IFR International - 21.07.2018

Upfront

„ OPINION INTERNATIONAL FINANCING REVIEW

Deal or no deal

T

here’s no doubt about it: Europe has too many banks. At

the last count, there were more than 3,000 European

banking institutions.

3OûITûISûNOûSURPRISEûTHATûREGULATORSûlNALLYûTAKINGûAûBITûOFûAû

BREATHERûFOLLOWINGûAûDECADEûSPENTûMOPPINGûUPûAFTERûTHEû

GLOBALûlNANCIALûCRISISûANDûTHEûSUBSEQUENTûEUROZONEûCRISISûAREû

now pushing the industry to get on with consolidation.

The advantages are clear: returns are dismally low right

now, and in some countries such as Germany are in the low

SINGLEûDIGITSû#ONSOLIDATIONûSHOULDûHELPûTAKEûCOSTSûOUTûOFûTHEû

system, encourage synergies, and push returns higher.

But banks are less keen. They complain that regulatory

HURDLESûREMAINûTOOûHIGHûFORûBIGûCROSS

BORDERûDEALSûPOINTINGû

TOûLIQUIDITYûRULESûTHATûPREVENTûTHEMûFROMûMOVINGûDEPOSITSûINû

one country to another and to the deliberately punishing

CAPITALûREQUIREMENTSûTHATûCOMEûWITHûINCREASEDûSIZE

!NOTHERûMAJORûGRIPEûISûTHATûMAJORûOPERATIONALûDIFFERENCESû

STILLûEXISTûBETWEENûCOUNTRIESûMEANINGûTHATûTHEûDAY

TO

DAYû

MANAGEMENTûOFûAûPORTFOLIOûOFûLOANSûINûONEûCOUNTRYûCANûBEû

MASSIVELYûDIFFERENTûFROMûTHEûMANAGEMENTûOFûAûSIMILARû

PORTFOLIOûELSEWHEREûTHUSûDIMINISHINGûTHEûPOTENTIALûSYNERGIES

*USTûAûFEWûYEARSûAGOûTHEûBIGGESTûHURDLEûTOûBANKûCONSOLIDATIONû

INû%UROPEûWASûTHEûRELUCTANCEûOFûREGULATORSûWORRIEDûABOUTûTHEû

TOO

BIG

TO

FAILûPROBLEMûTOûALLOWûBANKSûTOûGETûBIGGERû.OWû

regulators are encouraging consolidation, and it is banks that

are coming up with new excuses not to pull the trigger.

7ITHûTHEûGLOBALûlNANCIALûCRISISûnûANDûTHEûILL

FATEDû

ACQUISITIONûOFû!".û!-2/ûTHEûLASTûBIGû%UROPEANûCROSS

BORDERû

BANKûDEALûnûSTILLûFRESHûINûTHEûMINDSûOFûMANYûBANKûBOSSESûITûISû

perhaps understandable that they don’t want to take big

RISKSû4ECHNOLOGYûANDûTHEûRISEûOFûSTART

UPSûALSOûTHREATENûTHEû

INDUSTRYûLIKEûNEVERûBEFORE

"UTûBANKSûMIGHTûREGRETûNOTûPUSHINGûFORWARDûWITHûDEALSûNOWû

9ESûTHEûBUSINESSûOFûBANKINGûISûCHANGINGûANDûFARûFEWERûBRANCHESû

WILLûBEûREQUIREDûFORûTHEûBANKSûOFûTHEûFUTUREû"UTûBUYINGûBANKSû

isn’t just about branches; it is also about adding new clients, and

THEûABILITYûTOûCROSS

SELLûTHEûSTUFFûYOUûALREADYûDO

7ITHûFUNDINGûCOSTSûSOûLOWûANDûREGULATORSûEGGINGûBANKSûONû

now is arguably the time to move. Fine, the regulatory

LANDSCAPEûMIGHTûNOTûBEûPERFECTû"UTûIFûBANKERSûAREûWAITINGûFORû

ALLûTHEûSTARSûTOûBEûINûALIGNMENTûTHEYûWILLûBEûWAITINGûFORûEVER

Don’t be greedy

D

ebate is raging in the European leveraged loan market

about how to get best execution in an environment

where pricing is on the move.

0RIMARYûMARGINSûAREûCLIMBINGûANDûTHEûSECONDARYûPRICESûOFû

aggressive deals completed earlier this year have tanked.

The discussion centres on whether a better result can be

achieved by putting a more reasonable deal on the table with

HIGHERûPRICINGûANDûMOREûINVESTOR

FRIENDLYûDOCUMENTATIONû

FROMûTHEûOUTSETûORûWHETHERûTOûPUSHûTHEûMARKETûWITHûYETû

another aggressive deal.

!ûSERIESûOFûCHANGESûTOûAûWELL

KNOWNûANDûADMIREDûCREDITû

LIKEû'ERMANûMETERINGûBUSINESSû4ECHEMûWHICHûHASûAû

YEARû

track record in the leveraged loan market, suggests that it

MAYûBEûMOREûPRUDENTûTOûERRûONûTHEûSIDEûOFûCAUTION

In order to clear the market, Techem had to increase

PRICINGûTOûBPûANDûMAKEûAûRAFTûOFûDOCUMENTûCHANGESûONûITSû

õBNûBUYOUTûLOANûAFTERûLAUNCHINGûITûWITHûHIGHûLEVERAGEûANDû

aggressive terms.

