Sunday 1st February 2015
NEWS TICKER FRIDAY, JANUARY 30TH: Morningstar has moved the Morningstar Analyst Rating™ of the Fidelity Japan fund to Neutral. The fund was previously Under Review due to a change in management. Prior to being placed Under Review, the fund was rated Neutral. Management of the fund has passed to Hiroyuki Ito - a proven Japanese equity manager, says Morningstar. Ito recently joined Fidelity from Goldman Sachs, where he successfully ran a Japanese equity fund which was positively rated by Morningstar. “At Fidelity, the manager is backed by a large and reasonably experienced analyst team, who enjoy excellent access to senior company management. While we value Mr Ito’s long experience, we are mindful that he may need some further time to establish effective working relationships with the large team of analysts and develop a suitable way of utilising this valuable resource,” says the Morningstar release - The Federal Deposit Insurance Corporation (FDIC) today released a list of orders of administrative enforcement actions taken against banks and individuals in December. No administrative hearings are scheduled for February 2015. The FDIC issued a total of 53 orders and one notice. The orders included: five consent orders; 13 removal and prohibition orders; 11 section 19 orders; 15 civil money penalty; nine orders terminating consent orders and cease and desist orders; and one notice. More details are available on its website - Moody's Investors Service has completed a performance review of the UK non-conforming Residential Mortgage Backed Securities (RMBS) portfolio. The review shows that the performance of the portfolio has improved as a result of domestic recovery, increasing house prices and continued low interest-rates. Post-2009, the low interest rate environment has benefitted non-conforming borrowers, a market segment resilient to the moderate interest rate rise. Moody's also notes that UK non-conforming RMBS exposure to interest-only (IO) loans has recently diminished as the majority of such loans repaid or refinanced ahead of their maturity date - The London office of Deutsche Bank is being investigated by the Financial Conduct Authority (FCA), according to The Times newspaper. Allegedly, the bank has been placed under ‘enhanced supervision’ by the FCA amid concerns about governance and regulatory controls at the bank. The enhanced supervision order was taken out some months ago, says the report, however it has only just been made public - According to Reuters, London Stock Exchange Group will put Russell Investments on the block next month, after purchasing it last year. LSE reportedly wants $1.4bn - Legg Mason, Inc. has reported net income of $77m for Q3 fiscal 2014, compared with $4.9m in the previous quarter, and net income of $81.7m over the period. In the prior quarter, Legg Mason completed a debt refinancing that resulted in a $107.1m pre-tax charge. Adjusted income for Q3 fiscal was $113.1m compared to $40.6m in the previous quarter and $124.6m in Q3 fiscal. For the current quarter, operating revenues were $719.0m, up 2% from $703.9m in the prior quarter, and were relatively flat compared to $720.1m in Q3 fiscal. Operating expenses were $599.6m, up 5% from $573.5m in the prior quarter, and were relatively flat compared to $598.4min Q3 of fiscal 2014. Assets under management were $709.1bn as the end of December, up 4% from $679.5bn as of December 31, 2013. The Legg Mason board of directors says it has approved a new share repurchase authorisation for up to $1bn of common stock and declared a quarterly cash dividend on its common stock in the amount of $0.16 per share. - The EUR faces a couple of major releases today, says Clear Treasury LLP, and while the single currency has traded higher through the week, the prospect of €60bn per month in QE will likely keep the euro at a low ebb. The bigger picture hasn’t changed, yesterday’s run of German data was worse than expected with year on year inflation declining to -.5% (EU harmonised level). Despite the weak reading the EUR was unperturbed - The Singapore Exchange (SGX) is providing more information to companies and investors in a new comprehensive disclosure guide. Companies wanting clarity on specific principles and guidelines on corporate governance can look to the guide, which has been laid out in a question-and-answer format. SGX said listed companies are encouraged to include the new disclosure guide in their annual reports and comply with the 2012 Code of Corporate Governance, and will have to explain any deviations in their reporting collateral. - Cordea Savills on behalf of its European Commercial Fund has sold Camomile Court, 23 Camomile Street, London for £47.97mto a French pension fund, which has entrusted a real estate mandate to AXA Real Estate. The European Commercial Fund completed its initial investment phase in 2014 at total investment volume of more than €750m invested in 20 properties. Active Asset Management in order to secure a stable distribution of circa 5% a year. which has been achieved since inception of the fund is the main focus of the Fund Management now. Gerhard Lehner, head of portfolio management, Germany, at Cordea Savills says “With the sale of this property the fund is realising a value gain of more than 40%. This is the fruit of active Asset Management but does also anticipate future rental growth perspectives. For the reinvestment of the returned equity we have already identified suitable core office properties.” Meantime, Kiran Patel, chief investment officer at Cordea Savills adds: “The sale of Camomile Court adds to the £370m portfolio disposal early in the year. Together with a number of other asset sales, our total UK transaction activity since January stands at £450m. At this stage of the cycle, we believe there is merit in banking performance and taking advantage of some of the strong demand for assets in the market.” - US bourses closed higher last night thanks to much stronger Jobless Claims data (14yr low) which outweighed mixed earnings results. Overnight, Asian bourses taken positive lead from US, even as Bank of Japan data shows that inflation is still falling, consumption in shrinking and manufacturing output is just under expectations. According to Michael van Dulken at Accendo Markets, “Japan’s Nikkei [has been] helped by existing stimulus and weaker JPY. In Australia, the ASX higher as the AUD weakened following producer price inflation adding to expectations of an interest rate cut by the RBA, following other central banks recently reacting to low inflation. Chinese shares down again ahead of a manufacturing report.” - Natixis has just announced the closing of the debt financing for Seabras-1, a new subsea fiber optic cable system between the commercial and financial centers of Brazil and the United States. The global amount of debt at approximately $270m was provided on a fully-underwritten basis by Natixis -

