Who's in the frame for Tom King's job?

Vodafone illustrated the flexibility of the equity-linked market last week with an unusual £2.88bn mandatory convertible bond that smashed the record for the largest sterling issue ever in the sector. The deal was also the largest equity-linked trade in EMEA since KfW’s €3.3bn exchangeable into Deutsche Telekom in 2008 and was more than four times the size of British Aerospace’s £685.96m exchangeable, the former sterling record holder. But the jumbo size was not the main reason the deal stood out. The most interesting feature was the way the deal used the mandatory structure to solve a problem for the telecoms company. Vodafone has US$5bn in loan notes as receipts for the sale of its indirect stake in Verizon Wireless in 2014 that have maturities of 18 months and three years. The company wanted to find a way of monetising those notes. The use of mandatory bonds split into two tranches of £1.44bn, with maturities matching those of the loan notes, delivered cash upfront and provided a welcome injection of equity into the balance sheet (offsetting the credit negative of a €1bn injection that Vodafone has committed to a joint venture with Liberty Global). With no desire to actually issue equity, Vodafone said it may use proceeds from the Verizon loan notes to carry out share buybacks for the same number of shares issued following conversion of each tranche. A cash-settled bond would not have secured the desired equity credit from ratings agencies and under IFRS accounting. “There was push-back from investors wanting it to be fully convertible, even though the chances of converting are extremely low” Vodafone is also insulating itself from share price movements through buying calls and selling puts from the two leads, JP Morgan and Morgan Stanley. That left the banks with significant exposure to Vodafone stock, so as part of their own hedging effort, the two banks bought a large portion (40% at launch) of the bonds in what was effectively a hedge of a hedge. Shortly before books closed, investors were told the banks could take up to 48% of the bonds but in the end they settled at 45% on pricing. One banker involved said that the increase to 45% was a function of “the shape of the book” – in other words, the increased portion was a result of a lack of good quality demand from other investors. Late night rethink Certainly, the bonds did not exactly fly off the shelves. As most people were heading home for the day there was still no guidance on book coverage levels from the leads. One issue was that hedge funds did not like the lack of provision for early conversion. “That was the only real sticking point we came up against,” said a second banker involved in the deal. “There was push-back from investors wanting it to be fully convertible, even though the chances of converting are extremely low.” In order to get leverage to borrow from their prime brokers, hedge funds needed to be able to show that the bonds could convert during their lifetime. “What kind of leverage they could get and on what terms meant that there was quite a lot of complicated plumbing and so it did take time to close the deal. But we got it done,” said the first banker. At 7.15pm on Thursday, investors were informed that terms had been amended to include the option of conversion for bondholders – in line with other mandatory bonds. Six minutes later, a books-covered message was published. There was no delta placement and no premium. The conversion price will be the higher of the pre-launch close of 217.30p and the VWAP over three trading days starting February 19. Because the deal does without a conversion premium – and therefore denies that upside to the issuer – the coupon is smaller than the 5% or so typical on mandatory CBs. For the August 2017s, guidance on the coupon was 1.25%–1.5%. For the February 2019s, the range was set at 1.7%–2%. Pricing came at the wide ends of 1.5% and 2%, unsurprisingly considering the late hour that the book was covered. Vodafone is

Attempts to regulate “too big to fail” banks have failed, and US lawmakers should consider breaking up the largest firms, according to Minneapolis Federal Reserve Bank president Neel Kashkari. Kashkari warned in a speech last week that bold action is needed as the next financial crisis could imperil multiple banks and force the US government to once again rescue the financial system. Kashkari, who has previously worked at Goldman Sachs, Pimco and from 2006 to 2009 held senior positions in the US Treasury, said it was time for lawmakers to return to the drawing board and consider breaking up banks or limiting their asset size – radical moves that were considered but abandoned in the aftermath of the 2008 financial crisis. His comments come at a time when pressure is building on the biggest banks from two fronts – regulators keen to limit the fallout from any future problem, and some analysts who say depressed valuations show banks have become too big and complex and could be broken up to unlock value for shareholders. “Senior members of the Fed have bully pulpits and Kashkari just used his,” said CSLA bank analyst Mike Mayo. “It’s a signal that the Fed is not homogeneous with regard to the views of larger banks,” he said. Mayo has previously made calls for some of the largest banks to be broken up and still argues that Citigroup should sell off global operations including Banamex and that Bank of America should spin off Merrill