Vanilla deals fell out of favour in equity-linked issuance in 2005, with highly complex, structured transactions building unprecedented dominance. Despite higher volatility levels than in 2005 and a very promising M&A outlook, this trend is likely to continue in 2006. Peter Koh reports.

The Russian real estate market is one of the best performing in the world. Foreign capital is lining up billions of dollars to invest in it. But there’s a problem – it has to compete with the billions in local capital generated by oil sales. Julian Evans reports.

Japan might finally be on the road to recovery from its economic downturn but recent events have revealed a crisis of a different sort. After a human input error to a trade by Mizuho Securities in December that the Tokyo Stock Exchange trading system refused to cancel, despite requests from the broker, the TSE was rocked by another crisis in January when panic selling forced the exchange to shut early since the trading system was unable to cope with the flood of orders.

Raising money in global financial markets in 2005 was not always easy. But equity returns were strong and global credit survived a volatile year; it was also a notably profitable year for investment banks as M&A boomed again and the fees came rolling in.

Emerging market companies still lag behind in corporate governance but, says Karina Litvack, their success in developing businesses outside their home countries and their need to tap global capital markets is forcing them to devote more attention to the rules

The country’s president-elect knows little of economics, but is set to appoint a market-friendly finance minister.

Debt exchange plans hobbled by bad timing, repeat performance and a fully tapped shelf.

Eurex’s US woes are continuing. Last month the derivatives exchange’s chief executive, Rudolf Ferscha, stepped down. Ferscha had been behind the launch of Eurex US in Chicago in 2004 but sources say he was not given the support he needed to develop the US effort properly.

Bank of America is expanding its private banking business by targeting US families worth $50 mln+.

The second SVG Capital fund of funds securitization – SVG Diamond 2, again arranged by Nomura, has further developed the concept of private equity collateralized fund obligations. This is a managed deal where the assets are selected over time by SVG to deliver enhanced equity returns. Some €175 million of equity risk in the form of preference shares in the fund was sold to various external investors. This is drawable equity, meaning that this most expensive form of capital is not utilized until it is needed, thus enhancing the efficiency of the CFO. The rest of the financing comprises €328.5 million of rated paper (seven tranches ranging from triple A to triple B).

The name has changed but the business has not. Credit Suisse has demoted its First Boston heritage to a passing reference in its new logo, but it is far from jettisoning its US investment banking expertise. In January, it announced an expansion of its Asian leveraged finance team with three new hires in Australia, Hong Kong and Japan. Once this is complete, Credit Suisse will boast Asia’s largest leveraged finance team.

“Some of the other banks closed their internet offerings at 9pm. Just think about that for a minute. ‘The internet is closed.’”

Foreign banks are lining up to follow RZB and BNP Paribas’ lead by acquiring Ukrainian banks. The next to be sold looks set to be Ukrsotsbank, which oligarch Viktor Pinchuk has been looking to sell since the Orange Revolution of December 2004. Erste Bank, OTP, Société Générale and Intesa are all looking to buy the bank, which is Ukraine’s fourth biggest by assets. Ukrsotsbank has attracted foreign banks’ attention thanks to its strong growth in retail lending, with its gross consumer loan portfolio growing by 58% last year.

In the first of a regular new column featuring heads of funding at leading financial institutions, Barclays’ new treasurer talks to Alex Chambers about the early days of his new role and how its demands differs from his experience as an investment banker.

Rumours had been swirling around about the fate of ECN Hotspot for weeks. Many commented that with legendary billionaire currency speculator Joe Lewis as one of its backers, Hotspot was unlikely to be experiencing a cash crunch. Nonetheless, its present owners have seen fit to accept an all-cash bid of about $77.5 million for the business from Knight Capital Group. The close of the transaction is subject to receipt of appropriate regulatory approval and is expected to be completed within 90 days of its announcement on January 24.

UK breakfast cereal maker Weetabix will be one of the first companies this year to test the market for leveraged recapitalizations. The deal, expected to come to market in the next few weeks, will be lead arranged by JPMorgan. It takes out the £450 million ($803 million) leveraged loan backing the £642 million buyout of Weetabix in 2004 by private equity firm Hicks Muse Tate and Furst.

Funding from Abbott Laboratories for Boston Scientific’s bid for Guidant could set an important precedent.

UK

The US commercial real estate CDO market is the one to watch in 2006 for volumes and new opportunities.

