THE TWITTER IPO: CROSS-SELLING!

Facebook CEO Mark Zuckerberg recently joked at a conference that he would be the last person to advise Twitter executives on "now to make a smooth IPO". Before Facebook's IPO, executives increased the size of its offering and the price, despite some internal concerns about the strength of its ads business. While the offering was also haunted by technical challenges on the Nasdaq market, some critics blamed the stock's challenges on greed among Facebook's management.

Twitter chose Goldman Sachs as the lead underwriter for its offering, over the Morgan Stanley team that advised Facebook, according to people familiar withe the decisions. Twitter is in the process of discussing which additional banks will be involved in the process. A number of other banks are already in the mix, including Morgan Stanley, Bank of America's Merrill Lynch and JPMorgan, who had leading roles on LinkedIn's IPO in 2011.

The discussions with the banks also include possible extension of credit to Twitter, people familiar with the talks said. Twitter would use the loans for general working capital and to pay taxes related to employees' stock options. In this respect, Twitter's IPO process appears tto mirror that of Facebook, which secured similar credit lines ahead of its own IPO last year.

By all external indications, Twitter's ad revenue continues to grow, particularly on mobile devices. Twitter's revenue is sealed inside its confidential filing, but analisyst firm eMarketer expects its ad revenue growth to a little under $1 billion next year, up form $583 million this year. It also purchased MoPub last week for $350 million, a mobile advertising firm.

NOTE:  investment (and commercial) banking "products" involved. Cross-selling, anyone?

[From the Wall Street Journal, September 2013].
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SHORT SELLING?

The famed hedge fund short-seller Carson Block's is betting against Standard Chartered, the UK-based, emerging market-focused bank. According to Euromoney, Mr. Block said in mid-May that “deteriorating loan quality” makes Standard Chartered a prime target for a bearish punt, expressed by shorting its five-year CDS. Read the whole story. But wait a minute: shouldn't he rather be buying five-year CDS, given his outlook?

(*) Sid Verma: "Carson Block misfires on Bearish Standard Chartered bet", Euromoney, 31 May 2013.
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CREDIT MARKETS WATCH...

- Corporate bonds. According to the WSJ, the price of Apple bonds has sunk to 90% of face value: "The loss from the high point to the low is around three years' worht of coupon income — a big hit". Corporate bond prices have fallen slightly more than ultra-safe Treasury bonds. Not good from a discount rate perspective! A good source for corporate bonds: KDP High Yield Daily Index.

. Credit Default Swaps. Speaking of discount rates, the iTraxx Europe Crossover Index trades again above 400bps. You can track this very important index on page 28 of the WSJ. See also the Markit website.

. Brazil rating outlook. From Bloomberg: "S&P lowered yesterday the outlook on Brazil’s BBB rating, which is two levels above junk, saying it was concerned by the country’s sluggish economic growth, weakening fiscal accounts and loss of credibility with investors. S&P also cut the rating outlook for state-controlled companies Petroleo Brasileiro SA and Centrais Eletricas Brasileiras SA. The nation’s $2.2 billion of bonds due 2023 fell 0.19 cent to 92.40 cents on the dollar, the lowest price on a closing basis since the notes were issued in September, according to data compiled by Bloomberg. Yields rose 3 basis points, or 0.03 percentage point, to 3.57 percent" (*). Note how closely corporate rating changes follow on the heels of a change in sovereign ratings.

(*) Katia Porzecanski & Blake Schmidt: "Brazilian Dollar Bond Slump Deepens as S&P Lowers Rating Outlook", Bloomberg, 7 June 2013.
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ECB MEETING OF GOVERNING COUNCIL: NO CHANGES, AS EXPECTED

The official communiqué: "6 June 2013 - Monetary policy decisions. At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.50%, 1.00% and 0.00% respectively. The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today". Text of press conference: see.

Two things to note: (1) subdued inflation expectations: "The underlying price pressure in the euro area is expected to remain subdued"; (2) the progress made in terms of fragmentation of credit markets within the Eurozone:

It is essential that the fragmentation of euro area credit markets continues to decline further and that the resilience of banks is strengthened where needed. Progress has been made since last summer in improving the funding situation of banks, in strengthening the domestic deposit base in stressed countries and in reducing reliance on the Eurosystem as reflected in repayments of the three-year LTROs.
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AN IMPORTANT PAPER!

