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IFR 2305 - 19 Oct 2019 - 25 Oct 2019

Forget CDS: equity-default swaps return

A rare and risky form of derivative insuring against stock market crashes is staging a comeback, as banks dust off the pre-crisis playbook in search of ideas to present to yield-hungry investors. JP Morgan is at the forefront of banks building products using equity-default swaps this year, according to people familiar with the matter, with investors earning money by selling protection against a sharp decline in the share prices of a broad range of companies. These derivatives have not been commonplace since the run-up to the financial crisis, when bankers first dreamed up the equity-market equivalent of the credit-default swap. Activity in “EDS” is still low, but a growing number of investors are turning to the product in this low-yielding environment, bankers say, with returns increasingly hard to come by elsewhere. While minuscule in size compared with the US$8trn CDS market, equity-default swaps have one notable advantage over their more famous credit-market cousin: they offer a higher yield. Such deals allow investors to earn annual returns in the region of 3% to 4% for selling crash protection on a portfolio of 100 or so stocks, bankers say, assuming markets don’t fall off a cliff. Equity-default swaps are in many ways much simpler products than CDS, which rely on a panel of banks and investors interpreting dense legal clauses to determine whether a company has defaulted or not. Instead, the performance of an equity-default swap simply references share prices. In a typical trade, an investor will sell a deeply out-of-the-money put option (or the right to sell an asset at a pre-agreed price) with a barrier at 50% of a company’s current share price. Presuming the stock stays above that level over the life of the trade – usually 12 to 18 months – the investor collects their fee for selling the protection. If the stock hits that barrier, though, they will lose half of their investment. So the investor’s bet isn’t too concentrated, they will sell protection of this kind on a portfolio of about 100 stocks, which could be picked out of the Stoxx Europe 600 benchmark index. That diversification should help reduce the risks of the trade, bankers say. Such deals often appeal to private banking clients desiring a steady income over the next year or so who are convinced markets aren’t about to nosedive. BIG IN JAPAN JP Morgan was at the forefront of creating the equity-default swap in the early 2000s in Japan. Jason Sippel, JP Morgan’s current global head of equities, was one of the executives instrumental in developing the product within the bank at that time, according to people familiar with the matter. Then, as now, local investors wanted products promising chunkier returns than the measly yields available in bond markets. But in one important difference to that time, banks in the present day are no longer creating pools of equity-default swaps to slice up into an equity market version of complex synthetic collateralised debt obligations. "Japan had a long history of low interest rates. Investors were looking for ways to get income and there was a greater acceptance of longer-dated structures," said Clarke Pitts, a now retired former JP Morgan executive, who was also involved in developing some of the first equity-default swap trades in the early 2000s in Tokyo. “We created the concept of the equity-default swap not so that we could trade them directly, but so we could tranche the payoffs and do structured product-types of assets. The main intention of creating the equity equivalent of CDS was to support equity collateralised obligations, or ECOs," Pitts said. JP Morgan was one of the first banks to sell CDOs linked to equity-default swaps to institutional investors in the early 2000s by slicing up portfolios of these derivatives into tranches with varying degrees of risk. One of those transactions was named "Geronimo” after a famously raucous "shot bar" in T

RATE
6 min read
IFR 2305 - 19 Oct - 25 Oct
Christopher Whittall
IFR 2305 - 19 Oct 2019 - 25 Oct 2019

'Short delay' for Aramco's mega IPO

Oil giant Saudi Aramco has delayed its local IPO of up to US$60bn that was scheduled to launch on October 20, though the postponement should only be for one to two weeks, according to people involved. The IPO is now expected by bankers to follow rapidly after publication of Aramco’s third-quarter results, giving the company a chance to reassure the market on its financial health following a drop in production caused by September 14 attacks on its Abqaiq and Khurais refineries. "It will be cleaner to do [the IPO] after the results and gives Aramco more time for investor engagement," said a senior banker at one of the bookrunners working on the float. "It will definitely happen this year." Aramco said on Friday that it was engaged with the Saudi government on the IPO. "The company is ready and timing will depend on market conditions and be at a time of the shareholder's choosing," the company said. Despite reports of investor concerns about state interference and valuation, the senior banker said that there was sufficient support to get the deal done on the local Tadawul exchange. "The question is the valuation where international support will come. The quality of the underlying assets is not in question and neither is whether Aramco should come at a premium to anyone else out there," he said. "However, this is still a very nascent local stock exchange and there are questions about governance, which some investors will have to get their heads around." As a result, views on valuation are varied. Investors are focused on the dividend yield. The company has already committed to an annual dividend of US$75bn. Some investors are said to be angling for a yield of 5%, which would represent a valuation of US$1.5trn, versus a US$2trn valuation (3.75% yield) sought by the government. A more generous 6%−7% yield requested by others gives a US$1.2trn valuation. Local investors are also comparing it with Aramco’s 30-year bonds that pay a coupon of 4.375%. Ultimately, valuation will drive the size of the deal and whether Aramco sells a 1% stake or an up to 3% stake, said a head of ECM syndicate. QUITE A RANGE Each percentage point on offer represents a circa US$15bn step up in stock to be placed, so while the low end would not even rank in the top 10 IPOs ever, the upper end would be a multiple of Alibaba's record-holding US$25bn IPO. Bankers say they are comfortable with the idea of raising that quantum of cash, despite nothing of that size being attempted before. Another banker involved in both Alibaba and the US$22bn IPO of ICBC of China in 2006 pointed to total demand for Alibaba in the region of US$300bn, while demand for ICBC totalled about US$700bn. Bank of America Merrill Lynch, Citigroup, Credit Suisse, Goldman Sachs, HSBC, JP Morgan and Morgan Stanley are joint global coordinators with local banks National Commercial Bank and Samba Financial. SMBC Nikko Securities was added to the syndicate as a bookrunner in late September. IFR previously reported the base fee for the IPO is 35bp, with an incentive fee of at least 55bp.

