India: On the right track

Citigroup has hired Arvind Vashistha as head of equity capital markets for Citi India. Based in Mumbai, he reports to Ravi Kapoor, head of corporate and investment banking in the country, and Hong Kong-based Kenneth Poon, head of Asia-Pacific capital market origination. Vashistha joins Citigroup from UBS in India, where he was executive director, global capital markets. He replaces Bhavna Thakur, who resigned earlier this year.

Australia and New Zealand Banking Group said on Wednesday that it has suspended seven staff involved in a regulatory investigation into the fixing of benchmark interbank interest rates. The suspension, the first by an Australian bank, followed a review by the Australian Securities and Investment Commission (ASIC) of all Australian banks for possible rate-setting. Global regulators have been reforming rate-setting practices after banks, including Barclays, UBS, Royal Bank of Scotland, were hit with fines totalling billions of dollars for rigging Libor. ASIC said it is investigating ANZ, “including the conduct of individuals” but would not comment further as the investigation was ongoing. Nigel Williams, chief risk officer of ANZ, said the bank was cooperating with ASIC. “This is a complex issue, and ASIC’s investigation and ANZ’s internal review may not be complete for some time,” Williams said in a statement. Earlier this year, ASIC censured BNP Paribas and RBS after revealing its traders tried to influence the setting of Australia’s Bank Bill Swap Reference Rate mechanism.

Trusts press on after taxi IPO skids Singapore’s IPO market is finally showing some signs of revival, after a series of pulled and downsized transactions in the past few months. Taxi company Trans-cab Holdings last week became the second company in three months to cancel a local listing, putting the brakes on its S$128m (US$99m) IPO after new information emerged on its outstanding insurance premium. The company said it was not earlier aware of the S$1.83m additional premium on cumulative accident claims made against its fleet of taxis. As the company did not have time to properly evaluate this information, it decided not to proceed. The delay left Singapore investors stunned, as the deal had been well flagged and was said to be well oversubscribed. The institutional book closed on November 10, one day ahead of schedule following strong demand. The IPO was priced at the top of the S$0.65–$0.68 range as the book was multiple times covered. DBS was sole lead. The IPO comprised a base deal of 168m shares with a greenshoe option of up to 20m shares, which was fully allocated. The retail portion of the float had been due to close last Tuesday. The surprise move came after Singapore listings had already endured a difficult few months. Samudra Energy shelved its S$276m IPO in August, citing weak market conditions and poor response from investors. Then, a month later, EMAS Offshore Construction drastically cut its offer size to S$70m from S$254m on weak response. The Oslo Bors-listed company was seeking a secondary listing on the SGX. Sensible investment “Investors are freaked out by such last minute developments. They want to see some sensible investment opportunities,” an ECM banker said. These could come in the form of business trust IPOs from Keppel DC REIT and Universal Terminal. Last week Universal Terminal started premarketing its up to S$1bn business trust IPO of oil storage terminals. Premarketing will continue for two weeks and bookbuilding is expected to start on December 4. Listing is targeted for December 18. Book building for Keppel DC’s S$500m data centre trust IPO, meanwhile, will start on November 25. Pricing is scheduled for early December and listing by the middle of the month. “We have two IPOs to suit two investment classes. Keppel DC offers growth while offering a slightly lower yield. Universal, on the other hand, is a defensive play with a higher yield,” a banker associated with one of the IPOs said. “If the IPOs sail through and do well on listing, it could reopen the Singapore market.” Universal has not decided its indicative yield as yet, but comparable trusts in Singapore trade at 7.1%–7.5%. Meanwhile, yield for Keppel DC is likely to be in the high 6% to 7% range. Hin Leong and PetroChina are the major shareholders of Universal. DBS, HSBC and Standard Chartered are the joint global co-ordinators on the transaction. Keppel DC REIT will be the first of its kind in Asia, comprising data centre properties. Credit Suisse, DBS and Standard Chartered are the joint global co-ordinators and joint bookrunners with Deutsche Bank and Goldman Sachs.