Lynch. “Senior members of the Fed have bully pulpits and Kashkari just used his”    Kashkari recommended breaking up large banks into smaller, less connected, less important entities, turning large banks into “public utilities” by forcing them to hold so much capital that they virtually cannot fail or taxing leverage throughout the financial system to reduce systemic risks. No alarm bells ringing His break-up calls did not set off alarm bells at the largest US banks, however. That was primarily because the perch from which Kashkari makes his call, the Minneapolis Fed, has no direct impact on rules regulating Global Strategically Important Banks, or GSIBs. Those banks are regulated by five Fed banks and overseen by Federal Reserve governor Daniel Tarullo and assigned confidential supervisory ratings intended to keep close tabs on risk. Kashkari, who became Minneapolis Fed president at the start of this year, said he would hold symposiums this year and present policy briefs with the goal of moving US lawmakers. “Ultimately, Congress must decide whether such a transformational restructuring of our financial system is justified in order to mitigate the ongoing risks posed by large banks,” he said. And that may be precisely why no alarm bells were ringing inside the TBTF banks. Even efforts to reopen the Dodd-Frank Act to make minor adjustments have been derailed by intractable partisan bickering. According to at least one bank lobbyist, banks are confident that no major legislative effort will make its way through Congress. The irony is that banks are more resilient and capital is higher than it’s been in 80 years, earnings are more stable than they have been in a decade, and many of the riskier activities have been halted, Mayo said. “The industry is on a multi-year path to simplify and that’s likely to continue,” he said. Last year, JP Morgan reduced its assets by 9%, an amount equal to the 10th largest bank. JP Morgan and others have reduced size and complexity in response to a beefed up capital buffer imposed by the Fed. The top three banks, including Citigroup and BAML held assets of more than US$6.2trn at the end of 2015, down from US$6.5trn in 2014. Still, one former senior bank executive said some banks should break up for the benefit of shareholders as they remained too complex and inefficient. With many banks trading at well below their book value it showed investors do not believe the value of their assets. The former executive, who no longer works at a bank and asked not to be named, said costs w

Downgrades to energy companies’ credit ratings are weighing on CLO funds’ portfolios, in another hit to a market already facing a drop of more than 50% in issuance this year. The credit quality of CLO assets is deteriorating, according to a report by Standard & Poor’s, which has downgraded 45 energy borrowers this month as oil prices remain around all-time lows. The credit ratings of about 1.4% of assets held by US CLOs have been downgraded or placed on creditwatch with negative implications this year. CLO volume is already forecast to more than halve to US$45bn this year due to market volatility and impending regulation that will force firms to hold 5% of their deals. CLOs are typically allowed to hold around 7.5% of loans with ratings of Caa1/CCC+ or lower, according to Deutsche Bank, which makes mass credit downgrades difficult for some managers. About 15% of funds have lower limits of 5%. When low-rated loans exceed those limits, CLOs get a haircut in overcollateralisation tests, which mean that the loans may have to be marked down to market value rather than par or face value. The test measures the value of funds’ assets compared with their debt and if CLOs fail, interest proceeds are used to repay debt investors. Downgrade pain According to S&P, 209 US CLOs issued since the credit crisis have an average exposure of 0.69% to one or more of the 45 companies downgraded by the ratings firm. Fieldwood Energy is held by 140 CLOs and had its corporate credit rating cut to CCC from B. Templar Energy is held by 72 funds and had its rating cut to CCC– from B–. “A number of names have been lowered to the Triple C bucket, which could affect OC tests if the Triple C thresholds are breached,” said Jimmy Kobylinski, an S&P analyst. The number of downgrades may continue to increase. The number of companies with a low B3 rating and a negative outlook or lower rose to 264 as of February 1, just 27 issuers below an all-time record in April 2009, according to a February 3 note from Moody’s. Oil and gas borrowers make up 28% of the list. The growing list, formerly known as the “Bottom Rung”, shows deteriorating credit quality and points to a rising default rate in 2016, Moody’s analysts said. The ratings firm is expecting the US speculative-grade default rate to rise to 4.5% in 2016. Heavy energy exposure is also starting to weigh on CLO ratings. A tranche of a post-crisis CLO was downgraded last month when S&P cut the Class E notes of Silvermine Capital Management’s ECP 2013-5 to B– from B. Analysts said the fund has had credit deterioration in the collateral portfolio and a large exposure to the energy sector. “People are definitely trying to get their heads around what [increased Triple C holdings] says about the credit cycle,” said Chris Flanagan, head of US mortgage and structured finance research at Bank of America Merrill Lynch in New York. “The market has changed dramatically in just six weeks.”

