Skin in the game? Not much at Deutsche

Negative yields are making a comeback in the European corporate primary market as growth fears rekindle memories of an era that investors thought had passed after the ECB stopped QE at the end of last year. On Wednesday, French pharmaceutical company Sanofi became the second company in 2019 to print a deal that includes a negative-yielding tranche. LVMH was the first in February with a €300m note at –0.017%. LVMH’s deal had a two-year tenor but Sanofi, which was part of the first wave of corporates pricing with negative yields in 2016, sold a €850m three-year bond issue at –0.049% as part of a three-tranche deal that raised €2bn in total. The tranche also came with the lowest spread for a corporate issue this year at 5bp over swaps. Orders were €3.75bn at the swaps plus 10bp area guidance – equivalent to around a 0% yield – although interest dropped by some €2bn after leads went on to launch at plus 5bp. “This tells you a lot about global growth, European growth,” said a syndicate banker away from the deal. “We’re stuck in a low-rate environment.” Even with a negative yield, the March 2022 offering gives investors a pick-up over French government bonds. France’s three-year benchmark is bid at –0.37%, according to Refinitiv data. It also compares favourably with the ECB’s deposit rate of -0.40%. “Investors are just worried about beating the level of cash deposits,” said a second syndicate banker away from the deal. “Buying a negative yield sounds appalling, but the truth is that it’s better than the alternatives.” NOT THE FIRST Even though the ECB has stopped its bond-buying programme, primary markets are seeing yields get crushed. In the SSA sector, KfW on Tuesday priced a €5bn June 2022 issue at –0.267%, though the April 2022 reference OBL is bid at –0.52%. In the secondary market, the pool of eurozone government bonds with negative yields rose at the end of January to almost 40% - its highest share in nine months, according to Tradeweb data. It was marginally less at the end of February. As for the investment-grade corporate market, bonds with negative yields increased to 14.75% as of the end of February, more than double the 6% at the end of January. That’s still a long way from the peak of 31% in February 2017 during the height of the frenzy caused by the ECB’s bond buying programme. Some investors say that at least negative yields this time around are a reflection of market sentiment rather than a distortion caused by ECB policy. “Negative corporate yields tell me we don’t need the ECB continuing QE for the market to function,” said Jorgen Kjaersgaard, co-head of European fixed income at AllianceBernstein. However, central bank interest rate policy remains dovish. The ECB downgraded growth and inflation forecasts at its meeting earlier this month, causing 10-year Bund yields to tumble towards zero. Many believe the central bank will struggle to put an end to the easy liquidity that has been a constant fixture of fixed-income markets over the last decade. WALK THE LINE Investors are left trying to walk a thin line: reaching for yield, while attempting to avoid riskier companies that have leveraged up over the years of central bank largesse. It is proving a tricky balance to strike. European investors have a lot of money to put to work after beginning the year underweight credit and with large cash balances because they expected redemptions from their funds after a volatile last two months of 2018. Those redemptions never materialised, and so they are now piling into each and every deal coming to market. “I see this more as an act of desperation,” said Puneet Sharma, head of credit strategy at Zurich Insurance. “The situation is made worse by strong inflows into credit. They’re chasing every bond issued – even if at negative yields, given negative government bond yields at the short end,” he said. Against that background, Sanofi, rated A1/AA, is just the ticket for bond-hungry but conservative investors. In addition to the

The first quarter is shaping up to be a wash-out for fixed income, currency and commodities trading, and Citigroup added to the chorus of banks saying a rebound from December’s gloom has been appreciable, but not enough. “As we look at the first quarter thus far and in particular equities and fixed income markets revenues, we expect that they’ll be down year-over-year in the high single digits,” said Citi’s new chief financial officer Mark Mason. Mason took over from long-time Citi CFO John Gerspach on March 1. He had previously been CFO of the bank’s capital markets group. FICC trading was tough for most banks in the fourth quarter after a horrid December. Citi’s FICC revenues fell 21% in the fourth quarter compared with the same quarter of 2017. Its equities revenues fared better, however, to limit the fall in its markets revenues to 11% from a year earlier. But as the first quarter of 2019 draws to a close, both appear to be struggling. FICC trading hasn’t rebounded as strongly as hoped and in equities Citi has a tough comparison with the year ago, after first-quarter 2018 revenues jumped 38% from a year earlier. “In our view, the markets have stabilised,” Mason said at a financial services conference last week. He said most markets have traded higher, but he still doesn’t feel as though the market has fully recovered despite credit spreads tightening. The year earlier comparison for Citi in FICC is easier, but that would make a year-on-year decline all the more disappointing. The bank’s FICC revenues in Q1 2018 were US$3.4bn, down 7% from 