Upfront
OPINION INTERNATIONAL FINANCING REVIEWHail to the chief
A
nother cash-burning company – this time Uber – has
pulled off a junk bond sale. But it’s not necessarily a sign
that the high-yield market is bonkers.
9ES û5BERûISûAûVERYûSECRETIVEûlRMûANDûITSûAPPROACHûTOûTHEû
debt sale was unusual. Getting any kind of details on the
bond was tough for investors (as well as journalists).
The format – a so-called 4(a)(2) – meant there was no
chunky bond document to pore over, or dodgy covenants
widely visible that critics could slate. There was no
underwriting either, so if bondholders want to sue down the
ROAD ûTHEYûMIGHTûlNDûITûTOUGHûTOûDOûSO
But that aside, the unique approach may have been the
right one for what is a unique business.
And we’re not talking about multi-billions of dollars of
DEBTûHEREû4HEûBOND ûTHEûCOMPANYSûlRST ûWASû53BNû4HATû
takes its debt, if you only include the two loans under its belt
ANDûTHEûNEWûDEAL ûTOûABOUTû53BN
The much bigger number that investors have their eye on –
and the premise for lending to Uber (because you can’t judge it
ONûCASHmOWûITSûBURNINGûMONEY ûnûISûTHEûLOFTYû)0/ûVALUATION
3OMEûBELIEVEûANû)0/ûnûEXPECTEDûNEXTûYEARûnûCOULDûVALUEûTHEû
COMPANYûATûASûMUCHûASû53BN
/FûCOURSE ûTHATûVALUATIONûMAYûWELLûBEûUNACHIEVABLEû
But a number anywhere near that mark would provide a
pretty chunky cushion of equity sitting below bondholders.
!NDûWHOSûTOûSAYû5BERûWONTûTAKEûOUTûSOMEûOFûTHEûDEBT û)TSû
not clear whether terms in the bonds dictate that they would
BEûPAIDûDOWNûFROMû)0/ûPROCEEDSû5BERûISNTûSAYING ûANDû
NEITHERûISûTHEûPLACEMENTûAGENTû-ORGANû3TANLEY ûBUTûTHEû
loans are certainly pre-payable.
3OûMAYBEûTHEûBALANCEûSHEETûDOESNTûLOOKûTOOûBAD ûAFTERûALL
Back from the brink
T
urkey is back on investors’ radar screens – just two
months after staring into the abyss of a full-scale
lNANCIALûMELTDOWN
,ASTûWEEK ûTHEûSOVEREIGNûCONlRMEDûTHATûINVESTORSûHAVEûRE
ENGAGEDûBYûSELLINGûITSûlRSTû53ûDOLLARûBONDûSINCEû!PRIL
)NûMANYûWAYS ûTHEûDEALûWASûAûSUCCESSû!Tû53BN ûITûWASûTHEû
same size as the country’s previous outing in April, while the
53BNûBOOKûWASûSOLIDûENOUGHûTOûENABLEûPRICINGûTOûBEûCUTûBYû
BP ûLEAVINGûAûPREMIUMûOFûNOûMOREûTHANûBP
4HEûCHOICEûOFûAûlVE
YEARûTENORûWASûNONETHELESSûSURPRISING û
especially as the purpose of the trade was to make a
statement rather than raise funds.
)Fû4URKEYûHADûTRIEDûTOûISSUEûAûFEWûWEEKSûAGO ûWHENûmOWSû
into the credit were still inconsistent, a relatively short-
duration bond would have made perfect sense.
But liquidity has recently picked up, while key assets have
RALLIEDûHARDû3OVEREIGNûBONDûYIELDSûHAVEûFALLENûMOREûTHANû
BPûSINCEûTHEIRûMID
!UGUSTûHIGHSûANDûTHEûCURRENCYûHASû
APPRECIATEDûAGAINSTûTHEû53ûDOLLARûBACKûTOûLEVELSûNOTûSEENû
since before the summer panic.
3URELY ûIFû4URKEYûHADûWANTEDûTOûMAKEûAûBOLDûSTATEMENT ûAû
YEARûWOULDûHAVEûMADEûMOREûSENSEûnûEVENûIFûTHATûWOULDû
have meant locking in a relatively high coupon.
