009 on who could borrow in foreign currencies. Total foreign currency borrowing – including loans from Turkish banks – has doubled since then to US$320bn. While US and European banks facilitated that growth, the recent crisis has made them wary about extending further credit. Many have hit their own internal limits, and options to sell loans in secondary markets is limited. Against those dynamics, Chinese banks are expected to grow further in importance. "A lot of international banks are finding themselves coming right up to their country limits on Turkey, which have been reduced because of the crisis," said the banker at the US lender. "It's not like we can just increase the price of the loan. We simply don't have the capacity in the balance sheet to do deals." But the entrance of the Chinese and the fight between banks to be on the same, scarce deals has made gauging the market more difficult. US and European banks say that knowing how to bid for deals – what pricing levels, what ticket size – has become tricky for those that are able to participate. "The Chinese lenders are a big unknown," said one senior local banker at a European lender. "They are a bit of a black box to us. We know how much we can get – and at what price – for our clients when working with our US or European peers, but with the Chinese banks that's much harder to gauge." "They also seem to have a much bigger appetite for larger tickets, which means there is less work to go around," said the second banker. "US and European banks are much more willing to do small tickets. Their entrance here isn't just filling the gaps; it really is changing the dynamics of the market." LOCAL MONEY Longer term, there is an acknowledgement from the government that the private sector needs to be weaned off its dependence on borrowing from abroad. It is pushin

BON LOA P&M

6 min read

Global

IFR 2310 - 23 Nov - 29 Nov

Gareth Gore

IFR 2310 - 23 Nov 2019 - 29 Nov 2019

Alibaba lifts Hong Kong's spirits

The completion of Alibaba Group’s HK$88bn (US$11.2bn) secondary listing in Hong Kong is expected to encourage listing aspirants to push ahead with their floats in the territory. The Chinese e-commerce giant last week wrapped up the mega share sale despite an escalation in anti-government protests that have rocked the financial centre. The offer of 500m primary shares, or 2.3% of its enlarged share capital, priced at HK$176 per share. The price represents a tight discount of 2.9% to the closing price of US$185.25 per ADS in New York last Tuesday. Each ADS represents eight shares. The equity offering, the largest in Hong Kong since insurance giant AIA’s US$20.5bn IPO in 2010, attracted strong demand. Books were multiple times oversubscribed with support from global long-only funds, sovereign wealth funds, Chinese funds and hedge funds. "As Alibaba is listed in the US, we did see some demand in the books driven by arbitrage trades in the two exchanges. But overall, stripping out demand from global funds, more demand actually came from Asia than the US," said a person close to the deal. "Some investors participated in the deal as they want to trade the stock in Asia hours while some see the potential of the stock being re-rated through a Hong Kong listing," the person said. Alibaba is likely to challenge Tencent Holdings as the largest listed company in Hong Kong. Tencent traded at a forecast P/E of 25.7 while Alibaba was at a forecast P/E of 22. Expectations that Alibaba's Hong Kong shares will soon be traded through the Stock Connect scheme are also likely to support the share price. Alibaba drew strong demand from retail investors, with the retail tranche more than 42 times covered. After clawback, 10% of the shares, instead of the original 2.5%, were sold to retail investors. Institutional investors took up the remaining 90%. VOTE OF CONFIDENCE Alibaba’s listing is a vote of confidence for the Hong Kong stock market, highlighting its ability to accommodate mammoth fundraisings despite political unrest in the city. This is especially important when some foreign companies are getting cold feet about their Hong Kong listing plans. Last week, Czech consumer finance company Home Credit Group decided not to proceed with a US$1.5bn Hong Kong IPO of subsidiary Home Credit because of market conditions. UK-based data centre operator Global Switch also pushed back its Hong Kong IPO of at least US$1bn to 2020 because of political and market conditions. Alibaba’s float, however, has encouraged at least two Chinese companies to move forward with sizeable IPOs. Facial recognition specialist Megvii Technology sought listing approval last Thursday for a US$500m–$1bn float, while Bank of Guizhou is considering launching a US$1bn listing as early as December. It is not yet clear whether Megvii will start pre-marketing this week. Controversy over surveillance technologies has been a feature of the protests in the city, and some analysts are concerned about the business impact of Megvii's addition to a US trade blacklist. In October, the US Department of Commerce placed eight companies, including Megvii, and 20 public security bureaus on its trade blacklist over alleged involvement in human rights violations related to Beijing's clampdown on Muslim Uighurs in the autonomous region of Xinjiang. Megvii has argued there are no grounds for its inclusion. “Market sentiment is not bad at the moment. Megvii could be able to go through if they lower their valuation expectations to reflect the risk of the US blacklist,” said a person close to the deal. In April, Megvii raised US$750m from a private financing at a valuation of about US$4bn. For Alibaba's Hong Kong listing, there is a 15% greenshoe of 75m primary shares. The Hong Kong shares will start trading on November 26. CICC and Credit Suisse were sponsors, and global coordinators with Citigroup, JP Morgan and Morgan Stanley. The five were also bookrunners with

