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South Africa’s central bank has disagreed with a ratings decision by Moody’s to downgrade Capitec Bank Limited (Capitec) by two notches, and place it on review for a further downgrade. The central bank says it respects the independent opinion of rating agencies but that it does not “agree with the rationale given in taking this step”. Two reasons are given for the rating action: a lower likelihood of sovereign systemic support based on decisions recently taken in relation to African Bank Limited (African Bank), and heightened concerns regarding the risk inherent in Capitec’s consumer lending focus. “With regard to the first point, it is important to reiterate that the approach taken by the SARB to any resolution to address systemic risk will always be based on the circumstances and merits of the particular prevailing situation. Decisions will also be informed, as was the case with African Bank, by principles contained in the Key Attributes for Effective Resolution Regimes proposed by the Financial Stability Board (FSB), which have the objective that a bank should be able to fail without affecting the system,” notes the central bank in an official statement. “This is in keeping with evolving international best practice. In the case of African Bank bond holders and wholesale depositors are taking a 10% haircut, which is generally regarded as being very positive given that the trades following the announcement of African Bank's results were taking place at around 40% of par. Therefore in fact substantial support was provided, not reduced. Moreover, all retail depositors were kept whole and are able to access their accounts fully,” it adds - According to the Hong Kong Monetary Authority (HKMA) credit card receivables increased by 2.1% in the second quarter to HKD112, after a reduction of 6.7% in the previous quarter. The total number of credit card accounts edged up by 0.7% to around 16.8m.The rollover amount, which reflects the amount of borrowing by customers using their credit cards, increased by 2.9% during the quarter to HKD19.2bn. The rollover ratio also rose marginally from 17.0% to 17.1% in the same period. The charge-off amount increased to HKD569mduring the quarter from HKD528m in the previous quarter. Correspondingly, the quarterly charge-off ratio rose to 0.51% from 0.46% in the previous quarter. The amount of rescheduled receivables transferred outside the surveyed institutions’ credit card portfolios reduced to HKD94m from HK$109m in the previous quarter. The delinquent amount increased to HKD249m at end-June from HKD239m at end-March. However, the delinquency ratio remained the same at 0.22% because of an increase in total card receivables. The combined delinquent and rescheduled ratio (after taking into account the transfer of rescheduled receivables mentioned above) edged up to 0.29% from 0.28% during the same period - Harkand has been awarded a contract to support Apache with inspection, repair and maintenance work (IRM) as well as light construction (LC) across their assets in the North Sea, following completion of a competitive tender exercise. The award includes the provision of vessels, ROV and diving services for a three-year period, plus two one-year options. The firm will also support offshore marine construction contractor EMAS AMC who have been awarded a separate contract for pipe lay and heavy construction as part of the same tender process. Harkand Europe managing director, David Kerr, said: “This contract is an important step in strengthening our close working relationship and growing our North Sea business with Apache.

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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