2017. Analysts at Keefe Bruyette & Woods are expecting Citi’s Q1 trading revenue to fall by about 4% from a year earlier, including a 6% decline in FICC and a 3% gain in equities trading. BETTER… A BIT Citi’s guidance follows previous gloomy comments from rival JP Morgan, which warned in mid-February that markets revenues, which cover FICC and equities trading, could be down in the “high teens” percentage from a year ago. JP Morgan said stripping out gains a year ago related to accounting changes, the decline could be in the “low teens” percentage. But it said its guidance could all change with a particularly good – or bad – March. Credit Suisse chief executive Tidjane Thiam offered a similar view from Europe. He said conditions had improved early this year, resulting in a “less negative trading environment than in the fourth quarter” but one that was weaker than the first quarter of 2018. SHUTDOWN SLOWDOWN Investment banking is looking better and should be up from the first quarter of 2018, Citi’s Mason said, thanks to M&A advisory and investment grade debt underwriting. Citi is facing an easy comparison with a year ago, when first-quarter investment banking revenues were down 10% from 2017, with M&A advisory and ECM down 14% and DCM down 8%. “Corporate banking activity was off to a slow start,” Mason said of the latest quarter. He said investment banking revenues are likely to be down from the fourth quarter, when they were US$1.28bn, down 1% from a year earlier. They were US$1.13bn in the first quarter of 2018. The momentum in advisory may have been dented by the shutdown of the US government coming into 2018. “We obviously had the slowdown at the beginning of the year and we had a pipeline coming into the year we felt very good about,” Mason said. “We’ve seen that momentum continue with the shutdown being lifted. And so we feel very good about the pipeline that we have, particularly, in M&A and in other parts of the franchise,” he said. JP Morgan is due to kick off Q1 results on April 12.

Hospital operator Healthscope is back in the leveraged finance market with a A$2.15bn (US$1.52bn) loan backing its second take-private buyout in less than a decade. Seven underwriting banks are seeking commitments from banks after launching senior syndication last week. The multi-tranche senior loan – one of the country’s biggest ever buyout loans – backs the planned A$4.35bn acquisition by Canadian investment firm Brookfield Capital Partners. The latest big-ticket financing in the booming Asia-Pacific leveraged loan market is expected to be well received due to Healthscope’s robust underlying healthcare business, its leading position in Australia and New Zealand, rarity value and track record with lenders. Healthscope was the subject of an LBO in 2010 after TPG Capital and Carlyle Group took it private at a valuation of A$2.7bn. The two private equity firms then relisted it in 2014 and exited their remaining stakes through block trades in 2015, raising over A$4bn from their share sales. “Healthscope provides a rare opportunity for both the financial sponsor as well as banks to take exposure to the healthcare sector in Australia at this kind of scale,” a loan banker in Singapore. said. “It has a proven track record and with public hospitals in Australia carrying a 95% occupancy rate, Healthscope’s future is quite promising.” The seven underwriting banks are seeking to reduce their risk and a wider launch into general syndication is expected in April. Healthscope’s board recommended Brookfield’s offer on February 1, and shareholders are due to vote on the deal in May. EXTRA DOSE Research analysts expect strong earnings growth for Healthscope, which will help support the hefty debt load. Jefferies forecasts Ebitda of about A$405m for the year ending June 30 2019, and A$451m and A$502m respectively for the following two years. Morningstar estimates Healthscope will produce Ebitda of A$413m and A$455m for the fiscal years ending June 30 2019 and 2020, respectively. For the full year ending June 30 2018, Healthscope generated Ebitda of about A$314m, according to Refinitiv data. The estimates on forward earnings put the leverage multiple on the latest loan at about 5.20–5.31 times. This is higher than the gearing on a A$1.7bn financing completed in October 2010 to finance Healthscope’s original LBO, which came with total leverage of 4.7 times Ebitda and 4.0 times senior debt. A total of 30 lenders, including 17 mandated lead arrangers and bookrunners, participated in the A$1.5bn five-year senior portion, which was among the first high-profile LBO financings from Asia after the 2008 global financial crisis. After Healthscope’s relisting in July 2014, the company raised a A$1.295bn three-year post-IPO loan with seven banks. In February 2015, Healthscope also raised another A$690m four-year public-private partnership club loan for its Northern Beaches Hospital. On the new deal, mandated lead arrangers, bookrunners and underwriters are Bank of America Merrill Lynch, Barclays, ING, JP Morgan, MUFG, National Australia Bank and SMBC. The five-year loan comprises a A$360m amortising term loan A tranche, a A$1.44bn bullet piece, a A$250m revolving credit facility and a A$100m acquisition and capex facility. The interest margins are 400bp over BBSY for the amortising term loan and the revolver and 425bp over BBSY for the bullet piece and the capex facility. Banks are invited to join as MLAs with take-and-hold commitments of A$125m or above, as lead arrangers with A$100m–$125m and co-arrangers with A$75m–$100m. CHANGES TO LIQUIDITY Much has changed in the Australian leveraged finance arena since Healthscope’s 2010 buyout, notably around the composition of capital providers. Some European banks, including Barclays, BNP Paribas, Credit Agricole and Societe Generale, have resumed lending in the last 18 months after scaling down or shutting their operations following the European financial crisis. Australia is seeing a proliferation of institution