EQY

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Global

IFR 2310 - 23 Nov - 29 Nov

Fiona Lau

IFR 2310 - 23 Nov 2019 - 29 Nov 2019

Alibaba lifts Hong Kong's spirits

EQY

4 min read

Global

IFR 2310 - 23 Nov - 29 Nov

Fiona Lau

IFR 2310 - 23 Nov 2019 - 29 Nov 2019

Privatisation bankers consider nationalisation options

Investment bankers who specialise in advising governments are divided over whether they could still act for the UK should the opposition Labour party win the general election on December 12. Leader Jeremy Corbyn published Labour’s manifesto on Thursday setting out ambitious plans to nationalise most major utility providers in the UK, as well as BT’s broadband company Openreach. “We could see more work from the government regarding nationalisation proposals if there is change in the political landscape. We might have to adapt our model,” said a banker at one advisory firm. Over the past 40 years investment banks, led by Rothschild and Lazard, have built significant practices advising governments on how to sell off assets. For example, Lazard advised the UK government on the IPO of Royal Mail in 2013 and Rothschild performed the same role for state-owned Network Rail’s £1.5bn sale of its railway arches this year. In 2008, the UK government also received advice from several banks – including Credit Suisse and UBS – when it was forced to inject capital into troubled banks RBS and Lloyds. However, those near-nationalisations of the banks were seen as emergency measures. Investment bankers might balk at implementing an explicit policy of taking assets back into public hands. “Advising the government on nationalisations would be a source for debate at senior management level,” said one executive of a prominent privatisation advisory firm. Most bankers told IFR they would not explicitly rule out such mandates, since they might require significant time, effort – and fees. “I’m not sure what would happen regarding nationalisations. You would want a big law firm and investment bank to help with them but I’m not sure they would because of the conflict of interests,” said Dan Neidle, a partner at law firm Clifford Chance. “If we acted for the government on nationalisation no one in the sector would ever engage us again.” Many UK utility companies, for instance, have taken advice on how to refinance their debt. For example, Rothschild acted for Southern Water ahead of regulator Ofwat’s price review, which is due to be published on December 16, days after the election. It would be hard to see firms suddenly switching sides to advise on nationalising their former clients. NO ADVICE NEEDED The executive said the government might not need help from advisory firms in any case. “I am not totally sure the government would need advisers. That didn’t happen in 1982, when the socialists came to power in France and nationalised most of the banks.” Taking companies out of private hands may not need much advice. Labour said it would nationalise Openreach, for instance, at a price to be determined by parliament, payable in Gilts. “It’s hard to see what the mandate is. It would be easy for the government to simply pass a law letting it buy the shares of a company it wanted to nationalise at a particular price,” said another banker. But nationalised companies may still require investment banking services to refinance their debt, possibly on better terms as government-backed entities, he pointed out. “First you do whatever you need to do with the equity. Then after that, with the government credit behind it, we should be able to refinance such a company at the government cost of debt,” said the banker.

