Global Finance (February 2006)

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Foreign-owned banks play politics as the Kremlin raises the stakes

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FEBRUARY 2006 | VOL.20 NO.2

Balance of Power ussia’s recent spat with Ukraine over the price of gas sent much of Europe into a spin as politicians and businesspeople alike began to see how vulnerable their own energy supplies could be. But as we find out in our cover story this month (see page 18), the fracas also exposed some other uncomfortable truths about the Kremlin’s plans to use Russia’s vast oil and gas reserves as a political tool. The scale of the reaction to Russia and Ukraine’s dispute highlights just how much—and how quickly—the global balance of power is changing. For example, in only a short space of time China has amassed eye-popping foreign exchange reserves, and it looks as though those reserves will continue to grow by around 20% per year. By the end of last year the country had salted away more than $800 billion.Within just one more year its foreign exchange reserves are expected to top $1 trillion.With such a vast stash at its disposal, China certainly will have the power to move markets—whether or not it wants to. Change in the old world order is snowballing as countries such as China, India and Russia are beginning to flex their growing economic and political muscles. In a move that sent shivers through the oil-producing world, China and India announced last month that they would work together to secure energy supplies for the future. Last year, as the two countries faced off against each other in a scramble to secure access to dwindling oil supplies, they realized that fighting for access to oil served only to push up the prices they were paying. By teaming up in their efforts to satisfy their thirst for oil and gas, they are effectively creating a de facto organization of petroleum importers—something that Western nations, hampered by rising fuel costs, might do well to emulate. There is no doubt that we are witnessing a startlingly rapid transfer of economic and political clout from the West toward the East.This trend is not likely to slow down any time soon. If anything, it will accelerate as global corporations continue to pounce on the opportunities thrown up by this dramatic transformation. Countries and corporations must act now to prepare themselves for what will undoubtedly be a very different world in the very near future. Until next month.

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EDITOR IN CHIEF AND CHAIRMAN: PAOLO PANERAI PUBLISHER AND PRESIDENT: JOSEPH D. GIARRAPUTO ASSOCIATE PUBLISHER: MATTEO GABBA

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CONTENTS

COVER STORY BY MARK LEHANE

COVER STORY 18 Russia Russia’s president Putin knows he’ll need help to turn his country’s energy wealth into an effective political tool.Western banking giants are scrambling to assist him—and to grab a slice of what promises to be a very large pie.

Software giants are developing new financing techniques in an attempt to provide smaller companies with access to their high-end systems.

The Need To Be Different

World’s Best Trade Finance Banks 2006 Global Finance selects the leaders in a specialized area of finance that is undergoing some jarring changes.

Dear Reader A letter from the editor.

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SECTOR REPORT: GLOBAL CUSTODY BY ANITA HAWSER

Newsmakers Citigroup’s Charles Prince sets his sights on China; SEC gets a new chief legal officer; Bolivia’s new president squares up to Washington; and India’s airline chiefs make waves.

FINANCIAL SOFTWARE BY ANITA HAWSER

As their customers’ needs become ever more complex, custodians are finding themselves providing services that are far beyond their traditional realm.

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REGULARS 1

FEATURES 24 Enterprising Solutions

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FEBRUARY 2006 | VOL.20 NO.2

Milestones Brazil sets pace as Latin America frees itself from the IMF; a fracas over privatization of Romania Telecom exposes rifts in the investment banking world; Ford pumps more juice into troubled Jaguar; and country risks ebb as growth feeds through to emerging markets.

12 Emerging Markets Roundup The latest news from India, China, Brazil and Russia.

16 Emerging Markets Investor AWARDS: TRADE FINANCE BANKS BY GORDON PLATT

Key information for investors in emerging markets.

40 Corporate Debt Flatter yield curves and a possible move to inflation targeting by the US Federal Reserve could be in store for the global debt markets in 2006, but no credit crunch is anticipated as economic growth remains strong.

44 Mergers & Acquisitions Last year was the best year for mergers and acquisitions worldwide since 2000, with the energy and power sector leading the way.

46 Foreign Exchange Speculative investment flows into East Asian stock markets are boosting local currencies and raising concerns about what will happen if flows should suddenly reverse.

48 Global Equity/DRs Both the value of investment in depositary receipts and the trading value surpassed $1 trillion for the first time in 2005, helped by Russian companies listing DRs on the London Stock Exchange. 2

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UNITED STATES/CHINA

UNITED STATES

CITIGROUP BANKS ON GROWTH IN CHINA

SEC CHAIRMAN NAMES NEW GENERAL COUNSEL

itigroup chief executive Charles O. Prince told an investor conference in New York in December that the bank has a plan to boost the share of its profits that comes from its overseas operations.Thus it came as no big surprise a few weeks later when a consortium led by Citigroup raised its bid for an 85% stake in China’s Guangdong Development Bank to $3 billion. If completed, the deal would make Citigroup the first overseas investor to buy control of a state-run bank in China, where economic growth has averaged 9.5% for the past 25 years. The Chinese government, which had imposed a 20% cap on foreign ownership of domestic banks, was expected to grant Citigroup an exception because of the large

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amount of non-performing loans on the books of medium-size Guangdong Development Bank. Citigroup and its local partners bid about twice the bank’s book value, topping offers from France’s Société Générale and China’s Ping An Insurance. Singapore-based DBS dropped out of the bidding a few weeks earlier. Citigroup’s interest in China also was apparent in late December, when it agreed to quadruple its stake in Shanghai Pudong Development Bank to 19.9%, at a cost of about $875 million. Prince has said that he expects China’s future growth to be led by consumer spending, and the bank is expected to focus on home loans, auto loans and credit cards. Guangdong, which is near Hong Kong, has the highest per capita income in China after Beijing and Shanghai. Citigroup was anxious to catch up with rivals HSBC and Bank of America, which had bigger investments in China, analysts say. Foreign banks are stepping up their investments in China ahead of the full opening of its banking sector to overseas competitors later this year. —Gordon Platt

The SEC’s new chief legal officer, Brian Cartwright Securities and Exchange Commission chairman Christopher Cox, who hails from California’s wealthy Orange County, named Los Angeles lawyer Brian Cartwright, a former astrophysicist, as the agency’s chief legal officer. Cox and Cartwright both attended Harvard Law School and worked together at Latham & Watkins, the fifth-largest law firm in the United States. While Cartwright’s long-standing ties to Cox suggest that the old-buddy network is alive and well, his record can stand easily on its own merits. After graduating from Yale University, Cartwright earned a Ph.D. in physics from the University of Chicago and was a research physicist at the University of California at Berkeley’s space sciences laboratory. He was president of the Harvard Law Review and served as law clerk to US Supreme Court justice Sandra Day O’Connor. At Latham & Watkins, he chaired the firm’s public-company practice, where his recent clients have included AmGen, a biotechnology company, and Edison International, an electric utility. “Brian Cartwright will be a relentless and powerful champion for investors, and will continue the SEC’s tradition of exceptional professionalism,” Cox said in a statement. The general counsel evaluates the legality of new rules as they are being developed, advises the agency’s commissioners and represents the SEC in court cases. The agency is currently being sued over rules requiring mutual funds to have an independent chairman and requiring hedge fund managers to register with the SEC. Cox, a former Republican congressman known for his pro-business stance, replaced William H. Donaldson, who resigned as SEC chairman in June 2005. Cox likely will have an ally in Cartwright in seeing that investor protection doesn’t come at too high a cost for business, although most of the Sarbanes-Oxley Act’s reforms Simonseem Zadekto be in danger of being watered down. don’t –GP

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FX Update Petrodollars and the US Dollar Outlook The US dollar’s structural decline was interrupted in 2005, despite continued deterioration in the US current account deficit, as rapidly growing volumes of petrodollars were increasingly invested into US securities. Energy commodities such as crude oil and natural gas are sold internationally in US dollar terms. In order to import oil and

As long as US interest rate differentials remain positive, it appears that petrodollars will continue to support the value of the US dollar. gas, local currencies must be sold, and dollars purchased, with the resulting profits referred to as petrodollars. Net oil exporters have sustained extraordinary windfalls over the past two years due to a prolonged rise in energy prices that few anticipated. A year ago, OPEC was forecasting that oil prices would fall back below $40/bbl. Two years ago, $30/bbl was believed to be a stable equilibrium. One of the reasons for this sustained rise in energy prices is the rapid economic growth of emerging Asia, particularly China and India, which has bolstered global demand for oil and gas. The “p e t rodollar effect” has been both a blessing and a curse for the US economy and the US dollar. The rising global demand for energy has stimulated oil and gas prices and provided new-found ballast for the US dollar. Reinvestment of petrodollars into the US bond market has kept US bond prices high and their respective yields low. Low bond yields have in turn contributed to strong US economic growth by keeping borrowing costs and mortgage rates low. Howe ve r, the US current account deficit continues to grow as strong growth and a strong currency stimu-

lates US demand for foreign goods. Asian exchange rate inflexibility further exacerbates matters, yielding what is commonly re f e r red to as the global imbalances pro blem. As long as US i n t e rest rate differe n- By: Michael Woolfolk, tials remain positive, it Senior Currrency appears that petrodol- Strategist lars will continue to s u p p o rt the value of the US dollar. So, what could change this sanguine view ? The latest quarterly re p o rt from the Bank for International Settlements (BIS) indicates that petrodollars have become increasingly sensitive to interest rate differentials. While oil prices soared in 2004, generating substantial petrodollar profits, US interest rates remained quite low. Consequently, negative US interest rate differentials discouraged petrodollar investment in the US bond market. As the US Fed continued raising interest rates in 2005, US interest rate differentials turned positive, encouraging petrodollar investment into US bonds. This may help to explain Greenspan’s now famous “conundrum” comment, referring to the failure of the long-end of the US yield curve to respond to Fed tightening. The risk now is that the US interest rate differentials could once again turn negative, prompting oil exporters to sell their US bond holdings as they look elsewhere for higher returns. This risk would be compounded if the dollar began to weaken. During 2006 it will be important to monitor changing monetary policy in the US, Eu rope and Japan. The resumption of the US dollar’s structural decline could very we l l hinge upon the return of negative US interest rate differentials.

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BOLIVIA

MORALES’S HOMEGROWN SOLUTIONS he election in December of Evo Morales, 46, as Bolivia’s new president is raising concerns among foreign investors.The leftist leader is calling for nationalizations and bracing for a face-off with Washington. The former coca farmer and high school dropout is an Aymara Indian. Despite the fact that native groups, which account for more than 60% of the population, were given the vote in 1952, Morales is the first indigenous president in Bolivia’s 180-year history.At the core of his platform is a plan to redraft the constitution to include greater rights for indigenous peoples and a proposal to increase government control over

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energy resources. Bolivia is South America’s second-largest natural gas exporter, with estimated reserves of 53.3 trillion cubic feet. Morales aims to nationalize the energy sector and review contracts with multinational investors, whom he accuses of tax evasion and resource smuggling. He explains that nationalization will not translate into confiscations. “Today in my country, no contract is constitutional,” he told the press during a trip to Paris as part of a tour that took him to Europe, Brazil, China and South Africa.“Any contract with companies must be ratified in parliament, and over 70% of contracts have not been ratified by parliament.”

Investors are eyeing Morales’s proposals but not yet exiting. Spain’s Repsol YPF, whose $1.2 billion in local assets make it Bolivia’s largest foreign investor, plans to sit tight. Morales hopes to attract new investors from China. European leaders have advised him not to take radical steps that might hinder investments, as political instability curbed gas sector investments from $608 million in 1998 to $200 million in 2004. Morales expects to invite the Organization of American States (OAS) as arbiter. Washington says it is watching Morales’s moves before deciding whether to withdraw its assistance, which totaled $90 million in 2005. With Morales calling for an

Evo Morales, Bolivia’s new president

end to the US-led coca eradication plan and praising Cuba’s Fidel Castro and Venezuela’s Hugo Chávez—the US’s Latin American nemeses—battle lines between Washington and La Paz appear to have been drawn. —Antonio Guerrero

INDIA

INDIA’S AIRLINES FLYING HIGH he Indian airline industry has hit a new high in January 2006 in terms of capacity addition, following a remarkable year of aircraft acquisitions in 2005. In the first week of January 2006, Air India, the state owned airline, placed an order for 68 jets with Boeing. The order was worth $11 billion—the largest ever placed by any Indian airline. It also took IndiGo’s Rakesh Gangwal close to a decade to negotiate. In terms of number of planes the largest order from an Indian airline came from IndiGo, a new private airline co-founded by Rakesh Gangwal former CEO of US Airways. That airline ordered 100 jets from Airbus in an order worth $7.8 billion, at the Paris air show in July 2005. The Air India order is a milestone in Indian aviation since it puts India firmly on the map as one of the world’s largest buy-

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ers of airplanes. In the nine-month period ended July 2005, Indian airlines ordered 250 aircraft from various global manufacturers including Brazil’s Embraer—roughly half of the total orders placed with aircraft manufacturers during that period. India’s airlines ordered more than 200 planes in calendar 2005, worth over $24 billion. Besides the IndiGo acquisition, others such as Jet Airways (India’s largest privately owned carrier), Kingfisher Airways and Deccan Air placed orders worth $17 billion for a total of 150 planes. The explosion in demand for domestic air travel as people shift from costly train journeys as well as the expansion and modernization of many airports in the country undertaken by the Indian government is prompting a major capacity expansion, and several new airlines have sprouted in the past two years, including Deccan, IndiGo, Paramount, Spice Jet and Kingfisher. Both Boeing and Airbus are hoping the buying will continue and are investing unprecedented amounts in India in pilottraining facilities, including simulators, and in aircraft maintenance. —Aaron Chaze

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LATIN AMERICA

ROMANIA

¡ADIÓS, IMF!

