The dark art of IB earnings

Kazakhstan blew the doors off the dormant CEEMEA bond market last week to print the biggest deal from the region this year, paving the way for other issuers before the summer lull. But the Baa2/BBB/BBB+ rated borrower had to pay a handsome premium to get the deal done in a move that is likely to set the standard in the coming weeks for far trickier credit stories such as Zambia. The market-rattling triumvirate of the Greek debt saga, wobbly oil prices and whipsawing Chinese equities calmed slightly on Tuesday, offering a tight window for CEEMEA issuers to raise debt. Kazakhstan pounced on the opportunity. The US$4bn dual-tranche 144A/Reg S bond was split between a US$2.5bn 5.125% 10-year portion and a US$1.5bn 6.5% 30-year tranche. Only China’s Sinopec and Mexico’s Pemex have priced bigger emerging market deals this year. “[The deal] allowed Kazakhstan to address its funding requirements for the year and has taken out the risk of coming after the summer,” said Stefan Weiler, head of CEEMEA debt capital markets at JP Morgan, a deal lead alongside Citigroup, Kazkommerts Securities and Halyk Finance. “Remarkably, the placement yields are even higher than Russian sovereign bond yields” Kazakhstan began marketing the shorter tranche at the 300bp area over Treasuries, while the longer tranche hit screens at around Treasuries plus 350bp, giving a new-issue premium at those levels of about 60bp on both tranches. “It was screaming cheap,” said a bond trader. The premium caught the attention of investors, with more than US$9bn of orders flooding in before books closed. Kazakhstan tightened the spread by 15bp on each tranche before pricing, giving new-issue concessions of around 45bp. The sovereign priced the 10-year tranche at a yield of 5.258% and the 30-year at 6.573%. “Remarkably, the placement yields are even higher than Russian sovereign bond yields,” said Alexey Bulgakov, a senior credit analyst at Sberbank. But for Kazakhstan, price was not the focus of the deal. “The deal’s generous pricing … is due to the issuer’s clear preference for size over price,” said Bulgakov. After initially sinking below their reoffer price after printing, the bonds floated back up to around one point above reoffer by Thursday, according to the trader. Distribution Fund managers picked up the majority of the deal, taking 88% of the 10-year and 89% of the longer tranche. Banks and private banks took 7% of each tranche, insurance and pension funds bought 4% of the 10-year and 3% of the 2045s. Supranationals and central banks bought 1% of each deal. In total, 119 new investors joined this transaction who were not present on Kazakhstan’s return to the bond market last October after a 14-year break. US investors took 60% of the 2025s and 54% of the 2045s. UK names bought 23% and 33% of the respective tranches, Continental Europe took 10% and 7%, while others took 7% of the 10-year and 6% of the 30-year. Only highly rated CEEMEA borrowers were able to take advantage of Tuesday’s window, as investment-grade Kazakhstan was joined by crossover-rated South African media company Naspers (Baa3/BBB–/BB+). Naspers raised US$1.25bn of 10-year money on Tuesday and paid a 20bp new-issue premium (see Emerging Markets section for more details). This has given the market a rough range for new-issue concession on potential deals, according to syndicate bankers. Zambia, which is not as obviously appealing as Kazakhstan to investors thanks to a B1/B/B rating, started a five-day roadshow for a new Eurobond on Thursday. “A B rating is a red flag,” said Patrick Raleigh, associate director, sovereign ratings at S&P, which downgraded Zambia at the beginning of July. Zambia’s roadshow announcement did not include any indication of the size of a potential bond, omitting the phrase “benchmark-sized” that is commonly seen on sovereign mandate announcements, indicating that a large sum might not be expected from this deal. “If they want a 10-year deal and limit it to US$500m, they

Investment banks are worried that they may be forced to work on unsellable deals under the Indian government’s latest plan to offload shares worth as much as US$3bn in a basket of state-owned companies. Ministers have struggled to attract underwriters for sales of illiquid stakes. In January, the last round of bidding fell through after banks asked for higher fees. In an attempt to solve the problem, the government recently told banks interested in managing sales of state-owned stocks that they must bid for a basket of companies, rather than individual offerings. “Clearly, the government doesn’t want us to cherry-pick deals,” a foreign banker said, adding that he would not take part in bidding. “I am waiting to see how the response to the current round is.” The government has divided the 10 companies for sale into two baskets. The first contains a 10% stake in Oil India, 5% in Container Corporation, 10% in NMDC, 15% in MMTC and 