The Indonesian Ministry of State-Owned Enterprises sent its top brass on the road in April with a presentation entitled: “Towards world class corporations.” The ministry showcased several of its key state-owned enterprises and told investors around Asia about the bright future they believe awaits this vast chunk of Indonesian commerce – 141 enterprises with Rp2,150 trillion in assets, or 38% of Indonesia’s GDP.

 Indonesia is trying a host of strategies to galvanize these enterprises: improving management and corporate governance, implementing stricter performance evaluation, restructuring companies into sector-based holding companies, closing or merging non-performers, and privatizing companies when they are ready. But in all of this process, nothing will be more closely watched than the long-awaited listing of Indonesia’s national airline, Garuda.

When it comes, it will be quite a milestone: Garuda has been trying to restructure itself and its debts on and off since the late 1990s. And in April, Parikesit Suprapto, Deputy Minister for State Owned Enterprises told IFR Asia and others in a presentation in Singapore that the listing of both Garuda and Krakatua Steel would take place “in the second part of this year. We are confident the two companies will be able to enjoy the same successful IPO as other SOEs that have been listed,” drawing particular attention to Bank Tabungan Negara (PTN), which completely a R1.98 trillion IPO in 2009, and Pembangunan Perumahan, which raised Rp582 billion in a January listing.

 Suprapto paints a picture of a business transformed. Revenues at Garuda have gone from Rp11 trillion in 2004 to Rp19.4 trillion in 2008; net income in that time has turned from a Rp810 billion loss to a Rp670 billion profit. Passenger yield is up by almost half since 2005 and on-time performance is improving. But most significantly, Suprapto insists Garuda has its debt program under control.  “The Garuda team has done a remarkable job,” he said in April, “reducing debt outstanding to approximately US$500 billion” (it stood at US$868 million in 2006) partly through a conversion of mandatory convertible bonds into a 10% equity stake in Garuda in December 2009.

 The Garuda Suprapto describes is an improving and wide-reaching airline ready for expansion: 28 domestic and 18 international destinations, with plans to increase total destinations to 68 by 2014; a four-star rating from Sky-trax; IOSA certification; and a commitment to fleet renewal and expansion with a significant reduction in average fleet life. “We believe Garuda is now well positioned for further expansion and is a suitable candidate for privatization,” he said.

 But since then, familiar delays and doubts have surfaced. In May Deputy Minister Mahmuddin Yasin, in the same ministry, warned the IPO – generally expected to raise around US$400 million in a 25-30% sale – could be delayed to 2011. A central point is the restructuring of a US$241.2 million debt with the European Credit Agency, although Yasin said in May he believed that was close to resolution. Without approval from that creditor, one of Garuda’s biggest, no IPO can realistically go ahead. Somewhat ironically for an airline, it is understood negotiations on that restructuring were delayed because the ministry and Garuda team couldn’t fly to Europe because of the volcanic cloud from Iceland.

 Consequently, IFR Asia understands that no RFPs have even been sent out yet, much less the appointment of an underwriter. When they do hit the road, they will have to convince investors that the restructured debt load – which is expected to be stretched out to 2016 – will remain serviceable. Other creditors include Singaporean holders of floating rate notes, and debts to state oil and gas operator Pertamina and state airport operators Angkasa Pura I and II.

 Relatively few state-owned companies are listed in Indonesia – just 16 – but they collectively accounted for 31.5% of the total market capitalization of the Indonesian Stock Exchange as of April 9 2010. Their total market cap in combination is Rp701 trillion, and they include four of the largest six companies in Indonesia by value: Telekomunikasi Indonesia, Bank Mandiri, Bank Rakyat Indonesia, and Perusahaan Gas Negara. State-owned entities command 51.4% of cellular telecommunications, 38.6% of bank assets and 44.7% of cement production. The listing of Garuda and Krakatua Steel would increase the significance of state-owned enterprises in the listed markets still further.

Asia’s best managed companies have come out of the financial crisis in better shape than their peers, and that’s no surprise: in most cases they went into it in better shape too. Prudent gearing, transparency, good governance and clear strategy have characterised these leaders, rewarded in this month’s Euromoney Asia’s Best Managed Companies poll, for years.

That’s not to say things have been easy for any of them. Take CapitaLand, for example. For many years the favourite Singapore blue chip among Asia portfolio managers, this time last year its whole approach to business was being questioned. “As global liquidity tightened and real estate transaction volumes dried up, analysts were raising concerns that our business model – which focuses on capital recycling and capital productivity – was broken,” recalls Olivier Lim, group chief financial officer at CapitaLand.

“What they forgot was that all real estate businesses need to recycle capital. We just articulate it and execute it diligently as a business strategy and this gives us more financial flexibility than others across market cycles.”

That was of little comfort when CapitaLand’s share price fell more than 70% from its highs in a shade over a year; its many listed satellites fared worse still. “Whilst we were very confident of our business model and viewed the dislocation as part of the cyclical nature of the real estate business – albeit more severe than a normal recession – it was difficult to convince the investment community,” says Lim. “Partly I suspect they were facing their own business model stresses with the loss of AUM from large redemptions and falls in portfolios values. They saw no light at the end of the tunnel during the crisis.”

But Lim and his team put the building blocks in place to weather the storm and flourish when it passed. Seeing trouble ahead it divested over S$9 billion of property assets and reinvested only S$4 billion over a two year period heading into the financial crisis. Some of this, such as the sale of an iconic tower in Beijing, looked like a forced or panicked sale at the time; in fact, it proved to be a great deal in that the price it raised would have been unthinkable only months later. By the time the crisis hit in earnest, CapitaLand had built up a cash reserve of over S$4 billion, with a low gearing ratio. It slowed business development; it bolstered itself with a S$1.3 billion long-dated convertible in mid 2008; it pulled in another S$1.8 billion in a pre-emptive rights offer in February 2009, heavily oversubscribed. And investors have continued to back it in the capital markets, first with a seven-year S$1.2 billion convertible in July, the largest and longest tenor convertible for an Asian listed issuer at the time.

