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New empire for Ottoman Bank It is still called Bankalar Caddesi, bank street, but shops selling light fittings have taken over most of the premises that were once occupied by bank headquarters in Pera, Ottoman Istanbul’s European quarter. Driven away by traffic and pollution, banks moved to custom-made new buildings in the outer districts of the city where access is easier. The only bank which still resides on Bankalar Caddesi is the venerable Ottoman Bank which occupies a colossal nineteenth-century stone building blackened by smog. But Ottoman too may soon leave. Turkey’s oldest bank has been bought by Ayhan Sahenk, a leading Turkish contractor, who is collecting banks in the way that other rich men collect antique cars. Ottoman Bank has been acquired through a leveraged buyout by Garanti Bankasi – the largest of Sahenk’s four banks – for $245 million from Compagnie Financière Ottomane which is controlled by Banque Paribas. (The other banks held by Sahenk’s holding company Dogus are Korfezbank, Bank Ekspres and United Guaranty Bank of Amsterdam.) The deal is expected to be completed in mid-June when cash is exchanged for shares. The Turkish treasury has already given its blessing, and due diligence, analysis and appraisal of the bank have been completed without revealing any irregularities. Not that any were expected. The Ottoman Bank, established as a Franco-British partnership in 1863 during the reign of Queen Victoria, has long been regarded as one of the most professional and conservative of banks in Turkey. Garanti will pay $45 million dollars from the group’s funds and finance the rest of the purchase through a club loan. The $200 million loan, which is being led and underwritten by UBS, has been subscribed to by American Express (Frankfurt), Dresdner Bank, Sanwa, Bankers Trust (London) and Dai-ichi Kangyo, says Akin Ongor, chief executive officer of Garanti. The loan has a maturity of three years with an option to extend for a further two years. The all-in cost is “in the region of” Libor plus 2%, says Ongor. The Ottoman Bank was established to bankroll the crumbling Ottoman state and to put its finances in order. It was the note issuer and it was the first institution that the sultans turned to when they needed a new loan. The bank survived two world wars, the break-up of several empires, and the establishment of nation states in the Middle East and the Balkans. It financed wars, and provided funding for railways and ports. It bought Egypt’s cotton crop and gave loans for oil operations in the Gulf. It had numerous branches in many cities including Vienna, Athens, Nicosia, Beirut and Baghdad. But after the collapse of the Ottomon Empire and the establishment of the Turkish state in 1923, the Ottoman Bank started to disintegrate as its operations were nationalized in newly-emerged states, such as Iraq and Iran. In 1931, the bank lost its status as a bank of issue in Turkey but continued to operate as a commercial bank. Why did Sahenk need to buy a new bank when he already has four – particularly as he owns Garanti, considered by many foreign bankers to be one of the best in Turkey? “We want to become larger,” says Ongor. “Garanti decided to buy the Ottoman Bank to increase its share of the market, which is now in the region of 5%.” Instead of building one gigantic bank, Sahenk decided to proceed with a larger number of smaller banks. “The Turkish economy is very volatile,” says Ongor. “Small banks are flexible whereas larger banks aren’t.” Some bankers were sceptical. They cited Citibank and Koc, Turkey’s largest private conglomerate, which refused to pay the money demanded by Paribas because they considered it to be exorbitant. “I cannot think of a single reason why Garanti needed to do it,” says one foreign banker. “If you look at it from Sahenk’s point of view, he has got an already perfectly good brand name in Garanti. He has got a wonderful little boutique bank in Korfez and an interesting franchise over at Bank Express. Why he had to buy Ottoman, I haven’t the slightest idea.” But Ongor has no doubts that the bank was a bargain. The Ottoman bank, whose 1995 assets were $507 million, has less than 1% of the market, compared with Garanti’s 4%. But according to discounted cash flow analysis, it is worth between $400 million and $450 million, he says. He believes that with more dynamic management – the bank’s new manager will be Aclan Acar who now runs Korfez Bank and is described by a foreign banker as “very ambitious and very smart” – and a new approach, Ottoman Bank would yield a net return on investment of between 35% and 40% per year. “The price we paid for the bank is 2.8 times its expected 1996 profits,” he says. An American banker describes Ottoman Bank as “an under-utilized franchise not developed to its full potential by its previous owners. It has a great name, a fabulous history and a very interesting platform from which to operate a commercial bank”. The Ottoman Bank occupies a unique position among foreign banks in Turkey. It is the only foreign-owned multi-branch bank which is active at the retail level. Contrary to the usual practice in Turkey, the bank was not affiliated to any commercial or industrial group, nor does it hold any equity participations in other enterprises. And unlike the majority of Turkish