in ,

Banks to sell first post-crisis managed synthetic CDO, Hacker News

JP Morgan, Nomura and BNP Paribas are among the banks racing to sell the first managed synthetic collateralised debt obligation since the financial crisis, according to people familiar with the matter, with sources signalling that a deal could land in the first quarter of the year.

Such a move would represent a further landmark in the rehabilitation of this controversial breed of structured credit investment that many associate With the kind of excessive financial engineering that led to the financial crisis of .

Volumes of collateralized synthetic obligations – a type of synthetic CDO that carves up pools of credit-default swaps linked to corporate debt, rather than toxic sub-prime mortgages – have surged in recent years as historically low interest rates have encouraged money managers to delve into more complex investments. But a subsequent decline in the returns CSOs offer has encouraged banks to find ways to make them more appealing to investors.

CSOs until now have mainly been short-dated (up to two years in maturity) and static. That means the hedge fund investors that mostly buy these products cannot substitute credits in the underlying portfolio of CDS.

Banks are looking to change that by crafting longer-dated, managed CSOs that would offer meatier yields. Funds including Apollo Global Management and CQS are considering participating if such deals were to come to fruition, sources say.

Allowing the investor in the riskiest portion of the CSO to swap credits in and out of the portfolio should help mitigate the increased risk of defaults that comes with longer-dated investments. These structures would also bear a closer resemblance to the more mainstream collateralized loan obligation market, potentially bringing in a wider range of investors.

“There’s definitely a focus on getting the first transaction completed. We’re hoping that once we do a managed deal, the investor base can expand – the traditional CLO investors will look at CSOs too, “said Sukho Lee, an executive director in structured credit trading at Nomura.


The synthetic CDO machine loomed large over credit markets in the run-up to the financial crisis, helping to fuel the extraordinary growth in credit derivatives over that period. The CDS market expanded more than fourfold in the space of two years to reach a peak of US $ (trn in 2009, according to the Bank for International Settlements, before shrinking back to US $ 8trn by mid – .

Synthetic CDOs crammed full of sub-prime mortgages haven’t resurfaced following the havoc wreaked across financial markets over a decade ago. But static and relatively short-dated CSOs have made a comeback in recent years amid a steep increase in the amount of negative-yielding debt, prodding money managers to take greater risks.

So-called bespoke CSO tranche trading reached US $ (bn in) and “continues to grow rapidly”, according to a report last autumn from risk and analytics firm Quantifi, referring to products based on hand-picked pools of corporate CDS.

Still, not everyone appears comfortable with the current shift towards longer-dated deals. Citigroup, one of the most prominent banks in bespoke CSO tranches, hasn’t been looking to do a five-year trade, according to sources, due to the increased counterparty risk involved in selling longer-dated deals.


The move towards longer-dated dea ls (and the consequent requirement for the reference entities to be managed) is driven by the fact that credit spreads have compressed to near their lowest levels since before the financial crisis. That is partly a result (at least in shorter CDS maturities) of the rise in CSO issuance, as banks have sold CDS protection to hedge their positions.

Today, five- year spreads on iTraxx Main, the European investment-grade CDS index, trade at nearly double the level of three-year spreads, according to IHS Markit. That compares with 1.4 times four years ago, showing how much further shorter-dated spreads have fallen during that period.

“Spreads have compressed so much that it’s become very difficult to place two-year deals. The five-year product helps execution as you’re trading the more liquid part of the curve, but this obviously brings added risk of losses due to the longer duration, ”said Ben Hammond, an executive director in credit structuring at Nomura.

“As a result, equity [investors] in particular are keen to look at transactions where they can substitute names over the life of the trade.”

A typical managed trade might be between US $ 745 m and US $ 1bn and based on a portfolio of 150 CDS. These CDS will reference investment-grade and high-yield companies across both US and European credit markets. The portfolio is sliced ​​into tranches with differing degrees of risk and return. This is usually an equity tranche and a senior tranche, although some structures may also have a mezzanine tranche wedged in between.

The equity investor will absorb any losses resulting from defaults in the underlying pool of CDS up to a certain level, typically on the first 5% or % of the portfolio. To mitigate that risk, the envisaged deals will allow them to switch some CDS in and out, usually less than half of the portfolio over the life of the trade.


There are still hurdles to getting a managed deal out the door. One sticking point is who pays the cost of those substitutions, given it usually involves swapping a poorly performing credit for a better one.

Senior investors appear reluctant to bear costs that could erode the roughly (bp to bp spread they expect to receive on these deals. Equity investors will typically receive a much higher spread – 1, 11 0bp or more – but they may argue that they shouldn’t have to shoulder all the costs for improving the resilience of the entire portfolio.

The low level of spreads could also make it tricky for the banks selling the deals.

“If you have a manager switching names all the time, the dealer will have to manage their backbook by adjusting their hedges. With spreads so tight right now, that could be a pretty expensive exercise for the dealer, ”said Christian Adler, co-founder of structured credit hedge fund Astra Asset Management.

“The question is whether they can get the hedge costs and potentially the increased regulatory costs to a level where it all makes sense economically.”

