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News from Algeria tends to focus on the political violence and economic sabotage caused by Islamic opposition groups. Recently, however, the country's high-yielding debt has also been attracting attention. Following the long-awaited conclusion of a rescheduling agreement with the London Club of commercial bank creditors in August, Algeria has become a beneficiary of the increasing thirst for exotic risk.
Debt traders see the London Club accord as a vote of confidence by creditors and it has triggered interest in Algerian paper. "The deal has come at a good time for Algeria, coinciding with a time when investors are looking to diversify their risk," says Bradley Wickens, an analyst at Banque Indosuez in London. "We've seen a huge jump in liquidity for Tranche A [the most actively traded paper]. Now Euro brokers always have a price on the screen, which wasn't the case two months ago. The bid/offer spread has tightened from 200 basis points to 75bp."
Says Redwan Merouani, a director of UBAF Asset Trading in Paris: "Emerging market debt has moved up sharply since March. When more liquid instruments become too expensive, there is always a need for new frontiers. Traditionally, US hedge funds were the only big investors in Algerian paper. The difference now is that more conservative US funds are investing. I've had several big names come into my office recently and say, 'tell me about the exotic markets you cover'. They're desperate for new credit stories to tell their clients. Although the amounts are tiny in relation to their overall portfolios, they are very significant in terms of Algerian debt."
The accord follows the approval in April 1995 of a three-year $1.8 billion IMF extended fund facility and the Paris Club agreement in July 1995 with all 17 official creditor governments to bilateral rescheduling deals. The rescheduling became necessary for Algeria's commercial bank debt following default on its principal obligations in March 1994, although interest payments were still being met. Some $3.3 billion of Algeria's $4.7 billion total commercial bank debt is covered by the London Club deal. Creditors have agreed to a "carve out", in which maturities falling due between 1994 and 1997 are restructured but anything outside this period remains untouched.
Two tranches of debt already reprofiled in 1992 fall within the window: $687 million of long-term debt (Tranche A) and $226 million of short-term, trade-related debt (Tranche B). In addition, the accord covers $1.19 billion of non-reprofiled commercial bank debt and around $1.17 billion of structured finance (mostly yen-denominated transactions with Japanese leasing companies) of which $170 million was restructured in 1993.
In early September, following the agreement, Tranche A was trading at 68% of face value (up from 40% in 1995), with a yield to maturity of around 18.5% one of the highest yields available in both the Brady and pre-Brady markets. It compares favourably with yields of other high-risk assets, such as Nigerian promissory notes (around 15.9%). Part of the reason is Algeria's good relations with the IMF.
"The Algerians are clearly committed to the IMF programme whereas in Nigeria it is still very much up in the air," says Eric Lindenbaum, an emerging markets analyst at Merrill Lynch in London. "We view the presidential election last November as a turning point the voter turnout of 75% surprised a lot of people and there are signs that the first legislative and municipal elections will take place in the first half of next year."
Algeria's debt service burden remains heavy despite rescheduling, and the ratio is set to rise to 40% of exports by 1998 and 50% by the year 2000 as the effects of rescheduling wear off and repayments to the IMF increase.
"A lot of this is made up of principal falling due," says Robin Hubbard, an economist at Chase Securities in London. "That wouldn't be such a problem if Algeria could simply roll over its debt, but the country does not really have such ready access to the international capital markets.
"The yield on Tranche A does look pretty spectacular, but we think that there is quite a serious risk that cash flows due after 1997 will be rescheduled on a similar basis to the recent agreement, thereby deferring the cash flow. [Five of the original 11 equal semi-annual payments for Tranche A are not covered by the latest rescheduling]. We calculate that the effective yield to maturity would then be 14.8%, meaning a loss of 330bp."
On that basis Hubbard is more inclined to recommend the non-reprofiled loans to clients, the vast majority of whose cash flows fall due by 1997.
The government has stated that it will not seek a subsequent rescheduling. This depends greatly on the price of oil and gas, which account for more than 65% of government revenues, 25% of GDP and upwards of 95% of exports. Much of Algeria's estimated $32 billion foreign debt at the end of 1995 was incurred a decade ago when crude oil prices crashed.
Oil prices will depend on whether Iraqi oil is allowed back on to the market. Algeria wants to raise oil production from 800,000 barrels per day to 1 million bpd by 2000. Over the same period, gas production is projected to rise from 113 billion cubic metres per year to 134 billion cubic metres, due to a second gas pipeline. New investment, much of it foreign, will be needed to achieve these targets: foreign operators currently account for around 3% of Algeria's oil and gas production, but the government expects to raise this ratio to 32% by 2000.