EQY
3 min read
Emerging Markets
IFR 2305 - 19 Oct - 25 Oct
Robert Venes
IFR 2305 - 19 Oct 2019 - 25 Oct 2019

UK seeks to curb sudden surge in council borrowing

The UK government has moved to clamp down on what it sees as excessive borrowing by local authorities following a sudden surge in loan requests to the Public Works Loan Board, the 200-year-old public body that is the main lender to councils. Local authorities borrowed £2bn from the PWLB in August, a record for a single month and more than local authorities borrowed on an annual basis just a few years ago. While borrowing eased in September, councils still took out £1.6bn of loans, making it the second busiest month ever. With the PWLB running close to its £85bn statutory lending limit, the government was forced to act to avoid a total shutdown and possible liquidity crunch for councils. It upped the limit to £95bn, but simultaneously hiked interest rates by 100bp in a bid to rein in borrowing. Many local councils are pushing through loan requests following a collapse in Gilt yields, off which PWLB loans are priced, over the past six months. Gilt yields hit a record low in September, pushing PWLB rates down to 1%, lowering the bar for borrowing proposals to be approved by councils. The Treasury has been at pains to play down the impact of the hike, arguing that councils will still be able to borrow at extremely favourable rates. But officials admit there is concern about rising council debts, which stood at £105bn - including bank loans and bonds - at the end of June. "Some local authorities have substantially increased their use of the PWLB in recent months, as the cost of borrowing has fallen to record lows," the Treasury said in a letter to council finance chiefs. "HM Treasury is therefore restoring interest rates to levels available in 2018." COSTLY MOVE The Local Government Association, a council lobby group, criticised the move, saying it would cost councils £70m a year and threatens to derail capital schemes, including vital house building projects. Many local councils are struggling financially after a 60% fall in revenues since 2010. Moody's concurred, concluding that the rate hike would be credit negative for councils, since it would increase their cost of capital. However, it said that over the medium term the hike might rein in the recent rise in debts and could even push councils to look at other funding options. "The rate hike will not affect the availability of finance from the PWLB, and we expect it to remain the sector's main source of finance," said Zoe Jankel, a Moody's analyst. "Nevertheless, the higher cost may increase demand for financing from other sources, including capital markets." The UK government has long held the ambition of weaning councils off PWLB loans, which come with no strings attached. Local officials just need to make a request stating how much they want and over what term. They don't need to explain why they want the loan or how it will be repaid. The lack of oversight has allowed some to take on huge debts to fund questionable investments: Spelthorne has taken on £1bn of debt in the past three years to buy commercial property, while Warrington has borrowed £800m to lend on to housing associations and buy a stake in a bank. BOND MARKET HOPES But real reform of the system is yet to be seen. In 2010, the government announced that the PWLB would be dissolved, and in 2016 a consultation was launched on the subject. The Treasury previously told IFR that it remains the government's intention to "abolish the PWLB at the earliest opportunity". One hope was that the bond market might prove to be an alternative source of funding. The UK Municipal Bond Authority was set up in 2014 as a vehicle to co-ordinate bond issuance. An inaugural deal has supposedly been imminent for the past four years, but nothing has come. One problem is that councils like to borrow small: the average PWLB loan size in September was just £9.3m, way too small for a bond deal. The UKMBA was in part created to allow councils to pool together so that they could bring a benc

BON P&M
5 min read
EMEA
IFR 2305 - 19 Oct - 25 Oct
Gareth Gore
IFR 2305 - 19 Oct 2019 - 25 Oct 2019

