IFR 02.29.2020

International Financing Review February 29 2020 1

Upfront

„ OPINION^ INTERNATIONAL FINANCING REVIEW

Tilting at windmills

T

he three Barclays bankers accused of wrong-doing by the

5+Sû3ERIOUSû&RAUDû/FlCEûWEREûACQUITTEDûOFûALLûCHARGESûATû

London’s Old Bailey on Friday after a four-month trial and an

investigation that lasted eight years. They had been accused

in effect of paying £322m in kickbacks to Qatar – via two

separate deals – to secure investment in the bank.

The jury’s decision will now no doubt lead to intense

criticism of the SFO. With good reason.

"UTûITûWASûSURELYûRIGHTûTOûLAUNCHûANûENQUIRYûINTOûTHEûDEALSû

The fact that Barclays was willing to pay such a large amount

of money in exchange for a seemingly nebulous agreement

that Qatar would provide advice and introductions looked at

least worthy of an initial investigation. Especially as there

WASûAûQUESTIONûABOUTûPOTENTIALLYûMISLEADINGûINFORMATIONûINûAû

major fundraising prospectus.

"UTûONCEûTHATûINITIALûENQUIRYûDIDNTûlNDûAûSMOKINGûGUNûINû

the form of taped conversations or dodgy emails, the

decision to push ahead with prosecutions was a mistake.

A mistake that was compounded – three times – when the

SFO refused to fold its cards despite the corporate

prosecution against Barclays failing, Barclays CEO John

6ARLEYûBEINGûACQUITTEDûINûANûEARLIERûTRIALûANDûTHEûJURYû

eventually being discharged at that same trial.

4HEû3&/ûWASûNOûDOUBTûUNDERûSIGNIlCANTûPOLITICALûANDû

moral) pressure to bring someone to book for the failings of

THOSEûWORKINGûINûTHEûlNANCIALûINDUSTRYûDURINGûTHEûCRISISû"UTû

THATûDOESûNOTûEXCUSEûTHEûQUIXOTICûPURSUITûOFûTHISûCASE

In an admirably magnanimous statement after he was

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conscious that the SFO plays an important role in the ethical

FUNCTIONINGûOFûOURûCAPITALûMARKETSûHOWEVERûITûISûEQUALLYû

important that they are properly resourced to act fairly and

expeditiously.”

He is of course absolutely right. The SFO has a bloody

DIFlCULTûJOBûBUTûSOMEONESûGOTûTOûDOûITû4HEREûWILLûBEûCALLSûFORû

the SFO to be scrapped. But those calls don’t change the

FUNDAMENTALSû7HOEVERûISûPOLICINGûTHEû5+SûlNANCIALû

markets needs the resources and personnel to do it properly.

Decoupling Asia

B

ond bankers used to joke that when the US sneezes, it is

Asia that catches a cold. On the strength of last week’s

performance, those traditional roles have now been reversed.

Not long ago, Asian issuers wanting to sell US dollar bonds

in the international capital markets needed to wait for the

ideal market conditions to have a chance of getting investors’

attention.

The big US funds that dominated new issues would only

look at Asian credit if they were feeling especially bullish. A

shaky day in the US often meant Asian borrowers would have

to wait for a better window.

That was especially true in high-yield credit, where a sell-

off in the US would close the market for Asian issuers for

weeks.

It’s remarkable, then, that no less than 15 US dollar bonds

were printed in Asia last week, the worst week for US stocks

SINCEûTHEûûlNANCIALûCRISISû4ENûHADûNOûINVESTMENT

GRADEû

rating; four had no maturity.

There is good reason for this decoupling.

The Asian investor base has come a long way in the last few

years, to the extent that 97% Asian allocations on a new US

DOLLARûBONDûISSUEûAREûNOWûAûCOMMONûSIGHTûASûWASûTHEûCASEûONû

a deal for Hong Kong landlord Hysan last week).

Overseas Chinese buyers are now the driving force behind

the primary markets, with banks, wealth managers, pension

funds and sovereign investors all holding some serious

lREPOWER

Add to that dynamic the fact that Asian markets grasped

the seriousness of the coronavirus outbreak weeks ago, and

it’s no surprise to see business continue more or less as usual

last week.

2ELATIVEûVALUEûDICTATESûTHATûTHISûKINDûOFûDIVERGENCEûCANû

only run so far, and there is likely to be a period of

adjustment while Asian markets get used to the new pricing

levels.

It is clear, however, that Asia’s capital markets are healthy

enough to stand on their own feet, regardless of what is

happening with their Western counterparts. In fact, as

international investors struggle to assess the fallout from the

new coronavirus outbreak, more global funds will be looking

to China as a guide.

Governance issues

D

ebt investors think they might just have found another way

TOûSTOPûPRIVATEûEQUITYûlRMSûSTRIPPINGûINVESTORûPROTECTIONû

from leveraged loan and high-yield bond documentation.

Until now, investors efforts to push back on such tactics

have come to little as demand for paper continues to outpace

supply.

But the game may now have changed with efforts to recategorise

THEûPROBLEMûASûAûGOVERNANCEûISSUEûnûVIAûTHEûh'vûINû%3'

0RIVATEûEQUITYûlRMSûHAVEûLONGûARGUEDûTHATûITSûTHEIRûlDUCIARYû

DUTYûTOûSHAREHOLDERSûTOûSECUREûTHEûGREATESTûmEXIBILITYûPOSSIBLEûTOû

manage companies through a downturn. And if buyers are

willing to buy the debt, the argument goes, the PE shops would

not be doing their duty were they not to take advantage.

Hence the forcing through of Ebitda adjustments to reduce

LEVERAGEûTHEûLACKûOFûTRANSFERûPROVISIONSûTOûSTOPû0%ûlRMSûFROMû

EXITINGûDIFlCULTûDEALSûANDûOTHERûUNBALANCEDûTERMS

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argument that other stakeholders are unfairly treated –

might just give investors the ammunition they need to get

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It’s worth a shot.

2 IFR Upfront 2322 p 1 - 2 .indd 1 28 / 02 / 2020 20 : 12 : 44