Algeria's economic fundamentals meanwhile have improved thanks to its close adherence to the IMF extended fund facility. The budget deficit fell from 8.7% of GDP in 1993 to 1.4% last year; a modest surplus is projected this year. Inflation fell from 39% in 1994 to 22% last year; the economy grew at an anualized rate of 5% in the first half of this year; and the level of foreign exchange reserves has risen to $2.4 billion, above the IMF target.
Investors deciding to take the plunge on Algerian debt will face the problem of a relatively illiquid market. Many are waiting to see if Japanese banks, big holders of Algerian paper, will look to book profits following the recent rise in the market. An increase in supply will depress prices in the short term, but analysts say the strength of the market is such that many investors will view this as a buying opportunity.
Philip Eade
CHINESE SECURITIES
24,327 new accounts a day
In February 1995 China's premier securities brokerage, Shanghai International Securities Company, bankrupted itself after a punt on the Shanghai bond futures market went badly wrong. As a result, the government bond futures market in China closed down with little indication that it will reopen again in the near future.
However, for Shanghai International more commonly known by its Chinese name, Wanguo it was another brokerage, and not a bank, which took advantage of the disaster to buy up the business: arch-rival Shanghai Shenyin Securities stepped in and put in the winning bid for the humiliated Wanguo.
The central bank finally gave its seal of approval this year and in July Shenyin and Wanguo "merged" (as the Chinese tactfully describe what was essentially an acquisition) to form China's largest securities house: Shenyin Wanguo Securities Company.
Wanguo's bond futures blow-out is a sensitive issue, to put it mildly, and the price tag of the merged company is hard to come by. Shenyin's owner, the Industrial and Commercial Bank of China (icbc) one of China's largest state-owned banks, has had to take on a debt of anywhere between rmb500 million ($61.5 million) and rmb2 billion ($246 million), according to market estimates.
The two companies previously vied with each other for first place in the trading volume rankings and together their dominance is assured. Wanguo claimed the highest market share of any securities firm in China for the first half of 1996 trading around rmb143.4 billion, nearly 12% of the market's total trading volume, according to Shanghai Stock Exchange securities trading statistics. Huaxia Securities, which ranked second, was far behind, with a share of only 6.9%.
Seats on the Shanghai Stock Exchange cost rmb700,000 each: Shenyin Wanguo now has around 200 of them. Because of lack of space in the present building, one of the exchange's eight trading floors is even located in Shenyin's head office building.
Shenyin Wanguo's extensive branch network plus the broking business it attracts through this network goes some way to explaining its dominance, although foreign brokers speculate that proprietary trading plays a large role in most domestic brokers' trading activities.
Shenyin and Wanguo between them have some 110 to 120 branches and outlets across China a number unrivalled by any other firm. This is particularly important because retail investors dominate investment in the stock markets people will often just walk in off the street to buy or sell shares.
Savings rates in China are high, but investment choices limited. This year, interest rates on bank deposits have come down, so many Chinese have decided, for the first time, that the stock market is a good place to put their money. Between May and July, for example, an average of 24,327 new trading accounts were opened by investors every working day.
The corporate finance value for Shenyin of buying up Wanguo is less clear-cut. A key problem was that it took a year-and-a-half between the futures blowout and the approval of the merger by the People's Bank of China. During this period Wanguo was unable to participate in any ipos. Another major problem was that many Wanguo staff were poached by other brokerages and presumably took their clients with them. "A number of very talented people left the corporate finance department," says Jiang Deng Fu, a manager at Shenyin.
This year's rankings reflect that weakness. Beijing-based Huaxia Securities has led underwriting business in the domestic-investor reserved a-share market so far this year: traditionally Shenyin and Wanguo have dominated primary market transactions in China. According to Jiang: "Competition is very strong."
This is, however, partly symptomatic of a more general problem: the move by the Shanghai Stock Exchange away from being just a local experiment to becoming a national market. Although Shenyin and Wanguo are Shanghai-based companies, they have not gained from the stock market's local origins.
This is particularly true of the foreign investor-reserved b-share market, which was still administered in Shanghai and Shenzhen until this year. According to Richard Graham, director at ing Barings in Shanghai: "The first 30 b-share companies were all Shanghai companies. Now we've got 41 and the bulk [of the new ones] are from outside Shanghai. So their [Shenyin Wanguo's] obvious client base here has slightly disappeared, and they're now having to get mandates in the primary market from much further away. At the same time you have growth in securities companies such as Shandong or Zhejiang Securities owned by provincial governments. They will tend to have the inside track on what's coming up."