George Magnus, the UBS advisor, has published an important paper about the so-called 'middle-income trap' (*). The idea is simple enough: developing countries that hit the $12,000/$15,000 level (in terms of GDP per capita) will find it difficult to grow beyond that level if they fail to improve governance:

The appetiser to this discussion is the recent slowdown in growth in China, India, Brazil and elsewhere since 2011, notwithstanding signs of stabilisation in recent months. The cyclical issues are well understood, including weak Western demand. [To escape the middle-income trap, countries must] built trust, rules, good macro, corporate and social governance, and property rights and the rule of law, into national institutions … High levels of prosperity, which are ultimately about investment and innovation, rest on important political foundations, namely strong central government, and inclusive economic, social and political institutions, political checks and balances.

Political checks and balances! I like the idea! In fact, I have cooked up my own Checks and Balances Index [see, in Spanish].

(*) “Hitting a BRIC Wall: the risk of the middle income trap”, UBS Investment Research, 21 January 2013. See also the article: "China can yet avoid a middle-income trap", Financial Times, June 2011: "Richer, more complex economies need high-quality institutions, especially in the legal arena, to sustain human development. This is far more important than national output, steel production or any other metric".
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YUAN APPRECIATION

From the WSJ: "Since the January 2011 visit of Mr. Hu, the yuan has appreciated 11.9% against thge dollar when accounting for inflation, according to Brookings Institution researcher Karim Foda, including a 1.8% increase since the beginning of this year. The appreciation has come at a tough time for China's exporters, giving Mr. Xi a strong argument the U.S. should ease criticism of China's currency policies" (*).

Good point. In any country where the cost of capital is high, currency appreciation can be a letal recipe — high cost of capital and high cost of labor. But is the cost of capital that high in China? How do we know? We'll know when the bond market becomes more relevant, replacing bank credit as the main source of funding for Chinese companies.

(*) Bob Davis: "China, U.S. Growth: Tables Have Turned", Wall Street Journal, June 7-9, 2013.
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NORWEGIAN WEALTH FUND REDUCES DURATION OF BOND PORFOLIO

Norway's oil fund has reduced its bond holdings to their lowest level to date as the world's largest sovereign wealth fund signals its discomfort with the effects of western central banks'' money printing. The fund held just 36.7 per cent of its $726bn assets in bonds at the end of the first quarter, the lowest proportion since it first received money in 1996. Its equity holdings were close to a record high, accounting for 62.4 per cent of the total. Yngve Slyngstad, the CEO of Norges Bank Investment Management, told the Financial Times that the fund could take several courses of action to reduce the risk of a sharp fall in bond prices, including buying property and diversifying into new currencies. It has also reduced the average duration of its bond holdings from about six to five years.

Source. Richard Milne: "Norwegian wealth fund cuts bond portfolio", Financial Times, 27-28 April 2013.
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A PAPER ON CDS & PRICE DISCOVERY

Abstract. This paper examines the dynamics of price discovery among three informationally connected markets: the stock market, the bond market, and the CDS market. The recent financial crisis in the US has provided a perfect natural experiment to study the impact of stress on price discovery. We study daily stock prices, CDS spreads, and bond spreads over a four-year period before and during the crisis (2005-2008) for 10 US financial firms. Before the crisis, the stock market played a dominant role in price discovery. During the crisis, we document a much weaker role of the stock market while the CDS market has taken on a more important role becoming the dominant source of information during the financial crisis.

Christos Giannicos, Hany Guirguis & Michael Suen: “The 2008 Financial Crisis and the Dynamics of Price Discovery Among Stock Prices, CDS Spreads, and Bond Spreads for US Financial Firms”, 2012.

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MORE ON THE CREDIT CRUNCH IN SPAIN

Based in the small town of Esquivias south of the capital, Guitarras Manuel Rodríguez and Sons turns out more than 5,000 handcrafted flamenco and classical guitars every year, along with a small range of other wooden instruments. Despite the emphasis on tradition and craftsmanship, this is a capital-intensive business. The work floor is dotted with heavy machinery.

Starting a company such as this, says co-owner Manuel Rodríguez, would be almost impossible in Spain’s current economic climate: “If you go to a bank today, no one will give you credit. And even if they gave you credit, they would demand a big deposit and would demand eight or 10 per cent in interest”. Similar complaints can be heard in small and midsized businesses up and down the country, and are raising concern not just within the Spanish government but within the European Central Bank in Frankfurt.

In the five years since the crisis started, no fewer than 450,000 small and medium-sized enterprises have gone under, says Jesús Terciado, the president of Cepyme, the Spanish association. Researchers at Deutsche Bank, meanwhile, point out that last year almost 20 per cent of all loan applications by Spanish SMEs were rejected – twice as many as for large corporations. 

Source. Tobias Buck. “Spain threatened by resurgent credit crunch”, Financial Times, 4 April 2013.

