2008: Panic stations

Asia’s response to the global financial crisis was largely one of bewilderment. Asian banks, at least since the region’s financial crisis, were conservative, largely state-run institutions funded by a massive deposit base. The world of prop trading and subprime mortgage-backed synthetic debt was quite literally thousands of miles away.

But the sense of denial that kept markets pumping in the first half of the year – and even brought Korea Development Bank close to rescuing Lehman Brothers – eventually turned to dismay as the extent of the problems became clear. At the height of the crisis, Asia could only watch and wait to see what emerged from the US overnight.

IFR Asia 534 – January 12, 2008

Views sharpen on controversy-laden Reliance Power float

Anil Ambani’s mega issue for Reliance Power, slated to raise up to Rs117bn (US$2.9bn), has been one of the most drama-filled offerings in recent history.

After months of controversy the IPO – which was expected to take place in December but dragged on due to issues with minority shareholders and the regulators – is set to launch bookbuilding on January 15.

The early signs are that the deal will be hot. Grey market bids indicate it will trade at about Rs800 upon debut, nearly double indicative prices. Reliance Power is being offered at an indicative range of Rs405–Rs450, though retail investors will get a Rs20 discount.

The deal generated plenty of disgruntlement from minority investors in Reliance Energy – a listed company that has transferred assets to Reliance Power – up in arms shortly after filing its prospectus. Unknown parties circulated letters pointing out the risks outlined in Reliance Power’s offer document using the letterhead of members of parliament, later revealed to have been forged.

With Indian equity markets on a seemingly inexorable rise, investors appear to be eager to lap up a stock that has no earnings or track record. And, with the Reliance halo to bank upon, retail players are also expected to jump on the bandwagon.

“It’s going to be heavily oversubscribed. Concerns only happen in a bear market and, right now, the market is hot,” said one Singapore-based hedge fund manager who met with the management.

However, other investors that take a more fundamental approach to valuations are wary of the deal.

“I’m very sceptical of this stock. I’m sure there’s money to be made if you make a play on sentiment or a theme. But we’re not into that, we’re into holding stocks for the long term and it’s not fundamentally grounded at all,” said another Singapore-based fund manager.

Reliance Power, which holds 13 greenfield power projects (including six coal-fired, two gas-fired and four hydroelectric plants) faces considerable execution risk. None of its projects is generating any cash.

“If you look at the profit-and-loss statement, you will not see earnings nor cash. It’s more a venture capital markets deal than an equity capital markets deal in my view,” said the fund manager.

Meanwhile, bankers on the deal are predicting that the deal will fly and indeed surpass all expectations.

“It will be a blowout. People have been making money on the Reliance name for years,” said one banker.

ABN AMRO, Deutsche Bank, Enam, ICICI Securities, JM Financial, JPMorgan, Kotak Mahindra and UBS are bookrunning lead managers on Reliance Power’s IPO with Macquarie and SBI Capital as co-bookrunners.

IFR Asia 569 – September 20, 2008

Lehman delivers KDB’s moment of truth

Last week was a defining moment of the worst kind for Lehman Brothers as well as a moment of truth for Korea Development Bank, the jilted suitor of the US house in what at first glance always seemed the most unlikely of acquisitions. But KDB’s failure to bag Lehman lays bare the Korean policy bank’s burning ambition to become Asia’s leading home-grown investment bank.

The puff in KDB’s annual report is grandiose and uncompromising: “With an extensive business network at home and abroad, KDB will persistently revamp its capacity to initially advance as Asia’s leading bank, then transform into a global investment bank in the longer run … KDB is “redefining excellence” as it is about to make new history as a leading global bank through a process of selection and concentration.”

All of which explains KDB’s pursuit of Lehman, as well as the fact that KDB’s CEO Min Euoo Sung was until early this year Lehman’s country head in Korea, a post he held for three years having previously headed Salomon Smith Barney’s Korea operations.

