Regulator reaches compromise

On November 7, after seven days out in the cold, three UK brokerage firms were told by the Capital Markets Board (CMB) in Ankara that they could resume dealing in Turkish securities. They had been suspended for refusing to sign a letter agreeing to divulge client names directly to the CMB.

CMB chief Ali Ihsan Karacan ended up admitting that his behaviour may have been “unusually brusque”. But he got his way. The firms have now signed a revised letter, but they don’t regard the situation as satisfactory ­ they feel they can now deal only for their own account or for clients who agree that their names may be given to the CMB.

As reported in last month’s Euromoney, on October 21 the CMB gathered all Turkish brokers dealing with foreign brokerage houses and issued them with an ultimatum: the CMB was conducting an investigation into transactions executed between May 1 and September 30 by non-resident banks and brokerage houses operating through Turkish intermediaries in shares of national carrier Turkish Airlines (THY). It said that non-resident banks and brokerage houses must give the CMB a list of their clients involved in these transactions. Institutions based in Turkey would be held responsible. They had one week to comply.

On October 28 the CMB announced that Kleinwort Benson, SBC Warburg and Caspian Securities had refused to give the required information and would be suspended from dealing in Turkey’s capital market directly and indirectly until they complied.

Shares in THY had risen from about TL6,000 at the beginning of the year to TL50,000 in June but it was not just this that prompted the CMB to act. Between 80% and 90% of the trades in THY stock had been orders from foreign entities. The CMB suspected that these foreign entities were Turkish manipulators executing their orders through overseas brokers to escape detection.

In May, when THY shares were around TL20,000, the government’s Privatization Administration (PA) had informed brokers that it was planning to sell some THY shares in its portfolio at market prices. A block of shares was purchased by Global Securities, the country’s largest broker. Shares in THY started to climb to TL50,000. Both Global and the PA deny there was foul play.

The CMB’s first reaction, as director Karacan himself admitted later, was unusually brusque ­ and arguably devoid of any legal basis. It said henceforth that foreign brokers must reveal the names of their end clients in every transaction. The brokers were unanimous in their opposition to this requirement, which would have constituted a gross violation of client confidentiality. Wishing to get to the bottom of the THY debacle, the CMB then asked the brokers to supply the names of their end clients in transactions involving the airline.

Requests were put to 11 institutions, according to the CMB: Caspian, Bank Leu, Bear Stearns International, Citicorp International Securities, Donaldson, Lufkin & Jenrette (DLJ), ING Baring Securities, Merrill Lynch Equities, Kleinwort Benson Securities, SBC Warburg, Salzburg München Bank and Salomon Brothers International.

The institutions responded in different ways. On October 4, Kathy Cates and Abigail Harvey from the London offices of SBC Warburg wrote to the CMB declining to reveal the names of their clients, a source said.

Citicorp International Securities, which opened its doors in Istanbul earlier this year, had no problem complying with the CMB’s request. Nearly 90% of Citicorp’s clients are non-Turks and the conservative company is very careful about who it deals with. “We have turned away a number of Turkish citizens who came with huge sums of money whom we could not identify as bona fide businessmen,” says a Citicorp source.

ING Baring told the CMB it would not comply with the directive concerning notification of end clients in every transaction but proposed an alternative. It would reveal the names of clients who dealt in THY shares only if they agreed to it. (In the event they all did, says a Baring source. Had they not, Baring would not have revealed them, arguing that it need not obey a retroactive CMB ruling.)

SBC Warburg informed the CMB that it might obtain the information it sought if it approached them via the UK regulator, the Securities and Futures Authority (SFA). The reactions of Caspian and Kleinwort Benson were similar.

The response of the CMB was to suspend these three firms. Hasty talks between the UK treasury, the SFA and Turkish officials helped to defuse the situation and a compromise was found.

Other major UK institutions were indignant at the implication that they might be dealing for money-launderers or manipulators. “We have to go through serious money-laundering checks,” says a Turkish dealer at a big UK bank, “and our clients would have to submit two years of audited accounts.”

But most firms have now agreed to sign a revised undertaking, given to Turkish brokers and banks, which agrees to supply the CMB with information on the identity of end clients in any future investigation the CMB might feel it necessary to open. Without this undertaking from a foreign entity the Turkish broker or bank cannot deal with it. The wording is as follows :

“We hereby undertake to provide the CMB with information on the identity of end clients on whose behalf we place orders and other information and documents associated with their transactions which we will execute through your corporation when required by the CMB.”