The value of credit derivatives used to insure against a default on Schaeffler collapsed last week after the German car-parts supplier announced changes to its debt structure that traders worried could make credit-default swaps on the firm all but worthless. The annual cost of insuring against a default on €10m of Schaeffler debt for five years nearly halved to €83,000 during the week, according to Refinitiv data, before recovering slightly to €87,000. The previous week, it had cost €153,000. The move came after Schaeffler announced a potential bond deal on March 11 to be issued under its new €5bn investment-grade debt issuance programme. Bonds will be issued from a new holding company, Schaeffler AG, as opposed to Schaeffler Finance BV, the vehicle referenced by CDS contracts. The dwindling stock of debt belonging to Schaeffler Finance BV raises questions about the value of the CDS. “This means that as Schaeffler starts to remove the bonds at Schaeffler Finance BV … there will be no deliverables left” to be used in a CDS auction, credit strategists at BNP Paribas wrote in a note to clients on March 12. When a company defaults and CDS are triggered, an auction is held to determine the payout to protection holders. That typically involves banks bidding on the value of the bonds belonging to the company in default. If there are no bonds to deliver into the auction, there can be no CDS payouts. Schaeffler Finance BV still has four bonds, the BNP Paribas strategists noted. Three of those are callable and the other – maturing in 2025 – will be callable from next year. Writing in September, Moody’s analysts said they expect Schaeffler’s existing senior notes, due 2020, 2022, 2023 and 2025, will be gradually refinanced with senior unsecured notes under the new debt issuance programme. That programme was announced at the end of September, shortly after the company attained its third investment-grade rating following an upgrade to BBB– by S&P from BB+ the previous month. The company is rated Baa3 by Moody’s and BBB– by Fitch. All four of Schaeffler Finance BV’s outstanding bonds were issued between 2014 and 2015 – before the company achieved its first investment-grade rating and while its corporate and financial structure was still evolving, a spokesperson said. However, after Schaeffler’s IPO in October 2015, it became clear that Schaeffler AG would be the top holding company of Schaeffler Group – and the company decided it would be more efficient for bonds to be issued via Schaeffler AG. Within Schaeffler Group, this step allows the company to avoid duplicating structures, the spokesperson said. CDS have been in the headlines of late following a string of unrelated controversies. Earlier this month, the International Swaps and Derivatives Association proposed updates to CDS documentation following regulatory pressure to prevent so-called manufactured defaults. That is when a company strikes a deal with an investor that holds CDS protection on the company’s debt to engineer a default, triggering a CDS payout. In return, the investor will typically give the company a cheap loan. While investors and bankers largely applauded the move from ISDA, some pointed out the trade body has not sought to address other perceived issues with the contract. Those include the process of a company shifting its debt to another entity to render its CDS worthless – known in the industry as “strategic orphaning”. There is no suggestion that Schaeffler’s move to issue debt out of a different vehicle was planned with CDS in mind. Schaeffler’s spokesperson said the company was not aware of the effect on CDS. “This is a technical effect based on contracts we do not know and are not involved in,” he said. Strategic orphaning remains a problem, wrote Citigroup credit strategists in a recent note to clients. “The [latest ISDA] proposals do little to address [these] cases … which keep cropping up both in Europe and the US,” they said. Schaeffler kicked off meet

It’s official: Deutsche Bank and Commerzbank are in talks about a possible merger, German Finance Minister Olaf Scholz confirmed on Monday. But fears abound that the merger, which would create Europe’s third-largest bank behind HSBC and BNP Paribas with €1.8trn in assets, could simply compound each bank’s problems. And there are a string of questions – around jobs, strategy, cost savings, returns and capital – yet to be answered. One thing is clear: if the merger goes ahead, the combined entity will need to take tough decisions to slash loss-making divisions – including in investment banking – to improve returns, bankers said. News of the talks have already sparked disapproval from unions, who are worried about job cuts. Of the 141,000 people employed by the two banks (about 78,000 in Germany), 20,000 could face redundancy under a merger. But job cuts, and the ensuing reduction in the cost base, are seen as the strongest argument for a deal. Overlap, specifically in retail banking, is high, creating the possibility for large synergies that would boost returns in the low-yield market. But not everyone is convinced. “Cost savings would be difficult to do in Germany,” said one analyst, who noted