And finally, in a move that would have seemed implausible a year ago, it launched an IPO of another listed satellite, CapitaMalls Asia, with a placement 2.5 times oversubscribed and a public offering 4.9 times subscribed. “We patiently built this capital-intensive business over the last seven years,” says Lim. “We polished it, and gave it its own access to the capital markets so it can aggressively take advantage of its first mover position in Asia.” The funds allow CapitaLand to recycle capital, rebalance the portfolio and put the money into business units.

At Infosys, the challenges were rather different. Infosys has no debt whatsoever: 60% of its balance sheet is cash and cash equivalents. So there was no need to navigate the perils of refinancing in debt or loan markets, or to keep bond investors happy. That clearly helped. “It was a lot of comfort for investors,” says V Balakrishnan, Infosys’s CFO, in Bangalore. “People realise cash is God in that kind of environment: companies with a lot of cash can fulfil their strategy much better than anyone else.”

But Infosys had other headaches to deal with. “Today, 98% of our revenues come from outside India: we are a global company based out of India,” says Balakrishnan. “The majority of our revenues [66%] come from North America. Anything happening in the large economies around the world will have an impact on our revenues.” Infosys guidance at the end of the last quarter forecast revenues could decline 1 to 1.3% year on year, although the company has been insulated by the growing interest in moving IT services offshore to countries like India, as a way of cutting costs: hence recession has in some measure helped part of Infosys’s business.

Infosys is perhaps known best for its efforts in corporate governance, taking the best ideas from around the world and implementing them at home. Ideas like independent boards, bifurcating roles for CEO and chairman, committees for investor relations and risk management, are more common in Asia now but they have been standard practice at Infosys from the start. “We clearly believe that we are not the owners of this company,” says Balakrishnan. “We are only managing the investors’ money. They are the owners.” Infosys has a long track record of getting bad news out early. “All the bad news has to get to the market. Good news can wait,” he says. Transparency is a by-word at Infosys, which gives its annual results against the GAAP requirements of six different countries, several in their local languages, as well as additional but un-required information such as land and human resource valuations.

Companies like Infosys say they thrive in the bad times because of good governance. “It helps a lot in difficult economic times, because in this environment what investors want is management who are credible, who are honest, so they won’t see any shocks like they saw with Enron.” India had its own equivalent of Enron this year with the fraud around software services group Satyam. “But it you look at Indian stocks on the day the news about Satyam broke, they all went down – except Infosys. Investors want good corporate governance.”

The company that swept the board in this poll was China Telecom, winning not just in its own country but most regional titles too. Part of the increase in voter support for China Telecom may be because of its realisation of a long-term strategic goal. “Near the end of 2008, we successfully completed the acquisition of a mobile business in China and became a full service operator,” says chairman Wang Xiaochu. Wang talks of integration synergies between mobile, wireline and internet services, while rapidly expanding the mobile business. “Although these have brought short term pressure to our profitability, we firmly believe that they will significantly enhance the company’s future sustainable development and value creation.”

Bringing a strategy to fruition is one thing, but investors want to be kept up to date with it too. Wang says the company has frequently updated investors on the strategy and its progress, and thinks this is one reason investors have trusted and supported the company despite short term profitability pressure.

Alongside this, China Telecom has been a standard bearer for corporate governance and investor relations in China. Listed in both Hong Kong and New York, it has to adhere to requirements such as the Sarbanes Oxley Act and COSO Internal Control Framework, and uses these international standards “as our foundation of corporate governance,” Wang says. Five of the 14-strong board are independent, and the standing board committees only comprise independents. “We strongly believe that sound corporate governance can ensure management effectiveness, prosperous corporate culture, successful business development and a sustainable increase in shareholder value,” Wang says.

Other moves that have appealed to investors include holding the annual shareholder meeting in Hong Kong in 2005, despite being a mainland incorporated company, to have direct communication with public shareholders; monthly disclosure of operating metrics and quarterly disclosure of financials; and regular investor and press conferences.

China Telecom had a few advantages in the crisis. For one thing, China’s debt markets were basically fine throughout. “Given our solid fundamentals and the abundant capital liquidity in the domestic Chinese market, we did not experience funding challenges during the global financial crisis,” says Wang. This year it issued a RMB10 billion three-year corporate note. Additionally, Chinese telecoms was not one of the world’s danger areas in the financial crisis, although it did affect customer demand for services, especially on long distance voice service and business customers. Consequently the company shifted development emphasis to broadband and value added services, and promoted bundled services.

While most companies that featured well in our survey consider themselves innately conservative in their approach to risk, good management also means knowing when to act decisively. In the middle of the financial crisis, Fubon Financial bought ING’s Taiwan life insurance subsidiary, concluding the deal in February 2009. “We took advantage of the financial crisis by buying into some assets at a very reasonable price,” says Victor Kung, president of Fubon Financial. “That has given us the opportunity to emerge out of this crisis stronger than at the beginning.” But at the same time, Fubon knew when to stay away: it considered accessing the capital markets in support of a bid for Nan Shan, AIG’s Taiwanese unit, before deciding the pricing was too high (the business was bought by Primus instead). Investors will need to continue to trust Fubon’s judgement as it takes the lead in trying to take advantage of thawed relations with mainland China. “That is our main strategic focus right now,” Kung says.

The best companies learn from the bad times. “We learned a lot during the crisis,” says Kung. “We further strengthened our risk management systems and we have come out of this stronger than we used to be.” Like others who have been rewarded in this survey, Fubon has looked out for investors by getting bad news out quickly: Kung says it was the first Taiwanese institution to write down the value of its investment in Taiwan’s troubled high speed railway. Others have had to follow. “That boosted confidence in our investors, that we are serious about being transparent,” he says. “All this demonstrates to investors that they can have confidence in the management of the company: that we are working hard to make sure their investment is well taken care of.”