Still, Shenyin's historical dominance (lead manager in 40% of a-share listings and in 80% of all b-share listings), will stand it in good stead particularly once international investors are allowed to participate in the domestic market and foreign brokerages are freed from current restrictions which prevent them from taking a lead manager role in ipos.
Sophie Röell
SOUTH AMERICA
Arrival of takeover science
Building on his successful turnround of Banco Osorno, Chile's third largest commercial bank, ambitious local financier Alvaro Saieh is setting his sights on the rest of South America. His strategy is to seek underperforming assets in banking, insurance and pension management and exploit their growth potential.
The aim is to create a home-grown financial services group in South America a niche up until now dominated by foreign players such as Citibank, Banco de Boston or Banco Santander.
In pursuit of his goals, Saieh, a former director of research at the Chilean central bank, has been keeping M&A investment bankers busy during 1996 with a string of deals in Peru, Ecuador, Mexico and Colombia. A minority stake in Interbanc of Peru, acquired in 1994, marked the first step of the banking strategy.
Saieh is now seeking $500 million in fresh equity capital to further fuel his expansion plans. He hopes to raise this money from both Chilean and US investors. During the summer he has been pitching his story to potential strategic partners in the US, via a series of presentations, with the help of Chase Securities. The investment opportunity is being sold as a diversified financial services play and in particular a chance to tap into the market providing financial services to Latin America's rapidly expanding middle class.
So far, Saieh's strategy has achieved extremely high returns: Banco Osorno, originally bought from the government in 1986, was recently sold to Banco Santander of Spain; and his Provida subsidiary is the biggest pension fund manager in Chile.
Pension fund players from Chile have a distinct advantage in the region because the Chilean system of portable privately-managed pension funds (with $26 billion currently under management), is being adopted as a model throughout most of Latin America.
Saieh's primary investment vehicle, Infisa, acquired an initial 42.5% stake in Provida from Bankers Trust in 1993 when Provida was losing market share. Infisa soon increased its stake to over 50%. It invested heavily in computer systems to make Provida the lowest-cost provider and beefed up the salesforce. Provida was listed on the New York Stock Exchange in 1994.
The strategy on the pension fund side is to find strong local partners in each country, take a minority stake and negotiate tight operating agreements to ensure efficiency. So far Provida has taken minority stakes in pension managers in Peru, Colombia, Ecuador and Mexico, and signed an agreement to provide software to an operator in Argentina.
There is also a long-term plan to seek synergies between pension fund management and life insurance. The first steps have already been taken in Chile. Last year Infisa set up a joint venture with Massachusetts Mutual Life Insurance Company Mass Seguros de Vida. And last June, Infisa acquired life insurer Compensa Seguros de Vida in Chile for $67 million, in order to speed up the development of Mass Seguros de Vida and produce economies of scale.
"Life insurance will grow very slowly at the beginning, while the pension fund systems in those countries mature," says Saieh. "But when those countries mature in about 10 years' time, it will grow a lot."
The banking strategy is to seek control of banks in neighbouring countries, with Venezuela being one target. So far the only deal that has closed is the minority stake in Interbanc of Peru, held by another Saeih investment vehicle, Osorno Financial Investments. OFI's investment partners in Interbanc include Darby Overseas Partners, which is controlled by former US treasury secretary Nicholas Brady.
Infisa is currently cash rich following the Banco Osorno sale. After its original purchase by Infisa, Osorno was strengthened by a number of capital infusions, including a listing on the New York Stock Exchange in 1994. It was taken from being a primarily agricultural bank in the south to being a strong consumer bank with national coverage. The sale to Santander valued Infisa's 65% stake at $650 million, leaving the group with an annualized internal rate of return of 39%.
Such returns have confounded Saieh's critics, many of whom said he overpaid for Osorno back in 1986 when his bid was twice that of the second bidder. He also paid a high premium for the Bankers Trust stake in Provida. But Saieh's strategy is to seek assets with unexploited growth potential rather than pay bargain prices. For example, early this year Infisa acquired Chile's Banco Concepcion for $59.9 million and Saieh feels that the potential of the bank's strong credit-card operations division has not been fully explored.