the strength of the unions. Both banks are already cutting jobs: Deutsche has announced that 15,000 positions will go by 2021 and Commerzbank will lose about 3,500 by 2020. Still, there currently appears to be rare political backing to allow even more drastic cuts, largely because the German employment market is strong so could withstand the impact. Whether cutting jobs will be enough to pull up returns is another question. The combined entity would have about 20% of the German retail market, which remains dominated by quasi-public entities not overly concerned about making profits. “The savings banks and co-operatives have so much market power, which makes Deutsche and Commerzbank both price takers,” the analyst said. “Combining wouldn’t change that dynamic.” POLITICALLY DRIVEN Politicians seem to be driven by more than the prospect of synergies, however. A senior German regulator told IFR the deal did not make much economic sense, but was being driven by political reasons. Berlin wants to create a national champion that can serve the needs of German exporters by ensuring access to capital markets as well as more routine cash management and transaction banking – even during periods of crisis – to medium-sized companies, the backbone of Germany’s economy. “There has been a realisation that Europe cannot continue to rely on US banks for the provision of wholesale services,” said one senior financial institutions banker, who has worked closely with the two banks. He and other sources said Germany remembers in particular the exodus of banks and capital from Eastern Europe in 2008 and 2009. STREAMLINED But bankers said any deal should involve an overhaul of the combined investment banks to produce a streamlined and simpler investment bank with a much lower cost drag. Deutsche has one of the higher cost-income ratios in the industry and one of the most capital intensive business models, and analysts reckon a merger could enable the bosses to cut investment banking assets by 40%. “A combination of IB shrinkage and a cost merger could be taken more positively, we think, given the challenging IB revenue outlook,” UBS analyst Daniele Brupbacher said in a note. Past cuts have already diminished Deutsche’s status as a top-tier firm. Its corporate and investment bank brought in revenues of €13bn last year, down from €16.8bn in 2016. Its return on tangible equity was a paltry 0.9% due to its hefty costs and extensive use of capital. It ranked eighth globally for investment banking fees last year, down from sixth in 2010, a position it held through to 2015, according to Refinitiv data. SLASHER MOVIE One former senior Deutsche banker told IFR that the bank should slash its equities, rates and even flow credit business, and concentrate on its strengths i

United Overseas Bank ended a long wait for Singapore’s first Panda bond issue last week, raising Rmb2bn (US$298.2m) from a three-year offering that was mostly sold to international investors. Pricing came at 3.49%, towards the tight end of the initial price range of 3.4%–4.0% area. UOB had been planning the issue since early 2018, and held five days of non-deal roadshows in October in Beijing, Shanghai, Shenzhen and Hong Kong, during which the bank met more than 25 investors. The delayed regulatory approval eventually worked in its favour, coinciding with a decline in onshore yields and giving investors more time to put lines in place ahead of the deal. United Overseas Bank (China) last April sold Rmb1bn of three-year bonds at 4.93% in the onshore market, so the latest deal made UOB the first issuer from South-East Asia to sell onshore bonds both at group level and through its onshore subsidiary. “Our debut Panda bond issuance marks another milestone in UOB’s longstanding commitment to supporting greater financial market connectivity in the region,” said Wee Ee Cheong, deputy chairman and group CEO of UOB. This is the latest step in UOB’s efforts to diversify its funding sources, having printed bonds in currencies including renminbi, Malaysian ringgit, Indonesian rupiah and Australian dollars last year. The Panda offering had a subscription rate of 2.7 times from asset managers and commercial banks in Asia, having peaked around Rmb5.9bn during the auction process. The marginal rate, or tightest clearing price, in the first round of the modified Dutch auction was 3.60%, and was tightened to 3.55% with the lower bound of the range remaining unchanged as the auction continued. The final yield of 3.49% was equivalent to 31bp over China Development Bank’s three-year bonds, which was around 15bp–20bp inside the trading levels of recent onshore issues from some subsidiaries of offshore banks rated AAA in the local market. Pricing was expected around 10bp–15bp inside the secondary yield of UOB China’s 2021 bonds, but in the end was 19bp inside. Offshore investors were more supportive at final pricing, taking up 62% of the deal via the Bond Connect link. The central bank’s recent monetary policy easing stance helped support demand onshore, while offshore buyers were helped by a favourable renminbi-dollar basis swap. UOB will use proceeds from the issue onshore. The offering benefited from good timing, coming in the middle of China’s National People’s Congress, which is typically a stable period in financial markets with little bond issuance. Bank of China was the lead underwriter and lead bookrunner, and China Securities and Standard Chartered were joint lead underwriters and joint bookrunners. Both the bonds and the issuer have expected ratings of AAA from China Chengxin International.