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[CROSS-BORDER FINANCE] EUROPE: CROSS-BORDER INTERBANK LENDING

As a good example one can take the case of a country which in which banks’ credit rating is downgraded from AA to BBB (like Spain). Under the standardized approach the risk weight is only 20% for counterparties in AA-rated countries, but 100% for BBB-rated countries. A fall in the rating from AA to BBB therefore implies a jump of 80 percentage points in the risk weight. In practice this means a higher cost for cross-border lending, because Spanish supervisors are unlikely to apply this rule to domestic lending by Spanish banks whereas German supervisors are very likely to apply this rule to German banks lending to counterparts in Spain.

Eurozone banks have reduced cross-border lending within the Eurozone by $2.8tn since the end of 2007 (**)

(*) Daniel Gros. “The Single European Market in banking in decline – ECB to the rescue?”, Vox, 12 October 2012. (**) Howard Davies & Susan Lund: “Three steps to stop global finance disintegrating”, Financial Times, 21 March 2013.
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[CROSS-BORDER BANKING] IMF & GLOBALIZATION OF BANKING

The IMF on the Globalization of Banking
http://www.imf.org/External/Pubs/FT/GFSR/2007/01/pdf/text.pdf

Although no one indicator fully captures institutional globalization in all its aspects and forms, one telling illustration is the volume of cross-border M&A in the financial sector. M&A activity in the financial system has risen sharply since 2000, with crossborder M&A increasing from less than 1 percent to nearly 40 percent of the total value of financial sector M&A activity from 1997 to 2006.

Institutions have internationalized for a wide range of reasons, including expectations that knowledge and efficiencies in undertaking business and underwriting risk in one market can be transferred into others; that economies of scale and scope can be achieved when operating multi-country operations; and that a crossborder group can better allocate a large and stable capital base profitably across business lines to those where profitability is expected to be greatest, while also diversifying risk.

Cross-border expansion into emerging market (EM) countries has often been particularly appealing. Emerging markets have been seen as offering the prospect of faster business and profit growth, especially given the relative underdevelopment of their financial markets and institutions. For many emerging European countries, the prospects of closer economic integration with the European Union—including through EU accession and eventual membership in the euro area—have been a significant driving force in this regard.

Of all types of financial institutions, Banks are most active in pursuing an international presence. One measure of the rapid internationalization of banking in recent years is the rising number of foreign claims (loans made and deposits placed externally) of Bank for International Settlements (BIS) reporting banks. The increase in foreign ownership was particularly rapid in Eastern Europe, where the share of banking assets under foreign control increased from 25 percent in 1995 to 58 percent in 2005, and in Latin America, where that share rose from 18 to 38 percent of total bank assets.

The past decade has also seen a transformation of the role of foreign banks in EMs. First, while the large international banks have continued their expansion in selected markets, a number of mid-sized banks have also become increasingly active across borders since the mid-1990s, particularly in emerging Europe. This has partly reflected limited expansion opportunities, heightened competition in home markets, and prospects of strong profitability in host markets.

Second, there has been a significant shift toward local activities by foreign banks in EMs. Traditionally, foreign banks primarily focused on providing financial services to their inter-national corporate clients in host countries, but there is now often a growing emphasis on housing-related and other personal lending. One reflection of this development is that direct cross-border lending by the head offices of international banks has been progressively overshadowed by local lending by their foreign affiliates.

[EXAMPLE: SWEDBANK EXPANDS INTO BALTIC NATIONS]http://www.swedbank.com/
http://www.swedbank.com/about-swedbank/group-presence/index.htm

[CREDIT MARKETS] DERIPASKA INTERVIEW

A very useful and interesting interview of Rusal CEO Oleg Deripaska; he is "unusually frank about Russia's ills" (*). Mr. Deripaska sees three key problems in Russia: 1) the judiciary; 2) corruption; 3) interest rates and the cost of capital. Rusal was saved in extremis by the Kremlin in 2009, as huge debts taken on to buy a 25% stake in Norilsk Nickel ($10.8bn today) became unsustainable given the decline in aluminium prices. A new deal brokered —again— by the Kremlin will allow Rusal to obtain $835m in dividends from Norilsk (28% owned by Vladimir Potanin).

On the judiciary: the Russian FSB security service is now twice as big as the Soviet KGB, which undermines confidence. On corruption: "There is not enough prison capacity to fight corruption". On the cost of capital: "It is a topical issue. Some businessmen have blamed the economic slowdown on the Russian Central Bank's strict monetary policy. Mr Putin himself has expressed concern at the 'troubling rise in interest rates' to a level significantly above the inflation rate". Deripaska: "Russia will not get any benefit out of the World Trade Organisation membership unless we pay attention to these issues — the cost of capital and interest rates".