/VERLYûAGGRESSIVEûDOCUMENTATIONûCOULDûBEûCOSTINGûPRIVATEû

EQUITYûlRMSûBPnBPûMOREûINûTHEûCURRENTûENVIRONMENTûIFû

THEYûHAVEûTOûRECUTûDEALSûSEVERALûTIMESûAFTERûINVESTORû

pushback. Those numbers are encouraging some sponsors to

MODERATEûTHEIRûREQUESTS

4ECHNICALûFACTORSûAREûTHEûMAINûDRIVERSûATûTHEûMOMENTûASû

THEûMARKETûWORKSûTHROUGHûAûTEMPORARYûGLUTûOFûSUPPLY

4HEûDAYSûOFûhDISCOVERYvûWHENûAGGRESSIVEûDEALSûAREûPUNTEDûINTOû

THEûMARKETûTOûSEEûIFûTHEYûmYûAPPEARûTOûBEûOVERûASûAûMOREûBALANCEDû

reasonable and constructive market emerges. That will help

INVESTORSûTOûFEELûBETTERûABOUTûTHEMSELVESûnûATûLEASTûFORûNOW

Strained connections

L

ast week’s spat between over the Stock Connect link

between Hong Kong and China has dredged up some

UNCOMFORTABLEûQUESTIONSûOVERûTHEûFUTUREûOFûTHEûPARALLELû

markets. It needn’t have.

4HEû3HANGHAIûANDû3HENZHENûSTOCKûEXCHANGESûLASTûWEEKû

REFUSEDûTOûADMITû8IAOMISûNEWLYûLISTEDûSHARESûTOûTHEû3TOCKû

#ONNECTûPLATFORMûSURPRISINGûINVESTORSûWHOûHADûASSUMEDûITû

would meet the criteria once it entered the Hang Seng index.

The mainland exchanges, both regulated by the China

3ECURITIESû2EGULATORYû#OMMISSIONûSAIDûDUAL

CLASSûSHARESûASû

WELLûASûSTAPLEDûSECURITIESûANDûFOREIGNûCOMPANIES    ûWEREûTOOûNEWû

ANDûCOMPLICATEDûFORûORDINARYûINVESTORSûTOûUNDERSTANDûANDû

WOULDûONLYûBEûADMITTEDûAFTERûANûUNDISCLOSEDûhSTABILITYûPERIODv

4HISûISûAûSTUNNINGûCONTRADICTIONûOFûTHEû#32#SûEARLIERû

ENTHUSIASMûTOûALLOWûDUAL

STOCKûCOMPANIESûSUCHûASû8IAOMIûTOû

sell Chinese depositary receipts to the domestic investor

BASEûINûANûEFFORTûTOûBRINGûLEADINGû#HINESEûTECHNOLOGYû

companies back home.

)FûTHATûPLANûSTILLûHOLDSûTRUEû#HINAûMUSTûHAVEûANOTHERû

MOTIVEûFORûEXCLUDINGûDUAL

CLASSûSTOCKSû4HEûOBVIOUSûONEûISû

that the exchanges are worried about losing out to Hong

+ONGûINûTHEûBATTLEûFORûSECONDARYûLISTINGSûFROMû#HINASû

overseas technology champions, such as Alibaba and Baidu.

7HYûSELLû#$2SûINû#HINAûWHENûTHEYûCANûLISTûINû(ONGû+ONGû

and access mainland investors through Stock Connect?

This argument, however, doesn’t stack up. For one, Stock

Connect is only available in secondary trading, so it has

PRACTICALLYûNOûBEARINGûONûTHEûPRICEûOFûAû(ONGû+ONGûLISTINGû!LLû

THINGSûBEINGûEQUALûAûDOMESTICûLISTINGûINû3HANGHAIûORû

3HENZHENûWOULDûPROBABLYûFETCHûAûHIGHERûPRICE

4HEREûISûALSOûPLENTYûOFûROOMûFORûBOTHû*USTûASûMANYû#HINESEû

COMPANIESûHAVEûPURSUEDûDUALûLISTINGSûINûTHEû!

SHAREûANDû

(

SHAREûMARKETSûAûMAJORûTECHNOLOGYûCOMPANYûSUCHûASû

8IAOMIûCOULDûEASILYûSUSTAINûAûPRESENCEûINûBOTHûMARKETS

4HEûINVESTORûBASEûFORû#$2SûANDû3TOCKû#ONNECTûWILLûALSOûBEû

DIFFERENTûSINCEû3TOCKû#ONNECTûISûONLYûOPENûTOûMAINLANDû

INVESTORSûWITHûAûMINIMUMûBALANCEûOFû2MBû

53  ûnûEXCLUDINGûMANYûOFûTHEûINDIVIDUALûINVESTORSû

who dominate domestic trading.

7ITHûALLûTHATûINûMINDûTHEûONLYûLOGICALûEXPLANATIONûFORû

EXCLUDINGûDUAL

CLASSûSHARESûISûTHATû#HINASûREGULATORSûHAVEûNOû

CONlDENCEûINû8IAOMISûSTOCKûPRICEû!FTERûTHEûWILDûSWINGSûOFû

the last two weeks, they may have a point.