Massive supply of state-backed bonds supporting off-balance-sheet government expenditure ahead of India’s elections is threatening to crowd out private-sector borrowers, counterbalancing a recent cut in official interest rates. In the past week, Housing and Urban Development Corp and National Bank for Agriculture and Rural Development raised nearly Rs60bn (US$868m) from government of India-serviced bonds, while on February 28 Food Corporation of India printed Rs27.38bn of government-guaranteed bonds. Air India is planning to raise up to Rs70bn from bonds backed by a government guarantee before March-end, although in this case the money will go towards refinancing existing debt. Tata Asset Management estimates that almost-concluded FY 2019 will see record supply of half a trillion rupees of bonds issued by state-owned companies and backed by sovereign support in the form of servicing or guarantees. This supply pressure has delayed the transmission of last month’s 25bp repo rate cut, leaving Indian companies instead facing higher borrowing costs as they struggle to compete with state-linked issuers. “The cost of funds is rising for companies despite a rate cut by the RBI on February 6 because of the higher issuance of GOI-serviced and guaranteed bonds, along with the dearth of liquidity in the market,” said Akhil Mittal, senior fund manager at Tata Asset Management. “While the government has indicated that GOI-serviced bonds should be issued at a spread of 10bp–20bp above the underlying government security, the bonds are being issued at a spread of 80bp–100bp over the corresponding G-sec rate because of the huge supply, and that is a not a good sign,” Mittal added. Last Wednesday, Housing and Urban Development Corp raised Rs53.2bn (US$761m) from 10-year GOI-serviced bonds at 8.41%, at a spread of 86bp over the government security of same tenor, according to Refinitiv data. Off-balance-sheet financing is heading for a record after Prime Minister Narendra Modi unveiled a populist budget to buttress growth and win support ahead of elections in May. State-owned companies need to borrow to support flagship government programmes at a time when the national budget is already constrained. The government is expected to narrowly miss its fiscal deficit target of 3.3% of GDP for FY19, with the actual deficit estimated to reach 3.4%, according to the budget documents. “When fiscal space is limited, other means of funding are often sought out for capital projects, whether it be through state-linked firms or enhanced private sector participation,” said Andrew Wood, analyst at S&P. India Ratings estimates gross borrowings by public sector enterprises, central and state governments will shoot up to Rs15.3trn, or 8.1% of GDP, in FY 2019 from Rs14.5trn in FY 2018. “Extra-budgetary resources are being used to meet the ever-growing need of government expenditure,” said Devendra Kumar Pant, chief economist and senior director at India Ratings. SUPPLY PRESSURE Market participants are concerned that keeping liabilities outside government accounts not only understates the fiscal deficit but also leads to supply pressure in the bond market, crimping demand for corporate paper. “While investors want to lap up the debt instruments because of higher yields, there is no free lunch,” said Vivek Rajpal, Asia interest rates strategist at Nomura. “The impact will be seen somewhere else.” The coupon payments on these bonds will appear as an interest item under various ministries and will be seen in next year’s budget. “The higher off-balance sheet funding increases contingent debt of the government,” said Abbas Ameli-Renani, emerging markets debt portfolio manager at Amundi Asset Management. “It reduces the ability of the government to support growth through fiscal policy. That is why we have a negative bias towards Indian assets.” While most market participants do not have near-term concerns on the sovereign’s ratings, there are greater worries for the priv

China Orient Asset Management (International) Holding (COAMI) drew a massive order book of about US$18.3bn for its US$700m dual-tranche bond offering last week, replicating the investor frenzy that peer China Cinda Asset Management stirred up last month for a US$1bn deal. The response highlights the bullish sentiment in the Asian bond market and the continued popularity of China’s four state-owned asset management companies, which have become less frequent offshore issuers in the past year. New US dollar bond supply from these bad-debt managers has been shrinking since the China Banking and Insurance Regulatory Commission pledged greater oversight over AMCs and required them to refocus on their core business in late 2017. The COAMI deal comprised a US$400m 3.875% five-year tranche and a US$300m 4.500% 10-year tranche, priced at 150bp and 200bp over Treasuries, respectively. Both tranches were 35bp tighter than respective initial guidance of 185bp area and 235bp area and inside the bad-debt manager’s secondary