FRACAS EXPOSES CRACKS IN INVESTMENT BANKING MARKET

razil led the charge by prepaying its $15.5 billion IMF debt, which should save the country $900 million in interest payments. Brazil, which had borrowed heavily from the IMF after its 1999 devaluation, was scheduled to repay $7.03 billion in 2006 and $8.43 billion in 2007. Brazil also prepaid $2.6 billion of Paris Club debt slated for settlement through 2007, producing another $100 million savings. Brasilia used its $63 billion reserves, boosted by soaring exports, to make the payments. Argentina followed suit, prepaying its near-$10 billion IMF bill and ending tensions between Buenos Aires and the IMF, which president Nestor Kirchner blames for the country’s 2001 devaluation, debt default and economic recession. Argentina, which expects to save $842 million in interest payments, was to have paid the IMF $1.9 billion in 2006, $4.3 billion in 2007 and $3.5 billion in 2008, including interest and charges. Like Brazil, it dipped into its

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$28 billion reserves for the prepayment. “With this payment, we are burying a big part of an ignominious past of infinite debts and fiscal austerity,” Kirchner said. Some analysts are concerned, however, that now that he has shaken off the bonds of IMF policies and supervision, Kirchner will boost spending. For Brazilian president Luiz Inácio Lula da Silva, who is facing presidential elections in October, the temptation may be even greater. Both vow to keep fiscal policies untouched. Some observers have commented that the growing volume of prepayments taking place will threaten the IMF’s ability to cover its costs. IMF loans to Argentina and Brazil had accounted for 49% of the Fund’s total.The recent prepayments mean Turkey, Indonesia and Russia are now its top debtors. It seems the IMF’s 20-year dominance of Latin American economies may be coming to an end. —Antonio Guerrero

Two of the world’s leading investment banks, UBS and Credit Suisse First Boston, have been involved in an unseemly dispute about privatization mandates in Romania that threatens to damage the reputation of both. The row Dealbreakers? Tension is rising has also highlighted the low fees that even emerging market issuers now achieve for major IPOs given the intense competition to win equity capital markets business. The clash centers on the appointment of CSFB as adviser for the $800 million IPO of Romanian state telecom company Romtelecom. The government appointed CSFB as adviser for the lucrative mandate despite the bank not making the lowest fee bid. A consortium headed by UBS, which includes ING and local brokerage CET, submitted a fee proposal of 0.95% while CSFB’s was 1.4%. On an $800 million deal—which would list the company in Bucharest with a GDR listing in London—the difference between the two proposals will be an extra cost of $3.60 million to the cash-strapped Romanian finance ministry. The government has been quick to point out that fee levels were just one element of proposals to win the mandate. Indeed, the weighting for the fee element of proposals was just 20%, with the remainder based on the strength of the technical proposal—essentially the ability of banks to successfully complete an IPO and access the best possible investor base. CSFB is a leader in Central & Eastern Europe and has acted as adviser for many of the region’s biggest privatizations and might be thought to have an advantage in this area. But bankers say that there is usually little to divide technical tenders by major international banks—essentially they all have access to the same investor base—and as a result mandates are almost always awarded according to fee bids. The row has put the spotlight on falling fee levels for equity capital markets deals. Just a few years ago, the going rate for an IPO was around 2.5%, with privatizations and emerging markets deals often attracting significantly higher fees. But intense competition among investment banks—and the lure of follow-on business—has sent fees crashing. Some bankers fear such levels are unsustainable. “This is part of a wider problem in our industry whereby fee levels fall year-on-year while the workload involved in deals remains constant,” grumbles one equity capital market banker not involved in the dispute. “Ultimately it is not healthy for the client or the broader market.” –Laurence Neville

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SLUMPING FORD MOTOR BAILS OUT JAGUAR ord Motor, the cashstrapped US automaker, anted up more than $2 billion in December to bail out its British luxury car subsidiary Jaguar for the second time in two years. Part of Ford’s cash injection will be used to reduce a deficit in Jaguar’s pension fund.The news is not likely to go over well with Ford’s workers in the United States, where the nation’s secondlargest automaker was about to announce sweeping job cuts and plant closings as Global Finance went to press. Still, Jaguar’s new XK model convertible created a stir at the North American International

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Auto Show in Detroit in January. Jaguar is counting on the XK, which is to be built at the company’s Birmingham, England, factory, to help it turn the corner. Jaguar plans to sell fewer cars this year but to make more money on each sale in order to trim its losses. The sleek new XK convertible has an aluminumintensive body that makes it lighter than its key rivals and improves the performance of its V8 engine rated for 294 horsepower. Ford bought Jaguar and saved it from extinction 15 years ago. Last year it cut 1,150 Jaguar jobs in the UK, and now

it is considering selling the historic Browns Lane plant in Coventry, where car production ceased in 2004 after it had served as home base for the Ford is pinning its hopes for Jaguar on the new XK Jaguar marque both continuing to struggle since 1928.About 500 workers are still making wood veneer at with declining sales, high rawmaterial costs and rising labor the facility. bills in an increasingly Ford sold Hertz, the global competitive global auto market. leader in car rentals, to a Ford won a deal with the private-equity group in United Auto Workers union in September 2005, realizing $5.6 billion in cash from the sale to December that will save it $850 million in annual health-care help bolster its balance sheet. —Antonio Guerrero Meanwhile, Jaguar and Ford are costs.

GLOBAL

COUNTRY RISKS EBB AS GROWTH FEEDS THROUGH TO EMERGING MARKETS tronger economic prospects in European and emerging market economies fueled by fewer company insolvencies and higher oil prices have resulted in upgrades for seven countries on the country risk index produced by credit Sri Lanka’s rating fell after the tsunami ratings and insurance agency Coface. Lingering effects from the devastating tsunami in Asia are still hurting economies in the region, though, according to the agency. Algeria, Cameroon, Germany, Mongolia, Philippines, Romania and Zambia were all upgraded. Germany, which has suffered from high unemployment and sluggish economic growth, saw its rating upgraded from A2 to A1 as companies kept salary hikes in check and insolvency at bay. Coface, a subsidiary of Natexis Banques Populaires and Groupe Banque Populaire, predicts that exports and household consumption in Germany will also rise in the coming months on the back of more favorable tax and monetary conditions,

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which should see unemployment fall further and companies increase their expenditure on equipment. The upgrading to A1 for German businesses also means that total company credit risks improved in the fourth quarter of 2005, which resulted in a 2% fall in the Coface world country risk index. Stronger economic fundamentals were not confined just to developed markets, with Coface’s emerging countries risk index also showing signs of improvement. Algeria was upgraded from B to A4, and Romania moved from B positive watch to A4. Coface attributed Algeria’s improvement to rising oil prices and monetary tightening, which saw debt-equity ratios decline and monetary reserves rise. In Romania, proposed EU membership is having a positive impact, resulting in a strengthening of company solvency and strong capital inflows from foreign commercial banks to local subsidiaries, which helped boost monetary reserves. A more stable political environment in the Philippines, a reduction in sovereign risk and a budget surplus saw Coface upgrade the B rating for that country to positive watch despite slowing economic growth. Higher-risk countries such as Mongolia and Zambia were also upgraded from D to C. The only negative rating was for Sri Lanka, whose B rating was placed under negative watch due to the longterm damage caused by last year’s tsunami and the deteriorating political climate. —Anita Hawser

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EMERGING MARKETS

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CHINA

LULA PINS HOPES ON DEBT PREPAYMENT

GROWTH JUMPS AFTER CHINA REVISES ESTIMATES

n a bold move supported by Brazil’s improved fiscal situation, president Luiz Inácio Lula da Silva’s administration prepaid its $15.5 billion debt with the IMF in January by dipping into its strong international reserves. The measure improves the government’s debt load from 57% of GDP in 2003 to 51%. Brazil, which had been the IMF’s largest borrower, had prepaid another $5.1 billion to the multilateral last July. Lula feels the measures allow Brazil to take control of its finances, as the IMF will no longer impose its economic policies on Brasilia in exchange for fresh financing. “We repaid the money to show the world that this country has a government and it is the owner of its own nose,” the president said. Political observers, however,

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Brazil’s president Lula

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feel the prepayment could be part of Lula’s political strategy ahead of the October presidential elections. Freedom from the IMF, they say, may be at the core of his campaign. Brazil’s investment-graderated CVRD, the world’s largest iron ore exporter, sold $1 billion of 10-year bonds abroad in early January through JPMorgan. CVRD, which will use the proceeds to finance its ongoing operations, also launched a tender offer to buy back up to $300 million of its 9% bonds due in 2013.The bond is Brazil's largest-ever corporate issue. News of the offer pushed the Bovespa index up 3.1% to hit record highs. Despite the confidence in the stock market, the government was unable to persuade private sector investors to develop new power plants, with the stateowned Centrais Elétricas Brasileiras (Eletrobrás) taking four of seven licenses auctioned in December. Investors explained their lack of enthusiasm by pointing to the low prices offered by authorities for electricity generated by the new plants. Brazil, however, must attract private power generators to avoid future shortages that could dampen growth. —Antonio Guerrero

China’s National Bureau of Statistics raised a few eyebrows when it released the results of its first economic census. The census placed China’s 2004 GDP at 16 trillion yuan ($1.9 trillion), an increase of about 17% over its previous estimate. Over 90% of the newly added 2.3 trillion yuan came from better data about China’s services sector, showing the sector is more developed than previously thought. The census’ results will head off criticism that China’s savings rate is too high and continue to ease worries of economic China’s growth continues apace overheating. With the revised numbers and an estimated 2005 GDP increase of 9.8%, China has now surpassed Italy to become the world’s sixth-largest economy. While growth continues apace, the country’s central bank, the People’s Bank of China, is to allow over-the-counter (OTC) trading of the Chinese yuan and introduce market makers to improve currency liquidity. The limit on daily changes in the exchange rate will remain the same, 0.3% against the value of the US dollar, but the new arrangement may allow for greater movement within this range. China’s trade surplus more than tripled in 2005, and some trading partners, particularly the US, have charged that China’s inflexible exchange rate gives the country an unfair advantage by holding the currency at an unrealistically low level. Foreign steel companies are among those that are undaunted by the potential for future currency fluctuations and are looking to China for new investment opportunities—despite regulations preventing foreign firms from acquiring majority ownership stakes. Rotterdam-based Mittel Steel, the world’s largest steelmaker, is involved in discussions with Baotou Iron & Steel over a deal that would reportedly give Mittel a 49% stake in the Chinese company and increase the European company’s total output by about 5%. Arcelor, the world’s second-largest steel company, is also shopping in China, CEO Guy Dolle has said, with a possible investment in Laiwu Steel Corporation. China produces one third of the world’s steel and is the world’s largest consumer of the metal. Steel prices there have declined in recent months as demand has softened, possibly lowering acquisition prices. —Thomas Clouse

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INDIAN INDUSTRY SCALES NEW HEIGHTS ndian industry continued to scale new volume peaks in December 2005, led by telecom, cement and automobiles.Tele-density in India has crossed into double digits to 11.43%, while 30 million new subscribers were added during the year, 26 million of whom were mobile subscribers and 4 million were fixed line. In December 2005 alone, 5 million total new subscribers were added.The installed telecom base in India is now 125 million subscribers according to the Telecom Regulatory Authority of India (TRAI).The industry grew by 34% in 2005, and the pace of growth is expected to continue, driven by falling telecom and handset costs. In the first week of January 2006 Reliance

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Infocomm dropped the national long-distance calling rate to its lowest ever of $0.02 per minute. The Indian automobile sector, too, saw a surge in volumes for December despite price hikes. Cement industry leader ACC grew volumes for December by 18.3%, leading a renewed burst of growth for the industry as India continues to see an unprecedented construction and infrastructure boom. While Indians are rapidly buying cell phones, cars and other consumer products, their appetite for gold is also increasing. India is the largest importer of gold in the world, and bullion futures are the most popular instruments traded on Indian commodity exchanges

the National Commodity Exchange (NCDEX) and the Multi Commodity Exchange (MCX), with daily volumes exceeding $1.5 billion.The Securities and Exchange Board of Growing gains: India continues rapid expansion India is finalizing Thermal Power Corporation plans to allow the introduction alone will put up 21,000 MW of gold mutual funds and exchange-traded funds, making of that. In January 2006 it became the first Indian it one of just a few nations to corporate (after the banks) to have bullion-linked saving float a medium-term note instruments. program (tenure of 10 years) As the economy grows listed on the Singapore rapidly, the country’s power needs have been increasing, too. Exchange. It is in the market to A total of 100,000 MW of new raise $1 billion to fund its generating capacity is to be put gigantic expansion program. —Antonio Guerrero into place by 2012. National

RUSSIA

CRUCIAL YEAR GETS OFF TO A TWITCHY START he new year began with a chilled shudder throughout Europe, as Russia flexed its energy muscle by cutting off gas supplies to Ukraine and, in turn, to the rest of the continent over a price dispute. After a panicky international upOn and off: The gas dispute sent shivers through Europe r o a r, R u s s i a a n d Ukraine crafted a facesaving deal that allowed the heat to go back on. One key result of the affair was that Russia’s public image took yet another beating; that it happened on the very day that Russia assumed the presidency of the G-8 was not lost on the international community. “That kind of behavior is going to continue to draw comment about the distance between Russia’s behavior on something like this and what would be expected of a leader of the