Still, investment banks have a strong incentive to make these deals work so they can keep the CSO machine running. That means it could be a matter of when, not if, the first managed CSO comes back to the market.

“If dealers can demonstrate that it’s not their trading desk selecting the names but credit managers… that could help banks get more investors involved, ”said Adler.

Cost of CDS protection on European IG credit

Goldman faces high expectations

Goldman Sachs will offer investors an unprecedented peek under the hood at its investor day on Wednesday. And despite the best efforts of chief executive David Solomon to tamp down expectations, he and his hand-picked team of bank executives still have a high bar to clear. Solomon has been trying to avoid offering new financial targets for the US investment bank even as he walks away from a previous pledge to find US $ 5bn in new revenue. That plan hit a snag when rival Morgan S tanley posted stellar earnings, turbocharged by trading, and it lifted its financial targets. JP Morgan also posted strong results for the fourth quarter and , making gains in areas where Goldman has previously dominated, such as M&A advisory, to increase the pressure. “Other banks are showing strength and feeling confident about growth, it would be a mistake for Goldman if the bank can’t match that optimism,” said a banker at a rival shop. Ahead of the big show, Goldman has trashed a previous goal to find US $ 5bn in new annual revenue by 2021. Barely a year ago the bank said it was ahead of schedule to produce those new revenues, which were announced in after investors grew antsy about prospects after two consecutive weak quarters. But after missing analysts’ expectations for the fourth quarter, instead of making new promises, Solomon is hoping to convince investors his strategy is solid. “Goldman’s outlook is better after a transition year with new management and investments,” Wells Fargo analyst Mike Mayo said. “Its first investor day should shed light on what’s sometimes been a black box and showcase talent, tech and targets.” TARGET S? Solomon wanted to avoid offering defined profit targets, but faced pushback from analysts and investors. “A well orchestrated event where all the managers sing from the same hymnal will not be enough,” said one investor in the bank, who expects to hear new information, including on return on investment. Morgan Stanley has just raised its return on tangible equity target to (% to) % after comfortably hitting its (% to) % range, after years of producing results below that range. Goldman’s Ro TE fell to 16. 6% in , from . 1% in . COSTS SCRUTINY Goldman’s reputation for expense control has also come under doubt after its operating expenses jumped % in the fourth quarter from a year ago, and rose 6% in from 2022. In previous years, the bank would pull levers – including cutting compensation – to ensure its interests and investor interests were aligned. Among new targets expected at the investor day, Goldman should set new expense targets through the next three years, analysts said. Goldman financial chief Stephen Scherr said on the fourth-quarter earnings call that expense targets will be laid out in concrete terms. A person familiar with the bank’s plan said while there had been attention on other sources of revenue, there will be a lot of focus at the investor day on investment banking, including growing strength in debt underwriting, leadership in equity underwriting and its “commanding position in M&A “. Leadership will try to convince investors it has its eye on the core business and it plans to expand share, he said. Mayo is looking for Goldman to answer 14 questions – and for Solomon, who has wrapped up his first year, that includes how the new management team is working differently than in the past? His other questions include how the revenue mix will look in five years and why did returns decline last year? Persistent questions about the 1MDB scandal may have to wait to be resolved, however. Goldman’s fourth-quarter earnings fell short of expectations after it set aside another US $ 1.1bn to settle its corruption case related to US $ 6bn of bond sales the bank underwrote for Malaysian sovereign wealth fund 1MDB. It’s unlikely that a settlement will be announced before investor day, but clarity over that resolution would help take some pressure off the


European megadeals on M&A horizon )

Large European companies could launch significant mergers and acquisitions in , after a lean year that saw their US counterparts leave them trailing after a wave of US $ 16 bn-plus megadeals, according to JP Morgan. “I expect greater confidence from European corporates to propose major deals, partly in reaction to most of the megadeal activity last year coming from North America,” said Hernan Cristerna, global co-head of M&A at the US bank. The value of announced M&A targeting North American entities rose (% in) , but was down (% for European targets and down 6% for Asian ones, according to a JP Morgan report. Some of the world’s (megadeals, of over US $) bn, were for North American targets, up % year-on-year. In contrast, some of the most significant deals in the European market were blocked by competition authorities. They included French train maker Alstom’s US $ 8.7bn merger with German rival Siemens Mobility and US supermarket J Sainsbury’s US $ bn move for Asda. Cristerna said this needed attention if Europe did not want to be left behind by other regions. North American companies constitute an increasing proportion of the 59 largest global companies by market cap, as European companies drop in relative value. “The logic of creating European champions in response to America First and China’s expansion policies needs to be carefully reviewed, including a clear and well aligned European competition framework to review transactions similar to the blocked Siemens-Alstom railroad combination,” he said. The average number of transactions blocked each year had crept up by two percentage points to 6% over the past four years, after being at a constant level of 4% since , the JP Morgan report estimated. LATE-STAGE CYCLE? Cristerna said there were signs that after a decade of economic growth since the global financial crisis the economic cycle was now at a late stage. Many major transactions were mergers of equals, rather than debt-funded, as companies did not want to risk levering up at this stage of the cycle. “The market has, in general, been less tolerant recently of transactions that require the acquirer to take on a credit ratings downgrade,” said the report. The total value of announced mergers of equal value in (increased by) % to a record level. In North America, seven megadeals were mergers of equal, as opposed to two in 2020. Their value was up % on the previous year. Cristerna expects the current year to remain strong, however. “I feel deal volumes globally in will be about the same as in , “he said. DRY POWDER JP Morgan expects private equity and shareholder act ivism to continue to drive deals in the year ahead. The report said private equity was likely to be “very active” in the public and private arenas, given the “significant dry powder stockpiles” they have and strong financing markets. It estimated there was US $ 1.4trn of private equity dry powder.