P&M

3 min read

EMEA

IFR 2310 - 23 Nov - 29 Nov

Christopher Spink

IFR 2310 - 23 Nov 2019 - 29 Nov 2019

Australian states face carbon premium

Western Australia and Queensland face a “carbon premium” if other investors follow Sweden's Riksbank and boycott bonds from Australia’s two major coal-producing states. The Swedish central bank has sold its bonds issued by the two Australian states, along with its bond holdings from Canada's Alberta province, to give greater consideration to sustainability issues in the way it invests the country's foreign exchange reserves. Deputy governor Martin Floden said on November 13 the Riksbank “will not invest in assets issued by issuers with a large climate footprint” and that “Australia and Canada are countries that are not known for good climate work”. The Riksbank is hardly a big purchaser of Australian semi-government bonds, whose typical combined allocation to European investors as a whole is less than 5%, but the dominant and increasingly green-focused Australian investor base is another matter. Local investors, mostly asset managers, bought 87%–95% of the most recent deals from the sector: the A$1bn (US$681m) Australian Capital Territory 12-year, A$450m Tasmania 10.5-year and A$1.8bn New South Wales 12-year bonds, the latter of which was a sustainability bond issue. Furthermore, responsible investments under management are soaring in Australia, with another 13% increase last year to A$980bn as of December 31 2018. This represents 44% of the A$2.24trn total assets professionally managed in the country, according to the Responsible Investment Benchmark Report 2019 Australia. This rapid growth has fuelled a huge expansion in Environmental, Social and Governance (ESG) bond issuance, with year to-date supply exceeding A$11bn-equivalent, well above the previous annual record of A$8.4bn in 2018 and a dramatic pick-up from A$5.2bn in 2017 and just A$1.1bn in 2016. Core responsible investment strategies include negative screening away from industries such as thermal coal mining and sales, uranium and non-conventional oil and gas extraction, as well as tobacco, weapons, pornography and gambling. Until now, green investors have focused on avoiding corporate assets that do not meet their ESG requirements, but the Riksbank has opened a new front by targeting regions where the biggest “sinners” reside. In part, this reflects the special circumstances facing central bank investors. Floden explained that the Riksbank's ability to invest proactively in green bonds is limited because it mainly holds central and federal government bonds. On the other hand, he said, it can reject issuers with a large climate impact. Syndication desks have not seen any divergence between Western Australia and Queensland and the other states and territories, with the pricing of semi-government bonds still based solely on market dynamics such as ratings, size, tenor and liquidity. This could change, however. “This is the path we are going down as the ethical investor base broadens and more lines are drawn to differentiate between good and bad investments, including regional entities,” said one Sydney-based fund manager. “We have already seen this in America, where California passed its own Buy Clean Act that requires the state to include emissions information into procurement decisions in order to improve environmental outcomes. One consequence is Californian bonds may become a preferred asset among US green investors." BANKS CONFLICTED Australia's state issuers can still expect strong demand from local banks, thanks to rules on liquidity requirements. Bank balance sheets accounted for 23%–43% of the three recent semi offerings. Australian banks have made well-publicised decisions to reduce or stop lending to local coal miners, but they are not in a position to pick and choose between the states as they need to hold semi-government paper as Level 1 high-quality liquid assets for Basel III purposes. Australia’s restricted list of Level 1 HQLA assets is nowhere near sufficient f