KDB’s interest in buying Lehman effectively cast it as a deus ex machina that would bring the debacle to a happy conclusion, with the market thick with rumours that KDB was after a 25% stake in Lehman and which helped lift the US bank’s stock 5% to US$14.4 per share.

By the end of the week KDB was said to be walking away after Lehman refused to lower its price. Lehman Brothers share price subsequently tanked, and KDB wound up bidding US$6.4 per share, valuing Lehman at US$4.4bn, and demanding management control in return for what it saw as a 30% premium to fair value.

Lehman CEO Dick Fuld had held out for US$17.5, leading to a breakdown in negotiations and backing Lehman into a hole after last-ditch attempts to get Barclays to bid over the weekend failed.

Nevertheless despite Lehman’s ensuing bankruptcy last Monday, Min stated to the South Korean media on the same day that he regretted that KDB had not purchased the US bank.

“In hindsight I believe Lehman could have headed off bankruptcy if it had accepted our offer and the government had approved it. If that had been the case, both KDB and Lehman might have enjoyed a win-win result,” he said.

IFR Asia 570 – September 27, 2008

Meet the new Nomura

Last week’s announcement that Nomura would absorb Lehman’s operations held two surprises. The first was the startling outcome that Lehman’s 3,000 Asia Pacific bankers would be able to keep their jobs – with their bonuses intact, no less. The second surprise was that the ultraconservative Japanese bank had the ambition and the wherewithal to do this deal over a weekend.

Lehman Brothers’ 3,000-plus employees based across the Asia-Pacific spent the week ending Friday September 19 thinking that they were out of a job. The bank’s Asian businesses were in provisional liquidation (the Japanese businesses were in civil rehabilitation, a more polite term that meant the same thing).

Senior management was asking Lehman employees to keep coming to work but staff had no authority to conduct trades, and had no clear indication of what might come next.

After Barclays announced on September 16 that it would buy Lehman’s US operations, the bank’s Asia-Pacific operations were, in the words of an insider, “cut adrift”.

Jasjit Bhattal, Lehman’s Asia-Pacific CEO, and Asia-Pacific chief administrative officer Brian O’Connor were the main negotiators on behalf of Lehman. On Thursday September 18 they asked Rothschild to act as sell-side advisers. Rothschild arrived in Hong Kong on the 19th, at which time they opened negotiations with five interested parties. Topping that list were Standard Chartered, Barclays and, of course, Nomura, which emerged the following Monday as the winner.

To deliver a speedy deal, Rothschild realised they needed to ring-fence all of Lehman’s liabilities. They pitched a franchise deal that focused on employees, brand and relationships.

Given that such intangibles were up for sale, Lehman’s trick was to hold together its employees and present to Nomura a functioning, cohesive team that could easily resume its old business. It was a confidence game that Lehman executives managed well.

“You could see very quickly that this was an integrated team,” said Ben Davey, Rothschild’s lead adviser to Lehman on the sale of its Asia-Pac assets. “The senior Lehman management really stuck together. They drove this transaction, and they held this business together, which was crucial.”

Nomura, perhaps because of its Japanese background, was most receptive to Lehman’s conditions and the spirit in which they were negotiated. Nomura agreed to a deal that saw all Lehman’s Asia-Pac employees keep their jobs, and that included a promise to pay their 2008 bonuses in cash at the 2007 level.

And even if the banks are far apart culturally, Lehman represents where Nomura wants to go. CEO Kenichi Watanabe is clearly planning a big global push for Nomura, and Lehman can teach them a few things about trading nimbly in diverse markets (just as Nomura can teach Lehman a thing or two about risk management). There is a sense in Nomura, from Watanabe on down, that now is their time, and perhaps an injection of a smart, energetic American bank is just the tonic.

“Nomura went through the financial crisis, all the financial sector restructuring, they have avoided the financial meltdown of sub-prime, and now Nomura is the only standalone investment bank left,” said one insider. “There is a sense of a red sun rising. They are very ambitious.”