Infisa has a specialized team which looks at 100 potential acquisition targets in order to close one or two deals. With a Phd in economics from the University of Chicago, Saieh approaches takeover targets in a rigorously analytical way. This is not typical in Latin America, where many deals are done on instinct: the approach is more like that of the leveraged buyout players in the US, some of whom Saieh has been courting as potential strategic investment partners.
Saieh feels that there are still plenty of good acquisition opportunities around the region, and that costs can be lowered by investment in new computer and communications technologies. More deals are likely to follow soon. "We will apply the same principles as before," says Saieh, "going to the middle market, creating economies of scale and being cost-effective, and having a very tightly controlled operation."
Michael Marray
CAMBODIA
Clean aid crusade
Aid donors to Cambodia, whose government agencies are mired in corruption, have long struggled to get funds directly to the needy and deserving. As Cambodia is one of the world's largest recipients of aid it will receive $760 million over the next three years the issue is especially worrying.
But now Japan has found a solution to the problem: it is backing the creation of a private bank which will receive and distribute the aid. In this way, Japan hopes to bypass the government agencies and ensure transparency by working effectively with the bank's managers.
The new bank, called Cambodian Bank (Thaneakear Khmer), has as its goal the distribution of foreign aid and loans to local farmers and enterprises. According to the bank's founder Heng Kim Y: "The Japanese government is very wary about giving to the Cambodian authorities directly, because the money is not always used as it should be used. So they want to give it to the private sector." Heng says the new bank will be staffed and owned primarily by Cambodians and will have as its goal "answering a national need for distributing wealth to productive industry".
Heng, a Cambodian and former official with the IMF, who has advised governments in Rwanda and Albania, says he has the support of Cambodia's two prime ministers, the communist Hun Sen and the royalist prince Norodom Ranariddh.
Japanese donors are lending $40 million to Cambodian Bank at extremely soft rates of interest and Heng expects the loan to grow to over $300 million over the next five years. The bank is paying a nominal 1% or 2% interest rate on the initial tranche, interest is not payable on the funds for the first five years and the bank has 20 years to repay the loan in full.
The bank will lend the money out to local farmers at a rate of 1% a month, greatly undercutting the 20% a month charged by local ethnic Chinese businessmen who currently control Cambodia's agricultural lending. Bad debts and diversion of funds are a natural concern of any Cambodian banker, but Heng is creating consortia of farmer borrowers, in which each member will be jointly and severally liable for the loans to his consortium. Each consortium must control a total of 500 hectares and Heng expects eventually to have a quarter of all Cambodian farmers borrowing from his bank. As well as lending farmers money, the bank will set up a network of agricultural companies to assist borrowers in buying machinery, seed and fertilizers. The network will also sell and distribute the produce.
The bank will have a key role in building the country's economy, says Heng, who is an academic economist. Whereas most Cambodian commercial banks invest deposits outside the country, his institution will invest locally, he says. "At the moment the only people benefiting from the banks are the speculators. Nothing is being invested in the country. It is good for the country when you have long-term and serious investors."
The creation of Cambodian Bank is seen by the government as a first step towards the revitalization of its banking system. At the moment, Cambodia has 28 foreign banks, but they do little for the country's economy and even less for its good name. Many are fronts for money laundering and few regard Cambodia or its currency as a very reliable investment.
Cambodia had only two local commercial banks prior to the launch of Cambodian Bank. But one, Credit Bank of Cambodia (CBC), is currently out of action and the other, Mekong Bank, is owned by an alleged drugs money launderer.
In May this year, the government seized the assets and withdrew the banking licence of CBC, effectively closing it down. The government alleged that the bank had failed to comply with minimum capital requirements, after it suffered losses from trading US futures. It has since been alleged that this bank too was controlled by a money launderer.
CBC is probably only the tip of a rotten iceberg. Haphazard granting of banking licences before 1993 enabled many unsophisticated financiers from the Asian region, who were bent on getting rich quick, to take control of Cambodian banks. In a country in which it is difficult to cash a cheque within a week, unskilled bankers are gambling millions on currency futures and derivatives. Now the government wants to weed out some of the more corrupt and poorly-capitalized institutions.
Cambodia's banking crackdown has been instigated by the IMF which is seeking to restructure Cambodia's economy and introduce extensive privatization. As part of the revitalization of the economy, the government is introducing a new commercial law later this year aimed at placing the banks under much tougher control.
According to Tioulong Saumura, former governor of the central bank: "Our policy is to reinstate the value of a bank in Cambodia. Some of those operating at the moment would not deserve the status of a bank by international standards."
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