A Caspian source comments: “In retrospect people seem to think our refusal was a good thing.” Citibank says that all but one of its customers had signed the undertaking. The reaction of some brokers has been to say that they will do only proprietary trading in Turkey. But they reflect that the situation is no worse than the mandatory name give-up in Brazil.

It’s not known how many UK entities have signed the undertaking. “It’s still not a satisfactory solution,” says Peter Beales, a director of the London Investment Banking Association. “It’s a stop-gap but not a good long-term framework, and it’s preventing firms from doing business in Turkey.” Metin Münir

ST PETERSBURG

Eighty years on

With the political stormy season over, St Petersburg is gearing up to enter the international financial world on the heels of the federal government. City officials are ready to apply for an international credit rating, one of the final steps in the process that could make it the first Russian city to float its own securities on the world market since 1917. The $200 million-$300 million planned issue is slated to begin in early 1997.

Aside from the prestige, the city is looking to cover its yawning budget deficit. City governor Vladimir Yakovlev, elected in June, managed to submit a balanced budget to the city council in October. This marked the first time in recent years that a budget has been drawn up before the start of the fiscal year. The balance, however, calls for R1.89 trillion ($378 million) in municipal bond issues to cover the expected 17% budget deficit. Potential revenues from Eurobonds were not included in the budget. “We tried to take the most pessimistic scenario,” says finance committee chairman Igor Artyemyev. As before, bond revenues will be funnelled into restoring and maintaining the city’s public works, which need desperate attention.

There is also an element of pride at stake. Moscow’s city legislature just gave its stamp of approval to local officials to go ahead with plans for a Eurobond issue of its own. As the former financial centre of tsarist Russia, St Petersburg is not likely to let a rare opportunity to snub its current big brother slip through its fingers. With Russia already in the market and Kazakhstan on the way, the two capital cities would round out the latest growing sector in international financial markets.

Whether French investors will put aside their anger over losses in tsarist and municipal bonds cancelled by the Bolsheviks in 1919 is another story. The recent announcement by prime minister Viktor Chernomyrdin that Russia would pay $400 million to compensate French bondholders was described by bondholders’ associations as little more than a “down payment”. France has banned trading in Russia’s $1 billion Eurobond until the question of compensation is sorted out.

By all accounts, this past year has been a roller-coaster ride for St Petersburg’s municipal bond programme, considered one of the most successful muni issues in the country. The city currently offers short-term bonds (MKOs) for serious investors and savings bonds for the average Sidirovs, Ivanovs and Smirnovs unable to handle high dealer costs and commissions. Political uncertainty drove yields on MKOs to 140% last spring, well above the 100% refinancing rate offered by the central bank. Suddenly, what the city had touted as a less expensive resource than bank loans was forcing officials to dig deeper into their pockets when bondholders came to collect. According to some estimates, revenues from new bond sales during the first half of 1996 went in their entirety to paying off maturing issues.

Political typhoons swirled around the bonds with even greater fury after Yakovlev defeated former mayor Anatoly Sobchak at the polls. Given Yakovlev’s commitment to focus on local issues, a number of local financial experts took his election as a death knell for Eurobond hopes. Alexei Kudrin, creator of the short-term municipal bond programme and one of Sobchak’s closest advisers, soon departed for Moscow when his mentor, Anatoly Chubais, now chief of staff to president Boris Yeltsin, offered him the position of deputy. In the meantime, the new administration sharply criticized the level of debt ­ R4 trillion ­ facing the city. A few whispers of “pyramid” began circulating around the local and national media, suggesting that the bonds were about to plunge the city into bankruptcy.

Now that the dust from the post-election fray has settled, Yakovlev and his new economic team have thrown their support behind the bonds, muni and Euro alike. “Today it is becoming completely realistic, even though just yesterday it seemed almost impossible,” Artyemyev says. Officials are still quiet about current revenues, but yields have since levelled off at roughly 70%.

Another 3,000 small investors, including a large proportion of pensioners, have bought city savings bonds at a nominal price of R100,000. Yields are currently 65%. “Nowhere else in Russia is there such a profitable instrument accessible to average investors,” says Alexander Rodshtein of the St Petersburg Bank for Reconstruction and Development.

Buoyed by the relative success of the MKO programme, officials are hoping the Eurobond issue will receive an equally warm welcome. However, selling St Petersburg abroad is going to be a challenge.