A few years ago, Thailand was not popular with foreign derivatives bankers. As the Thai baht went through a period of increasing volatility, regulators became more and more restrictive on the sale of derivatives, telling banks to submit lists of products they want to sell for approval. “At the time it was very annoying: I thought it was too draconian,” says one banker.

But Thailand’s stringency on derivatives paid off when markets turned really nasty. “In the two years or so before the global financial crisis, every new structure you wanted to bring out, you had to take it to the regulators to get an approval done for the product,” recalls Adam Gilmour, managing director and co-head of corporate sales and structuring for Asia at Citi. “That meant that by the end of 2008, when the crisis was at full steam, they had good practices in place: solid documentation, no speculation, and robust product risk they could feel comfortable about. It put them in very good stead for the crisis.”

The Bank of Thailand recognises derivatives are important for its companies – particularly with such a volatile currency – and so despite its stringency it has been gradually relaxing laws, most recently in August. The box in this article gives more details but in essence it widens the ability of companies, institutional investors and individuals to enter derivative contracts linked to foreign variables, be they indices, currencies or rates.

Thai derivative volumes are not large. Bank of Thailand data shows that in September 2009, total outstanding Thai baht interest rate swaps at Thai commercial banks came to Bt2,231 billion, or US$67 billion [CHRIS: THIS IS SOURCED FOM BOT DATA – DOES THE FIGURE SOUND HIGH TO YOU?]. While that sounds a lot, the Triennial Central Bank Survey, which compiles data on derivatives and forex from the world’s central banks, gives an indication of how Thailand really compares on a world scale: in its last published survey, in 2007, total average daily turnover of OTC derivatives market activity – including foreign exchange and interest rate – was US$5 billion, compared to US$210 billion for Singapore. Similarly Thailand’s reported foreign exchange market turnover – in total, not just derivatives – was US$6 billion, or 0.2% of the world’s total; Singapore’s was US$231 billion. One foreign banker puts it like this: “If I cut the universe [of Asian markets] into a top and a bottom half, Thailand would be in the bottom half, but near the top of it.”

Nevertheless, Thai officials consider themselves accommodative to derivatives, within reason. The Bank of Thailand describes its policy on derivatives to Asia Risk as “to accommodate development in order to make available as many risk management tools as possible, while ensuring financial system stability and financial institutions’ soundness. In other words, the challenge is to strike a balance between the flexible environment to foster innovation and maintain system stability.”

The bank says it is guided by five principles in formulating the supervisory framework for derivatives business: efficient risk management, appropriate to the nature and complexity of the business; financial and economic stability; sufficient customer protection; relevant prudential regulations being in place; and sufficient information for supervisory purposes. It also claims have put “considerable effort and resources” into education, human resource development, accounting standards and the resolution of tax issues.

Those in Thailand who watch the market closely consider the Bank of Thailand accommodating without necessarily being enthusiastic. “It’s a small market from an international perspective,” says Komkrit Kietduriyakul, partner at Baker & McKenzie in Bangkok. “But the Bank of Thailand has tried to support it –  they understand derivatives and believe they can be useful.”

Others find it can be bureaucratic, but works. “I’m very positive about Thailand,” says a foreign banker in Singapore. “There is plenty of bureaucracy, and it takes a long time if you want to do a new structure – getting it approved can take months. But it’s a lot better than a lot of other markets like Indonesia, where the industry shut down completely with the financial crisis.” He adds: “If I develop a new product, there’s a mechanism to take it to the Bank of Thailand and to be able to get it approved. They might be a little bit tight on the documentary restrictions, but there is a clear path.”

Most things a corporate would need to do, they already can. “As long as it is a hedging transaction, it’s basically OK for corporates,” says Komkrit. “What they don’t want to see is speculation by corporates, and the most sensitive issue is the Thai baht position for non-residents. Their experience in the last crisis [the Asian financial crisis] means they don’t want non-residents manipulating the baht.”

One could argue that the volatility in the baht makes it particularly essential for Thai companies to have access to derivatives since the penalty for not hedging a currency exposure can be severe. In particular, Thai exporters and importers are heavily exposed to the US dollar. The Bank of Thailand acknowledges that Thailand’s managed floating exchange rate and the global financial crisis “has led to more volatile exchange rates in the emerging market countries, including Thailand” and says that “hedging exchange rate risk is a necessity for Thai companies to protect themselves against volatility of exchange rates.” The Bank reckons it has “continuously encouraged” the business sector to hedge exchange rates, and hosts numerous seminars to help small and medium enterprises understand why and how. It also publishes an SME risk management manual. In any event, it says the recent relaxations have made it easier for companies to hedge, and to use foreign currency accounts.

What next? In November the Bank of Thailand issued its Financial Sector Master Plan Phase II, which covers a host of issues around the Thai financial system. Although the public announcements about the plan don’t mention it, people close to it say that it pledges to support the development of credit derivative transactions, as well as continuing to encourage interest rate derivatives and urging participants to use ISDA market agreements (which, in practice, they generally do anyway). “I think credit derivatives will become more popular in the Bangkok market,” says Komkrit.

For the Bank of Thailand’s part, it’s open to the idea of further openness. “We are supportive of the liberalization of the derivative regulation in Thailand, as long as the stability of our system is maintained,” says the Bank. But further change seems unlikely in the short term: “The current regulatory environment seems to be appropriate to accommodate the current level of market development and provide enough hedging instruments for our exporters and importers.” In other words, for now, it’s as open as they feel it needs to be.