Now, with the sovereign done, the real test of sentiment
towards Turkey will come when the country’s banks try
to return to the international bond markets.
That test is unlikely to come soon, though.
Despite the positive signal for Turkish bank risk that came
LASTûMONTH ûWHENû!KBANKûBECAMEûTHEûlRSTûLENDERûTOûSIGNûAû
syndicated facility since the economic crisis accelerated in
August, banks are unlikely to be rushing back to the cross-
border bond market.
That is for two reasons. First, as the economy heads into
recession, the banks aren’t desperate for funds to on-lend.
3ECOND ûTHEûCOSTûOFûNEWûDEBT
BASEDûCAPITALûISûTOOûPUNITIVEû!Nû
OUTSTANDINGû!KBANKûûNON
CALLûû4IERûûBOND ûFORû
EXAMPLE ûISûTRADINGûCLOSEûTOû
But if the government continues to make the right moves,
it’s not far-fetched to believe that Turkish capital deals could
BEûBACKûONûSCREENSûINûTHEûlRSTûQUARTERûOFûNEXTûYEAR
/NLYûTHENûWILLû4URKEYSûCAPITALûMARKETSûRECOVERYûBEûCOMPLETEHidden dragon
T
he latest warning of hidden debts in China’s local
GOVERNMENTûlNANCESûWILLûBEûBADûNEWSûFORûGOVERNMENT
linked issuers planning to sell bonds offshore.
30ûCAUTIONEDûLASTûWEEKûTHATûASûMUCHûASû53TRNûOFûDEBTSû
may have been accumulated off the books, mainly through
LGFVs set up to channel investments into infrastructure and
social projects.
)NûTHEûONSHOREûMARKET ûAûLOCALûGOVERNMENTûTAGûISûSTILLûSEENû
ASûAûSIGNûOFûSAFETY ûANDûINûMANYûCASESûJUSTIlESûAûLOWERûCOUPONû
than would otherwise be the case.
/FFSHORE ûTHOUGH û,'&6SûAREûINCREASINGLYûVIEWEDûWITHû
SUSPICIONû)FûTHESEûISSUERSûAREûSOLIDûCREDITS ûWHYûDOûTHEYûNEEDû
to raise money overseas?
/NEûPOPULARûSOLUTIONûnûFORûTHOSEûTHATûAREûABLEûnûISûTOû
rebrand from an LGFV to a plain old state-owned enterprise.
)NVESTORSûUNDERSTANDûHOWûTOûANALYSEû3/%S ûBASEDûONûAûREALû
BUSINESSûTHATûHOPEFULLY ûGENERATESûAûPOSITIVEûCASHmOWûANDû
clear public ownership.
A loss-making LGFV is a different story: with China’s
ECONOMYûCOOLING ûANDûREGULATORSûSETûONûREDUCINGûEXCESSIVEû
leverage, the implicit support of a city or region potentially
thousands of miles from Beijing is no longer enough.
Rebranding the sector, however, does not change much.
%XPECTATIONSûOFûSTATEûSUPPORTûSTILLûALLOWûSTATE
OWNEDûENTERPRISESû
to raise funds at lower rates than if they were in the private
SECTOR ûEVENûTHOUGHû#HINAûISûREININGûINûSUPPORTûFORû3/%S
Rating agencies add to the confusion by factoring in
implied support from local and state governments, rather
than assessing issuers solely on their own merits.
The implicit guarantees around much of China’s offshore debt
AREûWHATûMAKEûFUNDRAISINGûVIABLEû3PELLINGûOUTûTHEûTRUEûSTRENGTHû
of state and local government support, using formal guarantees
or security against assets, will allow investors to assess and price
the risk properly – instead of trying to read the tea leaves.
)NûTIME û#HINASûCREDITûMARKETSûWILLûCOMEûTOûDEMANDûCLEARû
government guarantees or sound fundamentals, rather than
the vague promises that come with an LGFV stamp.
That also means some issuers will be shut out of the
INTERNATIONALûBONDûMARKETSû)NûTHEûLONGûRUN ûFRANKLY ûTHATûISûAû
GOODûTHINGû)FûLOCALûBANKSûAREûNOTûWILLINGûTOûLENDûTOûPROJECTS û
perhaps they are not worth funding.