The first derivatives contracts referencing agricultural hemp are set to begin trading on a regulated platform after cultivation of the commodity was legalised through the 2014 Farm Bill Act. Pending regulatory approval from the CFTC, two hemp swap contracts will begin trading on Seed SEF, a newly created swap execution facility that is owned and operated by the Seed Commodities Exchange. Seed CX founder and CEO Edward Woodford created the contracts following graduate research on what factors make derivatives contracts successful. He worked closely with hemp farmers and processors to address growing demand for a hedging tool as cultivation of hemp rapidly expands across the US. In its first year of legal cultivation, US hemp production was worth US$1.5bn, according to a 2015 report from the Congressional Research Services. “The hemp market has the right pillars for a successful derivatives market: volatility, a lack of viable alternatives to hedge such as through a cross-hedge, storability and an enthusiastic and deep network of hedgers,” said Woodford. “This is a contract that not only viscerally excites people, but serves a strong economic purpose for end-users.” Two initial swap contracts will reference hemp seed and whole plant hemp extract, though Woodford suggests that additional hemp derivatives may be suitable in view of the value-added that exists along the processing chain. Additional futures contracts are also being considered, which would require the exchange to register as a designated contract market. GMEX support Ahead of the launch, Seed CX secured investment from GMEX, a London-based derivatives platform that last year launched its own version of increasingly popular interest-rate swap futures that aim to bring traditional over-the-counter swap products into the exchange-traded world. As part of the deal, GMEX Technologies will provide its exchange trading system and market surveillance solutions, while GMEX CEO and co-founder Hirander Misra will become an observer on the Seed CX board. “We have the know-how to build new markets and we’re taking that innovation to other asset classes,” Misra told IFR. “The template we have makes a lot of sense as 90% of the heavy lift in technology and set-up is already done.” As a relative start-up itself, GMEX has taken an option to acquire 20% of the new exchange, enabling it to take exposure while preserving growth capital until the market is up and running. “We get a lot of approaches from other start-ups and it is quite important to focus on the most interesting opportunities that have a tangible benefit on revenues,” said Misra. “There are a number of areas we’re looking at that may be too niche to be on the radar of major exchanges, but there aren’t too many where the opportunities are as real and tangible as this.” More farmers are switching to hemp production as they seek diversification and more profitable products after farm incomes fell by more than 30% from 2014 to 2015 – the biggest drop since 1983 according to the US Department of Agriculture. At current wholesale prices of 50 cents per pound, hemp seed offers revenue of US$850 per acre, compared with just US$484 for soybeans, whose value has dropped by more than half in just one year, according to figures from USDA. “If this happened on Wall Street, there would be pandemonium but farmers like me survive in agriculture because of hedging tools,” said Andy Graves, chairman and co-founder of Atalo Holdings, a Kentucky-based hemp processing and farming company, who intends to use the planned derivatives products. Potential Studies focused on US hemp market potential paint a mixed picture, however. Researchers from USDA and the University of Wisconsin-Madison raised concerns that the hemp market is likely to remain small and while profits may be marginally higher than for other row crops, harvesting and processing technologies are labour-intensive, resulting in relatively high production costs. Extrapolating from o

US exploration and production companies are recalibrating balance sheets to low commodity prices through high-cost equity. For many, the decision to do so is painful acquiescence of dilution from selling stock at or near all-time lows in exchange for sustainability over the long term and flexibility in the short. Devon Energy, a multi-basin mid-cap explorer rated BBB and Baa1 by S&P and Moody’s respectively, became the latest to take the plunge, raising US$1.5bn from an overnight stock sale last Wednesday, the first time it had done so in 17 years. Taking it together with a 75% reduction in the quarterly stock dividend to six cents – the first cut in 23 years – further underscored the pain. Despite selling stock at a 14-year low, the company was able to increase the size of the funding. “There are some investors that were upset by the decision to dilute shareholders by issuing stock at a low point,” one energy banker close to the deal told IFR. “Some of them called back and said, ‘here’s my US$100m order’.” Goldman Sachs, sole bookrunner on the trade, finalised the placement of 69m