Box: The August liberalization

On August 5 Suchada Kirakul, assistant governor in the financial markets operations group of the Bank of Thailand, announced a series of liberalization measures. Most were about investment in securities abroad, but they also had a significant impact on the derivatives market.

The changes were:

• Thai institutional investors – including companies with assets of at least Bt5 billion – are permitted to invest in securities abroad and undertake a range of derivative activities with onshore or offshore counterparties. These include derivatives linked to foreign variables such as exchange rates, interest rates, prices of debt securities, equity securities, commodities, and various indices. Transactions can be for hedging or yield enhancement, although derivatives related to baht exchange rates can only be for hedging. These transactions can cover up to US$50 million without the Bank of Thailand’s prior approval.
• Thai companies are given more flexibility in derivative transactions with domestic commercial banks to hedge their forex exposure. The BOT gives the example of hedging based on one-year forecasts of revenues or obligations relating to goods and services.
• Thai residents are allowed to invest in derivatives, structured notes and structured deposits linked to some foreign variables – such as indices – for yield enhancement and to hedge their investments in securities abroad.

What’s the impact? The Bank of Thailand tells Asia Risk: “The relaxation has provided alternative investment channels for the institutional investors so that they can further diversify their investment and enhance their investment returns through derivatives.” It has also helped institutional investors with their risk management by allowing them to hedge risks such as commodity prices and interest rates more flexibly and cheaply, the bank says. “Additionally, the relaxation has added more flexibility in foreign exchange risk management of Thai exporters and importers, enabling them to hedge their foreign exchange exposure more efficiently.”

At the individual level, residents have a greater range of investment products, while it also gives domestic commercial banks a chance to offer structured products to a much wider customer base than before. “More structured notes and deposits traded in the market could possibly help reduce transaction costs and add more investment products to the domestic market.”

Spectator Business, December 2009

Andrew Ross Sorkin’s Too Big To Fail, the behind-the-scenes account of Wall Street’s brush with oblivion, contains an interesting detail that tells us a lot about the power of Chinese money. In that lurching week in September 2008 after Lehman collapsed, Morgan Stanley – by now looking perilously close to the edge – invited Gao Xiqing, the president of the China Investment Corporation sovereign wealth fund, to New York to talk about increasing the 9.9% stake it already held in the American bank to as much as 49%. In those uncertain days, it looked like a deal that could save the whole bank.

Gao, lying flat on his back on a couch in a Morgan Stanley conference room to ease his bad back, offered the ultimate lowball offer for the increased stake: up to $5 billion and a credit line. Even in those dark days the American firm was considered to be worth $40 billion, and it was a sufficiently hardcore negotiating stance to shock even the archetypal Wall Street ballbuster, Morgan Stanley chief John Mack. Sorkin says Mack was “stunned”, and anyone who’s ever met the man knows that takes some doing.

It didn’t come to that in the end – the Japanese came to Morgan Stanley’s rescue instead and Gao took CIC’s money home again. But the incident speaks volumes about how China’s newly minted sovereign fund, established only in September 2007, has grown up and, after initial mistakes, is nobody’s fool now.

The subtext to that stand-off with Mack is one of CIC’s first ever investments: a $5.6 billion stake in Morgan Stanley on December 19 2007 which, by the time of that apocalyptic week nine months later, had halved in value. CIC had been similarly bruised by another investment, a $3 billion stake in private equity group Blackstone. CIC was far from being the only sovereign wealth fund to be battered by taking stakes in western banks – others included Singapore’s Temasek and GIC, and funds in Kuwait, Qatar and Korea – but many of those had wisely insisted on provisions that enabled them to reset their purchase prices if the firm subsequently raised equity at a lower level. CIC, new to these investments at the time, had not done so with Morgan Stanley; Gao’s tough offer to Mack was an attempt to implement such a reset after the fact.

Consequently, one banker who deals closely with CIC says that today, if he comes to them with a deal, “The very first question I get asked is ‘will it have downside protection?’”

“With Blackstone and Morgan Stanley they didn’t, but they now consider a comfortable level of protection to be a key component of any new deal,” says the banker. “They didn’t have the sophistication back then and got taken for a ride. That’s never going to happen again.”

CIC was not irredeemably put off American banks – indeed, in June this year it bought another $1.1 billion of Morgan Stanley stock, and after the rally of the last six months, is in the money on its investments in the US bank. But there’s no question CIC has changed its stance since, in terms of the type of assets it buys, the locations in which it buys them and the approach it takes to buying them.

Almost every recent deal CIC has taken on has been in the energy and resources area, and the bulk of them have come in frontier markets. An example came in October when CIC bought $500 million of convertible debentures from South Gobi Energy Resources, a Mongolian coal mining and exploration company listed on Toronto’s TSX Venture Exchange. The debentures can convert into SouthGobi common stock if the company goes ahead with an expected Hong Kong listing.

The same week came a potential $700 million investment in another Mongolian mining group, Iron Mining International, this time through a convertible loan. Then there’s the $300 million, 45% stake in Nobel Oil Group in Russia. Or the 11% of Kazakh energy company JSC KazMunai Gas Exploration Production’s global depositary receipts, bought for $939 million in June. CIC has put $1.9 billion into the Indonesian mining group PT Bumi Resources, and $858 million into the Singapore-listed agriculture and energy supply chain leader Noble. In the developed world, CIC paid $1.512 billion for a stake in Canada’s Teck Resources, and most recently paid $1.58 billion for 15% of Virginia-based power company AES, plus $571 million for a 35% stake in AES’s wind development business.

Somewhat surprisingly, CIC publishes an annual report – its first one ever came out in August – and from this, we know that by global standards it has done pretty well so far. In 2008 it made a 2.1% loss in its global portfolio (relatively speaking, a standout among sovereign funds) and if we include CIC’s Central Huijin subsidiary, which invests in domestic banks on behalf of the state to improve governance, the overall group generated a return on registered capital of 6.8%. But in truth CIC hasn’t really demonstrated investment nouse yet: it put only $4.8 billion into overseas assets in 2008 and by far the biggest driver of returns was that by the end of the year 87.4% of the global portfolio was in cash.