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G-8,” remarked US secretary of state Condoleezza Rice. A beneficiary was government-controlled gas giant Gazprom, as gas prices were boosted closer to market levels for the company’s deliveries to Ukraine. More encouragingly, in late December Gazprom entered the final stages of the long-anticipated liberalization of its shares, which will significantly broaden the international investor base in Gazprom shares and make it one of the largest emerging market stocks globally. United Russia, the political party backed by President Vladimir Putin, resoundingly won December’s Moscow city council election, thanks in part to the convenient banning of a key opposition party on legally dubious grounds. The poll was widely viewed as a dry run for parliamentary elections, scheduled for December 2007. On another front, Uzbekistan’s president, Islam Karimov, signed a mutual defense pact with Russia, possibly paving the way for a Russian base to be opened there and signaling the Central Asian nation’s shift away from the West, following the ejection of an American base earlier in the year. —Kim Iskyan

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MERRILL IS BULLISH ON BRAZIL EQUITIES

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nvestors should start to anticipate a movement in Brazil toward investment grade, even though that might not happen for a few more years, says Pedro Martins Jr., Latin American equity strategist at Merrill Lynch (Brazil). Brazil represents the largest valuation convergence opportunity to emerging market priceearnings multiples, he says, citing the fact that Mexican and Russian stock markets strongly outperformed emerging markets in general in the four years preceding their upgrades to investment grade. Latin America returned the highest regional figures worldwide last year, with a rise of nearly 45% in dollar terms in the MSCI Equity Index,

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versus 30.3% for emerging markets.The best country performance was for the MSCI Egypt Index, which was up more than 154% in 2005, while the worst performance was for the MSCI Venezuela Index, which fell more than 28%. Emerging markets returned consistently higher returns than developed markets last year, and 15 of the top 20 countries were emerging markets, according to New York-based MSCI Barra.The United States ranked 41st out of 50 countries with MSCI equity indexes. Energy was the best-performing sector worldwide in 2005, with a rise of 26.2%, and yielded even higher returns in emerging markets, where the sector was up 57.2%. —Gordon Platt

COMPANY TO WATCH: TRANSCORP/NIGERIA

STATE INCUBATES NEW NIGERIAN GIANT ransnational Corporation, or Transcorp, is Nigerian president Olusegun Obasanjo’s vision of his country’s first multinational corporation.The privately owned company is being incubated by the federal government and is managed

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by chief executives of the country’s largest companies and financial institutions. President Obasanjo launched Transcorp, which is expected to become Nigeria’s biggest company, last July. It began operations with a share base of $425 million and plans

ndian companies such as Patni Computer Systems, UTI Bank and Essar Projects were among the most active creators of depositary receipt programs in 2005. More than 20% of last year’s new DR programs were created by companies based in India, according to an analysis by The Bank of New York. Companies from 36 countries established 162 new DR programs during 2005, compared to 126 programs from 29 countries during 2004, the bank says. Issuers from India, Taiwan and Brazil accounted for the majority of capital raisings by numbers of transactions. Based on the value of capital raised, however, the leaders were companies from Taiwan, the United Kingdom, South Korea and Russia. SWITZERLAND, GERMANY, UNITED STATES Emerging market issuers based in Asia raised more than $17.4 billion through DRs in 2005. A $2.6 billion follow-on offering by Chunghwa Telecom was the single-largest DR capital-raising issue ever. Taiwan-based Chunghwa offers long-distance telephone service in China and the United States. Taiwan issuers are expected to remain active. JPMorgan launched a GDR program last month for Taiwan Kolin in conjunction with the company’s $28.7 million initial public offering. Taiwan Kolin makes televisions, VCRs, refrigerators and air conditioners. DR issuers from the developed markets completed only eight capital-raising transactions last year, and six of those were issues of preference shares by four large UK banks. The Bank of New York acts as sponsored depositary for more than 1,200 ADR and GDR programs. Altogether, more than 1,900 sponsored DR programs for issuers from 73 countries are available to investors. —GP

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to raise about $500 million in an initial public offering, possibly in late March.The company will have operations in oil and gas, pipelines, agriculture, information technology, power, international trade and other industries. It will receive coddling from the government in the form of licenses to build refineries and power plants, land for the construction of a free-trade zone and industrial

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park in Lagos, and support for investments in other African countries. In December Transcorp subsidiary Capital Leisure and Hospitality formally took over the Nicon Hilton hotel in the capital city of Abuja and renamed it the Transcorp Hilton Hotel. Capital Leisure purchased a 51% interest in the hotel from the government last October for about $105 million. —GP

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Reforms Boost Business Confidence Syndicated loan market benefits from growing economic momentum ince assuming power less than two years ago, the newly appointed Egyptian government has launched a wide range of economic reforms that have boosted business confidence while producing a stronger economy with annual growth of nearly 6%. The government has streamlined customs procedures and cut duties as it reduced corporate and personal income tax rates and reinvigorated the privatization process. Recent sales have included SIDPEC, the country’s sole ethylene and polyethylene producer; AMOC, a producer of lube and fuel oils; Eastern Tobacco and the government’s stake in the Egyptian Fertilizer Company.The partial sell-off of Telecom Egypt, the state-owned, fixed-line telecommunications monopoly, was started with a sale slated for the last quarter of 2005. The reforms are expected to lead to more balanced growth, which was primarily exportdriven during the early stages of the nation’s economic recovery. Private consumption and investment should accelerate gradually and become the main engines of growth over the next two years. The recent strength of imports, which were up by 64% for the first quarter of 2005, compared with the same quarter of 2004, is another example of the economy’s strength. Inflation slowed significantly in 2005 to about 4.3% for the 12-month period ending in July 2005—a result of the strong Egyptian pound, tariff reductions and other factors. Many analysts expect inflation to remain under control and any inflation risks created by stronger domestic demand are not yet a concern. Meanwhile, Egypt’s current account has experienced a significant turnaround in the past few years and the surplus could increase to $4.5 billion, or 4.8% of Gross Domestic Product for the fiscal year (FY) that began in July 2004.This would compare with 4.3% for FY 2003-2004; 2.4% for FY 2002-2003; and 0.7% for FY 20012002.The primary factors behind the widening surplus are record tourism receipts; toll revenues from the Suez Canal that are driven by higher international oil prices; and increased remittances from Egyptians working abroad.

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Banking Sector Undergoes Dramatic Change Egypt’s banking sector is in the midst of tremendous upheaval as the Central Bank of Egypt boosts capital requirements by fivefold and pushes for mergers and acquisitions as a way to strengthen the overall financial system.The central bank wants to slash the number of banks from 50 to 22 by the end of 2007 and has shortlisted six banks to be merged with other financial institutions. Some of the recent deals include a merger between Arab African International Bank with Misr America International Bank and the Greek Piraeus Bank’s acquisition of Egyptian Commercial Bank. In a more dramatic move, Banque Misr and Banque du Caire, the secondand third-largest public sector banks, have merged and the smallest public sector bank, Bank of Alexandria, is slated for sale by year’s end. All the local activity is sparking the attention of global players and several international banks are aggressively moving to expand their presence in the Egyptian market. The participation of global financial institutions will have a significant effect on the Egyptian banking industry—impacting everything from products to pricing as well as lending requirements and the approach to transactions. Yet even with the improvement in the economy, a positive outlook for Egyptian corporations and the double-digit growth in bank deposits, bank lending remains static.The factors hindering the growth in credit include unutilized capacity at Egyptian corporate borrowers, the swift marketplace changes that have prompted some bank executives to adopt a “wait-and-see” attitude; and an inward focus on restructuring and merger activities. ■ Reham El-Beltagy & Heba Abdel Latif, Structured Finance Team, Commercial International Bank. Contact Information: Amr Rostom Corporate Image Department Tel: (202) 747 2332 Fax: (202) 748 1789 Email: [email protected]

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COVER STORY RUSSIA

BY MARK LEHANE

Power Play Russia’s president Putin knows he will need help to turn his country’s energy wealth into an effective political tool. Western banking giants are scrambling to assist him—and to grab a slice of what promises to be a very large pie. ussia’s high-stakes poker game with Ukraine over the price of gas placed pipeline politics fir mly at the forefront of Wester n leader s’ minds as 2006 dawned. “Europe needs a clear and more collective and cohesive policy on security of energy supply,” warned EU energy commissioner Andris Pielbags. The issue dominated talks between new German chancellor Angela Merkel and Russian president Vladimir Putin in January. But behind the headlines lay another story: the way in which international banks active in Russia increasingly are being drawn into the fray. Austrian bank Raiffeissen is a key player in an opaque organization right at the heart of the complex solution to the Russia/Ukraine imbroglio. Ger many’s Dresdner Bank has strong links with Gazprom, the state energy giant that has become the principal organ of Russian energy policy. After years in which overseas bankers largely have eschewed the limelight to concentrate on making money out of Russia’s burgeoning middle classes, they are being drawn like moths to the flame of the country’s high-octane mix of energy, politics and finance.

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The headline spat between Russia and Ukraine developed when Gazprom demanded that its western neighbor quadruple the price it paid for gas to $230 per thousand cubic meters. In early January it actually turned off the taps for a couple of days.After a tense standoff, the two countries finally arrived at a complicated solution in which Gazprom mixes its gas with cheaper supplies from the Caspian Sea countries and sells it at the price demanded to an intermediary trading company. That Swiss-registered company, RosUkrEnergo, is joint-owned by Gazprom and Centragas. Austrian-registered Centragas was set up by Raiffeisenbank to represent the interests of undisclosed Russian and Ukrainian investors. One of its investment bankers,Wolfgang Putschek, is Centragas CEO. YYePG Proudly Presents, Thx for Support

Gazprom’s central role in the affair is little surprise:With 20% of the world’s natural gas reserves under its control, it has effectively become an arm of Russian foreign policy. Over the past year or so, it has become increasingly clear that in the eyes of President Putin foreign policy centers on the heft lent the country by its position as the world’s largest exporter of gas and secondlargest exporter of oil. In late December he outlined this vision to his inner circle of advisers and ministers. “Our welfare at present and, to a great degree, in the future directly depends on the place we take in the global energy context,” he said.

Dresdner Steps Into The Fray It is Gazprom that has been charged with translating that vision into a reality. And in the complex sequence of takeovers, mergers and related financings, western banks have been involved almost every step of the way. When the state moved against Yukos, the resources company that under Mikhail Khodorkovsky had become poster boy for Russia’s supposed free market future, Dresdner Kleinwort Wasser stein made the f air value estimation for Yugaskneftgaz. That

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WITH 20% OF THE WORLD’S NATURAL GAS RESERVES UNDER ITS CONTROL, GAZPROM HAS EFFECTIVELY BECOME AN ARM OF RUSSIAN FOREIGN POLICY

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unit held the bulk of Yukos’s operating assets, and its sale to Rosneft was the defining step on the march back to the renationalization of the hydrocarbon sector. Next step was the sale of 10.7% of Gazprom to state holding company Rosneftgaz, effectively handing the keys to the executive suite to the Kremlin. Dresdner advised on that sale. It didn’t stop there: Gazprom moved immediately to buy Sibneft, the oil company owned by Roman Abramovich, the oligarch-turned-owner of UK soccer club Chelsea. A $13 billion loan arranged by Dresdner and ABN Amro provided the ammunition for that deal. Dresdner’s links with Gazprom go deeper still. In early December workers welded the first sections of a pipeline that will transport natural gas from Vyborg in northern Russia to Greifswald in northern Germany. Traveling under the Baltic Sea, the 745-mile pipeline bypasses existing distribution routes through Poland, Belarus and the Ukraine, removing any threat of blockage in those transit countries. Most of the media attention at the time focused on the fact that Gerhard Schroeder, recently defeated German chancellor, was to chair North European Gas Pipeline Co., the joint venture between Gazprom and Ger many’s

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PRIVATE BANKS STRUGGLE TO COMPETE WITH WELL-FUNDED STATE BANKS azprom chairman Alexey Miller (right) may be the man handing out the biggest checks to bankers in Russia at the moment, but for many others it is the country’s consumers who are the true heroes. Sky-high gas and oil prices are putting a fire under the Russian economy—GDP grew by a sizzling 7% last year—and that’s sending the country’s citizens out to shop till they drop.

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Retail expenditure is outstripping growth in the economy as a whole; the country’s shoppers spent over $280 billion last year, according to some estimates. Time was, that wouldn’t have made an impression on the figures for consumer finance. Leading Russian retail distribution company PPE surveyed consumers as recently as 2003 and found that just 9% would prefer to borrow from a bank while 72% would prefer to borrow from a friend or family. But behavior is changing fast in the new Russia, and the country’s shoppers rapidly are acquiring the borrowing habit. According to figures from the Central Bank of Russia, consumer credit levels have begun to double every year. There are plenty of indicators that this growth is set to continue. Consultant Ernst & Young is inking in a 20%-30% rise in credit for home goods in 2006. Russians are not just redecorating their apartments; they are buying new ones, too. The International Finance Corporation says Russia’s mortgage market could one day be the largest in Europe, rising from just $400 million now to as much as $30 billion. Unsurprisingly, banks are working hard to build loan portfolios. It is the private sector that is showing the most inventiveness in structuring products to meet this demand, with institutions such as Russian Standard importing overseas expertise. But funding remains a handicap. State-owned banks such as Sberbank continue to benefit from cheap funds, and private banks rarely can borrow beyond 10 years, making competing in mortgage markets difficult, for example. Also, Russian consumers have long memories: They recall the flight-to-quality that followed the financial meltdown in 1998. As a result, Sberbank dominates the market for retail deposits, which in turn allows them to lend at advantageous rates. Many private sector bankers placed high hopes on the 2004 extension of limited deposit insurance to their institutions, but that has yet to be reflected in a substantial shift of deposits to the private sector.

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PUTIN’S VISION ENCOMPASSES THE PRIVATE SECTOR PROVIDING MUCH OF THE FINANCING FOR RUSSIA’S NATIONAL CHAMPIONS That partly explains why free-market-minded bankers are not fazed by the dramatic scale of the renationalization program. They have also already received a substantial bounty of fees from the operations needed to reshape Russia’s resources industry. E.ON and BASF that is building the link. “It stinks,” was the comment of Reinhardt Buetikofer, co-chairman of Germany’s Green Party.