12% in ITDC. The second basket comprises a 5% stake in Bharat Electronics, 5% in NTPC, 10% in Engineers India, 10% in National Aluminium and 15% in Hindustan Copper. At current prices, the two baskets will have a maximum total value of Rs196bn (US$3.1bn). The mandate will be awarded for the entire basket and will be valid for three years. The government plans to appoint up to four investment banks for each basket, of which at least one has to be foreign and another domestic. “The nightmare scenario is that we may end up doing five deals for Rs1 instead of one. At least in the past we got some fees on the less liquid companies” The fee has to be quoted for the entire basket, but the share sales will be conducted separately. Banks have to submit bids by July 24, after a pre-bid meeting took place last Thursday to clarify queries on the new system. The government is likely to extend the deadline to July 28 as banks want more time to decide on which basket they will bid for, a banking source said. Nightmare scenario In the past, mandates for blue-chip companies such as Indian Oil, Oil India, Coal India and NTPC attracted local and foreign banks, but only a few local banks bid for MMTC, Engineers India, ITDC and National Aluminium. The proposed system favours the government, but it will benefit banks only if they can quote a decent fee to manage the entire basket, according to bankers. Many of them fear that the rush to get into the blue-chip deals – which offer a boost to league table positions and substantial brokerage fees – will mean that some banks may end up quoting a token arranging fee of Rs1 for the entire basket. “The nightmare scenario is that we may end up doing five deals for Rs1 instead of one. At least in the past we got some fees on the less liquid companies,” a local banker said. Although each of the companies in the basket will be sold as a separate transaction, banks have to update the government on the clients they have approached for each of the companies in the basket within 14 days of getting the mandate. “Most of the banks don’t have the bandwidth to run five deals simultaneously. Moreover, a three-year mandate has its own risks as the government can be very fickle on its disinvestment strategy,” the local banker said. Although market conditions were favourable in the first half, the government did not press ahead with share sales. “Instead of taking advantage of market conditions and selling the shares, the government is complicating the selling process,” an ECM source said. So far this financial year, India has raised just Rs16bn from the April sale of Rural Electrification Corporation shares against its target of raising Rs410bn through stake sales in state-owned companies for the fiscal year 2015/16.

The rebound in fixed-income trading in the first quarter proved short-lived as trading revenue across the four biggest US banks slumped in the second quarter. Revenue from fixed-income currency and commodity (FICC) trading for JP Morgan, Citigroup, Goldman Sachs and Bank of America Merrill Lynch fell 14% collectively to US$9.7bn. It was the weakest second-quarter performance for the group in five years. As revenue from FICC fell, revenue from equity trading surged 23% across the four banks, helping to pull up the trading quarter. “Equities helped offset a difficult operating environment,” said Goldman’s CFO, Harvey Schwartz. JP Morgan reported a 27% spike in equity trading compared with the previous quarter, Citigroup a 26% spike and Goldman a 24% spike. Despite the continued strength, however, equity trading has, on average, produced less than half the revenue of fixed income in recent years. In the latest quarter, equity trading accounted for 57% of trading revenue, but that only drew attention to how weak the FICC numbers were. The banks were also hesitant to call the strength in equity trading a structural change in the market, as they were unsure if the FICC trading decline had bottomed out. The first quarter is typically the strongest quarter for FICC trading. In April, US banks broke a four-year trend of successively weaker first-quarter results, and were hopeful that they found a floor for FICC revenue. The sharp dive in the second quarter will lead analysts and investors to wonder if there is still further to fall to find the bottom. Goldman reported the sharpest decline in the quarter, with FICC revenue falling 28% to US$1.6bn compared with the same quarter last year. The slump cut short Goldman’s victory lap – the bank reported the biggest improvement in FICC trading in the first quarter, apparently vindicating its decision to remain fully committed to trading as competitors pulled back. Goldman reported US$2bn in revenue from equity trading. “The combination of concerns surrounding Greece, widening credit spreads, and the reversal of macro trends led to lower client activity and a more difficult operating environment” JP Morgan also stumbled, with