shares at US$18.75, the lower half of a US$18.50–$19.25 marketing range and coming off of a US$20.33 last sale. Incremental investor demand on the overnight bookbuild allowed for an increase in size from the 55m shares the bank initially had backstopped, with the 15% greenshoe option extending the deal size to US$1.49bn. Devon shares closed on Thursday at US$19.70, partially highlighting the willingness and need of existing holders to participate in order to mitigate dilution. The financing follows equity raises earlier this year by similarly-sized IG E&Ps Hess Corporation, which raised US$1.875bn, and Pioneer Natural Resources, which picked up US$1.6bn, as well as four deals that totalled US$800m by below-investment grade E&Ps. Devon, like Hess and Pioneer, preceded its equity raise by slashing capex for 2016 by 75% to US$1.2bn–$1.45bn, from the US$3.2bn spent in 2015. The company also committed to cut its workforce by 20% (1,000 personnel) in the first quarter with a targeted savings of US$400m–$500m annually. It is also looking to raise US$2bn–$3bn from the sale of non-core producing properties (80,000 barrels of oil per day) as well as midstream assets. “There are some investors that were upset by the decision to dilute shareholders by issuing stock at a low point. Some of them called back and said, ‘here’s my US$100m order’” In total, the operating and capital measures will save the company US$4bn this year, according to analysts at CreditSights, an independent research firm focused on credit. The goal is cashflow neutrality at the current STRIP prices of US$36.00 for WTI oil and US$2.20 for natural gas. “As we look to 2016, our top priority in this environment is to protect the balance sheet by balancing spending requirements with available cashflow,” said Devon Energy chief executive Dave Hager on the fourth-quarter earnings call on February 17, a day ahead of the stock sale. “We also see no reason to accelerate production growth into these weak markets.” Devon is guiding towards full-year production of 597,000–634,000 barrels of oil per day equivalent (bboe/d), down from the 680,000 barrels it averaged in 2015. That has investors bracing themselves for a material drop-off in cashflows, to US$2.7bn in 2016 based on consensus estimates from US$3.3bn last year and the US$7.1bn generated in 2014. Leverage, not liquidity The timing of the equity raise is not coincidental. Devon is preparing for the semi-annual redetermination of its credit facility in April – in October availability was lowered from US$3bn to US$2.4bn. Combined with US$1.5bn of cash at year-end, that puts total liquidity at US$3.9bn, pro forma the US$1.15bn spent in January on the US$1.9bn acquisition of privately-held Felix Energy. “The problem with liquidity is the potential for downward revisions to asset-based bank facilities on semi-annual redeterminations,” said

Continued market volatility and the growing impact of bank regulations have contributed to a sluggish start to the year in the EMEA syndicated loan market as M&A activity remains patchy and the refinancing pipeline dries up. Just US$43bn of investment-grade loans have been completed in EMEA so far this year, down from US$67bn at the same time last year, according to Thomson Reuters LPC data. Apart from the US$18bn bridge loan backing Dublin-based rare disease drugmaker Shire’s US$32bn merger with Baxalta, and an upcoming US$20bn bridge backing ChemChina’s acquisition of Swiss seeds and pesticides company Syngenta, the wave of big-ticket M&A financings seen towards the end of last year has not been sustained into 2016. “There’s always a lot of talk about potential acquisitions, but it’s been pretty quiet on both the loan and bond sides. The volatility seems to have put a lot of people off from doing deals. There are a lot of worried bankers out there,” a banker said. Although the main cycle of European IG refinancing came to an end early last year, banks had been kept busy with a wave of amend and extend transactions, as companies took advantage of low interest rates to improve terms on existing loans and extend maturities. However, this A&E round also looks like petering out. “I’m racking my brain to think of anyone who hasn’t already done it,” the banker said. Candidates for refinancing are dwindling, and IG activity is expected to be largely restricted to the refinancing of event-driven transactions from last year. For example, in January LafargeHolcim agreed a €3.5bn loan to replace the existing credit facilities of Lafarge and Holcim after the two companies merged in July 2015. Italian tyre maker Pirelli is also expected to come to the market to refinance a €6.8bn 18-month bridge loan that backed ChemChina’s acquisition of the company last year. The refinancing is expected to include a €3.5bn term loan and a €1bn revolver, as well as a €2.5bn-equivalent bond. A prospective rise in pricing could also knock any potential for opportunistic refinancing. IG pricing in Europe is widely thought to have hit a floor last year, with Double A pricing hitting around 12.5bp, Single A