And he adds: "Small businesses struggle to obtain credit: loans are typically for three years at 15 per cent interest". In order to get a loan of $10m or more, businesspeople from Siberia need to travel to Moscow. The Russian banking system is too concentrated, as 72 per cent of credit is issued by only five banks, most of them state-owned. Ladies and gentlemen: there you have it — a dysfunctional judiciary, high levels of corruption, and a very high cost of capital. But don't expect Mr. Deripaska to connect the dots any time soon.
 
(*) Guy Chazan: "Deripaska hits out at Russia's big banks", Financial Times, 18 de marzo de 2013.
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[SPONSORSHIP] UBS & FORMULA 1

. From a 2010 article (*). Swiss financial services company UBS have signed an agreement to be a global partner of Formula One. The company, whose previous major sports sponsorship was with the Alinghi America's Cup team, joins LG, Mumm and DHL as Formula One global partners. Just Marketing International (JMI), the specialist motorsports agency, brokered the deal on the company's behalf, negotiating with Formula One Management's Bernie Ecclestone. No official financial details were released, but well-placed sources have indicated the initial five-year deal is worth up to US$40 million annually, roughly the equivalent of a Formula One team title sponsorship.

Oswald Grubel, UBS group chief executive, said of the deal: "UBS has been searching for a global sponsorship platform that has appeal to our clients, promotes our brand globally and makes good commercial sense. Our new partnership with one of the largest and most popular sporting organisations in the world will fulfil all these criteria, and it constitutes a key element of our newly launched branding activities. The global reach of F1 complements the many local activities we support." UBS has just rolled out a new global advertising campaign and it is understood that it's Formula One sponsorship, which will begin in September, will feature extensive trackside advertising, including unique positioning.

“All of us at JMI are delighted that UBS has chosen Formula One as a global sponsorship platform," added Zak Brown, the founder and chief executive of JMI. "The partnership has strong alignment to UBS’s truly international stature and strategic business objectives, particularly in key growth markets. We are proud to add UBS to our cherished portfolio of clients and privileged to support another fine brand in its introduction to and ongoing presence in the sport.” The deal will officially begin with the Singapore Grand Prix, Formula One's night race, on September 26th. It is understood that the deal is for five years, with options beyond that.

(*) Tom Love: "UBS sign US$200 million Formula One partnership", SportPro, 23 August 2010.
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[CORPORATE GOVERNANCE] BOARD STORIES

- Toyota: Outside directors for the first time. After spending the past four years battling crises, Toyota Motor Corp. signaled it is ready to go on the offensive. The Japanese auto maker on Wednesday announced its biggest management overhaul since founding-family scion Akio Toyoda took over as president in 2009. The moves will open up the world’s No. 1 auto maker to its first outside directors in its 76-year history, accelerate generational change in the executive ranks and streamline the company’s decision-making. Among the three outside directors named to the board is Mark Hogan, a former General Motors Co. executive who once ran a now-dissolved California joint venture between Toyota and GM.

Commenting on the move to appoint outside directors for the first time, despite the relative insularity of Japanese businesses, Mr. Toyoda said the company wants to improve transparency after years of requests by shareholders to take on external board members. “As a global company, we’d like people to view us as an open company,” he said. The move by Toyota—Japan’s largest company by revenue—to add outside directors to its board marks a significant shift, not just for the auto maker, but also for corporate Japan. Major Japanese companies have, historically, been reluctant to bring outsiders into the boardroom.

 

Under Toyota’s new board, three of 16 directors, or 19%, will be outsiders. In addition to Mr. Hogan, the company said it is nominating as directors a Japanese life-insurance executive and the head of a company in charge of clearing and settling securities transactions. The management changes will take place pending a vote at the annual general shareholders’ meeting in June.

 

[Yoshio Takahashi & Yoree Koh: "In Shake-Up, Toyota Turns to Outsiders", Wall Street Journal, 7 March 2013]

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- Transocean: calls for dividend. Transocean, the offshore drilling rig operator, plans to pay its first dividend for more than a year, as it responds to pressure from Carl Icahn, the activist investor who took a 5.6 per cent stake in the company in January. Transocean, the world's largest offshore drilling company by market capitalisation, said on Sunday that its board had recommended a divividend of $2.24 a share, worth a total of $800m, to be paid in installments from June 2013 to March 2014.

 

That is less than the $4 called for by Mr Icahn, who said in January he would put his demand at the annual meeting, set for May 17. The company stopped paying a dividend in March 2012 as credit rating warned that its debt could lose its investment-grade status.

 

[Ed Crooks: "Transocean responds to call for dividend payout", Financial Times, 5 March 2013].