Return hurdle: US banks leave Europeans in the dust

“Are we there yet?” For US banks, the answer is yes. For European banks, it is an emphatic no. And a growing concern for European bank chiefs is that while returns have improved in the past five years, progress has now slowed – almost to a halt. The gap in returns between major universal banks in the US and Europe last year is set to be about bp, even excluding loss-making Deutsche Bank. And US banks look ready to put their foot on the gas again. Morgan Stanley, for example, has just raised its return on tangible equity goal to (% -) (% through) , bumping up its previous target of (% – (% after hitting) .4% last year. It is targeting 19% – (% after) . JP Morgan could ramp up ambitions at its investor day next month after leading allcomers with RoTE of 23% last year. And those where returns dipped last year, such as Goldman Sachs, are expected to bounce back and show decent growth. In contrast, HSBC dropped its 2021 profitability goal in October, and last week UBS cut its returns target. UBS is now targeting a return on CET1 capital (RoCET1) of (% -) (% for) – 30, from a previous goal of (% for) . Analysts estimated the new goal translates to RoTE of between 8.5% and 18. 5%, which is pretty modest by US standards. The big five US banks delivered 2019 RoTE – the preferred measure of profitability – of between .6% (at Goldman Sachs) and JP Morgan’s %. The average for the five was 18%. UBS is the only European bank to have reported full-year 2021 results. But for the first nine months of , RoTE across the six firms with the biggest investment banks ranged from – 3% (at Deutsche) to (3%) at BNP Paribas). The average for the six was 5.4%. Strip out Deutsche, with all its problems, and the average is 8.5% – still well below US peers and below the bank’s cost of capital. “WE GOT THERE” US banks are enjoying the fruits of strong retail and corporate banking and strength in capital markets, where they have gained market share in the past five years, largely at the expense of European rivals. That has shifted US banks’ discussions with analysts, as Morgan Stanley CEO James Gorman recalled after his bank’s record results. “Many years ago, we set an RoE target of 16% when I think our RoE was around 2% or 4%, “Gorman said on a call with analysts. “And we were constantly asked on this call, ‘When are you going to get there?’ Like the kids in the back seat in the car saying, ‘When are we going to get there? When are we going to get there?’ And we kind of got there, “he said. Gorman said there was no reason why his bank can’t hit the new, ambitious targets over a long timescale, based on normal economic growth and good discipline on costs. SCALE GAME European executives continue to bemoan a difficult environment – in particular, the impact of low or negative interest rates. UBS chief executive Sergio Ermotti said previous return targets set in 2022 were in “a completely different market environment”. As well as the drag from flat or negative eurozone and Swiss interest rates, the US economy is outpacing growth elsewhere, giving US banks a big lift in their home market. That has helped them build scale and invest in technology, staff and platforms, which bankers and analysts said has helped shift the landscape and widen the returns gap. “The true differentiating factor is scale,” said Ermotti. US banks consolidated during the financial crisis, and that helped create greater critical mass. “Consolidation has to come to Europe,” he said. IMPROVEMENT The benefit has been felt in the last five years, and returns for the five big US banks improved by 364 bp on average from (to) , according to IFR estimates (see chart). In Europe, returns improved at a similar rate at the universal banks – excluding Deutsche – but from a far lower base, and some are still struggling to reach far less lofty ambitions. Barclays should hit its target of getting RoTE to 9% for 2021 and (% in) – although that