curve, despite a weaker structure than previous deals. The bonds jumped in the aftermarket, trading more than 10bp tighter across the two tranches last Thursday morning. “The response from investors was overwhelming and all the big international names are in the deal,” a banker on the deal said. The banker said demand was heavy because of robust market conditions, the small deal size, and thin supply, especially of high-grade issues, because of the blackout period for companies reporting their annual results. The takings were far smaller than COAMI’s last visit to the dollar bond market in December 2017, when it raised US$2bn from a triple-tranche deal. Last week’s issue was 26 times covered, while last month’s Cinda deal was said to be more than 20 times covered. “The lesser supply of Chinese AMC bonds, plus a diminishing credit risk because of stricter regulatory oversight, make AMC bonds more attractive,” said a Hong Kong-based portfolio manager from a Chinese brokerage, who participated in COAMI’s deal. TRADING STRONGLY AMC bonds have traded strongly this year, with the average AMC-to-bank senior premium around 40bp from wides of over 75bp at the start of the year, according to a note from Nomura’s trading desk. There is now market speculation that China Huarong Asset Management will be the next AMC to line up US dollar bonds in the near term, but also for a limited amount. The deal structure of the new issue was slightly different from COAMI’s previous deals, when ultimate state-owned parent company China Orient Asset Management (COAM), rated A3/BBB+/A, acted as keepwell deed and equity interest purchase and investment undertaking provider to provide extra credit enhancement. This time, there is no such arrangement. Its latest bonds were issued by Joy Treasure Assets Holdings and COAMI is the guarantor. The Reg S issue has expected ratings of BBB+/A– (S&P/Fitch), in line with COAMI. Citigroup analysts saw fair value for the new issue at 155bp and 205bp over Treasuries for the five-year and 10-year, respectively, after allowing for at least 10bp of risk premium because of the structure. Jefferies added a similar premium and put fair value at Treasuries plus 160bp and 203bp for the two tranches, respectively. CreditSights, meanwhile, saw fair value at 149bp and 194bp. “In theory, the lack of keepwell and [equity interest purchase undertaking] should add some risk premium, but the market dynamics and the massive orders outweighed this,” the above banker said. “Indeed, Chinese investors did not view the lack of keepwell and EIPU as a big difference and are comfortable with the new structure given that the guarantor [COAMI] also has a strong standalone credit rating,” he said. COAMI is one of COAM’s major offshore financing and operating arms. It contributed about 20% of COAM’s consolidated net profit in 2016 and 2017, and accounted for around 8%–9% of the parent’s consolidated total assets, according to Fitch. The ne

Central banks, which have moved beyond their essential mandate to set a country’s interest rates and now also regulate financial institutions, are laying themselves open to enhanced reputational risks. That, at least, is the view of Agustin Carstens, general manager at the Bank for International Settlements, who said two-thirds of central banks were now in charge of micro or macro prudential regulation as well as resolution decisions. “The institutional architecture for financial sector oversight has changed markedly,” Carstens said at a meeting last week of the Financial Stability Institute. This could mean they are blamed for future scandals if they are not prevented. “A plurality of objectives within a single agency could generate policy conflicts that may not always be solved in a socially optimal way,” said Carstens, former governor of the Bank of Mexico. He said that could put their independence at risk, if governments think they have too much power. “The accumulation of power within a single agency may be used as the basis for challenging the independence of central banks vis-a-vis elected officials,” he said. SUPERVISION Other central bankers at the conference said it was right that central banks had taken on more responsibilities since the financial crisis so they could manage risks more effectively. “The financial crisis has strengthened the case for the involvement of central banks in supervision,” said Bill Dudley, a former Goldman Sachs chief economist who was president of the New York Federal Reserve from 2009 to 2018. “As lender of last resort the Fed was instrumental in providing facilities during the crisis. If it is going to be lender of last resort then the Fed absolutely must be able to have major insight through monitoring of the financial system,” Dudley said. Before the 2008 financial crisis Bear Stearns and Lehman Brothers were not supervised adequately, he said, and the crisis may have been less severe if they had been. The Fed needed to ensure it remained in charge of supervising the financial system