banks, Ottoman derives its profits from pure commercial banking rather than speculation in foreign currency and other instruments, according to Hubert de Saint-Armand, the Ottoman Bank chairman. Capital adequacy at 20% is uniquely high for Turkey. In 1995, Ottoman was the fifth biggest tax payer in Istanbul. Despite its profitability and unique position in the market, the Paribas group did not make investments for its expansion. The bank’s capital was last raised (to £10 million) in 1873. A plan to float 15% of the bank’s shares was discarded in 1994 when the political and economic situation worsened. The Paribas group, which has its own problems, decided to sell. Metin Munir URUGUAYThe Switzerland of South America?Small, stable Uruguay, which is sandwiched between volatile giants Brazil and Argentina, has always aspired to be the region’s offshore financial centre – the Switzerland of South America.That desire has sharpened of late as the country casts around for a role within the nascent Mercosur customs union which links Uruguay with its two huge neighbours as well as Paraguay. With that in mind, the government has embarked on some important reforms, aimed at deepening the local capital markets, and making the country a more attractive and secure place in which to park and raise offshore funds. Changes include the introduction of private pension funds which are expected eventually to amass savings at a rate of $200 million a month, plus legislation aimed at easing the issuing of Euronotes by regional companies. Also pending is legislation on money laundering, which should enhance the country’s reputation for honesty, although bankers fear it might also raise administrative costs. Uruguay’s offshore foundations are already fairly solid. Twenty years of liberal banking laws, including full currency convertibility, have secured the country’s reputation as a safe haven for regional flight capital. Witness last year when, in the wake of Mexico’s devaluation, nervous Argentines boosted Uruguay’s offshore deposits by $800 million. Far more than this passed through the country’s banks – most of them controlled by foreign institutions such as Bank of Boston, Citibank, Chase, Lloyds and Santander – on its way to other offshore centres. Total foreign currency deposits in the banking system are $7.4 billion, of which 43% belong to non-residents. This may be small change in comparison with more developed offshore centres, but in the context of the country’s $17 billion economy, it is quite substantial. Uruguay, as well as having no restrictions on currency movements, offers Latin offshore investors a recent history in which banking laws have remained stable. In many neighbouring countries, investors are all too used to seeing their savings devalued overnight, transformed into worthless bonds or simply seized. Virtually all Uruguay’s private banking sector is controlled by foreign banks, providing depositors with the comforting knowledge that lenders of last resort are in London, New York or Madrid – not in local central banks. There is also “very strong banking secrecy”, says Christopher Golby, principal manager at Lloyds in Uruguay. “Some lawyers say it is even stronger than the Swiss banking secrecy laws, and it is energetically defended by the government and upheld by the legal system.” But Uruguay is far from being the sophisticated offshore financial centre which it aspires to be. The country is “a very efficient banking sector, as a place where people put money in time deposits, CDs, current accounts and so on”, says Douglas Peterson, general director at Citibank in Uruguay. “But it is a step behind in becoming a financial centre.” Capital markets are barely developed, with local companies too small and cautious to absorb large amounts of capital. Argentine companies, such as Telefonica, Pepsi bottler Baesa and energy group Perez Companc, have issued short-term Euronotes in Uruguay – where spreads are lower than elsewhere in the region – but these have rarely been for more than $50 million. Interest from elsewhere, though growing, has been scant. “The problem is there are funds available, but there are not many people to lend to…You see a lot of excess liquidity that doesn’t have a place to go to,” says Jorge Ramirez, general manager at Banco de Boston. Neither is the “degree of liberalization as great as in other financial centres”, says Golby. For instance, the legal lending limit to any individual borrower is 25% of a bank’s capital. “We would like to be a booking centre, but we are limited by our local capital base.” The lack of borrowers could be eased by the creation last April of a new category of institutional investor, the private pension fund administrator (AFAP). High-earning workers of under 40 are now obliged to place a portion of their pension contributions in a capitalization account administered by one of several AFAPs. The scheme, modelled on Chile’s pension system, is initially only expected to amass monthly funds of $70 million, but bankers say this could double or triple as the system becomes better established. As a result of the private pension funds, “there will definitely be a deepening of the capital markets”, says Peterson. The recent liberalization of the insurance business has also created a pool of funds looking for attractive investments, he says. Other analysts