FICC revenue falling 21% to US$2.9bn compared with the year-ago quarter. The bank restructured how it records FICC revenue in the current quarter. Once the adjustment is made and a one-time item is removed from the same quarter last year, the bank’s FICC number would have fallen 10%, according to Barclays’ analyst Brian Monteleone. The bank reported equity trading revenue of roughly US$1.6bn. Goldman’s Schwartz blamed the second-quarter FICC meltdown on weak client activity exacerbated by fears over the fallout from a potential exit of Greece from the euro, a rout in the Chinese stock market, and a looming rate hike from the US Federal Reserve. “The combination of concerns surrounding Greece, widening credit spreads, and the reversal of macro trends led to lower client activity and a more difficult operating environment,” Schwartz said. Specifically, Goldman was hurt by currencies, while credit was significantly lower as credit spreads widened during the period. The bank also found it tough going in commodities and mortgage trading. Of negative inputs in the quarter, Greece had the biggest impact as it weighed on spread-sensitive parts of the business like credit and mortgages. “It’s too early to tell in terms of where we are in this quarter,” Schwartz said. “Obviously the news around Greece has been positive in the last couple of days so hopefully some of the trends are behind us.” Citigroup surge Citigroup, which got off to a slow start in the first quarter, turned in the best FICC trading performance in the second quarter with revenue falling a mere 1% to US$3bn. The bank cited strength in rates, G10 rates in particular, and currencies, offset by lower revenues in spread products. “Rates and currencies revenues grew by double digits year over year in the second quarter

South African media company Naspers reopened the CEEMEA corporate sector in US dollars on Tuesday, taking advantage of a narrow window to hit the market. Although Greece and its creditors agreed in principle to a third bailout programme last Monday, risks around any deal implementation mean that market openings remain uncertain. “We’d been monitoring markets for the right window and got good feedback from investors late on Monday,” said John Wright, emerging markets syndicate official at Barclays. “That gave us the confidence to go ahead on the Tuesday.” The timing paid off as Naspers sold a US$1.2bn 5.50% 10-year 144A/Reg S note at 310bp over Treasuries. The deal is the second biggest by a CEEMEA corporate in the dollar market this year, just less than the US$1.25bn raised by Eskom in February – quite an achievement given the backdrop. The final spread was 15bp inside initial price thoughts of the plus 325bp area. That meant the new note came about 60bp back of Naspers’ 2020s, which were trading at a G-spread of 250bp just after the deal’s announcement, according to Thomson Reuters prices. Bankers reckoned the curve between five and 10-years was worth about 40bp, in line with the sovereign’s curve between its 2020 and 2025 notes and 10bp tighter than the 5s/10s curve typically seen for sector peers, leaving a new-issue premium of about 20bp. Hitting the right note While that is a bit more than the 7bp–15bp levels that US high-grade issuers are paying and the 10bp concession that Korea Gas offered on Tuesday for a US$500m 10-year note, bankers said that Naspers’ premium was appropriate given its ratings. Africa’s biggest media company is rated Baa3/BBB–/BB+. KoGas, in contrast, is rated Aa3/A+/AA–, and its deal was also a no-grow size. Naspers’ two investment-grade ratings helped draw in crossover investors, as the book exceeded US$3bn. One of the key issues for investors was getting comfortable with the company’s credit metrics, which at first glance appear vulnerable. Its debt-to-Ebitda, for example, increased from 4.8x to about 6.7x for the financial year ending March 31, according to Moody’s. However, Naspers holds one big trump card through its equity holding in Chinese mobile gaming company Tencent. The investment has risen in value from an initial US$34m in 2001 to not much less than Naspers’ US$65bn market cap. “From a balance sheet perspective, the company has US$2bn of net financial debt, or about US$2.8bn of net debt (including leases), against a market cap of around US$65bn so the loan to value coverage is very significant,” said Tommaso Ponsele, capital markets origination at Citigroup. The recent tumble in China’s A-share market did little to dampen the enthusiasm of investors, who were also drawn by the US$1bn-plus of Ebitda Naspers generates from its pay-TV operations. The new bond traded up on the break to 100.70 from a reoffer price of 99.962 or yield of 5.505%. Barclays and Citigroup were global co-ordinators. They were joined as bookrunners by Bank of America Merrill Lynch and BNP Paribas. The last CEEMEA corporate deal in dollars was a US$500m five-year note from DP World in mid-May.