The financial strength of China’s largest corporations is deteriorating as leverage increases, profit growth decreases and the mainland economy continues to slow down after decades of unprecedented growth, according to Standard & Poor’s. The rating agency’s study of China’s biggest companies by revenue and bond issuance showed that net debt at the 200 borrowers surveyed, most state-owned enterprises, increased about 15% in 2013, slightly below the rate in 2012. Total debt growth in 2013 slowed to 13% from 15% in 2012, but still exceeded revenue and Ebitda growth of around 10%. As a result, the gross debt-to-Ebitda ratio also edged up to 4.2x from 4.1x. The rating agency estimated that total non-financial corporate debt in China reached about 150% of GDP at the end of 2013 from about 100% at the end of 2007. The ratio dwarfs the US’s 80% ratio. “The indebtedness will continue to worsen and there is still downside risk as economic growth slows,” said Christopher Lee, leading analyst on the survey at S&P. “The caveat is further slowdown in China’s GDP growth, which S&P expects to be 7% in 2015 and we expect a downside scenario to be about 6% GDP growth.” The railway, metals and mining, real estate and building materials sectors are expected to be hardest hit by any downturn. S&P expects Ebitda for those sectors to drop 20% in 2015. Credit profiles for companies in those sectors could drop by one to two notches, the rating agency said. Some analysts agreed. “Cyclical sectors such as manufacturing, equipment, energy and metals and mining are faring rather poorly,” said a Hong Kong-based credit analyst at a US investment bank. “Some of the companies may not have been borrowing more, but due to their diminishing Ebitda, leverage is actually going up.” A few mining companies, such as Winsway Coking Coal and Hidili Industry Development, have both done distressed debt exchanges for their offshore bonds. Privately owned coal miner Shanxi Liansheng Energy has also recently started restructuring its debt. “Many Chinese mining companies are still afloat in this environment because they have better access to bank loans as banks don’t want to cut off their borrowings for fear of rising non-performing loans,” the analyst said. S&P’s Lee also believes the default rate is likely to increase from a low base. “The key question is whether the defaults come to light,” he said.

LGM Investments, a unit of BMO Global Asset Management, hired Stephen Ma as head of Greater China equities, based in Hong Kong. He reports to Thomas Vester, chief investment officer. Ma joins from Fidelity, where he managed assets in China and Hong Kong funds.

The enthusiasm shown for recent capital markets offerings out of India show just how much faith investors have in Narendra Modi’s government. Before politicians can restart the investment cycle, however, much of corporate India still has to resolve problems surrounding their existing commitments. India’s stock market reached all-time highs again last week, while two companies priced overseas bonds at record-tight credit spreads. The country’s potential is clearly enormous, but current valuations are in danger of ignoring legacy issues that continue to plague the corporate sector. Adani Enterprises, GVK and Lanco Infratech have pumped billions of dollars between them into developing coal mines in Australia, driven in part by India’s failure to reform its own domestic coal mining operations. India needs to import fuel as its economy grows, but a slumping coal price, project delays and environmental opposition have left the viability of projects such as Adani’s Carmichael mine in question. India’s infrastructure deficit, and the country’s recent GDP slowdown, is often blamed on the country’s notoriously slow bureaucracy. Modi supporters point to political paralysis under his predecessor, Manmohan Singh, and investors seem to believe that some business-friendly reforms can solve all problems. Leverage ratios, however, also need to be addressed before companies can get back on the growth path. As it stands today, Adani and its peers have little flexibility to take on additional debt to finance their existing commitments, let alone agree new ventures. Granted, the reopening of India’s equity capital markets has allowed some companies to take important steps in cutting their debt. Reliance Communications, for instance, restored investors’ faith with a US$1bn equity offering shortly after the new government came to power. But corporate India needs to do more. The global capital markets are ready to help. It would be a shame if companies let their chance to reduce funding costs and repair their balance sheets go to waste. India’s future may depend on it.