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RUSSIA

But hands-on management has a Teutonic flavor, too. Matthias Warnig, until recently the head of Dresdner Bank’s Moscow office, is the new YYePG Proudly Presents, Thx for Support

company’s managing director. But not all of the bank’s Russian home runs are down to Warnig: Former Dresdner managing director Bernhard Walter built up a formidable contacts book in Russia in his time. Conspiracy theor ists made much of r umor s that Warnig—an ex-captain in the East German secret police—worked with former spy Putin when the Russian was stationed in Dresden during the late-1980s. The chatter was probably overblown, but there is little doubt that the legwork that Warnig put in has paid off. Dresdner had the first foreign banking license in St. Peters-

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burg—way back in 1991—and Warnig has maintained close contacts with the group of Petersburg officials that now crowd the Kremlin. The second-city connection figures again: During the 1990s Putin studied at St. Petersburg’s State Mining Institute, where he wrote a (recently surfaced) paper on raw mater ials and their role in the country’s economic development. Prefiguring his late 2005 speech to his inner circle, Putin argued that Russia’s natural resource riches were the key not just to its economic development but also to its place in the world. Critics argue that his policy is misguided.The Ukraine spat was a misstep, they say, that cast a shadow on Russia’s reliability as an economic partner just as it assumed chairmanship of the G-8 group of leading industrialized countries. With Russian oil selling at $50 a barrel, the country’s coffers are swelling fast. But when Putin’s economic adviser Andrei Illarionov resigned in December 2005, he argued that the country was missing a golden opportunity to diversify away from its overdependence on hydrocarbons.

Fees Offset Fears The direction of Russian economic policy under Putin is now clear: a system of national champions straddling the commanding heights of the economy, with Gazprom at its heart. Surely, renationalization on that scale ought to fill free-market-minded bankers with fear? That it doesn’t is not just down to the substantial bounty of fees already earned on the operations needed to reshape Russia’s resources industry. Crucially, Putin’s vision encompasses the private sector providing much of the financing for Russia’s national champions. Important sectors of the economy need substantial investment; Putin may be more inclined to spend oil money on a preelection splurge on social services. Until recently, foreigners could buy

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Mission control: Much of the world’s gas supply is controlled from Gazprom’s offices

Gazprom shares only in the form of (expensive) depositary receipts. That restriction no longer applies, and brokers expect a rush of business as foreigners seek exposure to what may become the largest company in the MSCI emerg ing markets indexes. There are fees to be gained in IPOs, too. The state electricity monolith UES has long been preparing for sale YYePG Proudly Presents, Thx for Support

in order to raise cash for an overhaul of its outdated systems. And later this year Rosneft shares will be sold on the London Stock Exchange in an IPO slated to raise between $60 billion and $70 billion. Energy, politics and money may be combustible ingredients, but when the returns are so high, it’s a rare banker who doesn’t want to play the game. ■

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FINANCIAL SOFTWARE LEASING

BY ANITA HAWSER

Enterprising Solutions Software giants are developing new financing techniques in an attempt to provide smaller companies with access to their high-end systems. ith enterprise application software costing anywhere from €500,000 to €2 million to implement, financing IT is a bit like taking out a mortgage. It is a major financial commitment for any company, but at least when you buy a home you have some idea how much it is going to cost you before you take the plunge. With software and IT, the total cost of implementation, including ongoing operating costs and maintenance, is not that transparent from the outset. According to PricewaterhouseCoopers (PwC), 75% of the inhibitors to companies investing in enterprise application software are linked to financial concerns—whether it is the prohibitive costs of implementation and integration, reduced profits, unwillingness to increase IT budgets, or that age-old bugbear, the difficulty faced by companies when trying to calculate the return on investment (ROI). Despite their inhibitions, companies of all sizes are under increasing pressure to invest more in IT and automation. The strain is particularly acute for small to medium-size companies (SMEs) that do not have the financial wherewithal of their larger competitors but view IT as a strategic component in terms of remaining competitive. The need for more companies to invest in software and their increasing inability to finance these purchases has raised questions about traditional software financing approaches.

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The emergence of subscription-based software models similar to that provided by Salesforce.com has put pressure on traditional software vendors to come up with more innovative approaches. According to Werner Trattnig, a director at PwC, the advent of software subscription models, or pay-as-you-use financing, accelerates ROI by reducing upfront project and infrastructure costs. “The software industry needs to respond to this new customer demand,” he says. Unlike traditional software financing, where a company pays a substantial sum upfront, subscription or pay-asyou-use models allow companies to spread the cost of software implementation over a period of years (generally three to five years), based on a pricing plan that is tailored to their individual needs and circumstances. Most of the major software houses provide some form of financial assistance to companies wanting to implement their software in the form of software leasing solutions. Leasing solutions can also take acYYePG Proudly Presents, Thx for Support

count of “soft costs” (training, annual maintenance and service agreement contracts), which are less transparent when software is purchased upfront.Although software licensing has been around since the 1980s, prevailing economic, market and regulatory conditions have led to renewed interest. Last October one of the world’s largest enterprise application software companies, Ger many’s SAP, an-

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nounced the launch of SAP Financing, a pay-as-you-use software financing scheme developed jointly with Siemens Financial Services (SFS). SAP Financing was initially rolled out to 13 countries, including the UK and Germany as well as emerging markets.The service will be extended to another 28 countries by mid-June. “Most software leasing solutions are short term,” explains Joachim Diers, SAP product manager at SFS. “The smaller the companies, the shorter the timeline becomes. But SAP Financing can provide unsecured financing for up to seven years. We also offer the solution across all of SAP’s sales channels.” SAP Financing, which SFS developed specifically for the German software giant, provides four different forms of debt financing—hire purchase, loan, finance lease and operating lease.

Fishing In A Bigger Pond The emergence of fast-growing emerging economies such as China was certainly a factor in SAP’s decision to offer software financing. “The offering of financing in emerging markets is new and of biggest importance for the growth of SAP,” says Hans Juergen Uhink, SAP’s senior vice president of new business development. The company was also eager to make the costs of implementing its ERP application software less prohibitive for SMEs and believed the only way it could do that was by providing some form of financial assistance to help these companies get on the first rung of the ladder. “We wanted to accelerate growth in the mid-tier market segment and overcome the obstacle of financing,” says Uhink. “We are convinced that there is the need for financing ERP projects especially among mid-tier companies.” Although SAP Financing is largely targeted at new customers, Uhink says existing customers or larger corporates could also use it to fund ongoing SAP software upgrades and IT projects. Within two months of launching, SAP Financing had already attracted significant deals from

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companies in both mature and emerging markets, with deals ranging in size from €15,000 at the lower end of the scale to tens of millions at the higher end, which is expected to increase significantly within the first year. Uhink says pay-as-youuse software financing provides companies with predictable monthly payDiers: All SAP sales Uhink: There are no ments, covering all prochannels are covered hidden surcharges ject-related costs, includsolution enables SAP to recognize reving software and hardware costs, external enues immediately.” service costs (software customization, imBut why not just leave software fiplementation, training) and internal sernancing to the banks? Traditionally, comvice costs (costs incurred by the compapanies may have sought bank financing ny in implementing and maintaining the to fund major IT and software projects. software). “There are no hidden surHowever, the credit cycle is contracting, charges or unexpected surprises,” he says, and banks are less inclined to extend adding that this allows companies to credit to non-investment-grade SMEs. more accurately predict and budget for Offering unsecured loans for periods of IT costs over a period of several years. up to seven years in countries, including Unlike purchasing software upfront, emerging markets, without additional Uhink says payments under its financing collateral is unlikely to appeal to the program only commence once the inbanks, especially those having to comply stallation has been deemed productive. with Basel II regulations. So SAP turned SAP Financing also includes an online to SFS. SFS has €10 billion in assets uninvestment calculator so that mid-market der management and a financial network companies can measure the total costs of spanning 30 countries. ownership, including monthly repayAs Diers of SFS explains, using a globments, before implementing an SAP soal credit risk portfolio approach, it is able lution. PwC estimates that the cumulated to spread the credit risk it assumes on beannual net cost savings are higher for half of SAP across its global portfolio of pay-as-you-use than for traditional softcustomers, which means that a strong ware purchasing solutions up to the fifth credit profile among UK customers alyear. One of the drawbacks, however, of lows it to meet the needs of companies in the pay-per-use model is that the compamore challenging economies such as ny does not own the software outright. Russia, for example. “Thanks to our acSAP initially thought about providtivities in the Project and Export Finance ing the software financing itself but was [PEF] division, we have good contacts to advised by PwC that, if it did so, US local sales financiers in a multitude of GAAP accounting regulations would countries,” Diers explains. “This is why not allow software sales to be accountwe were able to offer SAP financings ed for immediately until payments were even in markets such as Russia, India, due.“The business model developed by Australia, Mexico and Brazil, countries SAP with advice from PwC assigns the where we do not have a balance sheet financial risk to an independent third that would allow us to handle our own party [SFS] and the performance risk to financing transactions.” ■ SAP,” Trattnig of PwC explains. “This YYePG Proudly Presents, Thx for Support

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SECTOR REPORT GLOBAL CUSTODY

BY ANITA HAWSER

The Need To Be Different As their customers’ needs become ever more complex, custodians are finding themselves providing services that are far beyond their traditional realm.

he custody business has undergone dramatic change in the past five to 10 years.With profitability levels becoming increasingly difficult to maintain and the ongoing need to invest in technology, a number of players exited the business, selling their assets to one of the large global players, which manage assets in excess of $30 trillion. Consolidation, and the need to sustain profit margins, means it has become more important than ever to differentiate on service levels. At the same time, the customer landscape has also changed dramatically, forcing custodians to move beyond core custody provision into more sophisticated areas. As Jeremy Hester, senior vice president, Global Funds Services, Northern Trust, explains, “As little as five years ago there was still a lot of pure custody in the UK and Europe,” which he attributes to the fact that throughout the 1990s the industry was less mature, and Northern Trust was focused primarily on servicing the pension fund sector. The provision of core custody was limited to a set of services involving the movement, settlement and safekeeping of securities, as well as services such as income collection and corporate actions processing. Anything above and beyond that was considered value-

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added. “Reporting was basic, with each custodian developing an individual system, and clients were left to do their own fund and portfolio accounting,” says Ramy Bourgi, a business executive at JPMorgan Investor Services. But the 1990s heralded a number of changes, not least of which was the impact of regulation on institutional investors, forcing them to re-assess what was core to their business and what they could “outsource” to third-party providers. “Once we started servicing

Alan Greene, State Street: “Custody has become fairly broad and is not just clearing and settlement”

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the investment management sector, they started asking questions about our capabilities in Dublin, fund accounting and administration,” says Hester, areas in which custodians were historically not involved. It wasn’t long before custodians found themselves moving beyond core custody and the investment manager’s back office into the front and middle office, where more emphasis was placed on value-added capabilities. “We have re-invented ourselves as an asset servicing company,” says Hester, adding that few firms today are still focused primarily on core custody—although safekeeping and settlement is still an integral part of custodians’ asset servicing menu.Alan Greene, executive vice president, State Street, says there is still broad interest in products and services that are linked to custody. But when the bank competes for large mandates, custody alone is never enough.“For us the definition of custody and everything it includes has become fairly broad and includes specialized functionality that we don’t believe others have,” he says. “It is not just clearing and settlement, but income projections, market analysis, market research and information supporting reconciliation.” While some claim core custody has become commoditized, Hester says cus-

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SECTOR REPORT

todians still differentiate on service delivery, operating models, reporting, technology capabilities and their flexibility to adapt to different customer needs. In the area of reporting, for example, a number of custodians are looking to differentiate based on their level of technological sophistication. The Bank of New York recently gained a UK patent for an electronic messaging interface that facilitates communication between investment managers and the bank’s BNY SmartSource platform, which it uses to manage investment managers’ middle- and back-office functions. “Access to data, the kind of data the customer wants, how, when and where they want it, is very important, and we have focused a lot on these areas,” says Greene. Providing this data demands constant investment in technology, though. State Street invests 20% to 25% of its operating budget in technology, for example.

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Street bought IFS. Royal Bank of Canada also beefed up its fund administration services recently with the announcement that it would merge its services to institutional investors with that of Dexia BIL to form RBC Dexia Investor Services. Dexia will contribute its expertise as a transfer agent in fund administration. As institutional investors seek to diversify their investment portfolios by moving into alternative asset classes such as hedge funds, custodians are also looking to move up the value chain by providing “joined-up” solutions across asset classes.

