Lenovo treasurer: “There is a bubble in the bond market and that is going to go the way of all bubbles”

By:
Chris WrightAnuj Gangahar
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Damian Glendinning, treasurer, Lenovo, sounds the alarm on the Asian bond market and says the loan market offers hedge against refinancing risks thanks to relationship banking.

When you’re cash rich, as Lenovo is, you tend to take a traditional view of your banking requirements.

“The main thing we go to them for is... obviously, we need a place through which to process cash transactions,” says Damian Glendinning, group treasurer. “They do actually still fulfil that somewhat useful social service, despite what’s in the press, and we’d be somewhat buggered without it.

“All the basic stuff of cash management: where you pay it from and where you receive it, and transferring it from one place to another. People do forget it. But it is the whole reason we exist.”

Clearly, Lenovo’s needs are more sophisticated than this, but Glendinning’s key relationships in banking are based on getting these essential things right rather than anything more esoteric.

Beyond cash management, there is a clear need in foreign exchange “because we do have a fairly significant mismatch between the currencies in which we sell [largely RMB] and the currency in which we principally incur our costs [largely dollars]” and this is an area he feels his commonly overlooked. “It happens to be the world’s largest market. It’s funny how little attention it gets.”

And the third main area is for funding. “Again, maybe I’m a little old fashioned, but I do think banks have a role to play in that. My view is, I would rather be dealing with a bank officer with whom I have a relationship, than dealing with an investment banker who is only interested in a bond issue and collecting his fees, and where what happens afterwards is not of interest or concern to him.

Damian Glendinning, group treasurer, Lenovo

“Despite the bad press, I have been in several situations where banks have helped people through bad times. If you treat people well, people tend to treat you well in return.”

Set against this, Glendinning says he “gets 3,000 bankers a week saying they’d love to help us issue bonds” and is less enamoured by them. Partly, this is because Lenovo has cash, and therefore doesn’t need capital market funding on top of the short-term funding he gets from lenders anyway.

However, additionally, he has doubts about the merits of the strong growth in Asian debt capital markets.

Glendinning says the amount of liquidity looking for returns is driving supply, while bank funding has dried up and started to make bond markets relatively more attractive for issuers. “That is an exceedingly negative development.”

Why? “The first reason is it is fairly clear there is a bubble in the bond market, and that is going to go the way of all bubbles. When all the pension funds who buy these bonds decline because all the bonds have defaulted, are they going to be in a better situation?”

Secondly, he thinks the bond market, with investor insistence on a healthy balance sheet and strong P&L, is going to discriminate against weaker companies that really need the funding. And third, he sees trouble ahead.

“What is going to happen when all the people who can’t get loans issue bonds? Would you rather have the decision taken by a loan officer in a bank who knows the company and understands the risks, or an investment banker who is only interested in earning fees? Which one is going to produce the more prudent outcome?

“Right now, the bond markets are booming because cash is looking for returns and everyone and his uncle can issue, whether or not they are financially viable. What’s going to happen when that bubble bursts?”

Asked whether Asian banks have come into their own since the financial crisis, he says: “Yes and no.” The yes side stems from the withdrawal of some big international banks, “which were fairly important providers of liquidity. We have an excellent relationship with them but whenever we have said we need some funding, they have politely coughed and disappeared. Clearly you understand that it’s not that they don’t want to help, it’s just that they can’t.”

That said, Lenovo is a key customer for international banks, even those that have pulled back the balance sheet.

However, while Glendinning appreciates the favoured status, it worries him too. “It’s OK if you happen to be one of the people that the banks like, but it is going to mean a lot of weaker companies, especially SMEs, are going to find life very difficult.”

Local banks, he says, vary from one region to another. They do have balance sheet strength, “so we did get situations where they would come to talk to us, but the issue that arose was, first of all, they are used to charging their customers prices that most MNC customers are not very interested in paying, and imposing T&Cs that most MNCs will not accept”, particularly around collateral and parent guarantees.

For companies strong enough not to want to buckle on that – and while local banks are strong enough not to buckle either – “you still have this fairly significant cultural gap between what most Asian banks expect from their customers versus what most healthy MNCs are prepared to agree to. And I don’t see any immediate sign of that gap narrowing.”

He also notes that, despite the efforts of DBS in particular, “the only truly pan-Asian banks are either British or American. Most Asian banks just don’t have the branch network and presence to provide a truly regional solution.”

He does note, though, that the global financial crisis has been accompanied by “the return of the Japanese. There was a time when the Japanese banks used to be a source of funding and their credit standards were not necessarily very stringent. Then they withdrew – but now they are back, as they came out of the financial crisis relatively well. And they are looking to increase their market share again.”

Interestingly, for Lenovo, the opening of the RMB is not such a great outcome as one might think, despite the fact it should make it easier to pool cash. The reason is the introduction of volatility in the RMB-dollar exchange rate, the single-most crucial rate for the company.

“I liked the old system, where the one thing that was certain was that the RMB was going to appreciate against the dollar. Now there’s two-way volatility, that’s a lot less convenient.”