As China’s capital markets have evolved in recent years, bankers focusing on mainland deals have had to change along with them. Winning mandates from globally competitive PRC companies has become more about what you know than about who you know. Understanding discounted cash flows or being able to explain an accretion/dilution analysis has become just as important as maintaining high-level relationships – if not even more so. Now that US and European regulators are reaching further and further into Asian markets, global firms with Greater China operations are more than happy to talk up their bankers’ spread-sheet skills over their pedigree, even if both are useful. Recent probes into international firms’ Greater China hiring practices only underscore how much has changed. Tougher hiring standards are a great thing for China’s capital markets, for its economy, and for the competition for business among firms in the industry. Local Chinese investment banks, which are going through many of these same changes, are always going to have an advantage at home. Yet, now that more traditional banking skills have grown in importance, foreign firms, better schooled in financial models and the like, should be in better stead to win mandates. All of this then means that China’s growing body of private enterprises, of which Alibaba is the global standard bearer, could perhaps be the biggest benefactor of the investment banking industry’s shift. They will be enjoying a level of service that was in the past unavailable to the stable of state-owned enterprises that are already well known among global investors. China may be at risk of an economic slump, but the standards in its banking industry are improving, and the right financial advice can provide momentum for one of the world’s largest markets.

Alibaba smashes Asian bond records Source: REUTERS Alibaba Group Executive Chairman Jack Ma speaks at the World Internet Conference in Wuzhen township, Zhejiang province. Alibaba Group wowed the markets last Thursday with the largest US dollar bond sale on record from an Asian company, pricing its US$8bn debut at levels even tighter than some of the world’s best-known issuers. The Chinese e-commerce giant amassed orders of more than US$55bn for the highly anticipated six-tranche deal, one of the world’s largest investment-grade bonds of the year. The narrow pricing marked a milestone for a Chinese company, comfortably beating higher-rated state-owned issuers and offering investors no compensation for the perceived risks associated with Chinese investments. “The pricing on Alibaba’s bonds did not reflect a China risk premium in our view, and was priced more like a US credit, given the solid demand from the US investor base and hype around the IPO,” said Raymond Lee, Sydney-based portfolio manager at Kapstream Capital, one of Australia’s largest fixed-income managers. Alibaba, rated A1/A+/A+, priced US$1bn of 1.625% three-year fixed-rate notes at 70bp over Treasuries, almost 40bp inside where state-owned China National Petroleum Corp (Aa3/AA–/A+) had sold three-year bonds just two days earlier. Alibaba also sold a US$300m three-year floater at 52bp over three-month Libor, as well as US$2.25bn of 2.5% five-year bonds at 95bp over Treasuries, US$1.5bn of 3.125% sevens at 115bp over, US$2.25bn of 3.6% 10s at 128bp over and US$700m of 4.5% 20-year notes at a spread of 148bp. At those spreads, Alibaba came 35bp–50bp inside China tech names Baidu and Tencent, and even priced through some US blue-chip tech giants. The seven-year tranche came inside Amazon’s 2022s, quoted at a G-spread of 116bp, and the 10-year also easily pierced eBay’s interpolated curve. “They clearly wanted to be priced in the context of their global peers and wanted to be viewed as a global tech or retail company, rather than one that should be compared with other Chinese corporations,” said one syndicate head who followed the deal. “They’ve priced significantly through where any other Chinese corporation would come to market.” US investors anchored the trade by taking about three-quarters of the notes, two sources familiar with the transaction said. The company and its bankers had not disclosed distribution statistics at the time of writing. “This is a new name highly exposed to the emerging Chinese retail market,” said Matthew Duch, senior portfolio manager at Calvert Investments. “By most comparisons the pricing is fair. But being its premiere debt deal, there’s additional interest.” Asian interest Asian investors, whose orders exceeded US$11bn across the tranches, were allocated a mere 15%–20% of the notes, the two sources said. Asian investors generally found Alibaba’s bonds expensive as they are accustomed to higher risk-adjusted premiums from Chinese issuers. According to a research note from Nomura last Thursday, Chinese credits typically pay a 20bp–50bp premium to their US peers. For Chinese tech issuers, the premium comes from geographic concentration and regulatory risks. “In general, Chinese IT companies are asset-lite and their business risks are focused on one geography that is China,” said Arthur Lau, Hong Kong-based head of Asia fixed income at PineBridge Investments. “Compared to a more mature market like the US, Chinese tech companies operate in an environment where policies and regulations are more uncertain.” Despite those concerns, Alibaba managed to convince US investors to look to blue-chip names like Amazon (Baa1/AA–), Cisco (A1/AA–) and Oracle (A1/A+) rather than Tencent (A3/A–) and Baidu (A3/A). Market participants, however, played down the impact on the wider Asian credit market, noting that Alibaba was a unique case. “For the Asian credit market, the Alibaba bonds are rich although they were priced fair for the US,” said Owen Gallimore,

