International cash management meets the global challenge

Bank of America gets the edge with its acquisition of Financial Labs.

With the notable exception of Deutsche Bank, German investment banks’ performance has lagged their French peers for most of the decade. But the German sector is picking up on new market possibilities, with Commerzbank in particular looking to rebuild its business after a dramatic recovery. Philip Moore reports.

Brazil’s biggest private sector bank has announced the creation of a new subsidiary, Bradesco Investment Bank. This will focus on all aspects of the local and international capital markets business as well as asset management. Bradesco is a retail powerhouse but the bank’s CEO, Marcio Cypriano, is keen to take advantage of growing capital markets activity from Brazilian entities. Cypriano told Euromoney last year: “In general, we should be bigger and better in capital markets. That business should closely match Bradesco’s retail performance.” [See Euromoney December 2005, “Bradesco's plan of attack”.]

The Swiss bank is making determined efforts to grow its US private banking business.

Goldman Sachs might still be the firm to beat when it comes to global M&A but it has just lost the chairman of its European investment banking business, Claudio Costamagna, who will leave this month after 17 years at the firm.

The Iranian authorities’ recent granting of operating licences to two new private banks (Bank Sarmaye Daneshgah and Bank Pasargeda) suggests that the sector has a future, despite president Mahmoud Ahmadinejad’s apparent disdain for his predecessor’s reformist agenda.

Supply of both Islamic-compliant and conventional instruments has so far failed to keep up with the voracious levels of demand across the Middle East, but there are signs that product-starved investors might now begin to see a steadier flow, though far-reaching challenges remain. Kathryn Wells reports.

By Lawrence White

Fund managers' priorities for 2006

Invest with female mutual fund managers to save on trading costs

FX heads aspire for gold in L’Etape du Tour bike race.

It’s not easy to see, but behind the trillions of dollars of FX trading a collision between new technology and traditional banking is changing the economics and mechanics of the business. So far, participants talk politely of cooperation.

A mixture of accounting issues, demographics, trends in the equity market and a sharp fall in bond yields has revealed the chasm between the assets and liabilities of pension funds in the UK, Europe and the US. Many will be unable to pay their pension promises in full. Most will be pushed into liability-driven investment strategies. But are they a real solution or an expensive act of desperation?

“We’ve made $100 billion of investments in the past few years. We have to be number one in every product, in every market. We have no choice. There’s no other way to go.”

Argentina’s debt default, devaluation and subsequent recovery is, along with Enron’s fall from grace, the biggest financial story of the decade.

“Citigroup should wipe the floor with everyone in credit derivatives. What happened?”

Summer cum laude

Synthetic bond is a precursor to bonds in Egyptian pounds.

Our December cover story, The problem with foreign exchange, has sparked debate about the structure of today's FX market. Responses to the feature are still arriving at the Euromoney office.

It hasn’t been the easiest of starts to 2006 for Citigroup in Asia, with continuing integration challenges at its Korean banking acquisition and difficult negotiations with existing and future partners over its China strategy [see Citigroup fails to solve the China conundrum, this issue]. Now Citi’s China strategy will need to be reconsidered after the departures of chief rainmakers Francis Leung and Wei Christianson.

Jollibee Bee, mascot, all dressed up to collect company's award for Best-managed consumer goods company in Asia.

The problems of open-ended real estate funds might pave the way for the rapid success of Reits.

Javier Lazaro has joined Credit Suisse as head of global markets solutions covering Spain and Portugal from Goldman Sachs’s leveraged finance group. He will report to Paul Raphael, head of European equity capital markets, and Marisa Drew and Craig Klaasmeyer, co-heads of European leveraged finance origination.

The number of Middle East-based hedge funds is set to increase. In January, Abu Dhabi headquartered First Gulf Bank launched the first hedge fund of significance in the region. The fund, Al Saqer (“the Falcon”), is a macro-strategy hedge fund and has a capitalization of Dh3 billion ($817 million).

Second-lien financings grew dramatically in 2005. Total US second-lien loan issuance alone amounted to more than $22 billion in 2005. In Europe, second-lien issuance totalled €5.75 billion in 2005, rising from €1.88 billion in 2004.