too, despite President Donald Trump’s criticism of the institution in recent months. “In the US independence does not mean the Fed can do what it wants,” said Dudley. “It is a creature of Congress and must live within that. Despite what the president may have said in recent tweets this has been shown to be the case.” AUSTRALIAN ALTERNATIVE Australia has resisted giving the central bank responsibility for financial regulation. Philip Lowe, governor of the Reserve Bank of Australia, said there was a “culture of cooperation” between Australia’s central bank, financial supervisor, securities regulator and treasury. But that approach was not seen as adequate elsewhere, and some said the eurozone crisis was only really solved when the European Central Bank stepped up and accepted its role as lender of last resort. The use of taxpayer money has provoked increased scrutiny of supervisors, said Andrea Enria, recently appointed chair of the supervisory board at the ECB. “The independence of supervision has been ignored slightly post-crisis,” Enria said. “Lots of taxpayers’ money was spent so there is more scrutiny of supervisory tasks, because he who pays the piper calls the tune. Government therefore needs to take responsibility for supervision.” Those concerns should ease as less taxpayer cash is used to bail out banks in the future after industry reforms. “The G20 reforms have set up tools for crisis management to prevent huge disbursements of taxpayer money … That would argue for more independence for supervisors then,” said Enria. He said other issues needed to be addressed including managing conflicts between supervisors and supervised entities. “We have not reflected enough on the safeguards in place to ensure there is not a revolving door between the market and the regulator, the poacher-turned-gamekeeper,” Enria said. ULTIMATE RESPONSIBILITY Carstens said that although “the addition of financial stability

JP Morgan is expected to make a tidy profit on a tap of Ukraine’s November 2028 bonds after the US bank acted as sole bookrunner and buyer of the deal. The sovereign, rated Caa1/B–/B–, raised US$350m on Tuesday through the private placement, which took the market by surprise as it came just three weeks ahead of a tightly-fought presidential election, for which comic actor and political novice Volodymyr Zelenskiy is leading in the polls. Even more intriguing was the nature of the trade. The deal itself was not disclosed to the market until after it was completed and even then there was no information about the yield or reoffer price. Aside from the size, which took the amount outstanding on the bonds to US$1.6bn, and the settlement date, the only other thing disclosed was that JP Morgan “acted as sole purchaser and bookrunner”. “I think JP Morgan made a lot of money,” said one banker away from the deal. Quite how much is impossible to say without knowing at what price the bank’s trading desk owned the bonds or offloaded them (assuming they have) or details about any hedging strategy. But the potential profit could be in the low millions, not including fees. Speculation was rife in the market that JP Morgan owned the bonds at 99.25 but IFR understands that price is inaccurate. What is clear is that the bonds were bid at 100.69 at Tuesday’s open, according to Tradeweb prices, or a yield of 9.635%, having climbed from 99.31 at Monday’s open. By Tuesday’s close the bonds were stable at 100.75, though they had fallen to 100.25 by Wednesday’s close. The trade was testament to JP Morgan’s belief that Ukraine is heading in the right direction, despite the huge challenges facing the country, and its willingness to put its balance sheet at risk. “Hats off to them. Would I have liked to have done it? Absolutely,” said a second banker away from the deal. GOING PUBLIC? Some investors grumbled that the deal was not done through the public markets and also questioned how beneficial it was for Ukraine. “I think Ukraine could have done it at better levels … if they had come to the market,” said one London fund manager. Ukraine’s Ministry of Finance did not respond to requests for comment. But the government would be under pressure not to pay too big a premium. Quite where a new public deal would price is open to debate. In October when it originally issued the November 2028s as part of a US$2bn dual-tranche offering, the sovereign paid a 12.5bp premium. Market conditions have improved since then – Sri Lanka, rated B2/B/B, sold US$2.4bn of bonds on March 7 with 5bp concessions – though it’s not clear that enough investors would have considered a public deal from Ukraine this close to the election. And with the government under pressure to raise US$2bn in the international capital markets this year, and no certainty about what the political landscape will look like, it became too good an opportunity to get some money in the bank. Ukraine is no stranger to private placements. In August it raised US$725m through a six-month trade through Goldman Sachs.