believe Uruguay’s pension reform, which leaves much of the old pay-as-you-go system intact, is too cautious to have any great impact on capital markets. Besides, in the initial stages, AFAPs will be obliged to place most of their funds in government-issued bonds, limiting the opportunity for private-sector placements. Private issuers should be encouraged, though, by new capital markets legislation which is expected to be passed in the next few months. This aims to replace previously hazy legislation with clear rules for regional issuers. Such regulations should now be compatible with regional centres, especially Brazil, making it easier for potential issuers to come to Uruguay. Although there have been two recent issues by Brazilian-based companies – Lloyds Leasing and Parmalat Brazil – these have been the exception not the rule. “The legislation in the pipeline will facilitate the issue of ONs (Obligaciones Negociables or corporate paper) by clarifying the rules of the game,” says Golby. “The previous legislation was very local.” Says Ramirez: “Anything that brings transparency and clear rules to the market helps. The legislation could be improved, but it’s a good start…I definitely see increased potential for the development of capital markets here.” Ramirez admits that it will be difficult to attract business from much beyond the Mercosur region since more distant Latin countries are likely to send their money to better established international offshore centres such as the Caymans or Switzerland. Bankers also worry that Uruguay’s advantages as an offshore centre, built up over 20 years, could be eroded as Argentine and Brazilian banking legislation catches up. Both countries have conquered rampant inflation and lifted most capital restrictions, while Argentina has maintained full convertibility since 1991. Uruguay “still has competitive advantages,” says Ignacio de Posadas, former finance minister and now senator, who sponsored proposed changes to capital markets regulations. It has a tradition of honesty, expertise and stability unmatched by others in the region, he says. But the country must ensure that these competitive advantages are maintained by a constant effort to improve legislation and reduce costs, says de Posadas. “If Uruguay doesn’t watch out, it might be displaced by other countries.” David Pilling THE PHILIPPINESReturning to the EuromarketsThe Philippines, once Asia’s least fashionable market, has suddenly become its hottest. While the equity market has led the way, with the Manila Composite Index up by over 40% in the six months to May to 3,200 points, demand for Philippines paper has been indiscriminate. Asia Equity estimates that $1.5 billion of foreign funds flowed into local debt and equity markets in the first quarter alone.Nowhere have the effects been more apparent than in the re-emergence of Filipino names in the Eurobond market. Ayala Corporation, the country’s oldest and largest real-estate developer, started the ball rolling in early May with its debut in the Euromarkets. The unrated five-and-a-half-year issue via JP Morgan met with strong enough demand to be increased in size from $100 million to $110 million. Priced at 173 basis points (bp) over the five-year US treasury bond, it achieved the tightest launch spread of any Philippines issuer, eclipsing the government proxy National Power Corp’s 2002 bonds by 10bp. In the two weeks after launch, the spread tightened quickly to 155bp. “The Ayala bond should have been a tougher sell than San Miguel’s 2000 bonds [which were launched in 1994 with a then record of 190bp over treasuries] because of name recognition and the fact that San Miguel has an international brand name,” says the head of fixed income sales at one US investment bank in Singapore. “Ayala is purely a play on the domestic economy and its success underscores the fact that sentiment has turned firmly in the Philippines’ favour.” The excitement is proving contagious. Philippines Long Distance Telephone, the national telecommunications operator, is said to be looking to refinance all of its foreign debt as a result. And both Philippine National Bank and Philippine Commercial & International Bank are rumoured to be on the brink of issuing Eurobonds at 85bp and 80bp over treasuries respectively. While perennial demand for onshore dollars from local banks is partly responsible for the boom, increased investor confidence in the Philippines’ macroeconomic performance has contributed most. “We are seeing a rerating of the whole country,” says the chief investment officer of one fixed interest fund in Hong Kong. “The Ramos government has been as good as its word in producing a stable currency, low inflation and strong economic growth and Philippines companies are reaping their just rewards.” Noting that secondary market prices for Philippines’ bonds now reflect at least BBB-rated equivalents around the world, he adds that pressure is now mounting for a second upgrade in the sovereign rating within 12 months. Moody’s upgraded the foreign currency debt rating of the Philippines from Ba3 to Ba2 in May 1995. Investment bankers have been quick to leap on the Philippines bandwagon in other markets. Turning their attention from the now saturated Thai convertible market, many have repaired to Manila in an effort to cash in on the good news. Merrill Lynch was first to