Evolving To Meet New Demands As asset managers’ view of what is core to their business changes, so, too, have custodians’ service levels evolved to meet their customers’ changing needs. Outsourcing in particular has had a profound impact on the range of services custodians have developed to support investment managers. Although the outsourcing market has matured, with some investment managers saying there is not much difference between banks’ offerings, Hester still believes there is the opportunity for custodians to differentiate “as each bank has a different outsourcing platform, does things differently and has different product capabilities.” Another area where custodians are looking to add value is fund administration. A number of leading global custodians have snapped up hedge fund administrators. Northern Trust bought Baring Asset Management’s Financial Services Group (FSG), The Bank of New York purchased IFA, and State

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Jeremy Hester, Northern Trust: “We have re-invented ourselves as an asset servicing company”

Hester says the FSG acquisition gave Northern Trust value-added capabilities in hedge fund, private equity and property asset administration, and offshore trusts, as well as expanding its UK fund accounting business. “Most traditional asset managers are looking to move into hedge funds, but hedge fund administration doesn’t necessarily follow a particular custodian,” Hester explains. “It is a highly specialized area and one of the areas we are looking to exploit. FSG gave us the ability to enhance and scale our existing offering to service existing hedge fund manYYePG Proudly Presents, Thx for Support

GLOBAL CUSTODY

agers, as well as those looking to launch hedge fund products.” Similarly, State Street’s Greene says its acquisition of IFS gives it a fairly dominant position in hedge funds, which he anticipates will remain an attractive investment class for some time to come. Another area that could potentially be a key point of differentiation between custodians is cross-border pooling. Northern Trust is well established in this area with its appointment as manager for Univest, the pension asset-pooling vehicle of Anglo/Dutch consumer goods company Unilever. Univest purports to be one of the first fully tax-transparent, cross-border pension-pooling vehicles launched for a multinational corporation. It provides tax transparency via a Luxembourgdomiciled fonds commun de placement (FCP). Other vehicles that can be used include a Dublin-domiciled common contractual fund (CCF). These structures provide multinationals with economies of scale, enhanced r isk management and a broader array of investment options by allowing them to pool assets from subsidiary pension plans. The complexity involved in setting up such structures, particularly the taxation expertise required and re-engineering of systems, means it is still very much a nascent industry. State Street offers pension-pooling vehicles in the UK and has opened a tax-efficient CCF in Ireland. However, Hester says, “Pooling is a work in progress, but if you are a custodian with multinational investment manager clients, you are going to have to find a solution.” The outsourcing of back- and middle-office functions has also seen custodians move into the front office, which performs tasks such as stock, portfolio and risk analysis. So although custodians may offer the same menu of core custody services, their range of product offerings is likely to continue to evolve and broaden as investment managers demand more. ■

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ANNUAL SURVEY BY GORDON PLATT

WORLD’S BEST TRADE FINANCE BANKS 2006 Global Finance selects the leaders in a specialized area of finance that is undergoing a jarring transformation. hifting global trade patterns S and stronger supply chains linking the Wal-Marts of the world with their overseas suppliers are challenging trade finance banks to devise new ways of doing business. ABN Amro of the Netherlands, for example, confirmed a letter of credit in October 2005 issued by Karachi-based Metropolitan Bank for the import of canola into Pakistan. By confirming the letter of credit, the Dutch bank obligated itself to make payment to the supplier once appropriate documents

were presented as evidence of delivery of the goods. This was the first transaction completed under the International Finance Corporation’s Global Trade Finance Program. The IFC provided a guarantee covering 80% of the risk involved in the transaction. As emerging markets increase their share in world merchandise trade, banks are increasingly being asked by their customers to expand their trade finance services into new and often more-challenging countries. Guarantees provided YYePG Proudly Presents, Thx for Support

by the IFC, the private-sector lending arm of the World Bank, are designed to encourage commercial banks to take on these added risks in a growing range of countries. JPMorgan Chase was another one of the first banks to join the Global Trade Finance program last September. “With an already robust emerging markets business in place, we will now be able to develop our exposure in these markets even further through the trade channel established by the IFC program,” says Stacey Facter, global 2 0 0 6

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ANNUAL SURVEY head of trade credit insurance for the treasury services business at the New York-based bank. Meanwhile, trade finance banks are being challenged on another front. The volume of bank-guaranteed letters of credit is declining, and a growing share of world trade is being done on open-account terms without relying on banks as

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intermediaries. Under open account, a major importer with an established relationship with an overseas supplier simply agrees to pay for a shipment at a future date. The importer is not required to have its bank issue a letter of credit guaranteeing payment. Not wanting to be squeezed out of this business, banks have respond-

BEST TRADE FINANCE BANKS

ed by developing online platforms that enable their trade customers to gain the efficiencies of open-account transactions without giving up the security of payment guarantees. New programs have been developed to take information from purchase orders to create electronic letters of credit. The major trade finance banks are entering into al-

WORLD’S BEST TRADE FINANCE BANKS 2006 REGION/COUNTRY AMERICAS

BANK AND WEBSITE Citigroup www.citigroup.com

KEY PERSON Valentino Gallo, managing director, Americas, export and agency finance

DESCRIPTION Citigroup is the leading trade finance bank in the Americas and is one of the world's largest in terms of volume, with about 2 million transactions annually. The bank leads in constructing end-to-end transactions that increasingly include vendor financing in emerging markets. Citigroup not only provides the liquidity that keeps global supply chains functioning smoothly, but it also manages the risks inherent in global sourcing and exporting. The bank's network and service are unsurpassed.

EUROPE

ABN Amro www.abnamro.com

Daniel Cotti, managing director, global transaction products

With its trade outsourcing for banks and supply-chain financing and payment products for corporations, ABN Amro is the leader in European trade finance and technology. The Netherlands-based bank's global trade portal, MaxTrad, enables clients to upload and submit approved invoices to suppliers and monitor trade transactions efficiently. By matching cash inflows and outflows, the system reduces the need for working capital.

CENTRAL & EASTERN EUROPE

RZB www.rzb.at

Reinhard Hönig, head of global trade finance

Trade finance is a core business for Austria-based RZB, which operates the leading banking network in Central & Eastern Europe, with 16 subsidiary banks. From its commodity and structured trade finance business with Russian oil companies, it has expanded into a range of activities in Poland, Belarus, Ukraine and southeastern Europe. RZB has the expertise to handle complex transactions throughout the region.

MIDDLE EAST

National Bank of Kuwait www.nbk.com

Shaikha Al-Bahar, general manager of the corporate banking group

National Bank of Kuwait is the leading trade bank in the Middle East, with expertise in letters of credit and guarantees. It is a member of the consortium operating the Trade Bank of Iraq. NBK is the highest-rated bank in the Middle East and is able to draw on low-cost funds. NBK plans to continue to expand across the region.

ASIA

HSBC www.hsbc.com

Alistair Currie, head of trade services for Asia Pacific

London-based HSBC, founded in Hong Kong and Shanghai, maintains an extensive network in Asia and has keen skills in handling East-West trade transactions. In October 2004 HSBC opened its 10th branch in mainland China. It also agreed last year to acquire a 19.9% stake in China's Bank of Communications and was recently named as a market maker in the Chinese yuan.

ARGENTINA

Citigroup www.citigroup.com

Valentino Gallo, managing director, Americas, export and agency finance

Citigroup has staying power in Argentina, where it has maintained a presence since 1914. The bank delivers a consistently high level of service to a wide range of corporate trade clients throughout the country.

AUSTRALIA

ANZ www.anz.com.au

Mark Paton, group managing director, corporate

ANZ is one of the world's leading trade-finance banks, delivering trade services to 10,000 customers in 29 countries. ANZ processes trade transactions for other banks, using a platform operated by CGI-AMS Propinix. The bank is projecting significant business growth in trade finance.

AUSTRIA

RZB www.rzb.at

Reinhard Hönig, head of trade and export finance

A majority of Austria's leading exporters turn to RZB to service their cross-border transactions. The bank offers a complete range of products, from letters of credit and guarantees to forfaiting. It works closely with all European export credit agencies.

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ANNUAL SURVEY liances with third-party providers of logistics and transportation services. This enables importers and exporters to manage their trade and payment flows from a single online site run by their bank or by a nonbank service such as TradeCard. Calyon, the corporate and investment banking unit of French bank Crédit Agricole, agreed last year to

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sell the TradeCard platform and provide customer service for the system throughout Europe. Calyon will use its global network to sell both TradeCard and its own financial services to export customers. In our sixth annual survey of the World’s Best Trade Finance Banks, Global Finance editors, with input from industry analysts, corporate

BEST TRADE FINANCE BANKS

executives and technology experts, chose the leading trade finance banks in 44 countries and five regions, as well as the best online trade finance provider. Criteria for choosing the winners included transaction volume, scope of global coverage, customer service, competitive pricing and innovative technologies.

WORLD’S BEST TRADE FINANCE BANKS 2006 BAHRAIN

Arab Banking Corporation www.arabbanking.com

Amr El-Ashmawi, head of trade finance and forfaiting

Incorporated in Bahrain in 1980, Arab Banking Corporation has branches in New York, the Cayman Islands and Tunisia. The bank is highly specialized in forfaiting and will purchase all types of foreign-trade receivables without recourse. ABC International Bank, based in London, finances trade between Europe and the Middle East and North Africa.

BELGIUM

Fortis Bank www.fortis.com

Ken Ackroyd, head of global trade services

One of the largest financial services providers in Belgium, Fortis Bank maintains a global commodities group in London and is active in the energy, metals and agricultural commodity markets, including trade with China.

BRAZIL

Banco do Brasil www.bb.com.br

Augusto Braúna, managing director, international division

Banco do Brasil was a lead arranger in October 2005 of Braskem's $400 million three-year unsecured supplier's credit. The Brazilian bank maintains correspondent banking relationships with financial institutions in 145 countries.

CANADA

Scotiabank www.scotiabank.com

Patrick Rooney, senior vice president, global transaction banking, trade finance, global products and financial institutions

Scotiabank is the most international of Canada's banks, with representative offices in 50 countries. The bank offers a full range of trade-related services and Web-based systems for both importers and exporters. In December 2005 it invested $330 million in Peru as part of its strategic growth plan in Latin America.

CHINA

Bank of China Zhang Yanling, www.bank-of-china.com executive vice president in charge of corporate banking

Bank of China handles about 40% of China's international trade settlements. Its Hong Kong unit completed the automation of its trade finance functions in November 2005. Bank of China has the largest international presence of any bank in China. It offers letter-of-credit issuance and confirmation services as well as forfaiting.

COLOMBIA

Banco de Bogotá Germán Salazar, www.bancodebogota.com.co vice president of treasury and international trading

Banco de Bogotá is Colombia's oldest and second-largest commercial bank. It operates about 275 branches in Colombia and has subsidiaries in Panama and the Bahamas. The bank also has agencies in New York and Miami, which conduct considerable trade-related business. Grupo Aval, a financial holding company, owns a majority of its shares.

EGYPT

Commercial International Mohamed El Toukhy, Bank (CIB) general manager www.cibeg.com and high policies committee member

Commercial International Bank is the highest-rated Egyptian bank by the major rating agencies, and it is the country's largest private bank. CIB owns a 40% equity stake in Egypt's first export factoring company, along with Malta-based FIMBank, with 40%, and the International Finance Corporation, with 20%.

FINLAND

Nordea www.nordea.com

Risto Savolainen, head of trade finance for Finland

Nordea, Finland's largest bank, has an extensive branch network and online trade-related banking services. Customers can use the online system to order or make changes to import documentary credits, to receive arrival notices on trade credits and to create exportcollection orders.

FRANCE

BNP Paribas www.bnpparibas.com

Alain Biscaye, head of global trade services

BNP Paribas operates a global network of 66 trade centers offering customized products and structured lending, as well as riskmanagement services. In October 2005 the bank arranged a $200 million structured pre-export finance facility for MGOK, a Russian iron and steel company. It also has arranged aircraft financings in China.

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BEST TRADE FINANCE BANKS

WORLD’S BEST TRADE FINANCE BANKS 2006 GERMANY

Deutsche Bank www.db.com

Reinhard-E Uhl, head of global trade finance

Deutsche Bank offers a variety of trade and risk-management services, including an online system for issuing letters of credit. The bank is a leading arranger of trade-finance loans and creates innovative export-finance structures. The German bank offers trade finance services in 55 locations in 37 countries.

GREECE

EFG Eurobank www.eurobank.gr

Evy Passa, head of trade finance division and loans administration division

EFG Eurobank has a strategic alliance with EFG Group, based in Geneva. The bank offers a full range of trade finance products, which it bundles to suit the specific needs of its customers. These services help to improve cash flow and to manage foreign exchange risks.

HONG KONG

HSBC Holdings www.hsbc.com

Alistair Currie, head of trade services for Asia Pacific

HSBC is a global leader in export finance, particularly in loans backed by export credit agencies. Trade services are a core business of the bank, which has an extensive network in the Asia-Pacific region. HSBC offers depth in trade expertise and online services.

INDIA

ICICI Bank www.icici.com

Sudhir Dole, general manager and head of the financial institutions group

ICICI Bank offers export and import financing and guarantees. Known for its technologically advanced systems, the bank helps its clients gain increased control over foreign receivables. In December 2005 the bank opened a representative office in South Africa.

INDONESIA

Bank Danamon Indonesia www.danamon.co.id

Herry Hykmanto, senior vice president, head of trade finance and custody

Bank Danamon Indonesia draws on a network of more than 800 correspondent banks to provide extensive trade finance services. The bank has a fast-growing portfolio of direct trade loans, with special emphasis on the oil and gas, mining and palm oil sectors.

ITALY

Banca Intesa www.bancaintesa.it

Ken Lomas, head of trade finance and emerging markets

Banca Intesa, Italy's leading trade-finance bank, is expanding in Central & Eastern Europe. In September 2005 it acquired control of KMB Bank in Russia and agreed to acquire a majority stake in UPI Banka in Bosnia and Herzegovina, adding to its already extensive presence in the CEE region.

JAPAN

Mitsubishi UFJ Financial Group www.mufg.jp

Nobuo Kuroyanagi, president and CEO

Mitsubishi UFJ Financial Group, the world's largest banking group by assets, was launched in October 2005. Its Bank of Tokyo-Mitsubishi subsidiary was the first Japanese bank to introduce online letters of credit. Quick delivery of LCs helps exporters to cut costs.

JORDAN

Jordan Kuwait Bank Abdel Karim Kabariti, www.jordan-kuwait-bank.com chairman and CEO

Founded by Jordanian, Kuwaiti and other Arab investors in 1976, Jordan Kuwait Bank is not the largest bank in Jordan, but it provides efficient online services and is growing at a healthy pace. It has offices in Palestine, Cyprus and Algeria.