Cautious start for Stock Connect Source: REUTERS/Bobby Yip Singers perform in front of Hong Kong and China flags during a reception following a flag raising ceremony in Hong Kong. China’s first cross-border equity trading scheme got off to a slow start last week, but market participants say the lack of major technical problems so far should entice more international funds to the landmark link-up. Northbound investors buying A shares under Shanghai-Hong Kong Stock Connect breached the Rmb13bn (US$2.12bn) daily quota on Monday afternoon, the first day of trading for the scheme. However, for the remainder of the week, Hong Kong investors did not come close to the daily quota, which limits the value of A share purchases, net of share sales. One the first day there were no sell trades because the A-share market does not allow same-day sales. The performance later in the week underwhelmed many market participants, especially those who spent the months leading up the scheme’s launch touting Shanghai Stock Exchange investment opportunities to clients. On Tuesday, Wednesday, Thursday and Friday only 37%, 20.1%, 17.5% and 18% of the northbound quota was used up, respectively. Yet, brokers and bankers have said lower-than-expected volumes so soon after launch do not indicate a lack of interest or success. ”I think day one was great because we saw brand new flow,” said Christina Ma, head of cash equities trading, Asia Pacific, excluding Japan, at Goldman Sachs. “The volumes have been a bit lighter than we expected after the first day, partially due to overall market conditions, and not Stock Connect itself, but that doesn’t mean it hasn’t been a success.” Even before the November 17 start, several international investors and brokers, representing hundreds of billions of dollars in assets, said they would need more time before they could get their funds and clients set up to make full use of the link-up. “We are working on improving the flow and getting more of our clients connected,” she said. “Most of our clients expressed interest, but the ability for everyone to be ready from day one was somewhat limited in the six-month time frame. None of this was easy, so the fact that we had a successful start, no outages, settlement issues as far as we know, is very good.” Investors are still working on adapting to the differences of investing in renminbi capital markets compared to home markets. It was only Friday, November 14, that China’s Ministry of Finance announced it would temporarily exempt taxes on profits earned on the “through train” pilot. Although the ministry provided participants with coveted information, it still only gave those most affected by it a weekend to consider it fully. During closely watched opening trading session, southbound investors, those buying H shares from the mainland, only used 16.8% of the US$10.5bn quota, the highest level all week. Nevertheless, more investors are expected to begin making bigger net purchases of H and A shares in the coming weeks and months, market participants said.