CIC declined to answer Business Spectator’s detailed written questions, but its chairman, Lou Jiwei, occasionally speaks out at conferences to give the world a sense of where the fund might go next. In October, for example, he told a Beijing audience that CIC had invested about half its $110 billion in available funds for offshore investment, mainly in publicly traded assets. He went on to call returns “not bad” and warned of a bubble in global asset prices, saying that the fund’s focus on investments in commodities and real estate – it is a major investor in the UK’s Songbird Estates, for example – is partly as a hedge against inflation and currency depreciation.

The point about the currency is key. CIC’s existence stems from a sense that China’s vast foreign exchange reserves ­– $2.273 billion as of September, according to China’s State Administration of Foreign Exchange – could be earning better returns, and it was given a $200 billion chunk to form the foundation of its registered capital at launch in 2007. China’s state agencies, CIC among them, are concerned about falls in the value of the US dollar, with a knock-on effect on the real value of China’s reserves and the exchange rate.

But investing in energy is not just about currency hedging. Various arms of the Chinese state, from its behemoth listed oil groups (Petrochina, Sinopec and CNOOC), to unlisted state entities (such as Petrochina’s parent, China National Petroleum Corporation) have been buying up companies and oil fields from Sudan to Kurdistan Iraq in a bid to improve China’s energy security. Expect to see CIC buy into African energy assets before long.

This brings up a favourite subject among CIC-watchers: the degree to which it represents the state in its investment decisions. Lou knows it: he said in October, “the outside world is very suspicious of us, saying we have a national agenda. But our strategy is just one of long-term risk-adjusted returns. It is to make money.” Others say that, of all sovereign funds, CIC fits most closely with broader national objectives in reflecting the interests of the sovereign. “It’s a part of the jigsaw,” says a senior banker who deals closely with them.

While this is hardly surprising, and entirely within China’s rights, it does create a political sensitivity when CIC invests. It’s a big issue, for example, for a Chinese state agency to go into Mongolia, where local people are adamant that they won’t see their natural resources swallowed up by Chinese or Russian interests. It’s perhaps because of this sensitivity that CIC had to get its South Gobi exposure by buying into a business listed in Toronto, and even then with a business structure that gives it a maximum 22% stake if the company went ahead with a Hong Kong listing.

Nevertheless, emerging markets represent fewer complications for a state Chinese entity to buy into than developed nations, where attitudes towards CNOOC’s tilt at Unocal and Chinalco’s at Rio Tinto demonstrate clearly the unease western politicians feel at Chinese ownership of their mines and oil rigs. With no need to explain the rationale of their decisions (or their ethics) to a democratic public, CIC’s future investments will take it to some unloved parts of the world – and a long way from Wall Street.

To see the article in its printed form, click here: http://www.chriswrightmedia.com/spectator-dec09the-spectator-cic-changes-tack/cic-spectator-pdf/

M&A in Asia has emerged from the credit crunch in a different shape than it entered it, but no less active. True, the jumbo private equity leveraged financings of 2006 have gone – for the moment, at least – but in its place have come new trends: China seeing cheap assets to be acquired, Australian resources attracting interest from around the world, and distressed or non-core holdings changing hands.

Activity has focused on China, India and Australia, and for banks with a presence in those markets business has been good. “We are very busy right now,” says Gordon Paterson, managing director and head of M&A for Asia Pacific at Deutsche Bank. “In fact quite frankly we’re as active as we’ve ever been in M&A.” Deal volume numbers might be down, but Paterson argues that is largely a function of lower share prices. Measured by number of deals, there have been a broadly similar number of announced transactions in the first nine months of 2009 as in the same period in 2007 or 2008.

“There’s a perfect window for Asia, and particularly places like China, right now,” Paterson says. “Funding is not an issue for most of the companies in our region: they have access to capital and it is priced relatively attractively, at a time when funding is an issue for the rest of the world. So not only does China have tremendous access to capital but its major competitors, the bigger companies elsewhere in the world, aren’t out there for assets. It’s a perfect combination.”

There have been numerous recent examples of Chinese companies seeking to acquire overseas, chiefly in resources, from Chinalco’s ultimately unsuccessful tilt at a $19.5 billion deal with Rio Tinto to Sinopec’s US$7.2 billion purchase of Addax, a Swiss firm developing an oil field in Iraqi Kurdistan. Other outbound deals have included Baosteel, China Minerals and Petrochina. There’s no sign of this fading away: in September China National Petroleum (CNPC), the parent of listed PetroChina, secured a US$30 billion loan from China Development Bank to finance overseas acquisitions. “There’s clearly a theme here that this is a time to go out and acquire, especially in resources,” Paterson says.

Many of these acquisitions have involved Australian assets, making Sydney M&A bankers equally active. “The level of activity here throughout has remained reasonably solid,” says Anthony Sweetman, head of M&A for UBS in Australia. “It’s not as busy as it was in 2006 and 2007, when levels globally were driven by private equity, the quantum of debt available and the pricing of that debt. But Australia has been somewhat sheltered by a relatively strong domestic economy and banking system and activity has been driven by foreign investment into our mining and resources sector.” In the coal seam gas sector alone, Santos has sold an LNG project stake to Malaysia’s Petronas, Britain’s BG Group (having bid unsuccessfully for Origin Energy) has bought Queensland Gas Company, and Origin has sold assets to ConocoPhillips. And it’s not just in resources: Japanese buyers have found value in Australian assets, with Kirin buying out affiliate brewer Lion Nathan and Asahi Breweries buying Australian assets of Cadburys Schweppes. In the other direction National Australia Bank has picked up the Australian arm of Aviva, and two companies have shown the first hint of Australian outbound M&A, with ANZ buying many of RBS’s Asian assets and Amcor buying parts of Alcan Packaging from Rio Tinto.