UK seeks to curb sudden surge in council borrowing

The UK government has moved to clamp down on what it sees as excessive borrowing by local authorities following a sudden surge in loan requests to the Public Works Loan Board, the 200-year-old public body that is the main lender to councils. Local authorities borrowed £2bn from the PWLB in August, a record for a single month and more than local authorities borrowed on an annual basis just a few years ago. While borrowing eased in September, councils still took out £1.6bn of loans, making it the second busiest month ever. With the PWLB running close to its £85bn statutory lending limit, the government was forced to act to avoid a total shutdown and possible liquidity crunch for councils. It upped the limit to £95bn, but simultaneously hiked interest rates by 100bp in a bid to rein in borrowing. Many local councils are pushing through loan requests following a collapse in Gilt yields, off which PWLB loans are priced, over the past six months. Gilt yields hit a record low in September, pushing PWLB rates down to 1%, lowering the bar for borrowing proposals to be approved by councils. The Treasury has been at pains to play down the impact of the hike, arguing that councils will still be able to borrow at extremely favourable rates. But officials admit there is concern about rising council debts, which stood at £105bn - including bank loans and bonds - at the end of June. "Some local authorities have substantially increased their use of the PWLB in recent months, as the cost of borrowing has fallen to record lows," the Treasury said in a letter to council finance chiefs. "HM Treasury is therefore restoring interest rates to levels available in 2018." COSTLY MOVE The Local Government Association, a council lobby group, criticised the move, saying it would cost councils £70m a year and threatens to derail capital schemes, including vital house building projects. Many local councils are struggling financially after a 60% fall in revenues since 2010. Moody's concurred, concluding that the rate hike would be credit negative for councils, since it would increase their cost of capital. However, it said that over the medium term the hike might rein in the recent rise in debts and could even push councils to look at other funding options. "The rate hike will not affect the availability of finance from the PWLB, and we expect it to remain the sector's main source of finance," said Zoe Jankel, a Moody's analyst. "Nevertheless, the higher cost may increase demand for financing from other sources, including capital markets." The UK government has long held the ambition of weaning councils off PWLB loans, which come with no strings attached. Local officials just need to make a request stating how much they want and over what term. They don't need to explain why they want the loan or how it will be repaid. The lack of oversight has allowed some to take on huge debts to fund questionable investments: Spelthorne has taken on £1bn of debt in the past three years to buy commercial property, while Warrington has borrowed £800m to lend on to housing associations and buy a stake in a bank. BOND MARKET HOPES But real reform of the system is yet to be seen. In 2010, the government announced that the PWLB would be dissolved, and in 2016 a consultation was launched on the subject. The Treasury previously told IFR that it remains the government's intention to "abolish the PWLB at the earliest opportunity". One hope was that the bond market might prove to be an alternative source of funding. The UK Municipal Bond Authority was set up in 2014 as a vehicle to co-ordinate bond issuance. An inaugural deal has supposedly been imminent for the past four years, but nothing has come. One problem is that councils like to borrow small: the average PWLB loan size in September was just £9.3m, way too small for a bond deal. The UKMBA was in part created to allow councils to pool together so that they could bring a benc

BON P&M
5 min read
EMEA
IFR 2305 - 19 Oct - 25 Oct
Gareth Gore
IFR 2305 - 19 Oct 2019 - 25 Oct 2019

WeWork spreads funding net as debt investors balk

WeWork's attempts to raise US$5bn in the loan and bond markets were faltering last week as the embattled office sharing company sought alternative financing amid widespread scepticism about its ability to return to the debt markets. The cash strapped firm has been rushing to cobble together new funding ever since it was forced to abandon its plans to go public last month after equity investors questioned the company's high valuation and shaky business model. WeWork is now receiving similar push back from debt investors who have widely balked at a JP Morgan-led rescue package comprising a US$1.75bn letter of credit facility and US$3.25bn of secured and unsecured bonds, even at substantial yields. The unsecured bond was being informally marketed with an 11% coupon and a discounted price of 94 to yield 15%, with attached warrants that are exercisable at a valuation of US$12bn, a source close to the financing said. The secured bonds were expected to price in line with the company’s existing bond. That package, however, is looking less and less viable − not to mention costly. Not only is the bond deal a tough sell, but banks that had signed up to a US$6bn loan package − which was contingent on a successful IPO − are dropping their support for a new deal. Only the banks already involved in the company's existing US$650m revolving credit facility are expected to stay on board should a new letter of credit come to fruition. "Why stay? Why do people stay in bad marriages? Because the alternative is worse," the source said. JP Morgan, Goldman Sachs, Bank of America Merrill Lynch, Barclays, Citigroup, Credit Suisse, HSBC, UBS, Wells Fargo and Deutsche Bank are lenders in the company's existing RCF. "It's hard to know what's going to happen," the source close to the financing said. "It's flawed and it's messy. It's like the Joker movie: it’s painful to watch, but you can’t keep your eyes off it." Sources say that the company is now assessing financing options involving SoftBank, as well as the JP Morgan proposal, as it looks to capitalise itself over the next 18 months. Both are major shareholders in WeWork. News that SoftBank was in discussions to provide US$5bn in equity financing temporarily lifted WeWork's sole existing junk bond − the 7.875% 2025 − which jumped last week to a dollar price of 89 to yield 10.547% only to fall back to 83.125 on Thursday. "It looks like SoftBank is coming with the financing," said Jesse Rosenthal, an analyst at research firm CreditSights. "The bond was a bit of a stretch." BOND INVESTORS BALK US high-yield bond investors have favoured higher-quality credits this year and are in no mood to reach down the credit spectrum as the economic cycle nears its end. "You can't make a silk purse out of a sow's ear in this market. It's a market that's much pickier in what it wants to fund," said David Knutson, head of credit research at Schroders Investment Management. Fitch downgraded WeWork by two notches to CCC+ this month, while S&P cut it to B− in September, partly on the uncertainty over its ability to raise capital. SoftBank, which has invested billions of dollars in the company, in effect forced co-founder Adam Neumann to resign as CEO and relinquish majority voting control last month as valuations for the company dropped from US$47bn to as low as US$10bn. "At the very least they need to restructure the balance sheet vis-a-vis the change in valuation," said Larry Perkins, CEO of advisory firm Sierra Constellation Partners. "[It needs] a restructuring to transform it from a pie-in-the-sky idea into an operating business that has the intention to make money." Against that backdrop, it is hardly surprising that most US high-yield fund managers expressed little interest in the credit and would in any case probably have trouble justifying placing WeWork debt in their portfolios. One such buyside manager thought any bond deal would probably be placed private