New Asian DR issues down. Will 2012 be any better?

Friday, 09 December 2011
New Asian DR issues down. Will 2012 be any better? Against the current backdrop of an unresolved eurozone crisis and slowing global economy, it is not surprising that the depositary market across the spectrum has grown quiet. Asian companies along with Brazil still account for the bulk of global DR issuance but like many they are waiting and watching for events to unfold. Lynn Strongin Dodds reports. http://www.ftseglobalmarkets.com/

Against the current backdrop of an unresolved eurozone crisis and slowing global economy, it is not surprising that the depositary market across the spectrum has grown quiet. Asian companies along with Brazil still account for the bulk of global DR issuance but like many they are waiting and watching for events to unfold. Lynn Strongin Dodds reports.

According to Gregory Roath, head of Asia-Pacific for BNY Mellon’s depositary receipts (DR) business, it is “fair to say in respect to capital raising, which includes initial public offerings of depositary receipts, there has been a general slowdown. It has affected the plans of issuers who were considering issuing in the third and, potentially, in the fourth quarter. There is still a healthy pipeline but in terms of timing, they may want to wait until the first or second quarter of 2012.”

Kenneth Tse, Asia Pacific head of JP Morgan’s depositary receipts group, adds: “There has been a great deal of global uncertainty with Europe in the middle of it. However, although flows to emerging markets have slowed, the Asian economy and the BRIC countries in particular have been more resilient. The one major trend that we have seen this year is the return of Russia, which was totally absent last year.”



According to Edwin Reyes, managing director and global product head of depositary receipts at Deutsche Bank, there were 166 new depositary receipt deals and follow-ons in 2010 with Asia accounting for 70%, Europe at 17% and Latin America at 10%. So far this year, the total has been 96, with Asia contributing 53%, Europe at 28% but staying roughly the same as in 2010 in terms of the number of deals, and Latin America at 13%.  

The bulk of activity happened in the first half with BNY Mellon figures showing 79 new sponsored programmes from 19 countries compared to 64 programmes from the same period in 2010. Australia led the way with 13 followed by 12 from India and nine each from Russia and China. Brazilian and Mexican issuers were also busy with four each. In terms of capital raised, issuers from Russia accounted for nearly half of the total $11.7bn in the first six months with financial group VTB’s $2.8bn follow-on offering being the most notable as the largest DR capital raising. Meanwhile, China and India executed the largest number of transactions at 12 and 11, totalling $2.6bn and nearly $200m respectively.

The BNY Mellon report noted that the New York Stock Exchange and NASDAQ remain the most popular venues for listings, accounting for almost 86% of all DR trading value worldwide.  In total, 65.1bn US-listed DRs, valued at $1.66trn, traded on US markets during the first half of 2011 with the most active being China’s most popular online search engine, Baidu, Brazil’s Petrobras and industrial metals and mining firm Vale, the UK’s BP and Israel’s Teva Pharmaceuticals.

 “The US continues to be the most popular for the Chinese private sector because that is where their peer group is,” explains Roath. “Investors understand start-up companies and their business models.” Tse echoes the sentiments. “China prefers the US markets because the internet and e-commerce industries are more developed in the country than in Europe. Russian companies though like the London Stock Exchange because it is stronger in mining and commodity related businesses.”

While fears over the eurozone debt crisis and slowing economic growth are making participants nervous, they are not the only reasons holding Chinese and Indian companies at bay. Accounting scandals in both countries have also made investors wary. There have long been suspicions that Chinese companies listed overseas do not adhere to strict accounting standards plus there are concerns over the Chinese government prohibiting US regulators from examining China-based auditing firms.

Reporting irregularities

In September, these issues came into sharper focus when the US justice department announced it was investigating accounting irregularities at Chinese companies on the US exchanges.  Although the names of companies have not been revealed, it has been reported that it is looking at both civil proceedings as well as criminal charges.  The minute the news hit the wires, American DRs of some Chinese companies such as Baidu as well as Weibo, which runs a service similar to Twitter, fell sharply.