This last point may herald a new direction in M&A as funding returns to Australia acquirers. “Amcor is a sign of things to come in 2010,” says Jonathan Gidney, managing director of investment banking at JP Morgan. “Australia has strong capital markets that are prepared to fund strategically sensible acquisitions by Australian companies.” Funding sources have been varied: ANZ did its deal with the proceeds of a prior rights issue, while lending and debt capital markets are also viable options. There’s not much syndicated lending yet, says Sweetman: “It’s mostly been club facilities with numerous banks taking and holding positions rather than a smaller number underwriting then syndicating.”

Both Sweetman and Gidney see a gradual re-emergence of private equity in Australia, although the takeover of MYOB by Sydney-based private equity house Archer Capital was the only major transaction in the first half of 2009. “It’s generally not big, multi-billion dollar transactions,” says Sweetman. “But a number of private equity players still have committed funds on the equity side and are looking to invest.” Gidney adds: “A number of assets are starting to be put back on the sell list again, and you’re seeing the re-emergence of sponsor interest in unloved companies like Emeco and Energy Developments.”

Deals like China Minmetals/OzMinerals (where a full takeover was nixed because of the sensitivity of a mine on Ministry of Defence land, and instead only a purchase of other assets took place) and Chinalco/Rio Tinto (not blocked politically but nevertheless controversial) have created a sense that China is impeded in its ambitions by an unwillingness of major government’s, notably Australia’s, to sell assets to it and its state-backed companies. Australians tend to find this concern overdone and those dealing with Chinese clients feel the sensitivity can be dealt with. “Politics is just one of many issues in a deal,” says Paterson. “How you structure the deals is important.” [Paterson doesn’t discuss specific deals but it’s notable that in two Deutsche-advised China-Australia deals recently, Baosteel’s purchase of a stake in Aquila and various Chinese entities in Fortescue Metals, the total shareholding was kept below 20%.]

In Asia, activity is being supported by strength of funding in local markets, chiefly bank lending. And for a sign of what can be supported, take a look at the Bharti Airtel US$23 billion merger with South Africa’s MTN Group, which appeared to be in its final stages as this article went to press: it is expected to achieve both a US$3-3.5 billion five year offshore loan and a rupee loan of US$2-2.5 billion equivalent, all of this after securing a US$5 billion underwriting commitment from Standard Chartered. If that’s illustrative, the markets are going to be vibrant for some time.

When TPG’s Newbridge Capital arm agreed to sell its stake in Shenzhen Development Bank to insurer Ping An, international commentary focused on the successful exit by a western private equity firm from a Chinese business. But there was another, less remarked trend in evidence too: the growing interest in the universal banking model in China.

Ping An is one of the clearest examples of this approach. Even before the SDB deal, Ping An had been working to build itself out from being a leading life and P&C insurer to a multi-faceted financial services group. In January 2009 its Shenzhen Ping An Bank arm was given approval to be renamed Ping An Bank, reflecting its integration into the rest of the group. It has fast growth in loan, intermediary and retail banking businesses, and has a network of wealth management centres under the Anchor brand, targeting Shenzhen’s high net worth consumers (of whom there are many). It issued 1.5 million credit cards in 2008, its first year of issuance.

Alongside that there is an asset management business, with RMB452 billion under management as of December 31; Ping An Securities, containing investment banking, brokerage and proprietary trading businesses; and Ping An Trust, one of the first trust companies to be approved by the People’s Bank of China.

Ping An takes this approach because it believes in the power of synergies: half the new cardholders in 2008 were already Ping An customers, and 14.3% of the premium income for property and casualty insurance in 2008 came from cross-selling, along with 14.9% of new assets under its pension annuity investment management business.

Now with the SDB stake, Ping An is the clearest example of this multi-pillar approach to financial services in China, but it’s not alone. The Citic group, for example, contains arguably the country’s leading brokerage (Citic Securities) as well as a powerful bank within its group, although they are separate listed entities. China Construction Bank is in talks to acquire China Cinda Asset Management – not a surprise, since Cinda was originally set up as a vehicle to deal with CCB’s bad loans, but representative of the same trend.

So will China move further and further towards universal banking? Probably – but slowly, analysts say. “I think there will be progressive development of the universal model, but I don’t think the trend will be very fast,” says Victor Wang, a China banks analyst at UBS. He notes that there is a distortion between the relative sizes of banks, brokers and insurers: ICBC has about RMB10 trillion in total assets, which is more than double the RMB4 trillion total assets of the entire insurance industry, which in turn is far bigger than the total brokerage industry. “Right now commercial banks are dominating the financial industry in terms of their distribution network, their assets and their staff,” he says. “I don’t think it would be the best idea for regulators to allow the universal business model all of a sudden with banks doing insurance and brokerage. It would result in massive reshaping of businesses in a short period of time.”

What, then, to make of the Ping An/SDB deal? “I think the regulators will allow deals on a case by case basis. They will allow specific names to buy into relatively smaller players,” Wang says.”But I don’t think in the next two years we are going to have a major merger of big players in different business areas.”

On top of that, China is not ignorant of what’s happening elsewhere in the world, and the universal banking model has taken a severe knock in Europe and the US. Chinese institutions have in some cases been badly hit by investments in these groups, most obviously the write-downs Ping An itself had to take on its investment in Fortis, which almost wiped out its entire 2008 financial year profit. “People are now a lot more cautious domestically about the universal model,” says Wang. In particular, the appetite for acquisitions overseas appears to have dimmed, and even if it does appeal to Chinese institutions, it will be tougher now to get such a deal past the regulators.