BON LOA
5 min read
Americas
IFR 2305 - 19 Oct - 25 Oct
Michelle Sierra, Paul Kilby
IFR 2305 - 19 Oct 2019 - 25 Oct 2019

Merlin financing pushes new boundaries

UK theme park and attraction operator Merlin Entertainments has completed a £1.252bn-equivalent loan (equal to €1.45bn at the spot rate), securing the lowest pricing for a euro-denominated Single B rated buyout loan this year and confounding critics who said documentation on the deal was too aggressive. The euro-denominated loan, which forms part of a wider £2.193bn-equivalent loan, came in at 300bp over Euribor from 300bp−325bp guidance, while the OID was tightened to 99.75 from 99.5. Pricing on a £941m-equivalent US dollar-denominated term loan was set at 325bp over Libor from 325bp−350bp at launch with a 99.75 OID from 99.5 at launch. Both loans have a 0% floor and 101 soft-call protection for six months. “It is an exceptionally tight print only available for the strongest and best-liked credits,” a capital markets head said. The 300bp margin for a Single B rated LBO loan breaks new ground in the market. By way of comparison, Single B rated Dutch telecoms company VodafoneZiggo last week priced its €2.25bn refinancing at the same level as Merlin. “It's impressive Merlin got 300bp in this market. It has been a while since we have seen one of those. VodafoneZiggo is in the cable sector, which everyone likes and it is a repeat issuer. Merlin is in the leisure sector and it's a new deal, which should in theory come with a new issue premium,” a senior banker said. At 300bp, some of the CLO bid was lost, but there was enough alternative money from credit funds to do the deal, sources said. “A lot of CLOs can't do it at 300bp but it got liquidity elsewhere. It has significant property, it is a big deal and it will be liquid, so funds with a lot of cash can use it as a cash park,” the capital markets head said. TOUGH TERMS Viewed as a strong and stable company, Merlin was able to push the boundaries with some aggressive documentation. Despite some investor pushback, most of the terms remained in place, helped also by investors' high regard for the buyers, a core fund owned by Blackstone, Lego family-owned investment company Kirkbi and Canadian pension fund CPPIB. The loan includes a basket that allows the company to incur debt in an amount equal to two times the available restricted payments capacity. In other words, Merlin will be able to incur twice as much debt as it could take out as a dividend. Typically it is one times. “Merlin is the latest benchmark on aggressive docs, especially in terms of debt incurrence,” a senior investor said. The terms also requested that drawings from a £400m 6.5-year multi-currency revolving credit facility would not be included when calculating leverage. “The exclusion of RCF drawings from leverage calculations can make a meaningful difference, which is especially a worry because the RCF is so big. It is the usual stuff but it is pushing it to the limit. It is not a huge surprise given the quality of the credit and the buyers,” the senior investor said. Merlin's loan documentation has been described as looser than on a US$13.5bn financing backing the buyout of Refinitiv by a Blackstone-led consortium, which up until now had been seen as the most aggressive. However, Merlin did make some concessions. In an unusual move, the borrower attempted to impose aggressive transfer restrictions to make the minimum amount anyone could trade €5m, compared with a usual €1m−€2m. There was also a minimum hold level of €10m requested on the loan. This was scrapped and the minimum hold and transfer threshold will be €1m. Fuelled by a supply/demand imbalance, lawyers have pushed the boundaries on jumbo buyout loans. Despite pushback from investors that has led to some revisions to opening documentation, most of the terms have filtered through. And such terms have then been recycled into smaller deals until they have become market standard. TIGHT BOND The bond component also got acro

BON LOA
7 min read
Americas, EMEA
IFR 2305 - 19 Oct - 25 Oct
Eleanor Duncan, Claire Ruckin
IFR 2305 - 19 Oct 2019 - 25 Oct 2019