KAZAKHSTAN

Kazkommertsbank www.kkb.kz

Andrey Timchenko, managing director

Kazkommertsbank, the largest bank in Kazakhstan, has the highest long-term ratings of any bank in the country. In November 2005 it placed $500 million of 10-year bonds and $100 million of perpetual bonds in international markets.

KUWAIT

National Bank of Kuwait www.nbk.com

Shaikha Al-Bahar, general manager of the corporate banking group

National Bank of Kuwait, the highest-rated bank in the Middle East, is the largest bank in Kuwait and the biggest supplier of trade finance services. It is continuing to expand throughout the region while maintaining a high level of profitability.

MEXICO

Banamex www.banamex.com

Felipe Rubio, head of international trade finance unit

Banamex issues letters of credit with funding provisions denominated in various currencies. It offers financing to direct and indirect exporters for up to 100% of the invoices or receipts of export sales. The Citigroup subsidiary can draw on the global network and systems of its parent to serve Mexican importers and exporters.

NETHERLANDS

ABN Amro www.abnamro.com

Daniel Cotti, managing director, global transaction products

ABN Amro is a global leader in financing cross-border transactions. Its technology and range of trade products deliver consistently good service in 62 countries. The bank purchases trade receivables at a discount to accelerate payments and enhance liquidity.

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BEST TRADE FINANCE BANKS

NIGERIA

First Bank of Nigeria Jacob Ajekigbe, www.firstbanknigeria.com CEO

First Bank of Nigeria announced a preliminary merger agreement with Ecobank in November 2005 to create one of Africa's largest banks, with assets of about $5.6 billion and a presence in 15 countries. The new bank, to be known as First Ecobank, will retain its FirstBank elephant logo. The bank offers a full range of trade-related services.

NORWAY

DnB NOR www.dnbnor.no

Borghild Holen, general manager, international financial institutions

DnB Nor, Norway's largest financial services group, is also its leading trade finance bank. In December 2005 the government gave it permission to acquire a 51% stake in Bank DnB Nord, with NORD/LB of Germany holding the remaining 49%. The new company, to be based in Denmark, will also operate in Poland and the Baltic states.

OMAN

BankMuscat www.bankmuscat.com

AbdulRazak Ali Issa, CEO

BankMuscat, Oman's leading bank, listed its global depositary receipts on the London Stock Exchange in October 2005. The bank has a network of 90 branches in Oman and a representative office in Dubai. In India it holds a 26% stake in Centurion Bank. BankMuscat International was recently formed to lead a regional expansion in the Gulf Cooperation Council states.

PAKISTAN

MCB www.mcb.com.pk

Mohammad Aftab Manzoor, president and CEO

MCB, formerly known as Muslim Commercial Bank, has a network of 900 branches in Pakistan, as well as overseas offices in Bahrain and Sri Lanka. MCB offers a full range of trade-related services. The majority of its branches are in the Punjab province.

POLAND

Bank BPH www.bph.pl

Sylwester Stasiak, director of the trade finance product department

Bank BPH, a member of Germany's HVB Group, is controlled by Bank Austria Creditanstalt. HVB is being acquired by Italy's UniCredit, which owns 51% of Bank Pekao, another major Polish bank. Bank BPH has 468 branches in Poland and offers online trade finance and factoring services.

PORTUGAL

Millennium bcp Paulo Teixeira Pinto, www.millenniumbcp.com CEO

Millennium bcp, Portugal's largest bank, has reached the limits of growth in its home market and is looking to expand its activities in Poland and Greece. It signed an agreement in December 2005 for IBM to manage part of its international IT networks.

QATAR

Qatar National Bank www.qnb.com.qa

Vince Cook, general manager for corporate banking and capital markets

Qatar National Bank, which is 50% owned by the government, is the largest issuer of documentary credits and trade guarantees in Qatar. Export Development Canada established a $100 million line of credit with QNB in December 2005. The Qatari bank has branches in London and Paris.

RUSSIA

International Moscow Bank www.imb.ru

Tsymalina Inna, head of trade finance department

International Moscow Bank provides a full range of trade-related services. IMB, a wholly owned subsidiary of Germany’s HVB, maintains correspondent relationships with 1,400 banks in 100 countries.

SAUDI ARABIA

Arab National Bank www.anb.com.sa

Rober Eid, managing director

Arab National Bank's online Al-Arabi TradeLink service enables customers to issue and amend letters of credit and process all types of trade-related documents. The bank's London branch offers innovative financing against credit insurance and other structured financing.

SINGAPORE

DBS www.dbs.com

Jackson Tai, vice chairman and CEO

DBS, the largest bank in Singapore, has an extensive presence in Southeast Asia and a growing list of branches in China. It offers a full range of export and import products and an online trade finance system.

SOUTH AFRICA

Standard Bank www.sbic.co.za

John O'Mulloy, global head of trade finance

With a presence in 17 African countries and a wholesale trade finance operation in London, Standard Bank is also active in the Americas, Asia and Central & Eastern Europe. It structures innovative transactions and advises on risk-management strategies.

SOUTH KOREA

Korea Exchange Bank www.korexbank.co.kr

Richard F. Wacker, president and CEO

Korea Exchange Bank is the leading trade finance and foreign exchange bank in South Korea. Kookmin Bank announced late last year that it would bid for KEB to help it become a major international lender. KEB is majority owned by Lone Star Funds, a US private-equity firm.

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BEST TRADE FINANCE BANKS

WORLD’S BEST TRADE FINANCE BANKS 2006 SPAIN

Grupo Santander Santiago Puente, www.gruposantander.com head of global trade finance, managing director

Grupo Santander, the leading financial group in Spain, purchased Britain's Abbey National in 2004 to balance its widespread holdings in Latin America. Last year it agreed to buy a 19.8% stake in Sovereign Bancorp of the US for $2.4 billion. Philadelphia-based Sovereign has 650 branches in the US Northeast.

SWEDEN

Svenska Handelsbanken Bengt Augustsson, www.handelsbanken.se vice president, head of trade finance

Svenska Handelsbanken is able to obtain favorable funding costs as a result of its high credit rating. Trade finance is an important niche market for Sweden's largest bank, which has trade finance departments in Stockholm, Malmö and Gothenburg.

SWITZERLAND

Credit Suisse Group www.credit-suisse.com

Credit Suisse operates an online system known as Direct Trade Finance that enables customers to process documentary credits, collections and guarantees. The bank has six trade finance centers in Switzerland.

TAIWAN

Chinatrust Commercial Bank Jeffrey J.L. Koo Jr., www.chinatrust.com CEO

Chinatrust, Taiwan's largest private bank, stands to benefit from the growth in trade between Taiwan and mainland China. The bank has more than 50 overseas offices and offers the TradeCard system.

TURKEY

Akbank www.akbank.com.tr

Zafer Kurtul, president and CEO

Akbank, Turkey's largest private-sector bank, is well-capitalized and has a low percentage of non-performing loans. The bank has about 600 branches spread across Turkey and has overseas operations in France, the UK, Malta and the Netherlands.

UNITED KINGDOM

HSBC www.hsbc.com

James Madsen, head of trade services

London-based HSBC has more than 9,800 branches in 77 countries, with heavy concentrations in the UK, US, Mexico and Brazil. The bank offers a comprehensive range of trade services, as well as export outsourcing for corporations. HSBC is the global leader in export finance loans.

UNITED STATES

Citigroup www.citigroup.com

Valentino Gallo, Citigroup's geographic reach and experience in international markets managing director, Americas, make it a natural leader in trade finance. The bank's innovative export and agency finance financing techniques and expertise in export credit agency guarantees further enhance its trade offerings. Citigroup is helping US companies expand in new markets while limiting their risks.

Christian Gut, global head of trade finance

UNITED STATES Bank of America Dan Scanlan, (Honorable Mention) www.bankofamerica.com senior vice president, head of trade product management UNITED STATES JPMorgan Chase (Honorable Mention) www.jpmorgan.com/ts

VENEZUELA

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Bruce Proctor, JPMorgan Chase has taken the lead in combining financial and logistics head of global trade services supply chains by getting involved in aspects of international trade that are new to banks. It provides a single portal that links its trade services with related cash-management activities. The bank is adapting to the trend toward open-account transactions even as it continues to lead in processing letters of credit.

Banco Mercantil Antonio Subero, www.bancomercantil.com manager, correspondent banking and international trade

BEST ONLINE TRADE TradeCard FINANCE PROVIDER www.tradecard.com

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Bank of America serves clients in 150 countries and is offering a series of global trade workshops across the US in 2006 to help its customers compete successfully in global markets. It advises companies on pricing exports, improving cash flow and using letters of credit and other financing techniques.

Kurt Cavano, chairman and CEO

Banco Mercantil, Venezuela's leading bank, remains highly profitable as the local economy expands in line with higher oil prices. The bank helps its customers cope with a maze of currency controls. Venezuela is on track to become a full member of Mercosur, the South American common market agreement. TradeCard automates the financial processes in global supply chains, replacing paper-based systems and enabling buyers and suppliers to collaborate online. Suppliers can create trade documents such as the invoice and packing list from data on the purchase order. The TradeCard platform integrates services including trade settlements and early-payment discounts, as well as credit protection and financing. New York-based TradeCard serves 1,000 corporations in 40 countries.

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CORPORATE FINANCING FOCUS

Corporate Debt Market Outlook Includes Flat Yield Curves, Possible Fed Inflation Target

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represents securities firms, banks and he outlook for the corporate debt asset managers that are active in markets worldwide in 2006 is underwriting, trading and investing in surprisingly sanguine, despite debt securities. worries about rising interest rates and Economists who are members of volatile energy prices, and the change the association’s economic advisory in leadership at the US Federal committee, representing 29 firms, Reserve, analysts say. While many expect the US economy to continue central banks are expected to raise growing in 2006 at roughly the short-term rates, which will flatten same rate as in 2005, or about 3.6%. government yield curves, they are “Business is benefiting from unlikely to tighten policy so good demand, low interest rates aggressively that yield curves become and strong profits, while severely inverted, according consumers have been buoyed by a to economists. revived job market and continued “While we see a number of gains in wealth and incomes,” says factors that bode negatively for Robert DiClemente, chairman of the credit markets, the current the committee and head of US backdrop is still very positive,” says economic and market analysis Robert McAdie, global head of Debt at Citigroup. credit strategy at London-based According to the median forecast Barclays Capital. Credit quality still that was published in the association’s remains robust, and levels of semi-annual year-end survey, the yield corporate free cash flow are at all-time on the 10-year treasury note is expected highs, he says. And while economic growth will to rise steadily from 4.4% in early January to remain strong in 2006, inflation is being constrained by 4.73% at the end of March and 4.9% at the end of June, central-bank policy, he notes. Barring severe problems at General Motors, credit spreads versus government securities before ending 2006 at about 4.93%. The short-term federal funds rate, which is controlled by the Federal will not widen or tighten significantly in 2006, he adds. Reserve, was forecast to reach 4.75% by June and stay at Overall bond issuance in the United States is expected that level through year-end. to decline 13.3%, according to the Bond Market Association’s annual survey released in January. While mortgage-related securities are likely to fall even more Inflation Targets Not Favored sharply than that, volume in corporate bonds, Slightly more than half of the economists surveyed by the collateralized debt obligations and commercial paper is association expect the Fed to set explicit inflation targets expected to increase. under its new chairman, Ben Bernanke. A majority is not Corporate bonds and asset-backed securities tied to auto in favor of such targets, however, noting that the Fed loans should benefit from sustained economic growth and already has price stability as a goal and that it has an increased business and consumer spending, says Micah S. implied comfort zone for core inflation, which is adjusted Green, president and CEO of the association, which for volatile food and energy prices. Nonetheless, most of

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CORPORATE FINANCING NEWS CORPORATE DEBT

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is also expected to be strong, as US corporations boost investment and finance some of the increase with bonds. According to the median forecast of the Bond Market # of Deals Association, US corporate bond issuance will 352 rise 1.6% to $719 billion in 2006. 297 The association’s economists also forecast that credit spreads of corporate bonds over US 181 treasury securities will reflect a stronger 189 economy and higher interest rates. Weaker 182 credits could suffer, they say, as investors show a 170 reduced appetite to reach for higher yields, but 156 stronger credits should be helped by higher 143 corporate profits, healthy corporate balance 84 sheets and a relatively small supply of corporate 150 bonds compared to investor demand. In the first 10 months of 2005, foreign investors 1,560 purchased a net $311 billion of US corporate bonds, accounting for more than 40% of net portfolio inflows into the United States, according to the US Treasury.