The Chicago Mercantile Exchange has launched a snowfall index. From the end of February, investors were able to trade snowfall futures and options based on snowfall in New York and Boston. “From municipal snow removal budgets to holiday retail sales, snowfall, or lack thereof, can have a major impact on local and regional economies,” says Scott Mathews, president of CTA WeatherEX. “Our clients will be able to hedge the expense or revenue side of the snowfall equation.” It will be a little too late for those affected by the snowstorms in New York in February. A record 27 inches of snow fell in 24 hours, costing the city an estimated $20 million.

As KPMG wins a $5.4 billion advisory mandate, are consultants stealing big deals from investment banks?

This could be just the beginning of a battle between exchanges and their users.

73.4

DrKW has embraced blogging in a big way. The fondness for internet opinion boards has spread from the bank’s IT staff to the rest of the bank, which now has about 300 internal web logs, used for sharing work ideas.

The Lehman Bond Show will now be available via podcast.

Bond investors are starting to clamour for extra protection as buyout risk increases.

Further consolidation in Latin America’s banking industry is expected on the back of strong economic growth and financial stability. Foreign banks, which were active acquirers in the 1990s, are expected to play a big part in this. Leticia Lozano reports.

Latin American companies are shedding reputations for irresponsible management to become competitors, and even leaders, in the global markets. So much so that some don’t even want to be considered Latin any more. Lawrence White analyses the results of Euromoney’s first survey of the best-managed companies in the region.

The country’s banks are successful and stable. But a small domestic market leaves a difficult choice: concentrate on building at home or seek to expand overseas. Laurence Neville reports.

The market is attractive to potential foreign acquirers, but the process of acquisition is proving far from easy. Patrick Gill reports.

India’s distressed debt market has a problem. Specialist firms, often set up by a consortium of banks, buy the assets from one arm of a bank, package them up, and then have to sell them back to the original banks. After intense lobbying from firms such as Arcil, the Indian government has changed the rules. Niranjan Rajadhyaksha reports.

Foreign investors are back in Thailand to scoop up bargains. The timing couldn’t be better for a new drive to develop the capital markets but politics could get in the way of some important deals. Peter Koh reports.

Arcelor, the Luxembourg-based steel company that has in the past preferred not to use bank advisers, is wheeling out the big guns to defend it against the €18.6 billion ($22.1 billion) hostile bid from Mittal Steel. It has just hired Morgan Stanley, which will join BNP Paribas, Deutsche Bank, UBS and Merrill Lynch in advising it. Most of the main advisory firms are involved in the hostile bid on one side or the other. Mittal Steel is being advised by Credit Suisse, Goldman Sachs, HSBC, Société Générale and Citigroup.

The sale of Hotspot has prompted a torrent of speculation about the future of other ECNs. But it seems the rumours about new owners for FXall are true.

Cheyne Capital Management sold one of the largest-ever European arbitrage CLOs last month via Nomura. The €1 billion Cheyne Credit Opportunity CDO 1 incorporated several structural features to overcome problems that could arise from its relatively large size. In contrast to typical CLOs, which are normally half the size, 40% ramped up at launch and have around a year to complete sourcing loans, Cheyne Credit Opportunity has a two-year time period to ramp up fully. This extra flexibility will be particularly useful. The competition for leveraged loans will be greater than ever, given that an estimated 35 CLOs are operating this year, compared with about 25 last year.

Dave Tait has not only had a long and successful career in the FX market, but he has also climbed some notable peaks outside of the trading environment.

The FSA took a couple of years but the UK regulator has finally accepted the concept of covered bonds; the Netherlands will be next.

Reserve confirms Wachovia deal qualifies for tier 1. And that could spark over $40 billion of copycat deals.

Hedge fund managers are increasingly shopping around and using more than one prime broker at the same time.

Latin America’s development bank has to change tack as countries in the region rely less on dollar funding.

Regulators outnumbered the regulated at a meeting at the Federal Reserve Bank of New York on February 16. Representatives of 15 bank and securities regulators and exchanges were relieved to hear that the world’s 14 largest credit derivatives dealers had fulfilled their promise, made last October, to cut by 30% the number of credit derivatives trades remaining unconfirmed for 30 days or more by January 31 2006. The backlog, which arose from high-velocity trading and assignment by hedge funds in a market with underdeveloped systems for initial confirmation of trade details, had sparked widespread alarm across the industry. More good news: electronic confirmation has risen to 62% of trade volume, from 46% in September 2005.