WeWork spreads funding net as debt investors balk

WeWork's attempts to raise US$5bn in the loan and bond markets were faltering last week as the embattled office sharing company sought alternative financing amid widespread scepticism about its ability to return to the debt markets. The cash strapped firm has been rushing to cobble together new funding ever since it was forced to abandon its plans to go public last month after equity investors questioned the company's high valuation and shaky business model. WeWork is now receiving similar push back from debt investors who have widely balked at a JP Morgan-led rescue package comprising a US$1.75bn letter of credit facility and US$3.25bn of secured and unsecured bonds, even at substantial yields. The unsecured bond was being informally marketed with an 11% coupon and a discounted price of 94 to yield 15%, with attached warrants that are exercisable at a valuation of US$12bn, a source close to the financing said. The secured bonds were expected to price in line with the company’s existing bond. That package, however, is looking less and less viable − not to mention costly. Not only is the bond deal a tough sell, but banks that had signed up to a US$6bn loan package − which was contingent on a successful IPO − are dropping their support for a new deal. Only the banks already involved in the company's existing US$650m revolving credit facility are expected to stay on board should a new letter of credit come to fruition. "Why stay? Why do people stay in bad marriages? Because the alternative is worse," the source said. JP Morgan, Goldman Sachs, Bank of America Merrill Lynch, Barclays, Citigroup, Credit Suisse, HSBC, UBS, Wells Fargo and Deutsche Bank are lenders in the company's existing RCF. "It's hard to know what's going to happen," the source close to the financing said. "It's flawed and it's messy. It's like the Joker movie: it’s painful to watch, but you can’t keep your eyes off it." Sources say that the company is now assessing financing options involving SoftBank, as well as the JP Morgan proposal, as it looks to capitalise itself over the next 18 months. Both are major shareholders in WeWork. News that SoftBank was in discussions to provide US$5bn in equity financing temporarily lifted WeWork's sole existing junk bond − the 7.875% 2025 − which jumped last week to a dollar price of 89 to yield 10.547% only to fall back to 83.125 on Thursday. "It looks like SoftBank is coming with the financing," said Jesse Rosenthal, an analyst at research firm CreditSights. "The bond was a bit of a stretch." BOND INVESTORS BALK US high-yield bond investors have favoured higher-quality credits this year and are in no mood to reach down the credit spectrum as the economic cycle nears its end. "You can't make a silk purse out of a sow's ear in this market. It's a market that's much pickier in what it wants to fund," said David Knutson, head of credit research at Schroders Investment Management. Fitch downgraded WeWork by two notches to CCC+ this month, while S&P cut it to B− in September, partly on the uncertainty over its ability to raise capital. SoftBank, which has invested billions of dollars in the company, in effect forced co-founder Adam Neumann to resign as CEO and relinquish majority voting control last month as valuations for the company dropped from US$47bn to as low as US$10bn. "At the very least they need to restructure the balance sheet vis-a-vis the change in valuation," said Larry Perkins, CEO of advisory firm Sierra Constellation Partners. "[It needs] a restructuring to transform it from a pie-in-the-sky idea into an operating business that has the intention to make money." Against that backdrop, it is hardly surprising that most US high-yield fund managers expressed little interest in the credit and would in any case probably have trouble justifying placing WeWork debt in their portfolios. One such buyside manager thought any bond deal would probably be placed private

BON LOA
5 min read
Americas
IFR 2305 - 19 Oct - 25 Oct
Michelle Sierra, Paul Kilby
IFR 2305 - 19 Oct 2019 - 25 Oct 2019

Banks piggyback 'megatrends' to sell new structured products

A crucial engine in investment banks’ equity trading units has stalled this year, prompting many to turn to financial engineering to sell new products. Sales of the most popular type of retail structured product − known as autocallables − have slumped this year, with banks’ revenues from such activities dropping by 15% to 20%, according to industry executives. That comes amid range-bound moves in stock markets, which have created a backlog of risky trades for banks to manage and dented investor demand for new products. Bankers have responded by crafting new indices that do not rely on mainstream stock benchmarks, instead piggybacking on popular trends such as robotics and environmentally-friendly investing to bring in new business. That has allowed banks to continue selling products while diversifying their exposure, but also raises questions about how they will manage these less liquid risks if markets turn lower. “There is a big concentration of autocallable products in the market that are not called. That’s made it a challenging environment to risk-manage and you have less new business. It is one element of the drop in equity derivatives results at banks in [the first half of the year],” said Nicolas Marque, global head of equity derivatives at BNP Paribas. Marque said the concentration of products on the Euro Stoxx 50 in particular, which could be more than €60bn across the market, has been complicating risk management as all banks have the same position on. “Hence BNP Paribas tries to innovate and advise clients to trade other underlyings like custom indices,” he said. The largest US and European investment banks reported an average year-on-year decline of 11% in the second quarter of the year after an average 17% drop in the first quarter. The drop-off in sales of structured products, long a significant money-making activity, at least partly explains that fall, analysts say. CALL ME MAYBE Structured products appeal to retail investors, particularly in Europe and Asia, looking for higher returns than those offered by bonds. The autocallable has become the most prominent of these products in recent years, but it is a risky structure that in effect gives investors exposure to stock markets while capping both gains and losses. As long as markets are rising, autocallables work well both for banks and investors. Take the most popular structure, which checks every year where an index like the Euro Stoxx 50 is trading. If the Euro Stoxx has climbed above a certain level after a year, the investor receives a chunky payout and the product automatically expires, hence its “autocallable” moniker. That process creates revenue opportunities for the bank as well. Not only can it now sell the client another product, the exotic risks stemming from this activity give the bank ammunition to place trades with hedge funds. But it becomes more challenging for banks and investors when markets decline sharply or even trade within a range, as the Euro Stoxx 50 has over the past year or so. Investors will have to wait to get their payout if the index has not climbed above that key level after a year. They could also lose some of their money if stocks decline below a certain barrier. Managing the risks from autocallable books gets tricky for banks whenever stock markets fall quickly, as they did in late 2018. But even markets moving sideways can be problematic as it means autocallables will not come due, leaving banks with a backlog of trades to manage and limiting the amount of new deals they’re willing to do. “If the market stays range-bound, autocallable issuance is going to be muted over time,” said Kokou Agbo-Bloua, global head of flow strategy and solutions at Societe Generale. INNOVATION Banks have turned to financial engineering to plug some of that gap, building products using their own indices rather than relying on mainstream stock benchmarks. Marqu