ABS supply fired up on both sides of the Atlantic last week as clouds over negotiations on the Greek bail-out programme started to part. In Europe, two UK RMBS deals rushed to final pricing on Thursday after holding off for more than two weeks, while two other UK RMBS, one multi-jurisdiction CMBS and a German auto joined the pipeline – injecting some much-needed optimism after months of inactivity. However, the two deals that were priced endured an interesting execution process, to say the least. Both Charter Court and Paragon managed to place the full capital stack of their buy-to-let deals but found investors demanding. Charter Court had to discount the cash price on all five tranches offered; for example, the Class As were priced at 99.64 while the Double B rated E Tranche was down at 95.77, which enhanced the spread of the coupons on these notes by 10bp and 100bp respectively. Paragon opted to recast the deal with higher coupons. “We had to establish completely new clearing levels for BTL deals,” a syndicate banker said. “It was a bit of a surprise that the market completely stalled during the last phase of the Greek saga.” The recent widening meant that the senior tranches of the two trades had to pay as much as 35bp and 25bp more than the same tranches of the previous issues of the respective series. Meanwhile, US issuers also emboldened by progress on European negotiations stormed their market with some US$7.5bn in ABS deals, making it the busiest week so far this summer. Good momentum But with only a sprinkling of deals seen in the preceding three weeks, the new crop of issuers were forced to start the week navigating low visibility on where the market expected to price risk. “There have been a lot of fence-sitters, but [now] we were seeing good momentum,” one banker said. Ally Financial, BMW, Mercedes-Benz, Navistar Financial, Nissan Motor Co and Santander Consumer USA priced US$5.4bn in auto deals, while Capital One and American Express cleared US$2bn in credit card issues. And Fannie Mae sealed a US$1.56bn risk-transfer RMBS. Most of the week’s consumer trades saw senior spreads inch modestly tighter and paid less than expected, giving the market a much-needed boost in confidence. “Even though we are wider than where we started the year, this is a good result in a week with a lot of deals,” one banker said.

Large banks are set to start reporting valuation adjustments for the cost of holding capital against their derivative positions later this year, according to sources. Capital valuation adjustment (known as KVA) is an addition in basis points to the cost of swap transactions. Unlike charges such as counterparty valuation adjustment (CVA) for potential changes in credit exposure and funding valuation adjustment (FVA) for funding costs, KVA has to-date remained an informal metric, not included in the clearing price of derivative transactions. However, as capital charges increase, banks are keen to formalise use of the measure. “There is talk that a couple of banks are set to report KVA by the end of the year, and while there is some uncertainty about timing it shows that KVA is moving from an implicit assumption about the cost of capital to a real number,” said Jon Gregory, a CVA expert and senior advisor at Solum Financial Derivatives Advisory. “It’s the difference between the Treasury desk saying you should be earning another five basis points and charging it upfront.” Regulations introduced since the financial crisis impose an array of capital requirements on derivative transactions, with charges for trade exposures and default funds in the cleared environment and increased levies for default and counterpart risk in over-the-counter trades. The Basel III leverage ratio imposes additional costs, and the combined impact has been widespread repricing and the exit of institutions, including BNY Mellon, Rabobank and Deutsche Bank, from all or some parts of the derivatives business. Paying for capital “Driven by Basel III, there has been a wholesale change in bank organisations since the financial crisis, and all the top banks are now aware of the cost of capital and understand that if derivatives do not make a profit, taking into account those additional costs, then they are not self-sustaining,” said a quantitative analyst at a UK-based bank. “Capital has to be paid for by somebody.” The majority of top tier banks now calculate KVA alongside CVA and FVA, but anecdotally few are explicitly charging the cost to clients, and none to-date has broken out the charge in earnings statements. One reason for caution is that the impact on reporting is likely to be significant, with the numbers higher than CVA and DVA, which themselves can run into hundreds of millions of dollars. Morgan Stanley reported a fourth-quarter 2014 DVA charge of US$223m, while Citigroup said its Q1 2015 combined CVA/DVA charge was US$74m. Speculation over potential first movers in reporting KVA centre