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[CREDIT MARKETS] TREASURIES SELL-OFF ON GOOD ECONOMIC NEWS

OK Bloomberg story on credit markets and the risks of investing in ultra-safe assets in the aftermath of a flight-to-quality episode (*) :

Treasuries extended losses that made them the developed world’s worst-performing bonds after a gain in employment raised expectations the U.S. central bank’s efforts to spur economic growth will bear fruit in 2013. U.S. government securities maturing in 10 years and longer handed investors a 1.3 percent loss in the past month, according to data compiled by Bloomberg and the European Federation of Financial Bank of Analysts Societies. It was the biggest decline of 144 bond indexes around the world. A report this week may show sales at U.S. retailers rose in February for a fourth month, based on a Bloomberg News survey of economists.

(*) Wes Goodman: "Treasuries Are World’s Worst Performers After Jobs Gain", Bloomberg, March 11, 2013.
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BONDS & BANK LENDING: GENERAL NOTES

. Europe. Before the financial crisis, low funding costs enjoyed by banks encouraged them to embark on a lending spree giving corporations little reason to tap capital markets — until the debt crisis hit. "Since the financial crisis, corporate treasurers have become more nervous aboyt relying just on bank funding and so they are increasingly trying to tap into the corporate debt markets when they can. Banks are also perhaps more reluctant to lend in the same way as before the crisis", argues Monica Insoll at Fitch Ratings. See Raplh Atkins & Michael Stothard: "Blue-chips look beyond Europe's banks for funding", Financial Times, August 15, 2012.

. Europe. "Compared with the US, and to a lesser extent the UK, the eurozone corporate sector remains over-dependent on banks for funding. If the eurozone economy is not to be stricken by hypothermia, someone will have to offset the contractionary effect of bank deleveraging." (John Plender: "Europe faces vicious circle of disorderly bank deleveraging", Financial Times, 25 April 2012). "Traditionally, the continent's companies have relied far more heavily than their US counterparts on banks for external funding".

. Europe. European bond issuance slows down in February 2013. But 2012 was busy: €188bn of bonds sold by non-financial corporations. (The concept of "benchmark-sized bonds": a benchmark bond is typically at least €500m in size). In other words, the bond market is not for small businesses! The obvious candidates to tap bond markets —rather than turn to banks — are larger companies with good credit ratings. A survey bby Fitch of 201 rated companies showed that bonds accounted for 73% of debt at the end of 2011, up from 53% in 2008 (80% to 85% for the largest issuers). In February 2013, non-financials sold €9.75bn of benchmark-sized bonds, vs. €20.7bn in January.

. Europe. Siemens AG sold a three-part deal, two parts of which were in euros, the third in dollars, raising €2.25bn (February 2013). Among French firms, JC Decaux sold a €500m bond. In 2012, Volkswagen issued a record amount of bonds; August 2012: £250m of three-year debt at 110 bps over gilt yields, €750m of 18-month floating rate notes in semi-privte deal arranged by Bank of America Merril Lynch. August 2012: BP sells $650m in fiver-year eurodollar bonds at 70bps over mid-swaps.

. Europe. Markit's iBoxx Euro corporate index measures the performance of investment grade debt issued in euros.
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[BANKS] ON THE ECB'S "SAFETY VALVE"

Nice3 WSJ article on the problems faced by the ECB (*). The "safety valve" has worked, and a complete meltdown has been avoided. But credit is still not flowing to businesses in Southern Europe.

 

Mario Draghi has toiled to repair the euro zone’s broken financial engine, fueling banks with cheap loans and installing a safety valve through an openended bond-buying program. This has calmed financial markets. But the European Central Bank president still can’t seem to fix the transmission. Until that happens, further rate cuts or bank- support measures may have little effect. As it is, the ECB is expected to hold rates steady at 0.75% after Thursday’s monthly meeting.

 

A cut can’t be ruled out with inflation below the ECB’s 2% target, at 1.8%, and expected to fall more in coming months. Even if a cut occurs, though, it wouldn’t do much for countries in Southern Europe. In healthy economies such as Germany, lower ECB rates feed through the economy by spurring consumer borrowing and business financing for investment. Not so in Spain and Italy. Their economies are mired in deep recessions and unemployment is at euro- era records. Political uncertainty remains high, especially in Italy. There, risk- averse banks aren’t likely to cut rates for privatesector clients.

 

 

 

“If the ECB cuts interest rates, it does so to the benefit of Germany but not Italy, that’s the whole problem with the transmission mechanism,” said UniCredit’s Marco Valli. The ECB offered a grim reminder of this on Tuesday. Small businesses in Spain, Italy and Portugal paid much higher rates for loans in January than their German counterparts, according to a monthly report. Policy makers could try to narrow this gap. One option is to lower the discounts, or haircuts, that they apply to small- business loans posted by commercial banks as collateral for ECB funds.