Nevertheless, small deals are likely to continue to happen. Do they make sense? Macquarie’s Mark Kellock notes: “While firm servicing agreements have yet to be signed, we expect Ping An to achieve synergy benefits by cross-selling both life insurance and P&C product into SDB’s vast customer base.” SDB operates 129 branches in 14 cities not occupied by Ping An; also it should be able to cross-sell its bank product into Ping An’s 45 million-strong customer base.

On the CCB/China Cinda deal, if it happens, one analyst notes: “They have a lot of cooperation anyway and if CCB can get control it’s a great business. But even if it acquires, I don’t think all its [CCB’s] outlets will then be allowed to do brokerage business.” In other words, acquiring a business with a securities licence won’t automatically allow all the branches of the acquiring bank to do all the things the target was doing.

Others feel that Ping An and Citic in particular will be watched closely by the regulators as test cases. Consistent good performance by those groups over time should lead to a more relaxed attitude to further consolidation and universal financial services.

Singapore Awards

BEST BANK: CITIBANK

While Citi globally was floundering and flirting with oblivion, Citibank Singapore was cementing its position as a head-on competitor to Singapore’s domestic banks. In fact, for its levels of growth across the board in a year when most have shrunk, it is the best bank in Singapore this year.

Citi is no longer a foreign competitor to the locals. It is a local. In fact, its 8,068 staff in Singapore are believed to be the largest at any bank. Its three key legal vehicles in Singapore between them recorded a net profit of S$1.2 billion on revenues of S$2.3 billion – more than OCBC, on a par with UOB and lagging only DBS. Its mainstay local consumer banking arm, Citibank Singapore Ltd, logged record profits profits despite the environment. The global markets business, covering equities, fixed income, commodities and currencies, grew 20% in 2008, transaction services 11%, FX volumes 15%, and trade finance confirmations 400% despite Singapore exports crashing.

Citi will never beat DBS for mortgages or straightforward loans but nevertheless it is in this retail space that Citi has made the greatest progress in recent years. Its branches reach beyond the city and into the heartlands now, and its shrewd tie-ups – the mass transit system, Exxon Mobil service stations, Citibank-AXS bill payment terminals, widespread ATMs – have made it as recognisable locally as many Singaporean institutions. One in two eligible card holders in Singapore now has a Citibank credit card – the market leader.  

What about the name risk, the knock-on effect of global troubles? Deposits in both Singapore dollars and other currencies dipped but are now above where they were in October; the Smith Barney shift into the Morgan Stanley venture makes no real difference here; and the wealth management platform, from top end private banking to mass affluent, remains the broadest in the country and the kicks it has taken have been no worse than elsewhere. Add to this a good year in investment banking and Citi has earned its award.

BEST DEBT HOUSE: DBS

Domestic houses remain dominant in the Singapore debt markets, with DBS and OCBC both enjoying strong years. DBS wins it for the strength and depth of its franchise across bonds and syndicated lending. It is the only bank to have completed a bond issue for every statutory board that has issued in the Singapore dollar bond market; it has proven distribution capabilities; it has been a pioneer in important new structures, such as Singapore REITs; and it gets the big deals.

In our review period, these included lead managing the largest Singapore dollar bond issue to date, albeit a self-led deal, a S$1.5 billion hybrid tier one note issue. It was a joint lead for S$600 million issue for Maybank, the first time a Malaysian bank had issued innovative tier one capital securities through Singapore. Other big deals were for SP Power Assets, Korea Development Bank and Sembcorp.

Alongside this DBS has a leading syndicated finance team, a useful role in a record year for syndicated lending in Singapore. DBS’s involvement included financing Singapore’s two integrated resorts and a range of real estate, power, technology and shipping deals.

BEST EQUITY HOUSE: JP Morgan

The three key equity deals in our review period were all rights issues: S$4 billion for DBS in January, then two different arms of the CapitaLand empire in March, first CapitaLand itself for S$1.84 billion, then CapitaMall Trust for S$1.23 billion.

Two banks appeared on all three: DBS and JP Morgan. So which to choose? Both make compelling cases – DBS also led an important deal for Mapletree Logistics Trust, also a rights issue – but JP Morgan shades it, despite a lower quantum of underwriting in the DBS deal, after helping Olam International raise S$307 million through a preferential offering at a time when most equity offerings in Asia were being cancelled or postponed. (JP Morgan would go on to help Olam raise a further US$300 million in convertibles two months later.)

What stands out is the performance of the rights issues. On the three JP Morgan and DBS were involved in, the share prices remained stable or climbed until the automatic adjustment leading up to the ex-rights date. On the Chartered Semiconductor rights issue, which featured neither of them, the stock sank 40% on announcement.

BEST M&A HOUSE:  Credit Suisse

The deals that mattered most in Singapore in our award period were not the league table-grabbing acquisitions of western bank stakes by sovereign wealth funds – Temasek in Merrill Lynch, and GIC in Citigroup through its conversion of preference securities – but the sales of power assets by Temasek. Credit Suisse were the sell side advisors for the US$2.8 billion sale of Senoko Power to Lion Power Holdings and US$2.5 billion sale of PowerSeraya to YTL Power.

Both have a credible stake but Credit Suisse had the broadest range of additional involvement in Singapore M&A. It was involved in two more Temasek deals: representing it on its sale of PT Bank Internasional Indonesia to Maybank, and representing the purchaser when Qatar Telecom bought a stake in PT Indosat from it, in the largest ever Middle East-Asia transaction. Other deals included UOB’s delisting tender offer for its Indonesian subsidiary, the sale of Singapore Food Industries, and a REIT deal for Allco. Although its role defending Lee Latex from a hostile bid for Straits Trading didn’t result in a deal, the fact that this was CS’s first advisory for the Lee family demonstrates the trust it has built locally.