on Citigroup, Bank of America and Morgan Stanley, which were leaders in reporting of CVA in 2011. JP Morgan is also seen as a likely candidate. “All these Tier 1 banks have fully embraced the concept of understanding the true life-cycle cost of derivative trades and are in businesses that chew up large amounts of capital; and certainly the quantitative technology is in place to come up with a number,” said Andrew McClelland, director of quantitative research at Numerix. “It’s definitely at the top of people’s minds, and it will be interesting to see who might be first to jump in terms of reporting.” Accuracy One of the challenges facing banks is making an accurate KVA calculation, which is predicated on the ability to model potential capital exposures over the life of derivative transactions. That will depend on the quantum of portfolio exposures, the potential for hedging and the future path of regulation. “The precise calculation you would like to do is to run the capital model thousands of times to see how requirements may evolve over 10 years,” said Gregory. “To get 100% there is a hard calculation, so what most banks do is project capital into the future and work out what may happen over time, which will miss some convexity but which will get you most of the way there.” Aside from the computational challenges, some banks are reluctant to impose too many valuation

More than eight years ago, Bhavik Katira had an idea that is about to become a reality: increased automation. A final standard of an electronic data messaging system, Financial products Markup Language (FpML), was released last Wednesday, which may help attract new investors to the loan asset class by cutting the cost of laborious data inputting for banks and in the future by speeding up lengthy settlement times. In 2006, Katira, now the chief executive officer at consulting firm TenDelta, was developing a loan trading system for UBS when he attended an International Swaps and Derivatives Association training session for the use of FpML in the derivative and total-return swap markets. Katira thought it could be a framework for the leveraged loan market and suggested the idea to the New York-based Loan Syndications & Trading Association. More than 20 participants from banks, investment firms and service providers took part in the first loan FpML working group meeting on June 5 2007. After many design revisions, ISDA has released the final version of FpML for loan servicing messages, including quarter-end payments and interest rate resets, which are often sent by e-mail and fax, Katira said. Interest in the system is also growing in Europe, which also has extended settlement times, as banks come under increasing pressure to cut costs. “If you can automatically process these events and then reduce manual labour there will be cleaner data than there is today because it’s not being transmitted by fax,” Katira said. “It’s clear, it’s structured and everyone has the same view. It will also lead to a lot of cost savings.” Members of the US$840bn US leveraged loan market, which provides credit to non-investment grade borrowers, are seeking to bypass inputting data manually, which can be costly and lead to mistakes, and also improve settlement times, which are currently far longer than the three days it takes to close a bond trade. This version of FpML “contains a major addition in the coverage of the syndicated loan asset class”, Karel Engelen, co-head of data, reporting and FpML at ISDA, said in an e-mailed statement. It “contains almost all major aspects of agent-lender communication for the purposes of asset servicing”. New investors The standardisation and automation should open the loan market up for more investors, which are concerned about efficiency and settlement, said Mark Schultis, a managing director at financial information services provider at Markit. The release of FpML “is pulling the market to one true standard, a centralised standard”, Schultis said. “Operationally it can be used in an effective manner, which I think this is where everyone starts to see critical mass. It’s something we can all use and we all agreed upon.” About 8% of all messages sent through Markit use FpML, an increase from about 5% this time last year, Schultis said. “The beauty of FpML is that it will allow systems to consume the information directly,” said Ellen Hefferan, senior vice-president of operations and accounting at the LSTA. “Data-wise, it’s a huge improvement and will offer more transparency to the market.” A final version for a loan FpML standard related to settlement information exchanged between a bank arranging a loan and the two counterparties to the trade is expected to be released in the first quarter of 2016, Katira said. “There won’t be any technology barriers that will impede settlement times,” he said. “Because transparency is increased, I think it would make it more glaringly obvious what are the reasons behind long settlement times.” On average it took 19.3 days last quarter to settle a leveraged loan, more than twice the seven days recommended by the LSTA, according to Markit data, and six times the three-day bond market norm. “Delayed settlement makes some question the validity of the asset class and whether it should be considered mainstream and part of asset managers’ tactical asset allocation,” said Jason Rosiak,