LEADING UNDERWRITERS OF US INVESTMENT-GRADE CORPORATE DEBT IN 2005 Proceeds ($millions)

Bookrunner

Rank

% Mkt Share

Citigroup

111,002

1

16.5

JPMorgan

73,645

2

10.9

Goldman Sachs

62,978

3

9.4

Lehman Brothers

57,656

4

8.6

Banc of America Securities

50,147

5

7.4

Morgan Stanley

43,996

6

6.5

Merrill Lynch

38,390

7

5.7

Wachovia

36,499

8

5.4

HSBC

36,295

9

5.4

Deutsche Bank

34,062

10

5.1

Industry Totals

673,782

—

—

Source: Thomson Financial Securities Data

the economists surveyed did not believe that a shift to an explicit target for inflation would have a material effect on monetary policy. More than half of those surveyed expect a change in the Strong Foreign Demand Fed’s communication style under Bernanke, with most “Foreign private investors have demonstrated a healthy forecasting a continued trend toward transparency. Some appetite for US corporate bonds, even as spreads over of the economists expect Fed statements to have more treasuries narrowed and interest in corporate stocks clarity than those issued by the US central bank under the was lukewarm,” says Marc Chandler, global head of chairmanship of Alan Greenspan, who is renowned for his currency strategy at Brown Brothers Harriman in New sometimes opaque rhetoric. York. Foreign investors probably will be net buyers of Global investment-grade corporate debt issuance rose to US corporate bonds this year despite the heavy redemption schedule, Chandler says. a record $2.1 trillion in 2005, according to Thomson For AA-rated financial institutions, the Bond Market Financial. While last year’s total marked a new annual Association’s median forecast high, quarterly volume declined steadily through calls for credit spreads to GLOBAL DEBT DENOMINATED 2005, from more than $623 narrow from BY CURRENCIES IN 2005 billion in the first quarter to 89 basis points above less than $442 billion in the comparable US fourth quarter, says Richard treasury securities at the Peterson, chief market end of 2005 to 75 basis strategist at Thomson. points by the middle of this Similarly, global high-yield year and then to widen to corporate debt issuance was 85 basis points at the less than 100 issues in each end of 2006. Euro of the final three quarters of US dollar-denominated 25% 2005, the first time that has debt accounted for 62% of happened since early 2003, the global debt capital raised Peterson says. last year, according to US Dollar British Pound Nonetheless, a record Christine Pierno, analyst at 62% 4% amount of US corporate Dealogic in New York. The bonds are maturing this year $3.7 trillion total of Japanese Yen Other and will need to be dollar-denominated debt 3% 5% refinanced, and additional was up 6% from a year borrowing is likely to earlier. Citigroup was the Australian Dollar finance mergers and leading underwriter of 1% acquisitions and leveraged dollar-denominated debt last buyouts. Business spending year, while Deutsche Bank Source: Dealogic 4 2

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topped the euro-denominated debt-volume rankings, according to Dealogic. Outside of the top five currencies, which included the dollar, the euro, the British pound, the Japanese yen and the Australian dollar, there was an increase of 36% in debt volume from a year earlier to $304 billion. Debt denominated in New Zealand dollars, or kiwis, rose 151% to $16.4 billion in 2005.

Hertz, the former car-rental subsidiary of Ford Motor that was sold to a private-equity group in September 2005, issued about $2.7 billion of high-yield bonds in a threepart offering in December to help finance the leveraged buyout. Dearborn, Michigan-based Ford sold Hertz, the global leader in car rentals, to a group made up of Clayton, Dubilier & Rice, the Carlyle Group and Merrill Lynch Global Private Equity. The transaction was valued at $15 billion, including debt. In its well-received December offering, Hertz sold $1.8 billion of nine-year senior notes and €225 million of similar debt. It also sold $600 million of 11-year senior subordinated notes. Deutsche Bank led the offering, along with Goldman Sachs, JPMorgan, Lehman Brothers and Merrill Lynch. Ford, which received $5.6 billion in cash from the sale of Hertz, said the transaction would strengthen its balance sheet. The automaker has suffered from falling sport-utility vehicle sales and faces rising health-care costs and other issues afflicting the US auto industry. The most significant unknown variable in the outlook for the credit markets in 2006 is the auto sector, says McAdie of Barclays Capital. Continued negative headlines, especially related to the potential strike at parts-supplier Delphi in February, or a delay in General Motors’ divestiture of a majority interest in General Motors

20 18 2004

16 2005

14

($ billion)

Hertz Borrows for LBO

US HIGH-YIELD NEW-ISSUANCE VOLUME

12 10 8 6 4 2 0 Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Source: KDP Investment Advisors

Acceptance Corporation (GMAC) could weigh on investor sentiment, McAdie says. Delphi, the largest auto-parts supplier in the US, has filed for bankruptcy protection under Chapter 11 and is seeking to eliminate 24,000 jobs. It also want to reduce benefits for workers and cut hourly wages by more than half. A potential resolution of the auto industry’s labor relations, however, could spark a rally in lower-quality credits, McAdie says.

Mirant Gets Exit Financing

Atlanta-based Mirant, a major independent electric power generation company, emerged from Chapter 11 bankruptcy protection in January.The $2.35 billion exit financing by Mirant North America included an offering of $850 million of seven-year senior notes and $1.5 billion TOP US HIGH-YIELD ISSUES IN DECEMBER 2005 of senior secured credit facilities. Mirant produces Issuer Offer Date Coupon % Issue Type Maturity Date Private/Public Amount ($mil) and sells electricity in the Hertz 12/15/05 8.875 Senior Notes 1/1/14 144A 1,800 US, the Caribbean and the Mirant North America 12/20/05 7.375 Senior Notes 12/31/13 144A 850 Philippines. Only its North Massey Energy 12/9/05 6.875 Senior Notes 12/15/13 144A 760 American operations were Hertz 12/15/05 10.500 Sr.Sub.Notes 1/1/16 144A 600 included in its July 2003 Omnicare 12/12/05 6.875 Sr.Sub.Notes 12/15/15 144A 525 Chapter 11 filing. Paxson Communications 12/19/05 Floating Rate Notes 1/15/13 144A 405 JPMorgan, Deutsche Bank Paxson Communications 12/19/05 Floating Rate Notes 1/15/12 144A 400 and Goldman Sachs Centennial Communications 12/13/05 Floating Rate Notes 1/1/13 144A 350 arranged the financing for LPL Holdings 12/28/05 10.750 Sr.Sub.Notes 12/15/15 144A 330 Mirant’s plan of reorgSpansion 12/16/05 11.250 Senior Notes 1/15/16 144A 250 anization. Mirant re-listed its Atlas Pipeline Partners 12/15/05 8.125 Senior Notes 12/15/15 144A 250 stock on the New York Plastipak Holdings 12/2/05 8.500 Senior Notes 12/15/15 144A 250 Stock Exchange, and trading Omnicare 12/12/05 6.750 Sr.Sub.Notes 12/15/13 144A 225 began on January 11. —Gordon Platt Source: KDP Investment Advisors YYePG Proudly Presents, Thx for Support

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CORPORATE FINANCING NEWS CORPORATE DEBT

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Energy Deals Make 2005 Big Year for Big Mergers Houston-based ConocoPhillips, the thirdlargest oil company in the United States, agreed to buy cross-town independent oil and gas producer Burlington Resources in December in a stock-swap transaction valued at $36.5 billion. The acquisition capped a year in which energy and power was the leading sector for worldwide mergers in 2005, with $416 billion in announced deals, a 40.7% increase from a year earlier, according to Thomson Financial. Last year was the best year for announced mergers and acquisitions worldwide since 2000 and the third-best year ever. Increased demand for energy assets, easy access to capital, and a record amount of privateequity fund raising all contributed to a 38.4% rise in announced global M&A transactions in 2005 to $2.7 trillion, says Richard Peterson, chief market strategist at Thomson Financial. Merger activity in the United States increased by 33.3% last year to $1.1 trillion. The leading US announced merger was Procter & Gamble’s $57.2 billion acquisition of Gillette. ConocoPhillips’ offer for Burlington Resources was the second-largest announced deal in the United States in 2005. In M&A transactions outside of the US, the 4 4

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biggest deal last year was in Spain, where Gas Natural, the country’s largest natural gas company, made a hostile offer of $51.2 billion for Spain’s biggest electricity provider, Endesa. Goldman Sachs was the leading financial adviser for announced M&A activity worldwide as well as in the United States in 2005, winning both titles for the eighth year in a row. Morgan Stanley was second, and JPMorgan was third, both globally and in the US last year, according to Thomson Financial. The energy and power sector was the most-active industry for US-based target companies in 2005. Besides ConocoPhillips’ acquisition of Burlington Resources, other significant deals in the industry included ChevronTexaco’s $18.2 billion merger with Unocal, and FPL Group’s planned acquisition of Constellation Energy for $15.2 billion. ConocoPhillips would remain the number-three US oil company after acquiring Burlington Resources, lagging behind ExxonMobil and moving closer to number-two Chevron. ConocoPhillips would become the largest natural gas producer in the US. Prices for natural gas hit the highest levels ever in December, and ConocoPhillips is betting that they will stay high over the next

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few years. FPL, the parent of Florida Power & Light, agreed in December to acquire Constellation Energy, based in Baltimore, Maryland. The deal was the first interstate merger of two power companies since the US Congress passed a bill last summer repealing a law that restricted such transactions. The biggest M&A deals in Europe in December were related to France’s privatization of its holdings in three of the country’s highway networks. The sales brought the French Finance Ministry a total of about $18 billion as part of the government’s efforts

to raise funds to reduce its debt. “This process has allowed us to get the best value out of our public assets, in excellent conditions,” the Finance Ministry said in a statement. French group Vinci will take control of Autoroutes du Sud de la France. The Spanish group Abertis will acquire a majority stake in Société des Autoroutes du Nord et de l'Est de la France. Eiffage-Macquarie, a group including French and Australian investors, will take over Autoroutes Paris-Rhin-Rhône. —Gordon Platt

AMERICAS M&A: TOP DEAL ADVISERS Rank Value % Mkt # of ($million) Rank Share Deals

Adviser Goldman Sachs Morgan Stanley JPMorgan Citigroup Merrill Lynch Industry Totals*

434,582 399,019 284,381 271,484 246,566 1,169,737*

1 2 3 4 5 -

37.2 34.1 24.3 23.2 21.1

191 149 177 156 139 9,487

EUROPE M&A: TOP DEAL ADVISERS Rank Value % Mkt # of ($million) Rank Share Deals

Adviser Goldman Sachs JPMorgan Deutsche Bank Merrill Lynch Citigroup Industry Totals*

363,641 305,163 264,360 258,980 246,284 1,012,623*

1 2 3 4 5 -

35.9 30.1 26.1 25.6 24.3

144 163 123 94 119 10,143

ASIA M&A: TOP DEAL ADVISERS Adviser Nomura Merrill Lynch Morgan Stanley JPMorgan Mitsubishi UFJ Financial Industry Totals* January 1, 2005 – December 31, 2005

Rank Value % Mkt # of ($million) Rank Share Deals 88,904 69,350 66,943 57,566 55,046 315,174*

1 2 3 4 5 -

28.2 22.0 21.2 18.3 17.5

139 52 68 33 149 8,605

Source: Thomson Financial Securities Data

* Figures may not add up, as more than one bank typically obtains credit for any one transaction.

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CORPORATE FINANCING NEWS MERGERS & ACQUISITIONS

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TOP MERGERS AND ACQUISITIONS (DECEMBER 1, 2005–JANUARY 1, 2006) AMERICAS Date Announced

Target Name (Target Advisers)

12/12/05

Burlington Resources (Morgan Stanley) (JPMorgan)

US

12/5/05

Guidant (JPMorgan) (Morgan Stanley)

12/19/05

Acquirer Name (Acquirer Advisers)

Country

Ranked Value ($billion)

Country

Description

ConocoPhillips (Goldman Sachs) (Citigroup)

US

Definitively agreed to acquire oil and gas company, in stock-swap transaction.

36.47

US

Boston Scientific (Merrill Lynch) (Bear Stearns) (Banc of America Securities)

US

Unsolicited challenging offer to acquire manufacturer of cardiovascular equipment.

22.55

Constellation Energy (Morgan Stanley) (Goldman Sachs)

US

FPL US (Merrill Lynch) (Lehman Brothers)

Definitively agreed to merge with electric and gas utility, in a stock-swap transaction.

15.23

12/9/05

Alltel’s wireline business (JPMorgan) (Merrill Lynch) (Stephens)

US

Valor Communications (Wachovia Securities) (Bear Stearns)

US

Agreed to acquire the wireline business of Alltel; includes the assumption of $4.2 billion in liabilities.

9.10

12/22/05

Arden Realty US (Wachovia Bank) (Lehman Brothers) (Secured Capital) (Houlihan Lokey Howard & Zukin)

GE Capital Real Estate (Merrill Lynch)

US

Unit of General Electric’s GE Commercial Finance subsidiary definitively agreed to merge with real-estate investment trust.

4.63

12/7/05

CenterPoint Properties (Wachovia Securities)

US

CalEast Industrial Investors (Morgan Stanley)

US

Definitively agreed to acquire real-estate investment trust, for cash.

3.29

12/12/05

Dunkin’ Donuts (JPMorgan)

US

Investor group (Citigroup) (Morgan Stanley)

US

Definitively agreed to acquire owner and 2.43 operator of franchise restaurants and donut shops; includes Baskin-Robbins and Togo’s brands.

12/14/05

Autoroutes du Sud de la France (Calyon) (Goldman Sachs) (Rothschild) (BNP Paribas)

France

Vinci France (UBS Investment Bank) (Merrill Lynch) (Lehman Brothers) (Société Générale)

Agreed to raise its stake to 73.4% by 16.09 acquiring a 50.4% interest from the French government, for cash; planned to launch a tender offer to acquire the remaining 26.6%.

12/14/05

Société des Autoroutes France Paris-Rhin-Rhône (Goldman Sachs) (Morgan Stanley) (Lehman Brothers) (HSBC) (BNP Paribas)

Investor group (Lazard) (Macquarie Bank) (ABN-Amro) (Credit Suisse First Boston)

France

Agreed to acquire a 70.2% interest from the French government, for cash; planned to launch a tender offer to acquire the remaining 29.8%.

11.85

12/14/05

Société des Autoroutes du France Nord et de l’Est de la France (Goldman Sachs) (UBS Investment Bank) (Dresdner Kleinwort Wasserstein) (BNP Paribas)

Investor group (JPMorgan) (Deutsche Bank)

Spain

Agreed to acquire a 75.7% interest from the French government, for cash via an auction; planned to launch a tender offer to acquire the remaining 24.3%.

9.78

12/1/05

Spirit Group (Deutsche Bank) (Merrill Lynch)

UK

Punch Taverns (Morgan Stanley) (Rothschild)

UK

Planned to acquire owner and operator of pubs; includes the assumption of $2.16 billion in liabilities.