HSBC has appointed 83 new managing directors in its global banking and markets division in its annual round of promotions. Twenty-eight of the new managing directors, or 34%, are female. GBM chief executive Samir Assaf said that marks a “significant rise” in the number of women promoted. “Achieving gender balance in leadership and creating an inclusive environment is a critical part of our people strategy,” Assaf said in a memo to staff last week. Thirty-six of the MDs, or 43%, are in the global banking unit, which includes M&A advisory and equity and debt origination. They include London-based Asif Sherani, head of SSA syndicate; William Higbee in corporate risk solutions; Mathieu Grasmuck, head of execution in portfolio management; and Elvira Rozajac in the infrastructure and real estate group, as well as Alessandro Mazzi, head of project and export finance for Italy in Milan; and Isabelle Aussourd in IB advisory in New York. In Asia, the global banking promotions include Vivian Zhang, head of securitisation for China; Anita So, a loan syndications banker; and Jit-Min Lim, a Singapore-based former Citigroup corporate banker. TRADING UP HSBC appointed 25 new MDs in global markets, which includes its trading desks. They include Robbie Harris on credit trading in London; Pascal Passeron, head of FX options in London; Sara Dodds from credit trading in New York; Richard Gallagher, head of equity derivatives and equity finance sales for Asia-Pacific; and Christophe Oleron, head of index, Delta One and synthetic prime trading for APAC. There are 10 new MDs in the global liquidity and cash management division. They include Joanne Towers, head of payments and cards for Europe in London; Michele Cros, a strategy manager in global transaction banking in London; and Rob Rotondi, head of business management and transformation in New York. HSBC named three new MDs in balance sheet management, three from global research, three in securities services and three from the GBM chief operating office. Asia, which last year accounted for more than three-quarters of the bank’s global profits, made up roughly 30% of the promotions. Kevin Xu is the sole new MD at HSBC Qianhai Securities, HSBC’s Sino-foreign securities joint venture, which opened its doors just over a year ago.

More than 180 finance industry professionals in the European Union were paid €5m or more in 2017, including 37 who took home at least €10m. Data released by the European Banking Authority last week showed 4,859 bankers in the EU were paid €1m or more in 2017, the most recent year for its compensation data, up 6% from 4,597 in 2016. Some 73% of the high earners were based in the UK, reflecting London’s dominance of Europe’s financial industry, despite concern in the UK capital that power will fade due to Brexit. The data showed 186 people were paid more than €5m in 2017. Of the 37 who received €10m or more, there were 15 investment bankers, 15 in management roles and seven asset managers. The highest earner was paid €40.9m, and was a UK fund manager. Another person in asset management in the UK was paid €22.5m. The highest paid investment banker received €17.8m and the best paid manager received €17.2m, both in the UK, according to the EBA report. The EU has capped bonuses since 2014 to no more than basic salary, or twice that amount with shareholder approval, in an effort to restrain bankers’ pay after taxpayers had to bail out dozens of firms in the financial crisis. But the EBA said asset managers are escaping the full impact of the cap, thanks to waivers applied to some business lines. It said the ratio of variable pay to fixed remuneration fell to 101% in 2017 for all high earners, down from 123% in 2014, as the bonus cap changed pay structures. In asset management, the variable/fixed pay ratio increased to 402% in 2017 from 358% the year before, due to the waivers for the industry in several countries. More than half of the high earners, or 2,541 people, worked in investment banking. The EBA said 861 worked in management roles, or 18%, while 510 worked in asset management (10%), 321 were in corporate functions (7%) and 194 worked in retail banking, or less than 4%. LONDON DOMINATES The data showed 3,567 of the €1m-plus earners were based in the UK, as were 160 of the €5m-plus earners, or 86%. The UK’s departure from the EU is expected to see some highly paid bankers move to Frankfurt, Paris and other EU cities. Austria was home to some of the highest earners outside of he UK - one manager in the country was paid €16.1m and three other people received at least €10m. The highest earner in Spain was paid €13m, the best paid in France received €11.5m, in Germany it was €8.7m, in Ireland it was €8m and in Italy it was €7.2m, the data showed.