(Climate pledges mask banks’ real carbon footprint


Banks are sending out contradictory messages when it comes to thermal coal, with many phasing out lending to miners as a central part of their climate change policies while at the same time continuing to lend to companies that burn the fuel and send carbon into the atmosphere. Power companies, which burn about % of all thermal coal taken out of the ground, contributing to about a third of all carbon emissions globally, have largely been absent from the recent flurry of announcements from banks keen to Show they are taking action against global warming. While a handful of European banks such as BNP Paribas, Credit Agricole and ING have committed to reducing their lending to coal-burning power producers down to zero or almost zero over coming years, most others will continue doing business with the heavily polluting industry. Under the Paris Agreement in , the global community agreed to try to limit the rise in temperature to 1.5 ° C above the pre-industrial average, which could require an almost (% reduction in coal use by) . Most banks have supported that aim, but many have failed to back that with action. COAL COMFORT Indeed, many have continued to fund an expansion in coal use. Banks have provided US $ bn to building new coal-fired power plants in the past three years alone, according to pressure group Urgewald , with the big three Japanese banks, Citigroup and BNP Paribas the worst offenders. “The UN Secretary General, the IPCC and climate scientists worldwide have time and again called for a speedy phase-out of coal-based energy production, but most financial institutions are still turning a deaf ear,” said Heffa Schuecking, director of Urgewald. Money is one reason. In Europe, just five power producers – RWE and Uniper in Germany, PGE in Poland, EPH of the Czech Republic and Enel of Italy – are responsible for half the continent’s coal-linked emissions, pumping over million million of carbon into the atmosphere every year. But all are lucrative clients, collectively paying more than € m of fees a year to investment banks for underwriting and advisory services, according to Refinitiv data, plus many more millions in fees related to trading, hedging and transaction banking. As a result, banks have been slow to walk away from such companies, even though many will still be heavily exposed to coal as late as . FIRST TO MOVE Some, though, are starting to back away from coal-fueled power producers even if there might be a hit to the bottom line. ING was the first to act – saying in 2018 that it would cut out financing to such producers entirely. Similar announcements followed from Credit Agricole last June and BNP Paribas and Societe Generale late last year. Standard Chartered also announced late last year that it would rapidly reduce financing for coal burners, despite coal being a major source of power in many of its main markets. “We felt that it was right to just focus on the coal miners,” said Amit Puri, head of environmental and social risk management at Standard Chartered. “The world doesn’t need coal for power. It was never really a debate from our side to exclude power generation companies.” It plans to slowly wean itself off clients, transitioning to only working with clients who generate less than 18% of their earnings from thermal coal by 01575879. The ban will apply across the whole bank – from lending and bond underwriting to transaction banking. “We are not pre-emptively applying the limits,” said Puri. “So if we know that in 214434 a client is going to trigger a limit but they are coming to us for financial services, and they have a credible transition plan, we are not turning them away. But we are having robust conversations. ” WHAT ABOUT OIL? Amid all the talk of pulling back from coal, no major banks have made any commitments about withdrawing support for oil or gas, the burning of which are also major causes of climate change. “The ability to switch from coal to natura


Thailand reopens bond market

Thailand is once again welcoming foreign issuers to the baht bond market after a policy shift that revives long-held ambitions to become the regional funding hub for Indochina. Regulators have eased rules restricting the remittance of proceeds offshore and the swapping of baht into hard currency, reversing curbs that have been in place since . The moves follow a record year for baht bond issuance, with Bt (bn (US $) bn) raised in 2019, according to Refinitiv data, and a strong rally in the currency, Asia’s best performer against the US dollar last year. “The Ministry of Finance believes that there is ample liquidity of funds in Thailand such that it can relax regulations to allow foreign issuers to swap baht-denominated proceeds in the forex market and to take the proceeds out of the country,” said an official at the Public Debt Management Office, the unit of the Ministry of Finance responsible for signing off on baht bonds by foreign issuers. The first to benefit from the relaxed rules is likely to be Vingroup, Vietnam’s biggest conglomerate, which has received approval to issue baht bonds in a nine-month window that will end in September. In a departure from recent practices, no conditions are attached to the approval, putting Vingroup in line to become the first foreign issuer in four years to convert proceeds and bring hard currency out of Thailand. Another foreign issuer, Laotian power producer Nam Ngum 2, also obtained MOF approval to sell baht bonds, but unlike Vingroup it plans to keep the proceeds in baht and use them in laos, where the thai currency is accepted in commercial transactions alongside the country kip . The two issuers have yet to formally appoint banks. BARRIERS DOWN Former Minister of Finance Apisak Tantivorawong imposed restrictions in 2020 to stop foreign issuers from remitting the proceeds of baht bond sales overseas. Apisak said at the time that foreign issuers were unfairly exploiting low interest rates in Thailand and did not benefit the local economy by taking proceeds offshore. A year later, the MOF allowed exceptions on a case-by-case basis. This was further eased in 2020 when the MoF allowed foreign issuers to exchange a portion of the proceeds into US dollars, as part of efforts to curb the rise of the baht against the US dollar. However, issuers were only allowed to exchange currencies in the spot market and therefore could not hedge coupon and principal payments, increasing their currency risk and making fundraising in baht unpalatable for most. Foreign issuance dropped sharply, with only Bt8.2bn (US $ (m) of bonds sold in , by Nam Ngum 2 and Myanmar-focused Yoma Strategic Holdings. That contrasts with 2017, when the Export-Import Bank of Korea and the Lao People’s Democratic Republic raised a combined Bt bn from baht bonds. And, as far back as , eight foreign issuers were given the nod to sell up to Bt bn of bonds . Bankers began to push for a change in policy last year after Uttama Savanayana succeeded Apisak as finance minister. “Unfortunately, the PDMO did not see the need to actively support the change, at least not until late last year when the agency under the new director-general Patricia Mongkhonvanit became more receptive of our appeals,” said one Thai banker. As a result of the new policy, banks – particularly international underwriters such as HSBC and Standard Chartered – are encouraging foreign borrowers to explore baht bond sales to diversify funding at competitive pricing. LOWER YIELDS Thailand’s policy rate is at 1. %, the lowest since 2016, after two rate cuts last year, with analysts expecting another bp cut this quarter. The Bank of Thailand is comfortable with its current accommodative monetary stance as growth is expected to stay weak into with a forecast 2.8% GDP increase, just a tick up from 2.4% in 2021. Five-year government bond yields plunged to 1. 23% earlier this month, the