pricing at around 20bp, and Triple B pricing at around 40bp. However, increased pressure on banks to meet capital requirements under new regulations has pushed lenders’ cost of funding up a lot, meaning an increase in loan pricing could be on the cards and such attractive margins will no longer be available to borrowers. “A repricing of the investment-grade market is due. If pricing rises as expected, there will be no longer any incentive for early refinancing,” a second banker said. Despite the lack of primary activity, banks remain busy behind the scenes putting bespoke bilateral and club facilities in place as short-term bridges to upcoming bond maturities, in addition to core revolving credit facilities. Emerging market woes For loan bankers focused on emerging markets, the mood is also sombre. Standard & Poor’s downgraded credit ratings for Saudi Arabia, Brazil, Kazakhstan, Bahrain and Oman last week, its second mass cut of large oil producers in almost exactly a year. Russia was spared as S&P said Moscow’s fiscal buffers gave it more leeway, but its loan market has been paralysed from nearly two years of economic sanctions imposed by the West. As a result, Russian borrowers have sought support from China – just this month state-owned gas giant Gazprom approached Chinese banks for a US$2bn loan. “Given the instability at the moment, the market is in the main flat and pipelines are very thin. The situation in Russia won’t change while sanctions remain in place and in Central Europe there is no business. There is nothing really pending – no repayments or refinancings,” a third banker said. In Central Europe low growth rates have dampened corporate appetite for loans in recent years – a situation expected to worsen as refinancings als

Myriad uncertainties, ranging from the future growth of China, weakness in oil prices and whether coupons on CoCos can be paid, may have sparked the volatility seen in European bank securities this month. But the overriding concern appears to be over how banks will cope with negative interest rates, which look likely to persist for longer than many ever expected. “The bottom line is the impact is negative, no doubt about that,” said Richard Barnes, senior director at ratings agency Standard & Poor’s, based on the experience of banks in Japan, Denmark, Switzerland and Sweden, all of which now have negative rates. “Banks have combated that by chopping deposit pricing and keeping up asset pricing. They have grown fee income too. But banks have not charged negative rates on retail deposits. It’s hard for them to do,” he said. European bank executives releasing full-year results over the past month have admitted that their basic businesses face severe pressures. Last week, Philippe Brassac, CEO of Credit Agricole, said he wanted to cut costs significantly to confront this challenge. “We are going to lower all the breakeven points of our businesses because of course we need to factor in the long-term reduction in margins caused by the low interest rate environment,” he told analysts. The group said its net interest margin – what it makes from loans less what it has to pay in deposits and other funding – fell about 2 percentage points last year. A 5% rise in fee income partially made up for this. Credit Agricole said it had already had to cope with low rates for some time, and said a “large chunk” of its home loans had already been restructured to take into account low interest rates. Other bank executives are also voicing concerns about the impact on margins, which is a crucial driver of revenues, and the dilemma this poses. As customers’ loans mature they will seek lower rates, and banks need to offer a competitive rate to keep them. And financing markets are indicating a longer period of deflation, which will keep pressure on margins. As well as short-term pain, it could have long-term consequences. “Negative rates are a ‘dangerous experiment’ for banks. They erode bank profits; incentivise banks to shrink, not grow; give a disincentive to cross-border eurozone lending; and risk non-linear effects on bank funding,” said Huw van Steenis, European banks analyst at Morgan Stanley. He estimated that negative rates erode bank profits by 5%–10%. Van Steenis said the experience of Japan, where net interest rate margins are now at 25-year lows, should warn policymakers off such a “large-scale, long duration policy intervention.” New strategies at European investment banks also seem to have been set with a low rates world in mind. Both Credit Suisse and Deutsche Bank are emphasising businesses relying on fee income, such as wealth management or capital markets and advisory, rather than vanilla corporate lending and secondary market trading, which requires significant capital commitments. But the danger is that negative rates leave most banks, where retail deposit rates are already rock-bottom, with little room to manoeuvre beyond garnering more fees. “Banks have few tools left to offset the impact of increasingly negative rates on profitability,” said Kian Abouhossein, analyst at JP Morgan.