A LITTLE OVER two years ago, I asked in this column whether a bond issue could ever decide the outcome of a national election. I was referring, of course, to a US$3bn private placement from Malaysian government investment vehicle 1MDB in the weeks leading up to Malaysia’s general election. In May 2013, the vote went in favour of Najib Razak and the incumbent Barisan Nasional coalition, and the controversy surrounding the under-the-radar debt deal – and the money Goldman Sachs made from it – died down. But the outcry over the state of 1MDB’s finances has now reached such a level that the Prime Minister’s position may now be at stake. The Public Accounts Committee and others are investigating, and I wonder to what extent the Goldman financings will be the subject of those inquiries. Full transparency is the only course of action, and 1MDB has yet to fully explain why it felt the need to offer such exorbitant returns on debt that ranks pari passu with Malaysia’s other sovereign bonds. Perhaps our friends at Goldman can provide some answers. GOLDMAN HELPED ESTABLISH 1MDB as an enterprise in 2009, eyeing power projects, real estate development and tourism. While the story of how a company with such a short history came to be encumbered with a raft of debt – estimated at US$11bn-equivalent – has been a field day for Malaysia’s opposition politicians, Goldman has largely been left out of the headlines. Charging what were rumoured to be exorbitant fees and placing debt at off-market pricing is hardly likely to raise the ire of the man in the street, whether in downtown Kuala Lumpur or on the boardwalk in Kota Kinabalu. Goldman’s star Malaysia coverage banker Roger Ng left in 2014, to “do his own thing,” according to various media reports published at the time, but not before helping the US bank rack up fees on privately placed bonds and loans on which apparently astronomical commissions were paid. The total wallet for Goldman from 1MDB is likely to have run into the hundreds of millions of dollars. The 1MDB transaction that really raised eyebrows, the US$3bn private placement at the end of March 2013, handed the US bank – according to my calculations at the time – a return of anything up to US$700m in fees and secondary market capital appreciation. Were my calculations on the nail? I expect we will never know for sure, but much political capital was made by the opposition in the run-up to the 2013 general election concerning that trade. More recently, former prime minister Mahathir Mohamad has mentioned it in his criticisms of 1MDB. As it presides over the 1MDB enquiry, the PAC has the right to summon individuals to testify before it. Who will they invite, and what questions will they ask? The answers to any questions raised before the PAC will be in the public domain, and one hopes that the interrogators will acquit themselves with aplomb in the eyes of the Malaysian electorate. Perhaps the PAC will decide to look more closely at that March 2013 deal and in the process will establish the veracity of my call. To do this, it will need to summon Goldman bankers to appear. THE COMMITTEE SHOULD ask Goldman to provide documentation setting out Goldman’s fees on the deal and any other pertinent covenants such as options clauses, carve-outs and its liability in the event of debt restructuring. In relation to the private placement, it might want to ask to see sales tickets, time-stamped with relevant Euroclear or Cedel account numbers and the name of the counterparty which bought the paper. It could also ask for voice recordings relating to the transaction, something every bulge-bracket investment bank keeps as a matter of compliance. This is not to impugn Goldman Sachs. It is to make the point that if the Malaysian government, the opposition and concerned parties are seeking to draw a line under the 1MDB “issue”, they should muster every conceivable means at their disposal to put the Malaysian public’s mind at rest once and for all. Goldman