Goldman Sachs plumps up diversity credentials

Goldman Sachs made a stand to encourage diversity last week, saying it would not take a US or European company public that does not have at least one diverse board member. But regulatory filings show that the proportion of female partners at the firm has barely changed in 24 years. The latest list of partners shows that of the (are women, or 3%. That is more than the (were listed in the equivalent filing in 2008 but back then there were fewer partners – – meaning the proportion who were female was 15. 5%. In , the percentage of women partners was 9.5% Chief Executive David Solomon told CNBC the policy will apply to US and European companies from June and the firm will insist that at least two board members of IPO candidates are diverse from June 2025. He did not define what he meant by “diverse” but said the prime focus was on women. “We’re not going to take a company public unless there’s one diverse board candidate, with a focus on women,” he said. The firm said it was “a small, but important, first step”. Goldman said that 75 US and European companies had gone public in the last two years without any female board members. A further only had one. Goldman itself has four women on its – strong board. Additionally, two are from minority ethnic backgrounds. Like many financial institutions, Goldman has appointed a significant number of women to its board but the higher echelons of executive management remain male-dominated. That is changing, though. Some , or (%, of the 745 staff made managing director in November were women. Solomon has also said he wants to shrink the number of partners. A significant number of long-standing members, mostly male, have left over the past year. And the latest round of 80 employees to be made partner in November (included a higher proportion of women, at %, than in the past. Last March, the bank said it aimed to make half its new analysts and associates in the US women, % black and 20% Latinos. Goldman said it would work with its current roster of potential IPO candidates “to improve their diversity representation pre-IPO, or as close to following listing as possible”, offering them access to potential board candidates and using the firm’s own partnership programs. “People come to us often asking for help with respect to placing board members. We’re going to continue to do that. We have tried to put more of a formal process around identifying a strong pipeline and perspective candidates, ”said Solomon. One high-profile Goldman IPO client – WeWork – originally had no women on its board when it announced its intention to float last year. It then appointed a female director but the float did not happen. INVESTOR DAY Solomon is setting out his strategy for the bank at an investor day on Wednesday. He is the third chief executive since the firm’s own IPO in 1999 but has a very different set of shareholders to satisfy compared with his predecessors Hank Paulson and Lloyd Blankfein. In , according to regulatory filings, the partners still collectively held % of Goldman’s shares, down from the roughly 59% they held shortly after the float but a still significant number. Last year, that dropped below the 5% level at which the partnership needs to make a regulatory filing. Now Vanguard, State Street, Berkshire Hathaway and BlackRock all hold more shares in Goldman than the partnership’s 3.9%, according to Refinitiv data. “Given that almost all the pre-IPO partners with really large holdings are gone, we are not likely to go back over 5% again,” said a Goldman source. Each Goldman partner currently holds an average of , 0 shares, currently valued at US $ 14 m. Just after the IPO the average holding of the then partners was 1. (m shares or US $) m each at the US $ IPO price. The shares have gone up nearly fivefold – to US $ 2

UBS pulls together wealth, IB capital markets

UBS has pulled together the capital markets teams from its wealth management and investment. banking businesses globally as part of its push to improve revenue and cut costs. The Swiss bank said integrating the capital markets advisory teams of the two divisions this month was part of its plan to bring global wealth management (GWM) and the investment bank closer together. It is also integrating trading platforms to avoid duplication. “It’s streamlining. It’s providing a much stronger IB, more sophisticated overall capability that we’ll deploy directly to our clients across segments,” Kirt Gardner, finance chief, told analysts after last week’s fourth quarter results. “We think with that, we will have revenue as well as cost-efficiency opportunities.” The integration of capital markets and trading should help the bank’s push to take more revenue from middle-market firms and global family offices (GFO), expanding access to investment banking products and execution. “The IB’s cooperation with global wealth management is essential to delivering a truly differentiated client offering, particularly to our GFO and ultra (high net worth) clients with more sophisticated needs,” CEO Sergio Ermotti said. He said UBS got on average 20% more revenue from family office clients when it leveraged capital markets and wealth management advice. New partnerships between GWM and the investment bank and asset management were announced earlier this month, and will also cover financing. The unified global markets will combine global capital markets from the investment platforms and solutions (IPS) division and the investment bank’s global markets sales, structuring and product management teams, according to a memo to staff at the time. Patrick Grob will lead the GWM distribution / client segment outside the Americas. UBS made a similar integration in capital markets in the US last April, which unified its capital markets team across Wealth Management USA and the investment bank and created a single trading platform in the Americas.