That would encourage banks to extend more of these loans. But the ECB tinkered with collateral rules before with little effect. Relaxing them further may stir the rancor of the bank’s conservative wing, led by Germany’s Bundesbank. That leaves the ECB in a tight spot. Car registrations in Mr. Draghi’s native Italy plunged 17% in February from a year earlier. They were down 12% in France. Until the ECB’s top mechanic finds a way to juice the economy, European households aren’t likely to rev their own spending engines.

(*) Brian Blackstone: "ECB Mechaninc Gropes for Right Wrench", Wall Street Journal, 6 March 2013.

* * *

(See also this WSJ editorial, 7 March 2013: "[Recent ECB steps have] helped prevent panic in the bond markets despite the unsettled Italian election result. But preventing disaster isn't the same as promoting growth. The monetary transmission mechanism, whereby ECB policy decisions influence the real economy, remains broken. In the euro area as a whole, household and company borrowing rates are about 1 to 1.2 percentage points higher than might be expected based on Euribor and sovereign-bond yields, based on JP Morgan, with particular problems in Italy, Spain, Portugal and the Netherlands.)
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[BANKS] [CREDIT] RUSSIAN BANKS & RENMINBI FUNDING

What a story! Russian banks are funding themselves through the renminbi bond market! How quickly things have changed! Here's a very interesting article by Sarka Halas: "Russian Banks Look to Yuan Bond Market", Wall Street Journal, February 26, 2013.

Russian banks are increasingly selling bonds in the offshore renminbi market as growing investor demand allows them to borrow at cheaper rates and a chance to diversify their funding base. Investors say they are keen to buy the bonds because they are often issued by state-backed, high profile Russian banks and offer an attractive yield and exposure to the Chinese currency.

Russian banks-including JSC VTB Bank, Russian Agricultural Bank OAO and Russian Standard Bank ZA--have already sold the equivalent of $480 million of the bonds this year, compared with just $309 million in the previous three years. Gazprombank OAO, the financing arm of energy giant Gazprom, also issued yuan debt.

 

The trend illustrates the growing prominence of the offshore renminbi market, which Standard Chartered expects to be worth between 320 to 350 billion yuan ($50.8 to $55.6 billion) in issuance this year, up from last year's record issuance of 267 billion yuan. The bank expects yuan issuance to rise in 2013 on further regulatory liberalization and a more constructive outlook for the currency.

"What's driving this largely is yield, some expectation of currency appreciation and the need for investors to put their renminbi somewhere while they wait," said Edmund Harriss, director at Guinness Asset Management. Mr. Harriss' Renminbi Yuan Chinese Currency Fund bought VTB's yuan bonds, which offered a coupon of 3.8%, in January. The Guinness Atkinson Renminbi Yuan & Bond Fund has $92 million of assets under management.

As well as yield, investors have been drawn to the Russian debt sales because they feel more comfortable giving them their money than some of the more local issuers. "A large percentage of bond issuance in the offshore renminbi market are from either China or Hong Kong, and for European-based investors who might not be familiar with these companies, the risk profile of these issuers may be deemed to be on the high side," said Liang Choon Koh, Nikko Asset Management's Head of Asia Fixed Income. "They [investors] are more comfortable with issuers that have recognizable brand names and those that are investment-grade rated."

Mr. Koh said he looked at all three investment grade-rated issuers from Russia, but declined to say which ones were picked up by the fund. Nikko Asset Management has a total of $154 billion assets under management. VTB, Gazprombank, and Russian Agricultural bank are all investment-grade rated, quasi-sovereign borrowers, with vast experience issuing in the dollar and euro markets. Russian Standard Bank has a high-yield rating, but is the country's biggest lender to consumers and one of the largest privately-owned banks in the country.

Such demand is allowing the banks to borrow at cheaper rates than they would do in the dollar or euro markets. For example, Russian Agricultural Bank sold a three-year one billion yuan ($160.78 million) bond with a yield of 3.6%. It pays 5.3% to investors in the dollar market for debt of a slightly longer maturity of five years. Alan Roch, head of bond syndicate Asia Pacific region at the Royal Bank of Scotland, one of the banks that placed the Russian Agricultural Bank bond, said he was very confident of selling the Russian bank's debt at a discount to the dollar market before his team even visited prospective investors to pitch the sale.

The Singapore-based banker said RBS was seeing growing interest from foreign issuers and Russian names in particular because of an increased need to fund in offshore renminbi, increase depth of demand and investor diversification, and arbitrage opportunities (ability to issue in renminbi and swap back into main currency). "European issuers have been quicker in identifying this and the more that come and issue in renminbi, the more will want to follow, as their comfort on the execution of these deals improves," said Mr. Roch.