BON RATE

5 min read

Asia

IFR 2310 - 23 Nov - 29 Nov

John Weavers

IFR 2310 - 23 Nov 2019 - 29 Nov 2019

Privatisation bankers consider nationalisation options

P&M

3 min read

EMEA

IFR 2310 - 23 Nov - 29 Nov

Christopher Spink

Bonds

Centene prints biggest high-yield bond of year

Health insurer Centene hit the high-yield market on Thursday with the asset class's biggest deal seen this year, a US$7bn three-tranche offering that will finance its acquisition of Medicaid provider WellCare. Combining the two companies after the acquisition, which was valued at US$17.3bn, will create the USA's largest provider of managed Medicaid, CreditSights said when the deal was announced. Interestingly, the company is seen on an upwards rating trajectory with solid financial metrics despite the increase in leverage that the deal will bring. S&P bumped the company's debt ratings up to an investment grade BBB- earlier this month and Fitch, which rates the company's debt BB+, has a positive rating outlook on the firm. Moody's rates the debt Ba1. "It's one of the few times when a company has taken on more debt through M&A and it was actually upgraded. That's fairly unique," said Mark Alexandridis, chief investment officer of First Principles Capital Management. The company was seen as having investment grade leverage metrics around three times, and it has benefited from being in a growing market as Medicaid participation increases, which is expected to help bring leverage down after the acquisition. Those qualities helped draw some investment grade accounts to the three-part deal, which consisted of a US$1bn add-on to its 4.75% senior notes due 2025, a US$2.5bn 8NC3 senior note due 2027 and a US$3.5bn 10NC5 senior note due 2029. Barclays provided an US$8.35bn financing commitment for the acquisition and was left lead on the deal alongside JP Morgan, SunTrust, Wells Fargo and Bank of America as joint bookrunners. Pricing was moved tighter through the marketing process but naturally came wide of where similar companies would price in the investment grade space. Pricing on the tap was set at 102.875, versus price talk of 102.25-102.75. Both senior notes were priced inside talk. The eight-year priced with a 4.25% coupon at 99.16 to yield 4.375%, inside price talk of 4.5%-4.625%. The ten-year priced at par with a 4.625% coupon, inside talk of 4.75%-4.875%. Despite the move tighter, the notes were seen trading up well in the secondary market with one investor seeing the ten-year notes at 103.5-104. CreditSights analysts said they would be buyers even at the tightest end of price talk levels. "We have a favorable assessment of [Centene's] credit profile, have a positive assessment of the strategic merits of the [WellCare] acquisition, and expect CNC paper to make its way to the IG index 12-24 months post deal-close," the analysts said on Thursday. The fact that pricing did not come even closer to investment grade levels was possibly down to political risks, given the spotlight on Medicaid - a revenue source that has driven the company's growth in recent years. Some Democratic candidates for the presidency have proposed versions of Medicare-for-all, a "black swan event that essentially eliminates the health insurance industry," CreditSights said. A win for the Republicans in both the White House and Congress on the other hand could raise the possibility of renewed efforts to repeal and/or replace the Affordable Care Act, which could impact Medicare funding levels. "The Centene story is a good fundamental story but it depends on how people value the political risk," said Alexandridis. "Our view is you're getting well compensated for that but others may not agree. Nonetheless it will take 3-5 years to play out. And the impact of a potential Medicare for all on the Medicaid program is highly uncertain."

BON

4 min read

Americas

David Bell, William Hoffman

IFR 2310 - 23 Nov 2019 - 29 Nov 2019

Australian states face carbon premium

BON RATE

5 min read

Asia

IFR 2310 - 23 Nov - 29 Nov

John Weavers

Equities

Saudi Aramco IPO over 75% subscribed

Saudi Aramco has attracted orders totalling SR73bn (US$19.46bn) for its SR90bn-SR96bn Tadawul IPO in the first five days of subscription. Institutional demand totalled SR58.39bn, while just over 1.8m individuals have chipped in a further SR14.59bn between them. The IPO represents 1.5% of the oil giant. Books opened last Sunday and runs until November 28 for retail and December 5 for institutions. There are approximately 200bn existing outstanding shares with around 3bn being offered by the Saudi government in a price range of SR30-SR32 per share. Around 0.5% of the company will be offered to retail/individual investors. International banks have been left with little to do on the transaction as the government re-focused on domestic and GCC investors, not even allowing banks to make outgoing calls to investors not in Saudi or the GCC. Nonetheless the syndicate currently remains intact even though many banks are inactive. Global coordinators are Bank of America, Citigroup, Credit Suisse, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, NCB Capital and Samba Capital. Domestic bookrunners are Al Rajhi Capital, EFG Hermes, GIB Capital, Riyad Capital and Saudi Fransi Capital. Foreign bookrunners are BNP Paribas, BOCI Asia, Credit Agricole, Deutsche Bank, First Abu Dhabi Bank, Mizuho International, RBC Europe, Santander, SMBC Nikko Capital Markets, Societe Generale and UBS. Lazard, M Klein & Co and Moelis & Co are advising.