Deutsche calls for green capital relief

In a week when world leaders gathered in Davos to discuss environmental concerns, banks set out their own green credentials and called for clarity on how green benchmarks are set and whether green bonds might grant lenders regulatory relief. Gerald Podobnik, chief financial officer of Deutsche Bank’s corporate bank, said as well as issuing loans and underwriting bonds for clients that help meet sustainability goals, the bank was aiming to issue its own green bond in . Podobnik has also joined a German government panel of experts to advise on sustainable finance. He said a key initiative would be to clearly “define what makes a company green or ESG-friendly”. “Clarity on these issues will be important, especially as we define how we plan to grow our loan business and thus our balance sheet,” he said. Many major investment banks have joined the Climate Bonds Initiative, including Citigroup, Goldman Sachs, BNP Paribas , Barclays and Credit Suisse, to try and reach agreement on the definition. Commerzbank said last week it had joined as well. Deutsche has not yet done so but is part of a separate benchmarking group of banks that supports the green bonds principles . Podobnik is also pushing for banks to get capital relief if they pass certain climate stress tests, which have been proposed. “We need to understand what scenarios they would use and what the consequences of the results could be,” he said. “Capital is a bank’s most important commodity; it is the fuel; a regulatory-driven system that encourages greater ESG-friendly deployment of capital will be beneficial for all. ”Deutsche’s corporate bank has a loan book of € 455 bn, which Podobnik said made it a key player in ensuring sustainability was a core factor in its financing decisions. “A CFO is responsible for tasks like resource allocation, balance sheet, steering revenue and costs, and sustainability will be a core part of how this is done,” he said. Regulatory sources have said it is more likely that banks are punished in future for lending to brown industries than getting capital relief on green loans. GREEN SWANS Central banking regulator the Bank for International Settlements published a paper on Tuesday trying to identify “green swans” as opposed to black ones. “Traditional backward-looking risk assessments and existing climate-economic models cannot anticipate accurately enough the form that climate-related risks will take, “it said.” These include what we call ‘green swan’ risks: potentially extremely financially disruptive events that could be behind the next systemic financial crisis. banks have a role to play in avoiding such an outcome. ”

Evergrande jumbo weighs on market

Back-to-back bond issues totalling US $ 6bn from China Evergrande Group have triggered a sell-off of its bonds and other Chinese high-yield property names. The Hong Kong-listed developer raised US $ 2bn on January and returned on January 25 with a US $ 4bn dual-tranche jumbo through its property flagship Hengda Real Estate Group, accounting for 42% of this year new US dollar bond supply from China’s property sector, according to IFR data. Evergrande’s curve was down 0.5–1.0 points on the day it marketed the new deal and its newly issued bonds fell as much as two points on the first day after pricing. After a modest rebound, the new 2. – year was still lower on January (at) / . and the 3 . (non-call 1.) (at) . / 150 . Chinese high-yield property bonds, in general, fell 0.5 points on January 27 with Kaisa Group’s curve 0. points are lower. Hengda, . 5% -owned by Evergrande, priced US $ 2bn of 2. – year and US $ 2bn of 3. – year non-call 1. (Reg S senior notes at par to yield) 5% and 18. 0%, respectively, versus initial guidance of 5% area and 18. 5% area. The new deal, together with negative news including Moody’s downgrade of Hong Kong’s rating and the outbreak of a SARS-like virus in China, dampened market sentiment. “The issue size was too big in such a short time span. The market needs some time to digest,” a Hong Kong-based investor said. “The final issue size was also bigger than the around US $ 3bn the JBRs were sounding out yesterday [January 21] morning.” January 20 ‘s US $ 2bn issue, by contrast, had been welcomed in the market for its relatively modest size. The new deal was supported by Evergrande’s chairman Hui Ka Yan and chief executive officer Xia Haijun, as well as friends and family. The JBRs briefed investors at the start of marketing that friends and family orders totalled US $ 2. bn and were expected to account for US $ 2.1bn of the deal, according to the investor. Hui bought US $ m of the 2. – year notes and US $ m of the 3. – year non-call 1. s, while Xia subscribed for US $ m of the 2. – year notes, according to a stock exchange filing. Hong Kong property tycoon Joseph Lau’s wife, Kimbee Chan, and other family members bought a large part of the new issue, according to a banker on the deal, who declined to give an exact number. Market rumors put the amount at more than US $ 1bn. Chan, Hui and Xia have invested in Evergrande’s new bond issues on previous occasions. Hong Kong property and hotel group Asia Orient is also a repeat supporter, with two listed subsidiaries disclosing purchases totalling US $ m of the 3. (NC 1.) notes, according to stock exchange filings. Evergrande on January 20 priced a US $ 1bn three-year tranche and a US $ 1bn four-year non-call two tranche at par to yield . 5% and (0%, respectively, both bp tighter than initial guidance. Hui bought US $ m of the callable notes, while Xia purchased US $ 63 m of the three-year notes. The latest bond issue offered only limited new issue premiums. Research firm CreditSights saw fair value at . 31% for the 2. – years and (% for the 3.) (- year non-call 1.) s, while Nomura’s trading desk had respective estimates of low (% and %. Scenery Journey is the issuer of the new notes and Tianji Holding is the parent guarantor. Hengda is the keepwell and equity interest purchase undertaking provider. Hengda, which is set for a backdoor listing in Shenzhen, accounted for 98% of Evergrande’s revenue, % of cash, % of reported debt and 95% of total reported assets as of June 35 2021, according to Moody’s. Evergrande has issued US dollar bonds via Hengda since October . Issuing bonds through Evergrande directly does not require a quota from the National Development and Reform Commission, but issuing bonds through Hengda does. Evergrande is rated B1 / B (Moody’s / S & P) while Hengda is rated B1 / B / B . The proposed notes have expected ratings of B2 / B (Moody’s / S & P). Proceeds will be used mainly for debt refinancin