Artyom Lebedev, a spokesperson for Russian Standard Bank, said the attractive cost of funding in yuan and the diversification opportunity for the bank's debt portfolio, meant the bank would be keen to sell more debt in the offshore renminbi market. Since being sold, the Russian yuan bonds have performed well on the secondary market. Yields are lower than what was offered when the bonds were sold as the price of the bonds have risen due to secondary market demand.

However, Russian bonds aren't without risk as investors highlight economic and political risk in Russia and stagnant growth in Europe as factors. Mr. Harriss looked at Russian Standard Bank which is not listed, but decided against buying the bank's debt, because the credit risk was too high with weaker profitability and capital ratios combined with an increasing push into consumer lending in Russia. 

Nevertheless market participants expect more yuan debt sales from Russia. "If you are an investment-grade rated borrower, you will have no problems because investors are looking for savvier issuers," said Augusto King, who is head of debt capital markets Asia at RBS and based in Hong Kong. "Russian names offer higher yield and investors buying this debt like the outlook of the long-term appreciation of the renminbi and they like the growth outlook for China," said Mr. Koh. Mr. Harriss agrees that better pick up in yield and quasi government status are strong selling points for the bonds, and in the case of VTB - its diversified operations.

Mr. King added that a large amount of yuan bonds were due to be paid back this year, meaning investors would have to find a new home for their money at a time when debt sales from Chinese banks in the offshore market has been low. The yuan market has so far been largely dominated by state-owned Chinese companies and Chinese government entities looking for foreign investors--something they can't do at home because the Chinese bond market is closed to outsiders.

"The pickup in issuance is largely demand-driven, because Asian investors have increased allocations to emerging market debt," said Mikhail Nikitin, Credit Analyst at VTB Capital. He also noted that for Russian banks, selling debt in yuan not only diversified their funding but helped them avoid potential over-supply to Europe and U.S. Among foreign borrowers, the big global companies such as McDonald's Corp., (MCD), Volkswagen AG (VOW.XE), and Caterpillar Inc. (CAT) have all tapped the market in an effort to grow their businesses in China.
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[MONETARY POLICY] EARLY EFFECTS OF LTRO (March 2012)

[Old but useful info!] A very interesting and prescient Financial Times article by Patrick Jenkins, Mary Watkins and Rachel Sanderson (FT, Friday Marc 2 2012):

Despite the smattering of criticism —form Bundesbank president Jens Weidmann and from Standard Chartered chief executive Peter Sands— Mario Draghi's injection of three-year European Central Bank momey into the eurozone banking system remains widely popular. The second phase of the so-called long-term refinancing operation on Wednesday attracted funding requests from 800 banks for a combined €529.5bn, with Italian and Spanish banks again dominating the take-up of funds.

Although there was no official disclosure from the ECB of who got what, various banks and associations announced a selection of data. Overall, Italian banks accounted for €139bn of the total, with Spanish banks estimated to have been allocated €110-€120bn. One surprise was that half of the banks involved were German, though together they have thought to have accounted for less than €100bn of the funds, suggesting the money went to small regional savings banks.

Two institutions —Italy's Intesa San Paolo and Spain's Bankia— appear to have dominated the auction, taking €24bn and €25bn respectively, almost twice as much as the next tier of banks. The question now is what banks will do with the funds. Many are expected to play a carry trade on their own domestic government debt, making the most on the spread between the 1 per cent interest on the LTRO funds and rates on Italian government bonds, for example, of as much as 5 per cent.

Figures from the ECB showed that banks in Italy and Spain increased their holdings of sovereign bonds in January by about €50bn. There has been a corresponding drop in government's cost of funding since the start of the year. Yields on Italian 10-year debt fell below 5 per cent yesterday for the first time in August, having touched 7.5 per cent last year. There is less confidence about the flow-through of LTRO funds to the 'real' economy. "Credit conditions are still tight in Spain, Italy and Eastern Europe", says Huw van Steenis, analyst at Morgan Stanley.

Funding to Italian business fell by €20bn in December and again in January, though Andrea Belratti, superviserory board chairman at Intesa, suggests there may now be a change of mood. "We think it's a win-win situation from the point of view of the bank", he told the Financial Times, indicating that LTRO funds would be directed both to government bonds and lending to corporate clients.

That win-win could extend to banks' broader funding base, too. The LTRO has led to a pick-up in bank bond issuance after a slow end to 2011 when low confidence led to a dearth of deals, particularly in the senior unsecured market, traditionally the bedrock of the bank funding market. The confidence boost from the LTRO has given investors greater appetite to buy bank paper again, while the fall in government debt yields that accompanied the operations has flowed through to lower banks's own funding costs, too.