“On the surface, St Petersburg is a very well known city with great international name recognition. It could be successful,” says Richard Deitz, managing director of Renaissance Capital in Moscow. “But officials will have to explain the prospects for the city and its future.” Turning the city’s prospects around, particularly its large share of the military-industrial complex, is Yakovlev’s next assignment. Rachel Katz

HUNGARY

Raincoat after the storm

Arpad Kovacs could make some money betting against his own survival. He became the chairman of the board of the Hungarian Privatization and Holding Company (APV) in October. The 48-year-old took the place of Imre Szokai, who had been sacked for rewarding one Marta Tocsik with $5.2 million for nine months of consulting work.

In theory, the cash was simply a fee for helping APV reach settlements on the value of contested assets; for every forint paid Tocsik, the government saved 15. But news of the arrangement provoked a mammoth public outcry when it was leaked to the press in late September. Hungarians are famously cynical, but this was too much. Tocsik’s nine-month windfall was roughly 1,500 times the average Hungarian’s annual salary.

At first it looked as though the deal was simply a pay-off; then the arrangement was rumoured to be a covert funding pipeline to political parties.

Beyond Szokai, the Tocsik explosion left other gaps in the government’s ranks: the rest of the APV’s 11-member board fell, as did the man ultimately in charge of privatization, minister of industry and trade Tamas Suchman. Even Socialist prime minister Gyula Horn teetered after he briefly made the mistake of backing Suchman against the massed will of the Socialist MPs.

So the odds are against Kovacs and the other men and women newly appointed to run the APV; the electorate will have little patience with slip-ups. Asked how long he expects to last in the new post, Kovacs jokes: “There have been a number of bets made about that. If I wanted to make a little money, I’d fix with the gamblers how long I’ll stay.”

Although Kovacs predicts he’ll make it until the next parliamentary elections (slated for May 1998), he says some wager he won’t survive three months.

In Kovacs, Horn reached for the safest possible candidate. Making Kovacs chairman of the APV’s board was like hiring a vegetarian to run the butcher shop. Since 1990, Kovacs has worked at the State Audit Office, where he made a name for himself criticizing successive privatization authorities’ inflated salaries, inordinate secrecy, and an over-reliance on consultants. Kovacs’ CV is just the whitest of a stack pulled out to paper over the Tocsik scandal. Party stalwarts are out, “experts” are in. Judit Csiha, a 46-year-old former public prosecutor and corporate lawyer, was named to be minister responsible for privatization, the post Suchman held before becoming minister of industry and trade.

Beyond personalities, the Tocsik scandal has provoked a broad move to revise privatization procedures to ensure clean dealing. According to one set of proposals put forward by Csiha, the APV’s board will no longer be able to cancel tenders after one valid bid has been received. Also, tender requirements cannot be altered after a tender is issued. To increase accountability, comprehensive records will be kept of APV decisions and staff recommendations. While the APV has been run as an autonomous company with no direct reporting responsibility to parliament, the company will now be accountable to a 19-member parliamentary oversight committee.

Immaculate credentials aside, Kovacs and company seem to be more an insurance policy against future privatization embarrassments than a broom to sweep out the APV’s dark closets. Once the privatizers’ fiercest watchdog, Kovacs now says he won’t be hunting for skeletons from his new post.

“There are six groups and agencies investigating the APV, so it would be redundant for me to do that also,” he told Euromoney recently.

Kovacs is also taking a hands-off approach to another persistent problem at the APV: patronage. Critics charge that under Suchman, the APV became a Socialist patronage machine, as the party stacked the boards of APV-controlled companies with its loyalists. “The politicization of nominations goes down to the smallest companies as a way of getting presents to friends,” according to one former APV staffer.

Asked if he’ll do anything to undo this pervasive patronage, Kovacs points out that the APV’s new board is explicitly apolitical. “We’re experts, not party members.”

Pressed about whether patronage appointees need fear for their jobs, he said: “There is no campaign of replacing people.”

Putting clean-handed Kovacs in charge of the APV at the end of 1996 might look like, as Hungarians say, “buying a raincoat after the storm”. After all, privatization should wind up by the end of 1998 and most big deals ­ ranging from phone company Matav, to oil and gas monolith MOL, to savings giant OTP, to tyre maker Taurus ­ are long done. But all is not lost. The Tocsik affair has revolutionized Hungary’s political culture, educating politicians and the public alike about accountability and the power of an enraged voter.