EQY

Quick read

Emerging Markets

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Spygate

HSBC’S RELATIONSHIP WITH Tottenham Hotspur is proving to be a lucrative one after the bank acted as co-lead arranger on the football club’s debut bond issue in the US private placement market a couple of months ago. And now both are in the news for big-name departures, following the sacking of Tottenham’s manager Mauricio Pochettino and the impending end of Samir Assaf’s reign as CEO of HSBC’s global banking and markets division. Indeed, the departure of “Poch” was announced on the same day as news broke that Assaf was on his way out. Like Poch and Tottenham, Assaf has given HSBC many memories to treasure. Just as the Argentine guided Spurs to the Champions League final, Assaf’s silky skills in Saudi Arabia meant that HSBC is the only foreign bank that can claim bragging rights on the Aramco IPO. This means Assaf can go out on a high after almost nine years in charge. But who should replace him? Spurs chairman Daniel Levy could act decisively because he had lined up Jose “the special one” Mourinho as his immediate replacement. But who can HSBC chairman Mark Tucker turn to? More to the point, will Spurs’ relationship with HSBC survive given that Tucker is a fan of Chelsea, who fell out of love with Mourinho during his second spell? The Portuguese super-coach has the job of lifting morale but it will take someone with the motivational skills of Jurgen Klopp to rally the GBM troops ahead of the mother of all restructurings on its way in February. So where are the Mourinhos and Klopps of banking? The era of charismatic super-CEOs has been over since Anshu Jain left Deutsche Bank. But perhaps Tidjane Thiam comes closest for his mercurial qualities, although on reflection the Credit Suisse boss is probably closer in style to dirty Leeds United coach Marcelo Bielsa, who last season admitted to sending spies to snoop on his opponents Derby County ahead of a match between the two sides. SPEAKING OF WHICH, UBS wealth management head Iqbal Khan has two years to show he has what it takes to become the bank’s next CEO, after it emerged that Sergio Ermotti is likely to step down in 2021. This date is significant because it will mean Ermotti will have reached the 10-year milestone. It’s well known that Khan is a man in a hurry, but two years might be too quick even for a man of his sprinting skills. And as he knows all too well, he can run, but he can't hide. IFR’S TWENTIETH FIG and bank capital conference in London last week was as exciting an event as it sounds, as packed full of fascinating ideas as only a FIG conference can be. But the best idea, by a distance, came from Morgan Stanley’s Matteo Benedetto, who jokingly suggested the best way to stop inflated order books in bond deals is to randomly select five investors who would get the full allocations of bonds they asked for. It’s not hard to imagine the conversation. “What do you mean, I’ve got US$100m of bonds? I only wanted US$10m.” “Then why did you ask for US$100m?” "Oh, yes. Good point. Sorry. Can I change my mind, please?”

IFR 2310 - 23 Nov - 29 Nov

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IFR hosts a comprehensive programme of conferences, seminars and roundtables throughout the year, providing authoritative insight into the trends and outlooks for specific regions and asset classes.

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IFR Digital Edition

Access a digital replica of IFR's print magazine, updated each Friday. Plus regular Special Reports and Roundtables, covering industry themes and trends.

Latest Digital Edition

Bellwether

Spygate

IFR 2310 - 23 Nov - 29 Nov

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