RATE
7 min read
IFR 2305 - 19 Oct - 25 Oct
Christopher Whittall
IFR 2305 - 19 Oct 2019 - 25 Oct 2019

Merlin financing pushes new boundaries

UK theme park and attraction operator Merlin Entertainments has completed a £1.252bn-equivalent loan (equal to €1.45bn at the spot rate), securing the lowest pricing for a euro-denominated Single B rated buyout loan this year and confounding critics who said documentation on the deal was too aggressive. The euro-denominated loan, which forms part of a wider £2.193bn-equivalent loan, came in at 300bp over Euribor from 300bp−325bp guidance, while the OID was tightened to 99.75 from 99.5. Pricing on a £941m-equivalent US dollar-denominated term loan was set at 325bp over Libor from 325bp−350bp at launch with a 99.75 OID from 99.5 at launch. Both loans have a 0% floor and 101 soft-call protection for six months. “It is an exceptionally tight print only available for the strongest and best-liked credits,” a capital markets head said. The 300bp margin for a Single B rated LBO loan breaks new ground in the market. By way of comparison, Single B rated Dutch telecoms company VodafoneZiggo last week priced its €2.25bn refinancing at the same level as Merlin. “It's impressive Merlin got 300bp in this market. It has been a while since we have seen one of those. VodafoneZiggo is in the cable sector, which everyone likes and it is a repeat issuer. Merlin is in the leisure sector and it's a new deal, which should in theory come with a new issue premium,” a senior banker said. At 300bp, some of the CLO bid was lost, but there was enough alternative money from credit funds to do the deal, sources said. “A lot of CLOs can't do it at 300bp but it got liquidity elsewhere. It has significant property, it is a big deal and it will be liquid, so funds with a lot of cash can use it as a cash park,” the capital markets head said. TOUGH TERMS Viewed as a strong and stable company, Merlin was able to push the boundaries with some aggressive documentation. Despite some investor pushback, most of the terms remained in place, helped also by investors' high regard for the buyers, a core fund owned by Blackstone, Lego family-owned investment company Kirkbi and Canadian pension fund CPPIB. The loan includes a basket that allows the company to incur debt in an amount equal to two times the available restricted payments capacity. In other words, Merlin will be able to incur twice as much debt as it could take out as a dividend. Typically it is one times. “Merlin is the latest benchmark on aggressive docs, especially in terms of debt incurrence,” a senior investor said. The terms also requested that drawings from a £400m 6.5-year multi-currency revolving credit facility would not be included when calculating leverage. “The exclusion of RCF drawings from leverage calculations can make a meaningful difference, which is especially a worry because the RCF is so big. It is the usual stuff but it is pushing it to the limit. It is not a huge surprise given the quality of the credit and the buyers,” the senior investor said. Merlin's loan documentation has been described as looser than on a US$13.5bn financing backing the buyout of Refinitiv by a Blackstone-led consortium, which up until now had been seen as the most aggressive. However, Merlin did make some concessions. In an unusual move, the borrower attempted to impose aggressive transfer restrictions to make the minimum amount anyone could trade €5m, compared with a usual €1m−€2m. There was also a minimum hold level of €10m requested on the loan. This was scrapped and the minimum hold and transfer threshold will be €1m. Fuelled by a supply/demand imbalance, lawyers have pushed the boundaries on jumbo buyout loans. Despite pushback from investors that has led to some revisions to opening documentation, most of the terms have filtered through. And such terms have then been recycled into smaller deals until they have become market standard. TIGHT BOND The bond component also got acro

BON LOA
7 min read
Americas, EMEA
IFR 2305 - 19 Oct - 25 Oct
Eleanor Duncan, Claire Ruckin