Asian bond markets eased tentatively back to normal last week after a breakthrough in the Greek crisis and signs of stability in Chinese equities brought issuers back to the table. After nearly three weeks with barely any debt offerings in sight, issuers from China and South Korea swooped into the primary markets as soon as eurozone leaders agreed in principle on a new bailout and reform package for Greece last Monday. G3 issuance from Asia ex-Japan borrowers including Australia rose to US$6.3bn, the most since the week of June 23, according to Thomson Reuters data. “The Greeks have until the end of August to negotiate a more concrete bailout package, and that has given the market some breathing room for now,” said Hital Desai of Bank of America Merrill Lynch’s Asia syndicate desk. Caution was very much on issuers’ minds, as risk appetite remained fragile. Many, such as Xinjiang Goldwind, Korea Gas and China Minsheng Investment, capped their deals to reassure investors that they would not overwhelm the market. The rise in risk aversion also brought down deal sizes. Tianjin Binhai’s US$800m dual-tranche offering was the largest of the pack outside Australia, while the majority of Asian new issues came in US$300m lots. Even with strong support from Chinese investors, big deal sizes proved too aggressive in the market. One syndicate banker on the Tianjin deal said those bonds fell in the aftermarket because the size was too big, and secondary markets were showing signs of indigestion from the sudden glut of supply from China. Chinese investors – especially the treasury departments of the Big Four banks – had supported PRC credits even at the height of the recent Greek turmoil and A-share volatility. That base of demand was again in evidence last week, but last week’s crop of issuers were also able to attract foreign investors by offering decent premiums, said another syndicate banker. “I think the argument for being in deals because Chinese investors are in it doesn’t hold that much water,” said the banker. Bankers believe the backdrop is not stable enough to expect that primary issuance will be smooth sailing just yet, especially because concerns about China’s equity markets have still not subsided, and the ink on the Greek agreement has barely dried. China Minmetals, Bank of Communications and the Republic of Indonesia are among a handful of names that are expected to eye opportunities this week, while others such as Pertamina, Adani Ports, Korea National Oil Corp and Haitong Securities will have to decide whether to come now or wait for a better window.

Market participants agreed that the CFTC needed to make changes to its highly controversial “made available to trade” rule at a public roundtable last Wednesday. The roundtable was the first open forum held by the agency on a topic that has long frustrated swaps users. Participants said the rule gave too much regulatory power to swap trading platforms that may be swayed by commercial interests. “We should remove the self-certification process – having swap execution facilities hold the power to move the mandatory trading requirement forward more quickly makes me uncomfortable because there are so many people trying to keep up,” said Angela Patel, trading operations manager at Putnam Investments at the roundtable on Wednesday. “If we can’t keep up we can conceivably lose access to some of the tools we use to manage risk – having our tools removed is troubling to me.” The complaint is that SEFs – exchange-like trading platforms where the majority of swaps are due to eventually trade as a result of Dodd-Frank – are able to self-certify swaps instruments for trading on their own platforms, and thereby make it mandatory for the entire market to trade formerly bilateral swaps on the electronic stage. The CFTC, in practical terms, has little power to intervene even if the swaps themselves appear inappropriate for the mandatory trading requirement outlined by Dodd-Frank – a sticking point for many participating firms. “The CFTC should have a role in this – in reality it should be a collaborative process between the agency, the buyside, and the sell-side,” said Lisa Cavallari, director of fixed-income derivatives at Russell Investments. So far, only benchmark tenors for interest rate swaps are mandated to trade on SEFs. Soon after the codification of the SEF framework in October 2013, start-up platform Javelin Capital Markets submitted a self-certification to the CFTC to try and make every swap with tenors out to 51 years in three currencies mandatorily tradable on SEFs. The industry backlash was so strong though that the firm voluntarily amended its application to include only benchmark tenors out to 30 years. That experience highlights a fear of SEF-trading that has kept volumes low through the first year and driven the calls for changes to the MAT process. Moving on to SEFs is viewed as a problem due to the operational and compliance costs associated with on-boarding, as well as the threat to traditional dealer market-making models that earn hefty spreads on bilaterally negotiated, custom swap deals. But Dodd-Frank mandated trading on SEFs. To meet halfway, some emphasised that at the very least the CFTC should open up MAT submissions for public comment. “There should be the opportunity for an open public debate – anyone with a vested interest should be able to have a say,” said Sunil Hirani, CEO of trueEX, another SEF. Criteria The CFTC also asked participants whether the