In 2005, the Nikkei equity index shot ahead by 40% while 10-year Japanese government bond yields inched higher by just 15bp.

Investment banks take their branding very, very seriously. The agonizing over choice of name, fonts and colour schemes can be endless – and extremely costly.

The UK’s Financial Services Authority is working on rules for UK covered bonds. Bankers hope that the regulator will announce at the February 7 Zurich meeting of the European Covered Bond Council plans for a framework for UK financial institutions. Abbey, HBOS, Northern Rock, Nationwide and Bradford & Bingley have all issued covered bonds using UK contract law. But because the UK has not introduced a special public supervision, UK covered bonds attract a 20% risk weighting for BIS restricted investors as opposed to the 10% enjoyed by investors for bonds issued where there is such supervision or specific covered bond law. This puts the UK issuers at a disadvantage as their bonds price wider. This development is a volte-face by the regulator. It initially had a conservative stance on the structure, placing an unofficial limit on the proportion of their overall balance sheets UK issuers could sell as covered bonds.

KfW inaugurated its 2006 euro benchmark programme with a blowout €5 billion 15-year deal, the first time the German agency has issued in this maturity. The deal is able to take full advantage of demand from pension funds and insurers for long-dated assets. Citigroup, Deutsche Bank and Merrill Lynch had a €10 billion order book after just one day. Pricing was 2 basis points through the 15-year swaps rate or 11bp over the April 2021 OAT.

Emerging market sovereigns that issue heavily in debt markets should prepare for higher borrowing costs.

Second-tier triple-A issuers have an opportunity to close the funding gap on KfW and EIB.

The borrower makes disappointing start to wave of telco financing.

Ask any of London’s famous black-cab drivers which investment bank they think is best and chances are they will vote for Deutsche Bank.

Mixed message in mix-up?

If anything symbolizes how far emerging markets have come over the past five years, it’s the growth of their domestic capital markets. Few would dispute that emerging markets local-currency debt is now an established asset class, despite its relative youth. Local-currency debt is the way of the future, but further reforms are necessary.

With hedge funds collapsing at record rates, funds of hedge funds will need to reassess their strategies. If you can’t beat them, join them.

Rumours of electronic broker EBS’s imminent takeover are rife, but a £1 billion price tag seems wide of the mark. Getting these to agree on whether tea or coffee is served at board meetings is probably difficult. Getting consensus on whether or not to sell EBS’s business, and then who to sell it to, must be a near impossibility.

High oil prices pushed Latin America’s equity markets to dangerous levels. In a new era where emotions about oil scarcity run high, Latin America is perceived as a big, endless supply of commodity wealth. But keep an eye on the volatility.

CMS growth is not expected to continue at its previous pace, but the momentum generated by the high first coupons, and the continuing leverage effort of MTN houses has kept demand for structured MTNs flowing.

The corporate hybrid sector shifted to retail with Porsche's 7.2% $1 billion perpetual non-call five (no coupon step-up). The transaction has several unusual aspects linked to the rating and structure, marketing and pricing.

Residential mortgage-backed securities origination in Italy could be about to receive a boost with the entrance of international banks establishing prime residential platforms. SG and Macquarie are two names that are looking into the possibility. The attraction is the relatively attractive margin achievable on loans compared with France, Germany, the Netherlands and, of course, the UK. In the UK there are already several established players in both the prime and sub-prime space but there too Deutsche Bank is building a sub-prime platform.

Aegis – the ABS fund manager established by Richard Stow and Miguel Alcober two years ago – has sold its first CDO, Cavendish Square Funding, via BNP Paribas.

The country’s stock indices are rising as the prospect of a coherent market looms into view.

IPOs in the Gulf are so popular that one investment bank has found a novel way to avoid crushes as investors scramble to register for shares. Qatar National Bank, which is arranging the $1.1 billion IPO for Al Rayyan Bank, hired a stadium in Doha for a two-week period in January.

Romania

Lebanon

Despite much hype and enthusiasm, the DIFX, Dubai’s new international stock exchange, has got off to rather a slow start.

In the first of a regular series of columns, John Arrowsmith casts light on what at first sight appears to have been a sudden volte-face on interest rates by the European Central Bank.

