Yields on Greece’s outstanding paper, which have been on a downward trajectory for a while now, are around their lowest levels since the 2010 bailout – in the 6.75%–7% range in the 10-year part of the curve. And the Troika last week was sufficiently satisfied with the country’s progress to approve the latest disbursement of aid.
Supported by whispers from inside the finance ministry, talk has been centred on issuance of €2bn of five-year paper, possibly before the European elections in May. That maturity makes sense, as it would fall between Greece’s short-dated T-bills and the shortest of its restructured bonds, which mature in 2023.
But the tenor is not really the point. The most important question is: would anyone actually buy the paper? And, if so, who?
The answer to the first appears to be yes. And the answer to the second is: not who you might expect.
At current levels, 10-year Greek bonds yield around 250bp over Portugal and 350bp over Spain and Italy. They also offer between 125bp and 150bp more than Turkey and even Russia, in spite of the current political situation.
So while hedge funds and distressed buyers have been circling Greece for a while, EM investors are now showing an interest, as are – more significantly – some mainstream real-money accounts.
Both Ireland and Portugal have already completed their rehabilitation – coincidentally also with five-year bonds – and been welcomed back into the issuance fold by real as well as fast money.
Of course, both of those countries had significantly higher ratings when they returned than Greece’s Single B/Triple C mark, and they had not burnt their bondholders through haircuts on their paper just two years previously.
But with Greek bank Piraeus last week selling €500m of three-year paper to a rousing welcome – the book was six times covered, and the new paper traded up around a point above reoffer when syndicate broke – it seems like a new (and successful) sovereign issue is only a matter of time.
The MD clause
Inserting so-called key man clauses into IPO mandates is a tangible example of the value that independent ECM advisers can provide to clients. A chief executive charmed by a smooth talking polyglot into appointing his or her bank has every right to expect that that banker is involved from start to finish – and doesn’t disappear after the pitch only to reappear for the closing dinner.
Advisers are keenly aware of both the surge in European IPO activity and the savage cuts to ECM teams in recent years, and are rightly protecting their clients’ interests.
Deals this year have shown that investors are engaged in IPOs, but buyers have a wealth of choice about where to invest – and aftermarket performance shows that not every deal is a slam dunk. Senior bankers’ years of experience are, therefore, crucial in navigating still tricky waters.
Stretched senior bankers understandably grumble about the extra demands on their time that such clauses entail – and some are even declining to pitch for RFPs as a result.
But rather than muttering under their breath about the demands put on them by ECM advisers and demanding clients, they should be pushing their bosses hard to invest in European ECM for the first time in five years.
Vulnerable position
All the signs suggest that Hong Kong will eventually change its listing rules to allow dual-class share structures. But whatever steps it takes now will be too late for the city’s hopes of luring a new group of high-profile issuers from China’s growing internet sector.
Alibaba’s confirmation that it will hold its long-awaited IPO in New York is an enormous blow to Hong Kong. It dents the city’s ambitions to diversify its stock market, robs it of additional trading volumes and hits banking revenues.
HKEx chairman Charles Li has pledged that consultations on shareholder structures will continue, but any action it takes now will be largely symbolic. China’s leading technology companies are already going elsewhere.
Of course, Hong Kong’s listing watchdog needs to prove that it is not beholden to the requests of any single company – and it has certainly done that. It also deserves praise for an uncompromising approach to corporate governance standards, having taken the necessary steps to restore investor confidence after a series of scandals, ensuring companies and their advisers are properly liable for any shoddy disclosure.
But it also needs to prove that it can respond faster to changing market dynamics. If the city is going to abandon its one-share, one-vote policy, then the loss of countless earlier IPOs, from Manchester United to RenRen, should have triggered a consultation on boardroom structures and profitability requirements long ago.
If it does not change, Hong Kong’s equity market risks looking like little more than a funding avenue for state-owned China. As China’s economy matures, and its own borders come down, that is looking like an increasingly vulnerable position.
Default discipline
China’s domestic investors have some thinking to do in the wake of the country’s first onshore bond default. For overseas creditors, however, the fundamentals haven’t changed. If anything, they have improved.
Foreign investors have been well aware of the risks associated with Chinese credits ever since state-owned Guangdong International Trust and Investment Corp missed a US$8.75m coupon payment on a US$200m bond on October 26 1998 – the first time a Chinese company had missed a coupon payment since the Communist Party took control in 1949.
Gitic’s ensuing bankruptcy left creditors with a recovery rate of 12.5% – a sobering thought for anyone still holding Shanghai Chaori’s defaulted bonds. Many more precedents exist, from Asia Aluminum and Sino Forest to LDK Solar, where foreign creditors again find themselves facing heavy principal losses with no chance of enforcing a claim on any mainland assets.
Defaults, of course, are an essential part of any efficient capital market. Overseas investors charge a premium to lend to Chinese companies and coupons well into the double digits show they are under no illusions as to the risks attached to the country’s property sector.
An onshore default will help bring some of that discipline to China’s domestic market, and that is a positive development for China in the long run. Onshore analysts and investors are already behaving more like their overseas counterparts, ramping up their credit analysis as they scramble to identify the next likely defaulters.
Foreign investors can also take comfort from currency reforms that are closing the gap between the onshore and offshore markets. Easier capital flows and more cross-border guarantees promise to give overseas creditors greater recourse to domestic assets should future financings go wrong.
After a US$40bn offshore funding spree over the past two years, Chinese companies now account for the lion’s share of Asia’s international credit indices. The sheer scale of that mounting debt pile – and its concentration in the property sector – means that some volatility is inevitable. But any talk of a funding crisis is grossly overdone.
China’s overseas issuers paused for breath last week, but they won’t be out of the international debt markets for long.
