Upfront
OPINION INTERNATIONAL FINANCING REVIEWLibor pains
O
f all the regulatory challenges facing the syndicated loan
market, the replacement of Libor as the base rate for
DEALûPRICINGûCOULDûPROVEûTOûBEûTHEûMOSTûDIFlCULT
Replacing a forward-looking rate with a backward-looking
risk-free overnight rate by the end of 2021 will be no simple
TASK
!NDûWHATûWORKSûFORûlXED
RATEûCAPITALûMARKETSûMAYûNOTû
WORKûFORûmOATING
RATEûLOANS
As all loan agreements are forward looking, borrowers are
able to calculate borrowing costs in advance, allowing them
TOûMAKEûALL
IMPORTANTûCASHmOWûMANAGEMENTûDECISIONSû
Backward-looking replacement rates, on the other hand, will
MAKEûITûVERYûDIFlCULTûFORûCORPORATEûTREASURERSûTOûCALCULATEû
BORROWINGûCOSTS
Unlike the mooted replacement rates, Libor also includes
term and risk premiums so banks are compensated for
lending money over longer periods of time and for the cost of
DOINGûSO
The big issue here is transition economics – how to close
the gap between Libor rates and the selected replacement
rates, which are likely to be much lower?
Adding forward-looking mechanics to the replacement
rates would help close the gap, but that risks the creation of a
&RANKENSTEIN
LIKEû,IBORûMARKû))û,EAVINGûTHEûREPLACEMENTû
rates as they are leaves a pricing gap that can only be bridged
THROUGHûAûWHOLESALEûREPRICINGûOFûTHEûLOANûMARKET
With around US$4trn of outstanding loans pegged to Libor,
THINGSûCOULDûGETûAûLITTLEûMESSYCarige clock ticking
W
e’ve been here before: an Italian bank, having failed to
meet strict targets set by the European Central Bank,
is given a hard deadline to raise capital in a market that has
CLOSEûTOûNOûAPPETITEûFORûEXPOSUREûTOûTHEûCOUNTRYSûTROUBLEDû
BANKINGûSECTOR
Banca Monte dei Paschi di Siena, Banca Popolare di Vicenza
and Veneto Banca were all in a similar situation just over a
YEARûAGOû!LLûTHREEûFAILEDûTOûRAISEûTHEûCAPITALûTHEYûNEEDEDû!LLû
THREEûWEREûEVENTUALLYûRESCUEDûBYûTHEû)TALIANûSTATE
The ultimatum given to Banca Carige by the ECB to come
up with a new plan (its two recent plans having failed) to
BOLSTERûITSûCAPITALûFEELSûVERYûSIMILARû!NDûTHEREûAREûMANYûTHATû
think the bank will end up going the way of its three larger
RIVALSûBAILEDûOUT
In some ways, Carige faces a much harder task than MPS,
6ICENZAûANDû6ENETOû4HEûRISEûOFûAûCOMBATIVEûRIGHT
LEFTû
COALITIONûGOVERNMENTûHASûLEDûTOûAûRUNûONû)TALIANûASSETSû"ANKû
funding costs have soared – even for the top-tier, never mind
Aû4RIPLEû#ûRATEDûBANKûWITHûITSûBACKûTOûTHEûWALL
It’s also just a few months since a €500m rights issue that
WASûMEANTûTOûSORTûTHEûBANKûOUTû!GAINSTûTHATûBACKDROP ûITSû
GOINGûTOûBEûDIFlCULTûTOûRAISEûFRESHûCAPITALûINûEITHERûTHEûBONDûor equity markets – at least without paying an eye-watering
PREMIUM ûWHICHû#ARIGEûCANûILLûAFFORD
4OûBEûFAIR ûTHEûBANKûDOESûHAVEûOPTIONSû)TûHASûPLENTYûOFû
assets to sell, not least a stake in a local motorway, and a
STAKEûINûTHEû)TALIANûCENTRALûBANKû"UTûITûPLANNEDûTOûSELLûTHOSEû
ASûPARTûOFûITSûlRSTûSTABûATûRAISINGûCAPITALûINû!PRILû0RESUMABLYû
there were good reasons it didn’t do so that are still valid
NOW
A merger might be its best option – and that seems to be
WHATûTHEû%#"ûISûPUSHINGûFORû"UTûITSûDIFlCULTûTOûSEEûWHYû
anyone would want to buy a narrowly focused bank with a
QUARTERûOFûITSûLOANSûINûARREARSûANDûITSûBOARDûINûDISARRAY
With that background, if Carige can navigate its way out of
ITSûCURRENTûSITUATIONûINTACTûITûWILLûHAVEûPULLEDûOFFûTHEûlNANCIALû
ESCAPEûACTûOFûTHEûCENTURYSummer heat
T
his summer is proving unusually hot for Asia’s capital
markets – and it’s nothing to do with the record
TEMPERATURESûINûPARTSûOFû*APAN
,ATEû*ULYûISûSELDOMûAûBUSYûPERIODûFORû!SIANûBONDûBANKERSû
4HEûEXPATûORIGINATORSûANDûFUNDûMANAGERSûHAVEûDECAMPEDûTOû
THEIRûVILLASûINû"ALIûORûTHEIRûCHATEAUXûINû&RANCEû%VENûISSUERSû
AREûINûSHORTûSUPPLY
Not so this year, with a cluster of new issues crossing the
TAPEûLASTûWEEKû)NVESTMENT
GRADEû!SIANûISSUERSûPRINTEDûEIGHTû
new US dollar bonds, and China’s property sector alone
ADDEDûlVEûHIGH
YIELDûlNANCINGSûnûTHEûBUSIESTûWEEKûFROMûTHEû
SECTORûSINCEû!PRIL
Equity markets, too, are busy with a giant international
listing from China Tower poised to trump Xiaomi as the
WORLDSûBIGGESTû)0/ûSINCEû
4HISûRUSHûTOûMARKET ûHOWEVER ûMEANSûONLYûONEûTHINGû
)SSUERSûAREûEXPECTINGûMARKETSûTOûGETûWORSE ûNOTûBETTER
3ELLûINû-AY ûANDûGOûAWAYû)TSûAûWELL
TRODDENûRITUALûINûTHEû
CAPITALûMARKETS
7HENûITûCOMESûTOû!SIANûlXEDûINCOME ûBUYERSûHAVEûBEENû
NOTICEABLYûABSENTûSINCE ûWELL û-AYû7HILEûTHEûSELLINGûAPPEARSû
to have stopped, thanks to an easing of liquidity conditions
in China, there is little to suggest a sustained rally in August
nûEITHERûINûDEBTûORûEQUITY
US President Trump’s constant threats of trade tariffs and
currency wars should keep investors on their toes in August’s
HOLIDAY
THINNEDûMARKETSû&URTHERûOUTPERFORMANCEûINû53û
equities is looking ever harder to justify, and even China’s
latest move to ease onshore liquidity is no guarantee against
FURTHERûDEFAULTS
August has also proven a historically volatile month in
recent years, with Europe’s sovereign debt crisis causing
havoc in 2011 and China’s stock market collapse rocking
CONlDENCEûINû
For the queue of Asian companies looking to raise capital in
THEûNEXTûFEWûWEEKS ûAûPROLONGEDûBREAKûFROMûTHEûVOLATILITYûOFûTHEû
SECONDûQUARTERûWOULDûBEûFARûBETTERûTHANûAûWEEKûONûTHEûBEACH