the plate with a $125 million offering for Metro Pacific (MPC), the Philippines’ property company affiliate of Hong Kong’s First Pacific, in April. Again buoyed by strong investor demand, the deal was increased from $115 million through a $10 million greenshoe. And the 10-year transaction achieved market-beating terms with a coupon of 2.5%, a conversion premium of 12.5% and a yield-to-put of 125bp over treasuries. MPC’s success also opened the door for further Filipino issues. Ayala Corporation followed up with a ground-breaking peso-denominated convertible preference share issue when BPI Capital led a Ps1 billion issue with a quarterly coupon of 5% and a 10% premium over the 10-day closing average of the property conglomerate’s common B shares. This was the first to be listed on the local stock exchange and strong secondary market support saw the conversion price hit within two weeks of launch. Real-estate development company Filinvest Development Corporation then picked up the gauntlet in early May with a $125 million issue led by Goldman Sachs and achieved slightly better terms than MPC. Its 10-year issue was priced with a 2.5% coupon, a 13% conversion premium and a yield-to-put after five-and-a-half years of 100bp over treasuries. The pipeline has since grown to over $500 million with issues expected from food manufacturer RFM Corp ($75 million via Salomon Brothers) and cellular phone company Piltel (around $200 million) expected to be next on the block. “The entire convertible market in 1995 raised only $300 million,” says Danilo Feliciano, director of corporate finance at securities house Exchange Capital in Manila. “This has already been eclipsed and there could easily be another half a billion dollars worth of issues in the next few months.” Tony Shale MOROCCONew gateway to north AfricaGiven that Morocco has not borrowed in the international capital markets for over 15 years, the $60 million global depositary receipts (GDR) issued by Banque Marocaine du Commerce Extérior (BMCE) in April offered many foreign investors their first opportunity to invest in the country. Over 70% of those who bought the offering were first-time investors in Morocco.The BMCE issue, lead-managed by Nomura and the IFC, was the first north African GDR and the largest by a Middle Eastern issuer. More than four times oversubcribed and priced at $12.70 at the top end of the range, the GDRs were trading at around $15 in mid-May, a slight premium over the price of BMCE shares on the Casablanca Stock Exchange (CSE). Another positive sign was that only 5% of the issue changed hands within the first week. Owing to secondary market demand, which exceeded the original issue size of $52 million, a greenshoe option involving some $8 million of additional stock was exercised. The GDRs are listed in London with Nomura, Robert Fleming and Citibank acting as market-makers. According to Assaad Razzouk, head of Middle East investment banking at Nomura in London, demand totalled $211 million. Almost all blue-chip emerging market funds were involved in the deal. “When you consider that the best estimate for total foreign portfolio investment in the CSE is $150 million, it says a lot about the difference in demand for Moroccan instruments when you tailor them to the international market.” BMCE, Morocco’s foreign trade bank, is the second largest bank in the country. It underwent a high-profile and successful privatization last year, and has since decentralized decision-making, focused on core activities – it is committed to selling 50% of its equity portfolio within the next 15 months – and placed greater emphasis on profitability than market share. The GDR was partly a way of introducing the bank’s new management, under the chairmanship of Othman Benjelloun, to the international investor community. Says Brahim Benjelloun Touimi, a director of BMCE: “The chairman wanted to irreversibly enlarge the bank’s international equity ownership. The aim was not so much to raise capital – we could have easily done that by tapping the domestic market. But we wanted to be first onto the international market.” Says Othman Benjelloun: “My real desire was to confirm that Morocco today is an emerging market. It has been on the way to becoming such for the past two or three years. I wanted to prove to ourselves and our foreign friends that we are on an upward curve. In our presentations to investors we of course gave details about BMCE’s new management since it was privatized and its profitability. But the success of this issue also reflects the success of the structural reforms in Morocco.” Mansour Kelada-Antoun, the IFC’s regional representative for north Africa, says the issue had a big impact on Morocco and on BMCE. “Up to now, institutional investors haven’t been able to get a good feel for Morocco’s investment environment and creditworthiness. Although this is an equity issue, by presenting a macroeconomic picture of the country, it puts Morocco back on the international investment map.” Adds Nomura’s Razzouk: “This was the first time that Morocco has been marketed in a systematic way to foreign portfolio investors. Our analysts were out there for three months beforehand. Now the market has a lot more knowledge and it has paved the way for other issues from Morocco. I think we’ll see another one before the end of the year.” Philip Eade |