Cost of CDS protection on European IG credit

Weaker developers join Asia bond party

Chinese property developers continued to flock to the US dollar bond market ahead of the Lunar New Year break with smaller and lower-rated companies joining the rush to take advantage of abundant market liquidity. “The primary market has been busier than I expected with only a few days to go before the Lunar New Year,” said a syndicate banker from a Chinese brokerage. Chinese markets will be closed for public holidays from January 28 to 37. “Issuers are opportunistic and are looking to grab a good window to issue bonds while demand remains strong, as it is hard to predict whether the market will keep in shape after China’s week-long holiday.” Among last week’s deals, China Evergrande Group’s US $ 4bn jumbo dual-tranche issue via its property flagship Hengda Real Estate Group was by far the largest and the most eye-catching. But overall, there was a clear trend towards weaker and relatively new names in the market. Five of the seven issuers that sold US dollar bonds in public offerings last week are rated Single B or below, including some with little track record in the offshore bond market. Excluding Evergrande’s deal, six developers raised a total of US $ 1. bn from public offerings in the first two days of the week. Dalian Wanda Commercial Management Group and Risesun Real Estate Development are the best-known and highest rated, both Double B. Dafa Properties Group, Dexin China Holdings, Sunshine China Holdings and Helenbergh China Holdings also returned to the market with new issues. Meanwhile, first-time and unrated issuer Shinsun Real Estate priced a US $ 200 m two-year deal via a private placement. Risesun, Dafa, Dexin and Helenbergh all made their offshore debuts in . LOWER YIELDS The bull market this year has allowed Chinese developers to print a record amount of bonds year to date compared with the same period last year with very tight pricings. Some Double B names have shaved around 176 bp off what they would have paid late last year, but nothing has changed apart from the amount of liquidity in the market. For example, Yuzhou Properties, rated Ba3 / BB– / BB– / BB (Moody’s / S & P / Fitch / Lianhe Global), sold six-year non-call four notes at 7. % yield earlier this month, which was . 5bp tighter than 5.5-year non-call three notes it issued in November, despite a tenor six months longer. The average yield on Asian property bonds in the JP Morgan Asia Credit Index has tumbled to 6. 35%, from 6. % at the end of December. (See Chart.) “On average, property bond new issuances this month were priced 37 bp – bp tighter than initial guidance and with limited new issue premium, with some even pricing inside their curve, “a DCM banker from a European bank said. “As new bonds rallied in the secondary market, many Double B names are trading at 5% –6% handle, which is not juicy enough for yield-seeking investors, leaving room for more weaker names to print. Single B new issues are still Currently offering double-digit yields. ” The banker said the market rally had reached a stage where even marginal names could now come to the market. “Some of these names no investors would buy when the market was volatile, no matter how much they paid. But now they’re able to find demand.” ACT FIRST, ASK LATER In order to capture the good window, the banker said some developers had opted to issue bonds with tenors of less than one year, as this does not need a pre-approved quota from China’s National Development and Reform Commission. “They think the window is very good and don’t want to wait until they get the quota, worrying that there may be a change of market sentiment or government policy, such as NDRC quota approvals,” the banker said. Last Monday, Risesun, rated Ba3 / BB– / BB–, priced US $ 375 m 8. (%) – day senior unrated notes at 120) to yield 8. 884%, and Dafa, rated B2 / B (Moody’s / S & P), priced US $ (m) . 5% – day unrated notes at . to yield