The rapid influx of new managers to the CDO market is a staffing headache for established players.

It’s the time of the year, with the bonus season over, when people moves are back in swing. So far, several have caused a bit of a stir.

The UK government’s commitment to imminent PFI transactions appears to be wavering. Have critics of the funding strategy won the argument?

“Probably a good idea” was how a leading market participant described the news that the International Capital Market Association (Icma), the International Swaps and Derivatives Association (Isda) and The Bond Market Association (TBMA) have formed a Global Capital Markets Board (GCMB).

Financial sponsors now account for an important chunk of advisory fees, but not all banks are cashing in.

Oil producers strike it rich, but long-term issues remain

The high price of oil highlights the fact that many economies are too reliant on raw materials exports, with governments creating unfavourable conditions for foreign investment through neglect or for political reasons. Florian Neuhof looks at the main drivers behind Euromoney’s latest country risk poll.

Hugo Chávez’s war of words with US president George W Bush has escalated, with the Venezuelan president threatening to sell his nation’s oil refineries in the US. Chávez has threatened to sell Citgo Petroleum’s refineries and divert US oil exports to other countries. “I could easily order the closing of the refineries that we have in the United States. I could easily sell the oil that we sell to the United States to other countries...[to] real friends and allies like China, India or Europe,” he told supporters at a rally last month.

Rio de Janeiro now offers a developing market alternative to Chicago.

Government rumoured to be planning new bond deal although holdouts issue remains unresolved.

Barclays believes there’s plenty of room for growth, helped by streaming prices on its own trading platform.

Société Générale Corporate & Investment Banking has appointed Serge Topolanski as its deputy head of Europe and Asia global foreign exchange activities. Topolanski, who is based in Paris, will supervise the global foreign exchange French team and the overall FX options business. He reports to Lars Hakanson, head of global foreign exchange activities, Europe and Asia.

New report calls on multilateral to issue more benchmark bonds.

The ASEAN tigers: back with a roar?

Jorge Maortua, deputy head of global wholesale banking for Grupo Santander and the group’s head of treasury services, is running a fast-growing business. Perhaps more important, his division, while finding alternatives to traditional low-margin lending, is building key relationships with the bank’s clients, including small and medium-size enterprises.

The US bank has made an expensive foray into China’s banking market, with little to show from two-and-a-half years’ work and millions of dollars spent.

Focus is on the potential for corporate debt outperformance in 2006.

Manic demand for returns is putting Latin American issuers in the driving seat, calling the shots on subjects such as length of maturity, target investor base and restructuring opportunities. Theodore Kim reports.

Latin America’s local-currency markets are no longer a sideshow for esoteric investors. Today, many emerging market portfolio managers have exposure. But, as Felix Salmon reports, the growth of domestic supply and demand will drive these markets forward.

Stock market reforms and restructuring portend further share price rises. There is money to be made, say fund managers, for those with patience and diligence.

A US Federal court case may force Congress to consider amendments to the Sarbanes-Oxley Act.

With Mario Draghi taking up a position on the European Central Bank’s governing council, and Jürgen Stark set to be the next new member, the inner sanctum is likely to become more pragmatic than doctrinaire.

Conflict over oil and gas supplies is set to fuel tension between western Europe and Russia in coming years.

Where developed western markets go, Asia’s markets usually follow. Bankers in the region are confident that’s true of hybrid securities. From a buy-side perspective, hybrids have arrived already. As many as a dozen international issuers, most conspicuously from Latin America, have successfully tapped an Asian retail market driven principally by private bank clients hungry for yield.

In Japan emerges from the shadows, February issue, we reported that Nikko Citigroup had led a ¥120 billion domestic bond deal for Sanyo last September. In fact, the deal was for Sony. Apologies to all concerned.

Asian-based hedge funds generated 30% of all reported commissions earned by brokers over the past 12 months on trades of Asian stocks.