In the absence of major planned equity offerings, 2016 is set to be a challenging year for Australian equity capital markets, requiring underwriters to demonstrate creativity and focus on smaller transactions to keep business going. Proceeds from equity and equity-related transactions in Australia last year hit an impressive US$42.8bn on a boost from a series of large bank recapitalisations and flagship IPOs, such as the US$684m listing of Link Administration. However, another wave of huge deals is unlikely to materialise this year, prompting bankers to make efforts to seek business in different market segments. The New South Wales government is due to begin preparations for the long-term lease of 50.4% of power producer Endeavour Energy, which could open the door to an Australian Stock Exchange listing of A$4bn (US$2.8bn) in the second half. However, it is just as likely, if not more, that it will opt for a trade sale, as it has done for its two previous power privatisations. If that happens, the first sizeable IPO will only come in the second quarter, when Australian financial adviser StatePlus embarks on its A$1bn listing. The prospect of deal sizes being scaled down in 2016 prompted one banker to predict that the mid-market will be the “battleground” for banks this year, a trend that suggests a more crowded competitive landscape in that part of the market as larger banks focus more on the less-lucrative deals. Other opportunities The first two months of the year are always notoriously slow for Australia and 2016 has been no exception, with a smattering of small deals in the equity and the equity-related segment just about exceeding total proceeds of A$200m as of mid-February. Heading further into the year, ECM bankers are focusing on several trends that may provide some rays of light. These include financing for M&A activity, commodities companies repairing balance sheets through rights issues, block trades from private equity exits and the possibility of more REIT listings. Poor global economic conditions, mostly related to China, have been a particular problem for the large and strategically important Australian commodities sector. Sky-high demand for natural resources from the Chinese economy had created a lucrative boom for commodities companies, but the recent slowdown has forced many of them to look at balance sheet repair or face the prospects of being hoovered up in a possible wave of consolidation. Whatever the outcome for individual companies, opportunities for ECM bankers seem plentiful in the sector. Lower down on the list of possibilities is the potential for the large banks to head to the market for further recapitalisations, but dealmakers are keeping a watchful eye on the potential for further business from Australia’s large financial institutions.