BON SF P&M

Libor concerns remain for legacy RMBS deals

Some of the UK securitisation market's most established issuance shelves - Holmes, Silverstone and Penarth - are now making progress to transition pre-2019 deals from Libor to Sonia but concerns remain for some legacy transactions, panelists at a Fitch structured finance conference said on Thursday.Many pre-2018 securitisations are structured so that, if Libor is discontinued after the end of 2021, their bonds simply use the final Libor fixing of 2021 for the rest of the life of the deal.An originator could in theory choose to lock in low interest rates at the end of 2021 by not switching from Libor and seeing its deals' liabilities effectively become fixed rate bonds linked to that final Libor fixing."I struggle to imagine an originator who relies on securitisation would fund his business doing that," said Cedric Tchaban, ABS investor at HSBC GAM.But Tchaban said he was most concerned about legacy deals where the originator is no longer in business and has perhaps been sold to private equity.Andreas Wilgen, global structured finance credit officer at Fitch, said that changing the underlying assets in such deals from Libor to Sonia could also be problematic, as well as any derivative swaps involving Libor.Tchaban agreed about the assets. "The liability side is great, there's a lot more certainty. But on the asset side it’s less clear," he said."Some lenders have already moved [from Libor] to Standard Variable Rate ... but for legacy transactions, people are a bit unclear."The panel also discussed the possibility of a term Sonia being developed in the future, instead of the daily compounded Sonia that is currently used.Richard Hopkin, head of fixed income at AFME, pointed out that the Bank of England is looking at term Sonia, but only for certain, limited asset classes.And compounded Sonia, according to Tchaban, "looks a bit Byzantine but as an investor you can get on with it, can book these assets."But Tchaban asked whether compounded Sonia would end up as the final, established rate used by the market or if it might in fact turn out to be just a transition to something different, such as term Sonia.

BON SF P&M
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EMEA

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BUZZ-USD/IDR teases bearish bias, Gojek CEO joins Jokowi cabinet

USD/IDR seeping lower, tentatively enters Bollinger downtrend channel Mon close below 14125 will confirm new bearish chart pattern Last week's break of 200 DMA was first trigger for USD bears Break of Ichimoku Cloud base 14115 will increase strength of sell signals Gojek CEO, co-founder, quits to join Jokowi's cabinet nL3N2761A3 May be revealed as head of digital economy ministry nL3N276157 IDR: https://tmsnrt.rs/2o2JLIx

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Emerging Markets, Asia
Ewen Chew

RATE FX

BUZZ-Huge EUR/USD, CHF and USD/JPY amid FX option expiries - Oct 21

Options expire at 10-am New York cut Monday October 21 EUR/USD: 1.1095-1.1100 (1.6BLN), 1.1110 (300M), 1.1120-30 (1BLN), 1.1150-60(1BLN), 1.1185-90 (900M), 1.1200 (1.1BLN) USD/CHF: 0.9900 (850M), 1.00 (500M) GBP/USD: 1.2700-10 (850M), 1.2900 (310M), 1.3000 (401M) AUD/USD: 0.6790-0.6800 (1BLN). NZD/USD: 0.6310-15 (800M), 0.6385 (300M) AUD/NZD: 1.0600 (740M), 1.0720 (740M), 1.0840 (370M) USD/CAD: 1.3265 (250M). USD/JPY: 107.90-108.00 (500M), 108.30-45 (1.4BLN)

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Global
Richard Pace

FX option expiries

Monday October 21 EUR/USD: 1.1095-1.1100 (1.6BLN), 1.1110 (300M), 1.1120-30 (1BLN), 1.1150-60 (1BLN), 1.1185-90 (900M), 1.1200 (1.1BLN) USD/CHF: 0.9900 (850M), 1.00 (500M) GBP/USD: 1.2700-10 (850M), 1.2900 (310M), 1.3000 (401M) AUD/USD: 0.6790-0.6800 (1BLN). NZD/USD: 0.6310-15 (800M), 0.6385 (300M) AUD/NZD: 1.0600 (740M), 1.0720 (740M), 1.0840 (370M) USD/CAD: 1.3265 (250M) . USD/JPY: 107.90-108.00 (500M), 108.30-45 (1.4BLN) Tuesday October 22 EUR/USD: 1.1100 (416M), 1.1120-30 (750M), 1.1200 (450M) USD/CHF: 0.9900 (250M), 0.9950 (332M), 0.9980 (1.4BLN) GBP/USD: 1.2900 (200M). EUR/GBP: 0.8800 (500M) AUD/USD: 0.6850 (776M). NZD/USD: 0.6300 (520M) USD/JPY: 108.00 (400M) Wednesday October 23 EUR/USD: 1.1100 (750M), 1.1150 (300M), 1.1200 (430M), 1.1235 (500M) USD/CHF: 0.9950 (450M), 0.9975 (350M) AUD/USD: 0.6775-90 (1BLN). NZD/USD: 0.6280 (371M) USD/CAD: 1.3250 (1.2BLN) USD/JPY: 108.30-40 (500M), 108.65-70 (500M), 109.00 (430M) Thursday October 24 EUR/USD: 1.1100 (677M), 1.1125 (300M), 1.1200 (360M), 1.1220-35 (700M) USD/CHF: 0.9965-75 (600M), 0.9990 (615M), 1.0015 (400M) GBP/USD: 1.2800 (850M). AUD/USD: 0.6700 (950M), 0.6750 (220M), 0.6770-75 (350M), 0.6795-0.6800 (350M), 0.6840 (300M) NZD/USD: 0.6255 (330M), 0.6400 (300M), 0.6450 (270M), 0.6500 (400M) USD/CAD: 1.3245 (760M). EUR/NOK: 10.15 (660M) USD/JPY: 108.00 (800M), 108.30-35 (600M), 108.50 (250M), 108.70-75 (500M) Friday October 25 EUR/USD: 1.1090-1.1100 (1BLN), 1.1200 (450M), 1.1225-30(600M), 1.1240-50 (1BLN) USD/CHF: 0.9650 (1.4BLN). GBP/USD: 1.2900 (300M), 1.3000 (250M) AUD/USD: 0.6795 (222M) USD/CAD: 1.3000-20 (1.6BLN), 1.3100 (305M), 1.3120 (300M), 1.3150-55 (600M) USD/JPY: 107.85 (300M), 108.00 (750M), 108.40-45 (500M), 108.50-55 (550M)