Beyond selling the few assets remaining in the Hungarian state’s larder, Kovacs and the APV will face another important challenge. The sale of $2 billion worth of gas and electric utilities last December was a coup, putting Hungary ahead of many west European countries. But important questions were not settled before the deals were done. Since the sales, several courts have ruled in favour of city and village officials’ arguments that the utilities were, in fact, never the national government’s to sell; the courts have accepted the local officials’ arguments that Hungary’s municipalities and villages funded those utilities’ construction in the years after World War II.

Although the government has appealed against these recent decisions, an adverse superior court ruling might soon force the national government to pass last year’s windfall ­ some of which has already gone to reducing Hungary’s large foreign debt ­ over to the aggrieved municipalities. That is the best-case outcome.

Another possible, more problematic, development is that the deals will be broken, with the APV left liable to foreign investors for any damages suffered. Who says it is too late for a raincoat? Henry Copeland

CHILE

Enersis issue breaks records

Flexibility was the key to the success of the November yankee bond offering from Chilean electric utility Enersis, brought to market by JP Morgan. The transaction simultaneously broke records for the largest deal size, the lowest spread and the longest tenor achieved by any Chilean credit.

The deal paves the way for other corporates from Latin America’s two investment-grade countries ­ Chile and Colombia ­ to lengthen the maturity of their debt portfolios. And such was the receptiveness to the 20-year tranche that market participants believe the first straight 30-year bond by a Chilean corporate may become a reality within the next 12 months.

The transaction was originally slated as a $500 million offering, but the roadshow took place at the same time as Enersis was awaiting the results of its bidding in the privatisation of Companhia de Electricidade de Rio de Janeiro (Cerj). Enersis executives had told JP Morgan from the outset that a successful outcome might mean bumping up the deal size. But it was just as the transaction was ready for launch that the Brazilians announced the results of the bidding process ­ Enersis had won a controlling stake.

That was late on Tuesday 19 November, and Enersis scheduled a press conference in Santiago for the next day. It was thus decided to give investors an opportunity to digest the news, and push back the launch of the bonds until the Thursday morning. And it was also during these final hectic few days that the decision was taken to add a third tranche to the deal, comprising a 30-year note with a put at seven years, the first time this structure had been used for a Latin American borrower.

The roadshow, led by Enersis chief executive officer Jose Yuraszeck and chief financial officer Juan Dominguez, had taken place at a time of exceptionally high issuance in the US domestic market, but nonetheless attracted lots of attention, including many accounts that had never before bought Chilean paper. The Enersis story, centring on its strong electricity generation and distribution operations in Chile being used as a springboard for expansion in Argentina and Peru, met with an enthusiastic response, while investors were also told about the likely impact of the Cerj deal.

“We didn’t go to the market with a very defined structure,” explains Simon Noble, vice-president in the Latin America Debt Capital Markets Group at JP Morgan in New York. “We went with an amount, a likelihood that there would be tranches, and that they would be tens and twenties, but we wanted to keep flexibility both to respond to what Enersis wanted and where the investors were showing the most interest.”

The investor base being targeted was institutional buyers of investment-grade paper, such as pension funds and insurance companies, rather than the usual emerging markets players who might buy Mexico or Argentina.

It soon became clear to JP Morgan, and to co-managers Salomon Brothers and Merrill Lynch, that there was particularly strong demand for 20-year paper. This was not only because some of the buyers had already seen plenty of 10-year paper offered from Chile earlier in the year, but also because the investment-grade players being targeted typically have need for longer-dated paper to put in their portfolios.

Some of the same investors had also recently been buying 30-year bonds with embedded seven-year put options ­ issued by US corporate names ­ and JP Morgan began to think that this structure might also work for Enersis. “We started to develop the idea internally the week before,” says Noble.

It was decided to offer $150 million worth of the 30-year notes with the put, and the granting of this option allowed Enersis to issue at only 61 basis points over seven-year treasuries.

The 10-year tranche stayed at much the same size as originally intended, with $300 million worth of bonds offered at a launch spread of 82bp. It was in the 20-year tranche where the biggest size increase took place, with $350 million worth of the bonds offered, up from the $200 million originally envisaged. These bonds were priced at 100bp over comparable treasuries.

The final outcome was a blowout. At $800 million the deal ranked as the largest ever issue done out of Chile. The 20-year tranche established a new record as the longest tenor achieved by a Chilean borrower. And the 82bp spread on the 10- year tranche was the finest ever achieved by a Latin American corporate.Michael Marray