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December 2002

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  • Issuer: Core Investment Grade Bond TrustAmount: $2.025 billionLaunched: November 15 2002Bookrunners: Bank of America, JPMorgan
  • In Asian markets in 2002 some leading corporate and sovereign issuers got bloody noses. But smaller deals just kept on coming. Overall volumes were lower, but not disastrously so, and there were impressive increases in some domestic markets.
  • Household's spreads had widened to 800 basis points over Libor in the five-year bond and 1,000bp in the three-year in October, while its share price rose $6 to $26.
  • We are in what amounts to a bear market rally. Many analysts and investors don't see it that way and complacency is back. US corporate earnings in the third quarter of 2002 were up 9%, ahead of analysts' downward-revised 6% expectations. The Republicans have taken full political control and will cement existing tax cuts and make new ones. And now the Federal Reserve has surprised the market with a big interest rate cut.
  • European companies used to regard the US private placement market as a refuge for the desperate. But pricing is increasingly attractive, issues can be sizeable and even unknown names can attract investors.
  • Financial institutions should work harder to force their clients to be thin, according to a new report from Meridien research and IDC Financial Services entitled 'I'm Not Quite Dead Yet': Fat Clients Cling to Life.
  • With Brazil and Argentina hors de combat and Mexico replete, bankers are busy looking for smaller Latin deals, including escape routes for burnt foreign investors.
  • Extensive revisions to capital requirements under Basle II will force structural changes in the financial services industry, offering advantages to some institutions and hindering others.
  • Fund managers are losing $6 billion every year because they are not reclaiming the withholding tax that they are entitled to, according to a new report. Investors and custody banks have been aware of the problem for years, but this is the first time that anyone has measured how much the fund managers are owed.
  • Since the end of October, following the Bali nightclub bombing, Indonesia has found itself in a group of countries that even Afghanistan doesn't quite belong to. Although the UK Foreign & Commonwealth Office seems to think that parts of Kabul are safe to visit, it advises against all travel to Indonesia. And that slaps the same warning sticker on Indonesia as on Burundi (civil war) Liberia (civil war) Somalia (anarchy and kidnappings) and Iraq (self-explanatory). The pleadings of Indonesian politicians that their country is not a terrorist-infested, extremist Muslim state have so far fallen on deaf ears.
  • Greece, like other smaller eurozone members, is not facing such severe economic problems as Germany and France. Nevertheless Eurostat revisions of its public debt figures will prompt accelerated privatization and reform of public finances.
  • Bankers and investors putting on debt versus equity trades are drawing on the idea first expounded by Nobel economics laureate Robert Merton that equity can be thought of as a call option on the assets of a firm. If the share price dips below a certain level - implying a lower value on the firm's assets and cashflows relative to its liabilities - default will follow. Bondholders, meanwhile, have sold an equity put option to the issuer and the spread on a corporate bond is the premium for taking that position.
  • It's all about location. Or when dealing with Chinese clients it had better be from now on. Investment bankers can no longer ride roughshod over their sensitivities about feng shui and karma. It would appear that Merrill Lynch and Morgan Stanley made exactly this mistake while China Telecom was trying to list in November - much to their cost.
  • Recent proposals from the Basle Committee on Banking Supervision have dismayed securitization bankers. They believe regulators are taking an unjustifiably punitive approach to the industry.
  • The Philippines
  • A desire to use clever words to avoid the horrible truth of a bad situation is natural. And as they struggle to explain the environment they are working in, investment bankers are keen to excel at the linguistic skill of euphemisms.
  • HSBC's purchase of Household International seems to have come in the nick of time. The US consumer finance group was under regulatory investigation and its accounts had just been restated. As a result its bond spreads had widened to a life-threatening degree.
  • Russia
  • With equity markets still moving sideways and no sign of a revival in corporate profitability, the creation of structured credit products to meet specialized investor needs is one of the few business lines still booming at investment banks. JPMorgan's structured credit business has been taking full advantage of that in recent months.
  • Securities firms are still debating a global settlement over equity research with New York state attorney general Eliot Spitzer, the SEC and other US prosecutors seeking to avenge investors' losses. All the parties, though, seem to have lost sight of their true purpose. The changes proposed so far will neither restore faith in the system nor prevent future abuses. They are unworkable and thus irrelevant. Proposed reforms are targeted at the wrong level: at the institution not the individual.
  • Traditionally Bahrain dominated finance in the Gulf but initiatives elsewhere in the region, particularly Dubai, have undermined its lead. Now Bahrain's central bank is making up lost ground.
  • If a bank does not win a particular award, it does not mean that its website is bad. Almost without exception the websites Euromoney saw in 2002 were well thought out. They now generally do what clients want them to do, not just what clever bankers and developers have realized they are capable of doing. And most firms undertake strict approval processes before they turn a good idea into a website. So it is little wonder that the overall quality has improved markedly over the past year.
  • Many Asian firms are adopting imaginative strategies to cope with the difficult business environment and improving their treatment of shareholders. Hong Kong companies have caught the analysts’ eyes.
  • Guy Hands built a reputation for private-equity innovation while at Nomura, which had deep pockets he could depend on. His new venture, Terra Firma, has managed to impress investors enough to raise its own funds but must now also out-think rivals that have adopted many of Hands' ideas.
  • France
  • High-grade credit
  • President & CEO, AG Bisset & Co
  • Good old-fashioned dividends are coming back into vogue. Nearly three years after previously soaring stocks came crashing down, investors are starting to show more interest in getting a steady income stream from equity investments.
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