4.63

12/13/05

Telsim Mobil Telekomunikasyon Hizmetleri (Rothschild) (Ernst & Young)

Turkey

Vodafone (UBS Investment Bank)

UK

Agreed to acquire wireless telecom services provider from Turkish Savings Deposit & Insurance, via an auction.

4.55

12/20/05

Banca Comerciala Romana

Romania

Erste Bank der Oesterreichischen Sparkassen (Rothschild) (JPMorgan)

Austria

Planned to acquire a 61.88% interest from the Romanian government, the European Bank and the International Finance Corporation, via an auction.

4.45

12/14/05

Autoroutes du Sud de la France (Goldman Sachs) (Rothschild) (Calyon) (BNP Paribas)

France

Vinci France (Merrill Lynch) (UBS Investment Bank) (Lehman Brothers) (Société Générale)

Planned to launch a tender offer to acquire the remaining 26.6% stake it did not already own.

3.76

12/19/05

Degussa (JPMorgan)

Germany

RAG (Morgan Stanley) (Deutsche Bank)

Germany

Agreed to raise its interest in inorganic chemicals maker to 92.96% by acquiring a 42.86% stake from E.ON.

3.33

12/7/05

Kabel Deutschland Vertrieb und Service (Goldman Sachs)

Germany

Providence Equity Partners (Deutsche Bank)

US

Planned to raise its interest to 95.1% by 2.72 acquiring a 63.4% interest in provider of cableTV services from Goldman Sachs and Apax Partners.

12/16/05

Kanebo Cosmetics (Merrill Lynch) (Nomura Securities) (Rothschild)

Japan

Kao (Goldman Sachs) (GMD Corporate Finance)

Japan

Agreed to acquire an 86% interest from 3.54 Industrial Revitalization Corporation of Japan; includes assumption of $1.26 billion in liabilities.

12/23/05

Tommy Hilfiger (JPMorgan)

Hong Kong Apax Europe VI Fund (Citigroup) (Credit Suisse First Boston)

UK

Definitively agreed to acquire clothing manufacturer, via an auction.

1.40

12/21/05

Hutchison Telecommunications International (Goldman Sachs)

Hong Kong Orascom Telecom Holding (Deutsche Bank)

Egypt

Acquired a 19.31% stake in wireless telecom services provider, in privately negotiated purchase.

1.30

EUROPE

ASIA

Source: Thomson Financial Securities Data

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CORPORATE FINANCING NEWS FOREIGN EXCHANGE

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Global Liquidity Causing Surge in Asian Currencies Even though the US Federal Reserve has ratcheted interest rates back to the neutral zone following a long period of ease, European rates are historically low when adjusted for inflation, and Japan’s monetary policy remains very accommodating. This has created a pool of global liquidity, or hot money, that can destabilize local markets, analysts say. “East Asian stock markets have exploded, and the currencies in the region have shot up,” says Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York. “This hot money distorts the price of capital, and governments in the region want to insulate their economies from the problems that this can cause,” he says. One of the lessons of the series of emerging-market crises, from the Mexican peso crisis in 1994-1995 through the Asian currency crisis of 1997, and the Russian crisis of 1998 to the Argentine crisis in 2001-2002, is that shortterm capital can flow out just as fast as, if not faster than, it flowed in, Chandler says. “The problem is not just on the destabilizing impact of the outflow, but also because the inflow distorts price signals to policy makers and investors alike,” he notes. The near-term risk is for a lower dollar as a function of speculative flows and 4 6

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technical factors, rather than as a result of a marked deterioration of US fundamentals or of central banks dumping US assets, Chandler says. Serious technical damage was inflicted on the dollar at the start of this year, with the short-term trend turning sharply negative. The beginning of the move can be traced to the thin markets of mid-December, when the Japanese yen rebounded from a nearly three-year low to make its biggest weekly rise against the dollar in about six years. “The squeeze on short yen positions was triggered at least in part by the rise in margin requirements for gold trading at the world’s second-largest gold market in Tokyo,” Chandler says. The move down in the dollar also coincided with a report in China’s Shanghai Securities newspaper that the yuan’s trading band against the dollar could be expanded. A widening of the 0.3% band would let China signal another step toward making its currency regime more flexible without having to do anything substantive, Chandler says. During the first week of 2006, China introduced a market-making system to allow commercial banks to trade yuan more freely with their customers without having to match trades with the pegged rate. HSBC, Citigroup, ABN Amro and Standard

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CURRENCY FORECASTS 1.0

Euro (Euro/US$)

0.9 0.8 0.7

Forecast

Source: The Bank of New York 0.6 J

F

M A

M J

J

A

S

O

N D

J

F

M

A

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2005

J

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A

S

O

N

D

N

D

O

N

D

O

N

D

O

N

D

O

N

D

O

N

D

2006

160

Japan (Yen/US$)

140 120 100

Source: The Bank of New York

Forecast

80 J

F

M A

M J

J

A

S

O

N D

J

F

M

A

M

2005 0.7

J

J

A

S

O

2006

UK (Pound/US$)

0.6

0.5

Forecast

Source: The Bank of New York 0.4 J

F

M A

M J

J

A

S

O

N D

J

F

M

A

M

2005

J

J

A

S

2006

1.6

Switzerland (Franc/US$)

1.4 1.2 1.0 0.8

Forecast

Source: Deutsche Bank J

F

M A

M J

J

A

S

O

N D

J

F

M

A

M

2005

J

J

A

S

2006

1.6

Canada (C$/US$) 1.4

1.2

1.0

Forecast

Source: The Bank of New York J

F

M A

M J

J

A

S

O

N D

J

F

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A

M

2005 14

J

J

A

S

2006

Mexico (Peso/US$)

12

10

Forecast

Source: The Bank of New York 8 J

F

M A

M J

J

A

S

O

N D

J

F

M

A

M

2005 3.5

J

J

A

S

2006

Brazil (Real/US$)

3.0 2.5 2.0

Forecast

Source: Deutsche Bank 1.5 J

F

M A

M J

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when the US economic cycle turns south.” The dollar could begin to decline this summer, when signs of weakening in the economy appear, Gilmore says. Trade sanctions lie in wait, for China at least, if the dollar is not allowed to depreciate against the Asian currencies, he says. Buying Asian currencies against the dollar was not a profitable trade in 2005, he says, but it could be in 2006. Hot money flooded into Asian stock markets in early January, with much of the investment directed toward technology companies in Taiwan and South Korea, analysts say. However, speculators have cut back on bets that there will be a one-time mega-revaluation of the Chinese yuan, says Carl Weinberg, chief economist at High Frequency Economics, based in Valhalla, New York. And while foreign direct investment continues to flow into China, it is not accelerating anymore, he notes. “What seems to have happened is that hot money

Chartered were among a group of 13 domestic and foreign banks approved to act as market makers. The launch of an interbank market in yuan was another small step in a long reform process, analysts say. Previously, the central bank was the only counter-party to legal foreign exchange transactions in the country. If China continues to take evolutionary steps to introduce more flexibility into its currency system, it will be hard for the US Treasury to designate the country as a currency manipulator in mid-April, analysts say. “The cyclical story favoring the dollar is lessening, but we are a long way from markets embracing a weak dollar both cyclically and fundamentally,” says David Gilmore, economist and partner at FX Analytics, based in Essex, Connecticut. “I am not saying that a bear market is not in the cards for the dollar,” he says. “Indeed, I have said all along that the dollar will resolve in a major bear trade

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and financial capital flows are rapidly falling,” he says. “This may have been the success of the floating of the yuan.” Meanwhile, the People’s Bank of China, the central bank, announced in early January that it would actively explore moreeffective ways to use its reserve assets. “China’s reserves are on track to reach the $1 trillion level this year,” says Chandler of Brown Brothers Harriman. “This fact scares many observers, who are thinking that the US will be held hostage by foreign ownership of US treasuries, which is around 50% of outstanding Treasury stock,” he says. Still, US Treasury securities are only a small part of overall US assets, Chandler says. “The idea that US interest rates or the dollar’s fate are inextricably in the hands of countries like China and Japan is grossly exaggerated,” he says. Even when China and Japan were net sellers of US assets last autumn, Caribbean-based hedge

funds and members of the Organization of Petroleum Exporting Countries were net buyers and more than offset these sales. Japan’s finance minister Sadakazu Tanigaki said in New York last month that as emerging market countries are assuming a larger role in the world economy and trade than in the past, they are capable of having a greater impact on the world economy. Unusually low interest rates have made abundant capital available at low costs in international financial markets, and this capital has moved freely around the world, he said. As interest rates in some industrialized countries have started to rise, this could potentially alter the international flow of funds in favor of the safer markets in advanced countries, including the United States, Tanigaki said. “We cannot preclude the possibility that such a reversal of capital flow might adversely impact the availability of funds for emerging countries,” he said. —Gordon Platt

CURRENCY FORECASTS 1.6

1400

Australia (A$/US$)

South Korea (Won/US$)

1200

1.4 1000

1.2 800

Forecast

Source: The Bank of New York 1.0

600

J

F

M

A

M J

J

A

S

O

N

D J

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J

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M J

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M

A

M

2005

10.0

J

J

A

S

O

N

D

O

N

D

2006

1.8

China (Yuan/US$)

9.0

Forecast

Source: Deutsche Bank J

D

Turkey (Million Lira/US$) 1.6

8.0

1.4 7.0 6.0

Forecast

Source: Deutsche Bank J

F

M

A

M J

J

2005

A

S

O

N

D J

F

M

A

M

J

J

2006

A

S

O

1.2 N

D

Forecast

Source: Deutsche Bank J

F

M

A

M J

J

A

S

O

N

D J

F

M

A

2005

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M

J

J

A

S

2006

2 0 0 6

F E B R UA RY

4 7

CORPORATE FINANCING NEWS FOREIGN EXCHANGE

G

GF

L O B A L

Trillion-Dollar Milestones Reached in DR Market

F

I N A N C E

particularly energy companies Lukoil, Gazprom and Unified Energy Systems of Russia. Lukoil, the most liquid security on the London Stock Exchange's International Order Book, is actually an ADR. London-traded ADRs are compatible with US-listed ADRs. Russian steel producer Novolipetsk Iron & Steel in December 2005 launched the biggest issue on the London Stock Exchange for five years, a $609 million offering that valued the company at $15 billion. The deal propelled Vladimir Lisin, a former welder in a coal mine who owns a 90% stake, into the ranks of Russia's billionaires. In the past year Russian companies have raised more than $4.5 billion in Britain. Meanwhile,Telecom Egypt, the largest provider of fixed-line telecommunications services in the Middle East, listed its GDRs in London in December, raising about $600 million as the

Citigroup. The total of equity raised was the second-highest ever, following the record $30 billion in 2000. The volume of global depositary receipts, or GDRs, traded on the London Stock Exchange surged 166% to $226 billion last year. American depositary receipts, or ADRs, accounted for $980 billion of the $1.2 trillion total trading volume for 2005 and were up 13%. “The higher GDR trading volume in 2005 was a major driver of the surge in DR capital raising overall,” says Nancy Lissemore, head of depositary receipt services for Citigroup. Some 88% of the $10.8 billion raised in initial public offerings last year was in GDR form. Much of the trading activity in London-listed DRs last year was in Russia-based companies,

Both the total value of investment in depositary receipts and the trading value in American and global DRs surpassed $1 trillion for the first time in 2005, according to an analysis by The Bank of New York. The bank said nearly $1.2 trillion of DRs traded on US and non-US markets and exchanges last year. “The trillion-dollar milestones underscore the significant and growing role DRs play in broadening the market to both issuers and investors alike, a trend which we expect to continue in 2006,” says Christopher Sturdy, managing director and head of the bank's depositary receipt division. Equity capital raised in the form of depositary receipts rose 194% to $27.5 billion in 2005, while the value of trading rose 27%, according to an analysis by

REGIONAL ADR INDEXES 180

160

Latin America

Europe

Asia

140

120

100

Source: The Bank of New York 4 8

F E B R UA RY

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Dec 31, 2005

Dec 16, 2005

Dec 2, 2005

Nov 4, 2005

Nov 18, 2005

Oct 7, 2005

Oct 21, 2005

Sep 9, 2005

Sep 23, 2005

Aug 26, 2005

Jul 29, 2005

Aug 12, 2005

Jul 1, 2005

Jul 15, 2005

Jun 17, 2005

Jun 3, 2005

May 6, 2005

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Apr 8, 2005

Apr 22, 2005

Mar 11, 2005

Mar 25, 2005

Feb 11, 2005

Feb 25, 2005

Jan 14, 2005

Jan 28, 2005

80 Dec 31, 2004

CORPORATE FINANCING NEWS GLOBAL EQUITY/DR S

G

Egyptian government sold a 20% stake in the company. The sale was Egypt's largest-ever initial public offering. Meanwhile, the appetite from US investors for foreign equity continues to be strong, says Patrick Colle, global head of ADRs at JPMorgan. The total value of US investment in non-US equities increased to $2.8 trillion as of September 30, 2005, according to the latest US Federal Reserve statistics. Investment in such securities has almost doubled since the second quarter of 2003, Colle says. Total global equity capital market volume for 2005 was $597 billion, an increase of 4% from a year earlier, according to Dealogic.The finance sector had the largest volume in 2005, with $111 billion raised via 694 deals. It also has the largest current backlog, with 45 deals expected to raise $5.5 billion as of January 12. Global IPO volume rose 24% to $170 billion last year and was the highest since 2000, Dealogic says. Convertible volume was lackluster, with just $77 billion raised, representing a decline of 31% from 2004. Citigroup was the leading underwriter for global equity capital markets in 2005, both in terms of volume and revenue. The biggest equity offering in December was by Bermuda-based XL Capital, an insurer and reinsurer. Citigroup and Goldman Sachs managed the $2.5 billion follow-on offering. —Gordon Platt

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