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People & Markets

MOVES-UBS's Singapore investment banking head flees to fintech

UBS's head of investment banking for Singapore Oi Yee Choo has left to join fintech startup iSTOX as chief commercial officer. Choo has spent the past five years at the Swiss investment bank having previously worked at Morgan Stanley, Nomura and Citigroup. She is due to start at iSTOX in January next year. Singapore Exchange-backed iSTOX is a securities token platform, licenced by the Monetary Authority of Singapore. It provides a mixture of issuance, settlement, custody and secondary trading services.

P&M
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Global
IFR Asia 1112 - 26 Oct - 01 Nov

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BUZZ-AUD/USD grinds higher in second try to break chart top

AUD/USD grinds higher but confidence wanes near key chart top 0.6880 May see second failure to break ceiling of Ichimoku Cloud resistance Earlier attempt in Sept backfired on inability to close above 0.6880 Resulted in sustained AUD/USD selloff in subsequent weeks China's aggressive pump-priming stokes mild AUD optimism nB9N26I011 A clearer Brexit stance could help clearout residual AUD/USD shorts AUD: https://tmsnrt.rs/2MvQ4O8

RATE FX
2 min read
Asia
Ewen Chew

People & Markets

China revises Stock Connect rules to include dual-class shares

(Reuters) Chinese bourses revised rules that would allow Hong Kong-listed dual-class shares to be included in Stock Connect for the first time, potentially benefiting Xiaomi and Meituan Dianping. The rule change, which takes effect on October 28, comes 15 months after the China and Hong Kong bourses started work towards including companies with DCS in the investment link following a rare public dispute over the issue. Under revised rules published late Friday separately by the Shanghai and Shenzhen stock exchanges, stocks qualified for inclusion must meet certain thresholds in terms of liquidity, market capitalisation and trading period. For example, they must have a minimum listing history of six months plus 20 trading days on the Hong Kong bourse and a minimum market capitalisation of HK$20bn (US$2.6bn) on average during the 183 days prior to vetting. Xiaomi and Meituan, China’s biggest digital marketplace for on-­demand services, both listed in Hong Kong last year with two classes of shares after the Hong Kong exchange changed its rules to allow companies to do so last April. Days after Xiaomi’s IPO, the Shanghai and Shenzhen stock exchanges said that they would not allow companies with two classes of shares to be included in Stock Connect, triggering a dispute with HKEx.

P&M
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Emerging Markets, Asia

Bonds

Macquarie University hires for A$ investor meetings

Macquarie University, rated Aa2 (stable) by Moody’s, has mandated HSBC and NAB to arrange investor meetings in Australia and Japan from October 28. An Australian dollar sustainability bond of 10 to 15 years may come to market in the near future, subject to market conditions.

BON
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Asia

Bonds

Bank BTPN to raise Rp1trn two-part bonds

Bank BTPN has announced indicative yield ranges for a Rp1trn (US$71m) two-tranche bond offering, according to the offer document. The Indonesian wholesale bank has set yield ranges of 7.3%–7.9% for a three-year tranche and 7.5%–8.1% for a five-year portion. The books open today and close on November 4. Fitch has assigned a AAA rating to the bonds. The funds will be used for lending activities. The issuance is part of a Rp5trn bond programme. BCA Sekuritas, Mandiri Sekuritas, Nikko Sekuritas and OCBC Sekuritas are the arrangers.

BON
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Emerging Markets, Asia

RATE FX ECON

BUZZ-Over to London-GBP cedes some gains after Brexit vote delay

GBP/USD -0.6%, EUR/GBP +0.4%, USD/JPY +0.11%, EUR/USD -0.11%, AUD/USD +0.08% USD/CNY -0.18%, USD/CNH -0.06%, USD/KRW -0.63%, USD/IDR -0.21%, WTI -0.3% S&P Emini +0.23%, N225 +0.3%, SSEC -0.01%, MSCI AXJ +0.25%, US10y 1.7607% UK says Brexit will happen on Oct 31 despite PM's delay request nL5N27410N Japan's extended exports slump could push BOJ to ease next week nL3N27212U IFR Europe Open nL3N27618B

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