As Latin American economies look forward to another year of robust growth, remittance flows continue to outpace expectations. With payments by expatriates worth a record $45 billion last year and increasing at more than 10% a year, it is little surprise that banks now want a piece of the action. Latin American and US banks are not only eyeing services to rival traditional wire services to bring in extra revenues, but also see money flows as a way to develop portfolios aimed at the small-scale Latin American customer, offering loans and mortgages.

Bankers and investors question the slew of Latin American perp issues.

by John Ferry

Iraq has completed a ground-breaking debt exchange that will involve Iraqi risk being actively traded for the first time in emerging market indices. It's a $2.7 billion Eurobond to join emerging market indices, boosting liquidity.

594,900,000,000 The global dollar value of equity capital raised in 2005. The figure is up 4% from 2004 and is the highest since 2000.

Happy New Year to the Tokyo Stock Exchange. The exchange needs all the good wishes it can get after getting off to a bad start this year. On January 18 the market was forced to close early when trading exceeded its troubled computer system’s daily capacity.

Peru’s retail banking market is almost unrecognizable from a decade ago. In the mid-1990s, when less than 15% of economically active Peruvians had a bank account, 26 banks were jockeying for business in a depressed local market, some with highly inadvisable lending policies.

Euromoney’s annual poll of polls shows that universal banks still dominate overall because of the breadth of their business. But firms such as Barclays Capital, Merrill Lynch and Société Générale are scoring notable successes in their chosen areas. Clive Horwood spoke to their heads of investment banking.

Like so many other aspects of Japan’s financial system, its pensions schemes are paying for the sins of the past and struggling to pay for the future. Existing reforms do not go far enough, says Chris Leahy, and flirt dangerously with the country’s future prosperity.

Even after the stock market’s dramatic climb in 2005 and sudden sell-off in mid-January, a wall of money is heading into Japanese equities, reports Peter Lee. Securing greater retail investment is seen as crucial to the reconstruction of Japan’s entire financial system. Privatization, new-economy IPOs, J-Reits and private equity exits will keep the investment bankers busy until the big blue chips are ready to issue once more. In the meantime, can someone please fix the TSE’s problems?

Several emerging market countries have discovered that oil is a bane not a blessing, destroying domestic development. The current crop of oil champions may have stabilization funds, but Theodore Kim explains how things can still go wrong.

Japanese companies are now creditworthy and the banks are recapitalized but neither side seems keen to enter into loan transactions. But companies can see the long-term value of establishing access to capital markets. And lenders are keen to repackage and redistribute credit risk in new ways and define a new relationship with corporate customers. Peter Lee reports

Moody’s says that it intends to keep GMAC’s senior unsecured Ba1 rating under review for the time being, breaking its rule of resolving ratings within three months of announcing a review.

Peter Weinberg, former head of European investment banking at Goldman Sachs, will join former Morgan Stanley star banker Joseph Perella in his as yet unnamed investment banking boutique. Perella left Morgan Stanley last April during the battle over the leadership of the firm and soon after was sole adviser to MBNA on its $35.8 billion sale to Bank of America.

The only court-sanctioned committee representing shareholders in the Winn-Dixie Chapter 11 restructuring has been disbanded by a US Justice Department official at the request of a group of unsecured creditors. This leaves shareholders without any official representation in the reorganization plans of the chain-store group.

According to data from research company HFR, the number of hedge funds going bust is rising rapidly. In 2005 to the end of the third quarter an estimated 484 funds went into liquidation, 81.8% more than in the whole of 2004.

According to one fund of hedge funds manager, the new craze in strategies is buying life insurance policies. Managers are approaching elderly people and offering to buy their policies from them at a discount. “For example, managers would offer $500,000 to a 75-year-old for their $1 million life policy,” says the manager. “It seems a bit unsavoury, as managers are basically counting on a quick death so they don’t have to pay the annual premiums for a prolonged period of time. But as long as the discount isn’t too high, it seems there is little wrong with the strategy. The elderly person gets a lump sum of money, and the hedge fund manager has a tidy return,” he says. Managers are said to hold portfolios of numerous elderly people with varying life expectancies to spread risk. “The only problem with the strategy is that there is a finite number of people about to die who want to cash out of their life insurance policies.”

It might make sense for hedge funds to buy traditional asset managers. When Citigroup sold off its asset management arm to Legg Mason last year, leaving the focus on its separate alternatives business, it supported the belief of many in the market that traditional asset management was becoming something of a dinosaur.