As China’s banks continue their rapid restructuring, government and regulators are already mapping out the future for the industry. “One word is becoming very important in China’s banking sector – deregulation,” says Zhang Jinguo, president of Bank of Communications (Bocom). “Banks in the west were talking about this in the 1980s and 1990s. We’ve been talking about this only since last year.” The People’s Bank of China, the mainland’s central bank, wants several so-called universal banks to emerge. That, say China bankers, means huge opportunities for mergers and acquisitions of banks and other financial services businesses such as securities firms and insurance companies.

The organizers of Rosneft’s IPO, tentatively scheduled for October or November, are considering placing the shares in Tokyo as well as in Russia and London, according to Valery Nazarov, head of the Federal Property Management Agency. However, he has so far ruled out a simultaneous flotation.

Italy’s Intesa has won the battle to acquire an 85.42% stake in Ukrsotsbank, Ukraine’s fourth-largest bank. The bank has 527 branches and serves more than 660,000 customers. Banca Intesa says that it values the bank at $1.3 billion and that its total investment will amount to $1.61 billion, including the share capital increase. Intesa already owns banks in Croatia, Hungary, Slovakia and Serbia & Montenegro.

Kazkommertsbank sold a S$100 million ($61 million) bond last month, the first ever Singapore dollar-denominated issue from a Kazakh issuer. European investors bought 65% of the three-year paper, with the rest divided between Asian and offshore US accounts. Singapore government securities offer very low absolute rates, and the deal’s success was attributed to the pick-up and currency diversification that it offered.

Fitch and S&P put Nigeria’s risk of default on the same level as Brazil and Turkey.

Flushed with the success of its 2005 activities, with more than $20 billion raised through privatizations for the Turkish treasury, the country’s privatization administration wants to reattempt the sale of tobacco firm Tekel. The government’s latest attempt to sell the firm was just last year, but no bids were received. This was blamed on an increase in tax on tobacco products. It also tried, but failed, to sell the company in 2003. Other entities slated for privatization this year include Halkbank, petrochemicals firm Petkim and Turkish Airlines.

There was a message of serious intent in the choice of syndicate for Hong Kong-based Hutchison Whampoa’s proposed flotation of its Italian 3G business. The message from the market was equally clear. Despite the best efforts of Goldman Sachs, HSBC, JPMorgan, Merrill Lynch and Morgan Stanley to get the deal away, the US$7 billion price offered by investors was simply too unpalatable for an investment that has cost Hutchison between US$8 billion and US$9 billion. The IPO was pulled.

How will money be made in emerging markets debt when bid-ask margins are anorexic and expected returns uncompetitive?

Acquired asset managers often fail to fulfil their promise, as Deutsche Bank has found more than once. But Deutsche’s parachuting of Axel Schwarzer into US firm DWS Scudder looks set to be a success story.

Increasing regulatory costs for hedge fund managers are leading large players to make a U-turn and look to outsource back-office functions, says Tom Kerns, global head of client reporting and product integration at Deutsche Bank Global Prime Services.

Lawyers are cashing in by advising managements of public companies in ways to ward off evil hedge fund activists. But activism, handled with decorum, can be positive for management and investors. And who better to be an activist than a hedge fund manager? Helen Avery reports.

The financial rehabilitation of Korean chipmaker Hynix offers salutary lessons for the region. Once the company was an embarrassment that an entire country wanted to go away. Now its creditors will reap a bonanza from a deal that they never even wanted. Chris Leahy reports from Seoul.

US state’s decision to pass a law protecting a bank from shareholder activists is seen as a setback for investors.

GDP warrants on the sovereign bond exchange are proving a hot market.

In December 2001, the government defaulted on $81.8 billion of debt repayments and broke the peso’s link with the dollar. When Nielsen was appointed in May 2002, the country was in the midst of one of the worst financial, social and political crises to hit any country since the Great Depression. His job, together with that of his economy minister, Roberto Lavagna, was to help restore stability and turn around Argentina’s financial fortunes.

A hostile bid in the Malaysian banking market is almost unheard of. But CIMB's pursuit of Southern Bank has provoked more than just headlines, and now almost every major banking group in the country is in play.

Lehman's Grant Bowman has a taste of Superbowl fame in the Pittsburgh Steelers practice squad.