China shift continues as Cai departs Source: REUTERS/Carlos Barria A Deutsche Bank sign is seen outside of a corporate building in Shanghai’s financial district. The looming departure of Deutsche Bank’s renowned China dealmaker Henry Cai is the latest sign of a generational change in the Greater China capital markets. Cai, who joined Deutsche in 2010 as head of its China investment bank, is set to leave around the end of the year. Recent departures of senior bankers, at Deutsche and elsewhere, come as tougher regulatory scrutiny is making their business harder and less financially rewarding. “I don’t care if you’re Henry Cai or some new analyst, the truth is that doing business in China has gotten a lot more difficult,” said a senior investment banker, who has worked with Cai. As a result, the banker said, many bankers are looking to move to the buy side, or leave finance altogether. Several of Cai’s peer group have moved on into other industries or retired, including Fang Fang, former CEO of China investment banking at JP Morgan, who stepped down in March this year. Regulatory pressures Global banks have been reviewing their China businesses since the US Securities and Exchange Commission launched investigations into hiring practices in the world’s second-largest economy. The US regulator wanted to see if any China investment banking hires violated the Foreign Corrupt Practices Act’s anti-bribery provisions, which bars companies from giving anything of value to foreign government officials in return for business. Mounting global regulatory concerns and, perhaps more importantly, the evolution of China’s capital markets has made many investment banks restructure the way they cover the country. Increased regulation is not just a China issue, however. It is affecting bankers in Asia Pacific and globally, making many at all echelons rethink their careers. In Asia, senior dealmakers regularly complain that they have to spend too much time with different countries’ regulators since the credit crisis and not enough time with clients. “If you step into one of these big jobs, you spend 50% of your time with regulators, 40% with internal reorganisation related to regulation and, what, 10% with clients,” the senior banker said. “These factors have many of the junior and senior guys at my firm looking elsewhere and it’s a challenge to keep them.” Deutsche departures At Deutsche, Cai’s expected exit would follow other senior departures in Greater China and globally. Rob Rankin this month quit as co-head of the global corporate banking and securities unit after just over two years in the job. Rankin is leaving in January to become chief executive of Consolidated Press Holdings, the business empire owned by Australia’s Packer family. Cai and Rankin were colleagues at UBS before joining Deutsche. Rankin arrived at the German bank a year earlier, in 2009, as Hong Kong-based CEO for Asia Pacific. Other departures at Deutsche this year include Jing Qian, another UBS China alum, who was co-head of China investment banking, a position she held for more than three years. She is now at Morgan Stanley as managing director in its China investment banking division. Cai’s title, currently executive chairman, corporate finance, Asia Pacific, changed in his three-plus years at the firm. The corporate and investment bank, which Cai ran for China, has been reorganised into corporate banking and securities (CB&S), now headed in Asia Pacific by Michael Ormaechea and Bhupinder Singh. In September, Larry Chi joined Deutsche as head of CB&S for China. He moved from Morgan Stanley, where he was head of Asia general sales, fixed income. Better year Deutsche Bank is currently fourth on the China equity and convertible bond league tables this year ending November 14, according to Thomson Reuters data. The German firm worked on 29 issues for US$7.48bn in volume, for 7.3% of the market. Its position this year is an improvement on the last three years of Cai’s

