Upfront
OPINION INTERNATIONAL FINANCING REVIEWNot so grand
I
n normal circumstances, raising close to US$2bn in the
high-yield bond market would be cause for celebration.
China Evergrande, however, might want to hold off on the
BAIJIUûAFTERûITSûLATESTûOFFSHOREûlNANCING
Having raised four-year money at 6.25% 16 months ago, the
11%–13.75% yields on last week’s new issue are a painful
lesson that international capital can be extremely expensive.
What’s more, Evergrande’s chairman had to stump up
US$1bn to support the US$1.8bn offering.
Evergrande is not the only high-yield issuer to have paid a
high price to force a new issue into a weak market. But the
absence of institutional support suggests it is also being
punished for past excesses.
Funds and asset managers bought only about US$133m of
the US$1.8bn deal, and mostly stuck to the two-year piece.
Even excluding the chairman’s portion, private banks
dominated the book.
Given Evergrande’s track record, that’s no big surprise.
Institutional investors have grown wary of its oversized bond
sales after a jumbo offering in 2017 left them nursing heavy
losses in early trading.
,ASTûYEARSûRISINGûTIDEûmOATEDûALLûBONDS ûBUTûTHISûYEARûISû
very different. Investors can pick and choose which
companies they want to support, and the ones in most
DIREûNEEDûOFûlNANCINGûWILLûHAVEûTOûHANDûOVERûTHEIRûPOUNDû
OFûmESH
The renewed turmoil in Asian high-yield raises a more
fundamental question over how much Chinese property
companies can rely on international funding. If Evergrande
has to pay almost 14% despite its size and its connections,
other issuers should be redoubling their efforts to keep as
many funding channels open as they can.
For Evergrande, this deal ought to have removed a massive
OVERHANGûONûTHEûCOMPANYûBYûCLEARINGûTHEûRElNANCINGûRISK û
but instead it has raised more questions about its desperation
for money. It’s now going to have to work even harder to win
back the support of institutional investors.
Back to square one
H
ow the mighty fall. Less than two years ago, UniCredit
was the darling of the markets: impressed by the
clean-up plans of its incoming CEO Jean Pierre Mustier,
investment banks and investors were falling over themselves
to get a piece of the bank’s €13bn rights issue.
Fast forward to today, and UniCredit is being given a wide
berth by equity and bond markets. Its shares are back to
levels before the capital raise, while the bank hasn’t been
able to do a bond deal in months. Rather worryingly, it has
done less than a third of its planned issuance for the year –
with just a few weeks to go.
Of course, UniCredit’s problems aren’t all of its own
making. The wide berth given by investors has more to do
with the stand-off between Rome and Brussels over Italy’s
PLANSûTOûmOUTû%UROPEANûRULESûONûlSCALûDElCITSû5NI#REDITû
WOULDûARGUEûTHATûTHEûCOLDûSHOULDERûISûUNJUSTIlED ûTHATûITSû
clean-up remains on track.
But the two are intricately related. The bank has made
good progress on getting its books in order, not least by
selling €18bn of bad loans in the landmark FINO transaction.
But much more needs to be done: the bank, like rival Intesa
Sanpaolo, still has more than €50bn of bad loans on its books.
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back to health. But those look unlikely in the current
environment. For one thing, investors will demand a big
discount given the acute uncertainty around Italy right now;
for another, sales normally involve hits to capital, which
might not be taken well by markets right now.
Of course, banks and domestic politics are always deeply
intertwined. But Italian banks have made things worse for
themselves. Many, including UniCredit and Intesa, loaded up
on cheap European Central Bank loans to buy sovereign debt.
The carry trade seemed a no-brainer.
But because Italian debt has sold off, that decision now
looks a bad one. Once again, the country’s banks are
completely at the mercy of domestic politics – just as they
were in 2011, when the ECB eventually had to step in to
effectively bail out the system with cheap loans.
Then, it took years for names such as UniCredit and Intesa
TOûWINûBACKûTHEûCONlDENCEûOFûINVESTORSû-USTIERûANDûHISûILKû
(not to forget his elk) will be hoping it doesn’t take that long
this time around. With €260bn of bad loans across the
system, much needs to be done – and quickly.Indian delicacies
F
or a country with so much potential, India never seems to
be too far from a crisis. Policymakers are once again facing
a dangerous predicament in the coming weeks as they battle
to keep the faith of the capital markets and avert a full-blown
liquidity crisis.
)NDIASûlNANCIALûMARKETSûHAVEûENTEREDûAûCRUCIALûPERIODûnû
not that those in charge seem to have noticed. Already
reeling from a sell-off in the shadow-banking sector and a
liquidity squeeze that has spread to even short-term
commercial paper, investors now have to contend with a rift
between the government and the central bank.
7ITHûTHATûINûMIND ûANûATTEMPTûTOûmOODûUPûTOû53BNûOFû
Coal India shares into a wobbling market last week looked
LIKEûANOTHERûMISGUIDEDûSTEPûFROMû)NDIANûOFlCIALSûnûEVENûIFû
the more modest US$800m base deal size allowed the state to
avoid disaster.
Questions over policymakers’ capabilities and
independence could not come at a worse time. Liquidity in
the funding markets is running so thin that the continued
support of the country’s mutual funds is the only thing
propping up the Indian markets.
Add in the constrained banking sector, seasonal tightness
around the festive period, the looming threat of elections
next year and a global retreat from emerging market assets,
and there really isn’t much left in the tank.
)NDIANûOFlCIALSûMADEûTHEûRIGHTûNOISESûTOWARDSûTHEûENDûOFû
the week, and falling crude prices restored some interest, but
they must now focus their efforts on deepening support for
RUPEEûINVESTMENTSûANDûSHORINGûUPûCONlDENCEûINûTHEûPOLICYû
framework. The next big state divestment will just have to wait.