regulatory test that a swap has to pass in order to be moved on to exchange should be tweaked. Currently, SEFs have to show there are diverse participants, frequent transactions, significant trading volume, relatively consistent bid/ask spreads, and a number of bids and offers. However, there are no concrete thresholds for proving any of the factors. Dealers asked the CFTC to change that. “For a swap to be made available to trade we would like to know that at least two SEFs can list the product, and that both have two viable market-makers lined up to support the product,” said Dexter Senft, managing director in fixed-income trading at Morgan Stanley. Edward Tsai, director and counsel at Credit Suisse, proposed a SEF should have five viable market-makers lined up to support a product. Others pointed out that putting in concrete thresholds could discourage competition in a market already rife with barriers to new entrants. “There are already significant barriers to entry in this market, in 25 years there have been no new entrants into this market that have been abl

To no great surprise, real estate business Sorgente called time on a pre-summer €500m-plus Milan IPO late last Wednesday. The company cited Greek uncertainty as a key factor for the decision, though time had already run out with the summer break days away. Sorgente opted not to de-couple and continue meeting investors without bookbuilding when the Greek issue caused a handful of IPOs to pause after pre-marketing. As a result, even an accelerated timetable would have run into late July. Banca IMI, Bank of America Merrill Lynch and Barclays are joint global co-ordinators, and joint bookrunners with Intermonte. Societe Generale is co-lead. There is no reputational risk in pushing back until after the summer, but that will position Sorgente among what is expected to be a very full September/October calendar, posing the question of whether an Italian real estate deal will garner enough attention then. An illustration of the challenge Sorgente faced if it had launched last week came in a conversation with one syndicate banker prior to the deal’s postponement. He suggested that there was plenty of time left for the deal, after all he had worked on the IPO of Spire Healthcare last year and that was priced “at the end of July”. It certainly felt like the end of the month, but pricing came on July 18.

Apollo Global Management last week raised the largest US CLO of the year, a US$1.1bn deal, despite CLO spreads widening to the highest level in three months. The CLO, arranged by JP Morgan and Citigroup, combines two portfolios of loans that New York-based Apollo had been warehousing. The Triple A senior tranche, a US$715m slice, pays investors 146bp over Libor. Last month Apollo had price talk on the Triple A slice at 142bp–143bp over Libor, bankers said (see US CLOs for additional details). Due to heightened market volatility, average Triple A spreads on CLOs widened to 147bp on July 3 from 143bp in June, according to Morgan Stanley data. This is their widest level since April, when they reached 150bp. “Uncertainty surrounding Greece and China have weighed on risk assets,” said Richard Hill, a structured credit analyst at the firm. Nevertheless, more than US$58bn of CLOs were issued during the first six months of the year, only just behind 2014’s volume of US$60.8bn for the same period, according to Thomson Reuters LPC data. A record US$123.6bn was sold in 2014, driven by managers seeking to issue deals ahead of the introduction of risk-retention rules that will require firms to hold 5% of their funds. Banks’ forecasts for US CLO issuance in 2015 range between US$70bn and US$110bn, and June’s volume of US$14.6bn was the third-highest month ever, said JP Morgan. Issuance is, however, expected to slow in the second half of 2015 as managers grapple with complying with the retention rules that come into effect in December 2016, and how to cope with widening spreads. “The top concern is a tie between challenging arbitrage and lack of collateral,” Rishad Ahluwalia, global head of CLO research at JP Morgan, said in a report. “Risk retention and credit deterioration,” are the second-biggest concerns. According to management consulting firm Oliver Wyman, only about 10 of the 30 largest CLO managers, which are primarily affiliated with an insurer or large asset manager, may be able to comply with the rules. BlackRock priced a CLO in May with Triple As paying a rate of 139bp, the tightest level since about October 2013, according to Wells Fargo. But Triple B CLO spreads widened to 410bp at the start of July from 380bp at the beginning of June, according to Morgan Stanley. Single B rated CLO spreads widened to 650bp from 610bp over the same period. While CLO spreads are widening, loan issuance is falling. New-money US institutional loan issuance was US$73.65m in the first half of the year, falling more than 37% from the same period in 2014.