Dim Sum market bucks liquidity fears China’s latest offering of offshore renminbi bonds last week put paid to fears of a liquidity squeeze following the launch of a landmark cross-border stock trading scheme between Shanghai and Hong Kong. Before the launch of Shanghai-Hong Kong Stock Connect, which allows Hong Kong investors to buy shares listed on the mainland, and vice versa, on November 17, there were worries that the stock scheme might cause a shortage of liquidity in the offshore renminbi market. Institutional investors were expected to rush to convert their money to renminbi to buy A-shares, which have traditionally traded at a discount to H-shares of the same companies, and to buy state-linked stocks which are not listed in Hong Kong. The Ministry of Finance, however, drew a solid response to November 20’s Rmb12bn (US$1.96bn) sovereign Dim Sum offering. Around Rmb33.96bn of orders were received for the Rmb9bn institutional tranches, representing around 3.77 times coverage, which was higher than the 2.99 times coverage in May auction. (See Hong Kong Debt Capital Markets.) “The result is encouraging and is a relief to the recent worries over renminbi,” said an offshore renminbi market strategist. As the trading volume on the first few days of Shanghai-Hong Kong Stock Connect underwhelmed, the liquidity squeeze did not happen, but there were still concerns that there would be less demand for MoF bonds, as investors chased gains in the stock market. In the end, the MoF three-year pricing was 21bp higher than the May auction but the 10-year was 62bp lower. “Since the announcement of Shanghai-Hong Kong Stock Connect earlier this year, institutional investors have been accumulating renminbi positions, which was reflected in the rising cross currency swap rates in the past six months,” said a market player. “The higher three-year result was a reflection of that. Meanwhile, the good size of orders on to the 10-year and the drop in yields is a vote of confidence to the currency.” Currency concerns People are willing to hold renminbi bonds with relatively low yields only if they expect the currency to strengthen. However, that is in contrast to some recent predictions that the Chinese currency would depreciate in the coming years. Last week, Daiwa Securities released a report predicting renminbi would fall to Rmb6.60 against the US dollar – a 7.8% weakening from Rmb6.12 currently – by the end of 2015. It forecast that China’s balance of payments would “run into a deficit of US$100bn for 2015 and US$120bn for 2016” because of massive capital outflows. Daiwa noted US$173bn of outflows outside China’s current account in the second and the third quarters this year. “We believe these outflows were due to: a drying-up of global liquidity because of the Fed’s tapering, as reflected by a strengthening US dollar, growing concerns about China’s credit conditions and growth outlook, and tempered market expectations for Rmb appreciation,” said Kevin Lai, chief economist for Asia ex-Japan at Daiwa, in a report. If the Fed decides to scale down and/or to increase interest rates, the outflows will accelerate, according to the report, putting the renminbi under great pressure. Daiwa estimated there were inflows to China of US$1trn from carry trades or hot-money inflows to chase yields in China since QE1. Many people disagreed with that view, however. “I don’t think China will allow massive capital outflows to hurt its currency,” said a banker. “If the US decides to scale down, China can start easing, just like Bank of Japan and the European Central Bank.” “The Chinese currency may weaken as the economy slows down, but it is unlikely to be dramatic,” said an investor. “If I pull out of China, where I am going to put my money?” Another investor echoed that he might start to look at developed countries again but would still focus on China. “Renminbi is in two-way trading now. If the currency hovers within 5% of the current rate, just like any other

China National Petroleum Corporation priced a US$1.5bn triple-tranche Reg S offering through its own curve on Tuesday, reaping gains from using the onshore parent guarantee structure. The largest state-owned company by assets had been using the keepwell structure to issue offshore bonds. But it decided to use the onshore parent guarantee for the latest offering after the new rules under State Administration of Foreign Exchange became effective in early June. The new regulation allows Chinese companies to provide an onshore parent guarantee for offshore debt issuances as long as the proceeds are used overseas. CNPC will use the proceeds to repay existing offshore loans. “Investors liked the superior structure and this helped the deal price through CNPC’s own curve,” said a banker on the deal. Indeed, the US$10bn order book across the three tranches spoke to its popularity. As a result, the US$500m three-year fixed-rate tranche priced 15.5bp through its existing 2017s, which were indicated at a G-spread of 123bp prior to the new deal’s announcement. The US$700m five-year piece also came about 10bp inside its 2019s, which were quoted at a G-spread of 130bp. The US$300m floating-rate notes, however, finished 3bp wider than its relatively illiquid FRNs due 2017, which were quoted at 84bp over three-month Libor. Investors also compared CNPC’s bonds to its state-owned peer Sinopec’s existing bonds, which also carry an onshore parent guarantee. CNPC’s three-year fixed came flat on Sinopec’s curve while the five-year was priced 5bp inside Sinopec’s 2019s. The bonds were issued off CNPC’s newly established US$7bn EMTN programme. Both S&P and Moody’sraised the programme rating by one notch to AA-/Aa3 due to the change of guarantor to the wholly state-owned onshore parent CNPC. Its offshore SPV CNPC General Capital is the issuer. The fixed tranches of the bonds were steady around reoffer prices Wednesday morning while the floating-rate piece tightened 2bp-3bps. HSBC, Standard Chartered Bank, Citigroup and Societe Generale were joint global co-ordinators alongside Bank of China, Credit Agricole and Morgan Stanley.