Capital raisings vital for the future of Italian banking are likely to prove extremely tricky, with bond investors beginning to price in the fact that planned listings for Banca Popolare di Vicenza and Veneto Banca may even be impossible in current market conditions. The IPOs planned for early this year are needed to fill capital holes – €1.5bn for Vicenza and €1bn for Veneto – but debt investors have begun to express fears about the chances of execution. Subordinated bonds issued just a few months ago by both banks have been steadily declining since the beginning of the year. Fitch added to Vicenza’s woes on February 12 when it downgraded the bank’s long-term rating by two notches from B+ to B–, citing the lender’s worsening liquidity position following a significant deposit outflow. The agency kept the rating on negative watch. The collapse in secondary prices has hit Tier 2 paper that both banks issued only a few months ago. The bonds, of €200m each, are now bid in the high 50s, having been bid at 100 as recently as November. That performance hasn’t been helped by the fact that four other Italian banks were wound down at the end of last year when they ran out of capital –  with holders of subordinated debt completely wiped out “Vicenza needs to raise €1.5bn of equity by April – the price of its Tier 2 takes into account the uncertainty regarding the execution of such a listing and capital raising, but also reflects the investor base of this recent Tier 2 issuance: mainly leveraged investors,” said one hedge fund investor. Another hedge fund investor echoed that view. “With this terrible sentiment all over markets and particularly with European financials, a potential IPO looks at least very badly timed,” he said. On the clock Ill-timed or otherwise, neither bank can afford to wait long for better days. Vicenza has a deadline of the end of April to get its deal done, while Veneto must complete by the end of June. The failure to raise capital will mean that both will fall foul of the European Central Bank Supervisory Review and Evaluation Process (SREP). Vicenza, for example, has been given a common equity tier 1 target of 10.25% – well above its 6.65% level at the end of 2015. “There is a risk that the underwriters won’t be able to distribute the equity and they could end up with a controlling stake” In fact, the only reason the banks are still considered going concerns is because their equity raisings have been underwritten – by UniCredit in the case of Vicenza, and by Banca IMI and nine additional banks in the case of Veneto. (Veneto has more time than Vicenza as its float is scheduled to complete by the end of the second quarter.) “BP Vicenza and Veneto Banca avoided the fate of the other four small Italian banks [that were wound up] as they were able to rely on the underwriting agreement for their equity raise,” said an analyst. “Had they not had this in place, they would have been declared non-viable.” The underwrites hardly represent a “get out of jail free” card for two struggling institutions, however. “There is a risk that the underwriters won’t be able to distribute the equity and they could end up with a controlling stake,” the analyst said. “The current market volatility means that the bid for Italian bank equity is low.” Hard questions The uncertainty is accentuated because hard underwriting of IPOs is such a rarity and the details of the underwriting agreements have not been disclosed. For example, could the downgrade of Vicenza represent grounds for UniCredit to walk away? Underwritten IPOs are a relic of the past – the practice rapidly died out after a 1987 deal for the UK’s BP coincided with the Black Monday stock market crash – so there is no market standard. One interpretation of “hard underwriting” is that, in the event the IPO cannot be priced by the deadline, UniCredit would have to step in and take a major stake in Vicenza. UniCredit bankers did not respond to queries on the details of the underwriting

The CMBS market took a hit from oil-sector stress on Thursday as rating agency Kroll warned that recovery values on some commercial property loans could fall as low as 12 cents on the dollar. The credit firm flagged 27 securitised loans of US$680m in the oil patch areas of North Dakota and Texas that are either in default or likely to sour in the near future. “Oil-related economies and companies have been contracting, thereby reducing demand for workers and investments in oil exploration and production,” Kroll analysts wrote. “Most impacted has been the Bakken Shale Region as production has slowed and oil rigs idled.” Concerns about mounting losses in oil-related CMBS came to the fore as far back as April 2015, but since then US crude has dropped to around US$30 from US$60 a barrel. Trio on watch The likely impact on CMBS deals holding those loans prompted Kroll to place US$67.3m in junk-rated securities on watch for downgrade. Those bonds were E and F classes on two 2013 Deutsche Bank-led deals and a 2014 Morgan Stanley transaction that priced with Kroll ratings of Double B to Single B minus. Such securities typically make up the bottom-most securities that are initially purchased by niche players known as B-piece buyers. Jitters around depressed oil prices have added to woes in the CMBS market, where funding costs are at their highest since 2011. Wells Fargo on Thursday priced its biggest 10-year Triple A class of its new US$875m conduit deal at swaps plus 165bp. While those notes are considered safe from losses, even in a major real-estate downturn, investors still demanded double the sector’s 12-month low of swaps plus 81bp seen in May. The pain was worse on the deal’s last rung of Triple B minus bonds, which cleared at a new high for the year of swaps plus 925bp from talk of 850bp, two investors said.