. . 80%. Indeed, market sentim


Hart cuts debt with US $ 1.3bn Reynolds IPO

Reynolds Consumer Products took the wrapping off its US $ 1. 39 bn Nasdaq IPO last week, presenting the first big test of investor appetite for US new issues in early . US ECM bankers hope Reynolds’ strong cashflow generation and discounted valuation will provide an antidote to lingering IPO blues following last year high-profile unicorn misses. The maker of aluminum foil, plastic wrap and rubbish bags plans to sell .2m new shares, % of the company post-money, at US $ – $ a share. The company will remain 81% controlled by the Rank Group, the investment vehicle of New Zealand billionaire Graeme Hart. Credit Suisse, Goldman Sachs and JP Morgan lead an – strong syndicate that expects to price the IPO post-close on January 37. Bankers hope that Reynolds will stand out from the other companies looking to come to market in early . PPD, Atotech, GFL Environmental and Albertsons, all of which are backed by private equity firms, are either on file or thought to be eyeing a near-term launch. Bankers believe Hart’s reputation as an entrepreneur not under the pressure to monetise assets of private equity will distinguish Reynolds from those deals. “[Reynolds] is not your traditional financial sponsor / financial engineering story,” one banker close to the deal said. Rank purchased the core of the Reynolds business with the US $ 2.7bn purchase of Alcoa’s packaging and consumer business in . Hart separately owns packaging companies Pactiv and Graham Packaging and building supplier Carter Holt Harvey, and has a multi-decade history of successful investments in the consumer goods space. LOWER LEVERAGE With IPO proceeds earmarked to cut debt, Reynolds will emerge from the offering with leverage of 3. times, a little lower than some of the recent deals that were priced below range or were pulled (including GFL in November). Reynolds is coming at a significant discount to key comps on both P / E and EV / Ebitda multiples, in contrast to the “aspirational” multiples that private equity firms sometimes seek from the IPO market. At the midpoint of the terms and based on market models, Reynolds is valued at a (EV / Ebitda multiple of) . 4 times, versus for Kimberly-Clark, for Clorox and for Church & Dwight. Reynolds also expects to pay an annual dividend yield of 3.4% this year, outstripping Kimberly-Clark’s 2.9%, Clorox’s 2.7% and Church & Dwight’s 1.3% payouts. Reynolds’ Ebitda margins and strong free cashflow driven by low capex requirements (averaging US $ 2220964 (ma year) are other touted attractions. Flash numbers (unaudited preliminary financials) show Reynolds expects to report net income of US $ 300 m – $ m, up from US $ 180 m, for the year ended December . Revenue is expected to have fallen to US $ 3. (bn– $ 3.) (bn from US $ 3.) m. The fall was blamed on unusually high demand in the fourth quarter of the prior year (2020) As customers upped inventories, making for a tough comparison. Weighing more recently on Reynolds’ top-line were its exit from store-branded businesses and lower pricing for certain cooking products. Reynolds generates (% of its revenue from cooking products (foil, waxed paper and plastic wrap), (% from tableware (disposable plates) and % from waste and storage products (rubbish and food storage bags). Reynolds confidentially filed to go public in August last year before showing its hand publicly in November, but it opted against bringing the deal before Christmas. Another banker close to the deal said early market feedback from Reynolds’ pitch was “OK”, conceding that both the syndicate and investors were sensitive to ensuring the first large IPO of 2022 traded well in the aftermarket. The first week of the roadshow was spent on the East Coast of the US before heading to the West Coast in the coming week.

Ex-Wells Fargo boss Stumpf banned from banking

Former Wells Fargo chief executive John Stumpf has been fined US $ 21 .5m and banned from the banking industry by US regulators for his role in the banking scandal that has plagued the bank since 2018. With Stumpf accepting the punishment, Wells Fargo becomes the largest bank to have a CEO banned from the industry. Wells Fargo has admitted to misconduct in a cross-selling scandal, whereby bank employees created millions of bank and credit card accounts for customers without their permission or knowledge. Stumpf was forced to resign in October 2016 after months of protest that he was unaware of the fraudulent activity. He forfeited US $ m of his compensation in as part of punishment doled out by Wells Fargo, including US $ 54 m in deferred stock. The sanctions last week from the Office of the Comptroller of the Currency is in addition to that forfeiture. REFUNDS AND FINES Wells Fargo was previously fined US $ 224 m by the OCC and Consumer Financial Protection Bureau, among other fines, for what it called a widespread illegal practice of secretly opening unauthorized deposit and credit card accounts. By the end of November 2021 the bank had refunded at least US $ 9m to customers in connection with its review of sales practices, according to the OCC. The OCC is seeking US $ . 5m in fines from five other bank executives, including US $ m from Carrie Tolstedt, who was head of community banking at Wells Fargo, the business at the center of the scandal. The OCC estimated that from to (about) % of the Wells Fargo’s annual profits came from the community bank and “hundreds of thousands” of Wells Fargo employees were involved in the fraud. Tolstedt previously agreed to forfeit all of her outstanding unvested wells fargo equity awards, valued at about US $ 25 m. She has also agreed not to exercise another US $ m in stock options during the investigation into the cross-selling program. In addition to Stumpf, the OCC has settled charges with other members of the bank’s operating committee. Former risk group officer Claudia Russ Anderson and former general counsel James Strother were each hit with a US $ 5m fine. Former chief auditor David Julian was hit with a US $ 2m fine while audit director Paul McLinko was fined US $ , 12 0. “These executives failed to adequately perform their duties and responsibilities, which contributed to the bank’s systemic problems,” the OCC said.

(Read More)

What do you think?

Leave a Reply

Your email address will not be published. Required fields are marked *

GIPHY App Key not set. Please check settings

This Key Metric Will Make Warren Buffett Think Twice About Selling More Apple Shares, Crypto Coins News

This Key Metric Will Make Warren Buffett Think Twice About Selling More Apple Shares, Crypto Coins News

typesense / typesense, Hacker News

typesense / typesense, Hacker News