The charges came after a review conducted earlier in the year by the US Securities and Exchange Commission (SEC) into accounting problems at foreign-based stock issuers. It was looking into the resignations of auditors and book-keeping irregularities at dozens of China-based companies.  For example, Deloitte Touche Tohmatsu CPA in May resigned as auditor of Chinese software company Longtop Financial Technologies, because it said it found falsified financial records and bank balance confirmations. Valentina Chuang, head of depositary receipt services for Asia at Citi, says:  “Although market conditions are the main reason why there has been a slowdown in issuance from Chinese companies, the scandals have had some impact. It has made investors more cautious. They are asking more questions and looking more closely at the companies’ corporate governance structures.”

In some ways, the scandals have had a positive impact in that it is forcing Chinese companies to raise their game. They not only have to strengthen their corporate governance standards but also their disclosures to the US regulators.

As for India, the Securities and Exchange Board of India (SEBI) banned seven companies from raising fresh capital, after investigations revealed they manipulated share prices after issuing global DRs (GDRs). The regulator also barred ten entities, including a foreign institutional investor (FII) and sub-accounts, from dealing in securities market.

A recent study conducted by Crisil Research, which is part of the Standard & Poor’s Index Services Group, analysed 40 GDRs issued by Indian companies in 2010 and found  that investors lost money in 85% with four out of five issues giving a negative return of 35% or more.

Looking ahead, while no one is brave enough to predict when the markets will recover, participants are hopeful that there will be a crop of issuance from India and China in the first and second quarters of 2012. ”One of the key challenges is the slowdown in some markets and that there is not the same level of deals coming through,” says Reyes.”However you have to be competitive and ready for when the markets improve.  You also need to be able to provide more than the basic services. Issuers are looking for value-added capabilities such as support with their investor relations programmes.  In this case we adopt a more consultative role and help them with identifying new investors.”

Local markets such as Hong Kong and Taiwan, albeit hit by the current turbulence, are also expected to rebound. They are increasingly attracting foreign companies on the back of the Asian economic growth story.  

Taiwan has been a favourite with repatriated companies although it is gaining traction from firms that do not have the same domestic connection. For example, in May, Hong Kong-listed companies NewOcean Energy Holdings, a vendor and distributor of liquefied petroleum gas in China and New Media Group Holdings, an investment holding company, filed to list troubled debt restructurings (TDRs).

HK draws luxury brands

Hong Kong too is popular, particularly with foreign luxury brand names which want to tap into mainland China’s burgeoning middle classes and wealthy consumers.  Handbag manufacturer Coach, which announced in May its intention to list on the Hong Stock Exchange, was hoping to make its debut in early December.  It follows Italian fashion house Prada and US luggage manufacturer Samsonite International, which raised $2.5bn and $1.25bn respectively in June. Coach, like other luxury brands, is targeting China’s newly-affluent consumers and says it plans to open 30 stores in China next year.

The handbag maker says in a filing to the Hong Kong Stock Exchange that it will issue up to 293.6m Hong Kong depositary receipts “by way of introduction” rather than a public offering and said no new funds would be raised. “China is our largest geographic growth opportunity, given the size of the market, its rate of growth, and our increasing brand awareness,” the company says in the statement. Fashion IPOs are also having a knock-on effect on their Chinese suppliers. One of Coach’s major Chinese suppliers, handbag maker Sitoy Group, is also due to list in Hong Kong in December.

Hong Kong is also a magnet for natural resource companies that want to forge closer links with resource-hungry China. For example, Swiss commodities trader Glencore International raised $20bn through a dual listing in Hong Kong and London in May.

There are also stirrings in the frontier markets of Mongolia, Indonesia and Vietnam which are looking towards Hong Kong as a way to raise their profile in China. Tse says: “Although BRIC will continue to dominate GDRs, we are seeing interest from state-owned enterprises for example in Mongolia. The firm recently organised the first Capital Raising Options for Mongolian Companies workshop where participants worked with the government to educate companies on how they can raise funds through a listing in Hong Kong. Vietnam has also seen a small number of GDRs below the $50m mark and I expect to see larger deals in the next two to three years.”

Aside from new countries entering the local DR game, different structures are also expected to appear. In June this year, Barclays Bank’s listed nine of its iPath exchange-traded notes (ETNs) on the Tokyo Stock Exchange via a Japanese DR.  It was noteworthy for being the first ever ETN listing in Japan as well as the first listing of non-Japanese securities in a format of a JDR.

 We see this as a very interesting development,” says Chuang. “One of the main reasons for the listing is to attract liquidity and we now are seeing more ETF and ETN providers hoping to replicate the process in Japan. As for the growing importance of the renminbi (RMB) market, DR players do not see it as a threat but as a complement to equity issuance.

“RMB issuance is a growing sector in some bond markets and we would expect this to continue once markets stabilise “says Roath. “In time we believe that equity RMB issuance will follow. However, it depends on the financing needs and structure of the company as to whether debt or equity is preferable.”

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