Mining and trade house Glencore has successfully closed senior syndication of the refinancing of a one-year revolving credit facility after raising US$8.4bn in commitments from a total of 37 relationship banks. Glencore’s net debt of about US$30bn – one of the highest in the sector – was under scrutiny as multi-year prices for commodities such as copper and coal pressure its finances. Markets have been concerned that Glencore’s high level of debt could compromise its ability to run its trading unit effectively, Bernstein analyst Paul Gait told Reuters. Moody’s downgraded Glencore’s credit rating to just one notch above junk in December. However, the company’s ability to secure debt in this environment had allayed some shareholder concerns, Investec analyst Marc Elliott said. The loan has been scaled back to US$7.7bn ahead of the launch of a wider syndication to a group of around 30 banks scheduled for the second quarter of 2016. Wider syndication will be aimed at allowing banks that did not participate in senior syndication a chance to take part in the loan as well as scaling back commitments of the senior banks rather than securing incremental amounts for the loan. Glencore is refinancing an US$8.45bn loan that supports the company’s trading activities and was agreed in May 2015. The new facility features a 12-month extension option and a 12-month term-out option. The facility does not contain any financial covenants. Pricing on the loan is in line with expectations, with an overall all-in cost of below 100bp. A small increase in pricing was expected after Glencore’s recent downgrade to Baa3/BBB— from Baa2/BBB. The financing is led by active bookrunners ABN AMRO, Bank of Tokyo-Mitsubishi UFJ, HSBC, ING and Santander. “At a time when the commodity sector is under close scrutiny in terms of its ability to weather the current storm, a bounce back and being in a position to honour borrowings suggest progress for Glencore,” said Mike van Dulken, head of research at Accendo Markets. Glencore said in December that it had increased its current liquidity to more than US$14bn, meaning that the company does not require a facility of the same size as last year.

Barclays is actively searching for an external candidate to run its investment bank to step into the shoes of Tom King, who will retire as the unit’s chief executive in two weeks. Barclays said on Friday King will retire on March 4. He had been widely expected to step down this year. The short statement did not give any details on who would take over permanently or on an interim basis. Barclays is expected to pick an external successor and has already been looking at candidates, people familiar with the matter said. The heads of banking and markets teams are expected to report directly to group chief executive Jes Staley until a replacement for King is picked. Staley, the former JP Morgan investment bank chief who became Barclays CEO in December, is particularly well connected in US banking after more than 30 years at JP Morgan, and has already made two senior hires from his former firm this month. Staley approached his former JP Morgan colleague Blythe Masters last year to run Barclays’ investment bank, sources said in December. But Masters said she was fully committed to running her financial technology start-up, Digital Asset Holdings. King joined Barclays in 2009 from Citigroup, where he was global head of mergers and acquisitions. He has been co-head or sole head of Barclays’ investment bank since May 2013, and is now based in New York. “After nearly 25 years in my career, and having now seen the investment bank through a period of extraordinary change and on to a solid footing for the future, I feel the moment is right for me to pass the baton,” King said in Friday’s statement. King’s departure has been expected for some time. The 55-year-old threatened to quit last summer during a row with then-CEO Antony Jenkins over the future of the division, as Jenkins wanted to cut the investment bank deeper than King, sources said at the time. That row contributed to the board’s ousting of Jenkins. King was persuaded to stay, but he indicated then that he would leave in 2016, the sources said. Barclays, like many of its European rivals, has scaled back its ambitions in investment banking as tougher regulations and more difficult markets have eroded returns. It scrapped plans to be a global investment bank three years ago and is still scaling back in an attempt to cut costs and improve profitability. It is focusing on its two “home” markets of Britain and the United States, and pulling back from areas where it lacks scale or is unprofitable. It said last month it would quit investment banking in Russia, Brazil and seven countries in Asia (and cash equities there). That would see about 1,200 jobs go, on top of about 7,000 cuts in the division in the last three years – representing about a third of staff. Staley will give more details of his plans for strategy on March 1 alongside the bank’s 2015 results. He is expected to include details on the investment bank and also Africa, where he is expected to reduce the bank’s presence. The bank’s board met last week to discuss how far to go in pulling back from Africa, where Barclays has had a long presence but has struggled in recent years to make decent returns. It own 62% of Barclays Africa Group, which is listed in South Africa and has operations across the continent.