In January, there was a surge of issuance in covered bonds —a highly collateralised form of debt— as banks took advantage of improved market sentiment to get deals done and cash-rich investors felt confident enough to recommit to the eurozone. The senior unsercured dent market also re-opened after months of disruption. "Market conditions, partially as a result of the LTRO programme in December, allowed banks to raise senior senior unsecured financing at attractive levels after having limited access in the second halft of 2011", says Chris Tuffey, co-head of European credit capital markets at Credit Suisse.

By February, some of that confidence had split over the southern European countries, which had been in effect locked out of the public markets for months amid the sovereign debt crisis. Led by Intesa and Santander, Italian and Spanish banks have also been keen issuers. "Spanish banks were the most active issuers in February despite also being some of the heaviest takers of ECB liquidity in December", Barclays Capital credit analysts wrote in a note to clients, predicting that the second injection of ECB three-year funding could spur a glut of commercial market bond issuance.

As well as the indirect benefits of the LTRO, some say cheap ECB money is being used by banks to buy other banks' bonds. Nagging worries remain; the exercise does nothing to plug remaining capital deficits at a selection of banks, particularly in Spain and Italy. But with a virtuous cycle of funding helping so many banks in such different ways, the critics of Mr. Darghi's policy seem set to remain in the fringes for some time to come.

Intesa San Paolo [€12.0bn Dec. 2012, €24.0bn Feb. 2013]; Bankia [€15.0bn Dec. 2011, €25.0bn Feb 2013]; BBVA [€11.0bn Dec 2011; €11.0bn Feb. 2012]; UniCredit [€13.5bn Dec. 2012, €10.0bn]; Dexia €20.0bn Dec. 2012; €12.5bn Feb. 2013].
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[CREDIT MARKETS] AN AMAZING HEADLINE!

Welcome to our crazy world! The seemingly bads news from the recent Italian elections lead to lower yields ... Down Under! From Bloomberg: "Italy’s voters handed former leader Silvio Berlusconi a blocking minority in the Senate, sparking concern that turmoil in Europe will undermine prospects for a global economic recovery […] “When there is a bit of a wobble globally, Australia becomes a beneficiary again in a world where there are fewer AAA nations,” said Su-Lin Ong, Sydney-based head of Australian economic and fixed-income strategy at Royal Bank of Canada" (*)

(*) Kristine Aquino & Wes Goodman: “Berlusconi Boosts Demand for Bonds Down Under: Australia Credit”, Bloomberg, 28 February 2013.
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[ASSET MANAGEMENT] THE VALUE OF NBIM'S FUND

This is quite impressive: see. Question: what must be happening in terms of interest rates, when the value of the fund —ceteris paribus— declines?
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[CORPORATE FINANCE] THE BOARD @UBS

From the UBS website: background info on risk management and control responsibilities [see]. The Board looks quite powerful indeed:

The key roles and responsibilities for risk management and control are as follows:
The Board of Directors (BoD) is responsible for determining the firm’s risk principles, risk appetite and major portfolio limits, including their allocation to the business divisions. The risk assessment and management oversight performed by the BoD considers evolving best practices and is intended to conform to statutory requirements, as is the related disclosure in this section.

The BoD Audited is supported by the BoD Risk Committee, which monitors and oversees the firm’s risk profile and the implementation of the risk framework as approved by the BoD. The BoD Risk Committee also assesses and approves the firm’s key risk measurement methodologies. The Group Executive Board (GEB) implements the risk framework, controls the firm’s risk profile and approves all major risk policies. The Group Chief Executive Officer (Group CEO) is responsible for the results of the firm, has risk authority over transactions, positions and exposures, and also allocates portfolio limits approved by the BoD within the business divisions. The divisional Chief Executive Officers are accountable for the results of their business divisions. This includes actively managing their risk exposures, and ensuring that risks and returns are balanced.

The Group Chief Risk Officer reports directly to the Group CEO and has functional and management authority over risk control throughout the firm. Risk Control provides independent oversight of risk and is responsible for implementing the risk control processes for credit, country, market, investment and operational risks. This includes establishing methodologies to measure and assess risk, setting risk limits, and developing and operating an appropriate risk control infrastructure. The risk control process is supported by a framework of policies and authorities, which are delegated to Risk Control Officers according to their expertise, experience and responsibilities.

The Group Chief Financial Officer (Group CFO) is responsible for ensuring that disclosure of our financial performance is clear and transparent and meets regulatory requirements and corporate governance standards. The Group CFO is also responsible for the management of firm-wide treasury risks and for implementing the risk management and control framework for tax.The Group General Counsel is responsible for implementing the firm’s risk management and control principles for legal and compliance matters.
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