AWARDS FOR EXCELLENCE – MALAYSIA

BEST BANK – PUBLIC BANK

Public Bank no longer has this award so easily to itself as the CIMB Group continues to develop and grow, but for now it’s still Malaysia’s clear leader pretty much any way you look at it.

It leads the way in terms of profitability, with a 36.9% return on average equity compared to an industry average of 19.6%; cost to income ratio, at 31.2% compared to 48% for the industry; and the quality of the book. Its gross NPL ratio, at 1%, and net NPLs at 0.9%, both lead the industry, with loan loss coverage of 163.8% almost double the norm in Malaysia.

As well as being well run the bank is successful. Already the market leader in both loans and core customer deposits, it increased its market share in both areas in 2008. It has 15% of residential mortgages in Malaysia and 24% of vehicle hire purchase business, while its Public Mutual subsidiary holds 40% of the unit trust industry. Initiatives are taking shape in bancassurance (with ING), wealth management and customer service. Malaysia’s banks have come out of the financial crisis largely unscathed and this is nowhere more true than Public Bank.

BEST INVESTMENT BANK – CIMB

CIMB leads the field in every discipline of investment banking.

The most important area over the last year has been the debt capital markets. CIMB leads not just in league table terms, with big deals like the RM4 billion Islamic MTN program for PLUS and RM4 billion tier one bond issue for CIMB itself, but in innovation, leading the first Islamic sukuk for a member of the Toyota financial services group, and a RM1.13 billion senior and junior sukuk for MRCB Southern Link, a greenfield project finance deal.

Only one equity deal really mattered during our review period: Time dotCom’s placement of Digi.com shares worth RM436.5 million in January, an accelerated placement. CIMB was the sole placement agent and bookrunner.

And in M&A it was involved in a host of different transactions, covering purely domestic transactions, Malaysians going overseas, others coming into Malaysia, and even the merger of Malaysia-owned businesses elsewhere. CIMB advised Sin Chew Media Corporation and Nanyang Press Holdings on their merger with Ming Pao Enterprise Corporation in Hong Kong, creating the inaugural dual primary listing on Hong Kong’s stock exchange and Bursa Malaysia. It also advised Magnum Holdings on the privatisation of Magnum Corporation through a selective capital reduction and repayment exercise; Bumiputra Commerce Holdings on the merger of its Indonesian indirect subsidiary, Bank Niaga, with Bank Lippo; CIMB on its own purchase of BankThai; Abu Dhabi Commercial Bank in buying a stake in RHB Capital from the Employee Provident Fund; and Telekom Malaysia on the demerger into TM and Axiata, one of Asia’s largest corporate demergers.

AUSTRALIA

BEST BANK

Westpac

Westpac has been viewed as the most conservative of Australia’s big four banks, and that’s never been a more welcome accolade than over the last 12 months. It hasn’t come through the market upheaval unscathed, but its modest decline in profit is dreamland compared to what’s happened to many American and European banks during the same period. Westpac today has the highest tier one capital ratio in Australia, the best asset quality and the cleanest balance sheet.

The jury is necessarily still out on how the merger with St George pans out but there is no significant customer leakage yet. St George did bring some bad residential property loans into the business and it will take time to see if Gail Kelly’s vision of maintaining the St George brand rather than osmosing it into Westpac will work.

Westpac is using the downturn to pursue mortgage market share aggressively, and this too may look foolish or a masterstroke depending on what happens next in the Australian economy. But there is a clear strategy at Westpac, and the handful of analysts prepared to put any buy recommendations the way of Australian banking are tending to opt for Westpac when they do.

BEST EQUITY HOUSE

UBS

UBS continues to lead the field in Australian equities no matter how you measure it. Overall volume, number of deals, secondary market, research: it has competitors in every area but none stack up so completely across the board.

On the primary side UBS demonstrated its capacity in February when it was at least a joint lead on six deals in six days raising A$5.5 billion between them, for Tabcorp, Henderson, Newcrest, Qantas, Westfield and Suncorp-Metway. It has been on big IPOs, like the Ivanhoe Australia listing; heavyweight secondaries, like the A$4.6 billion Wesfarmers accelerated entitlement offer and the A$3 billion follow on for National Australia Bank; innovative deals, like the one used by Crown and Axa to enable related party participation in capital raisings through a placement structure; and hybrids, such as the two raisings of tier one stapled preference securities for Westpac.

On top of that it is has been the dominant secondary market trader in Australia for the last eight years and has one of the best research teams in the country with 50 analysts covering 270 stocks. Goldman Sachs JB Were in particular gave them a good run this year but UBS still leads the field.

BEST DEBT HOUSE

JP MORGAN

There were banks that excelled in domestic bonds in Australia in our review period, and banks that were impressive in taking Australians overseas, but JP Morgan stood out best for achieving in both fields.

The big story in 2008-9 was about getting bank capital from the international markets. Of seven government-guaranteed transactions by Australian banks, JP Morgan was bookrunner on five, taking Suncorp, Macquarie, Commonwealth Bank, Westpac and ANZ into dollars. On top of that, it also took five different banks into euros; brought the first post-Lehman 144A issue by an Australian corporate for Woodside; was a bookrunner on Rio Tinto’s eye-popping $5 billion deal; and was active in sterling and US private placements.

On the domestic side, JP Morgan has grown strongly too, with a A$735 million convertible preference issue for Suncorp a standout. It has also brought foreigners into Australia, notably RBS, the first bond to be issued with a guarantee from a foreign sovereign. Considering JP Morgan’s domestic platform was only set up in 2007, the pace of success has been remarkable. In fact, it had a good year in all areas of investment banking and is the foreign name to watch.

BEST M&A HOUSE

UBS

There was no clear winner in M&A in Australia this year, with the big deals split between half a dozen houses. In that environment it’s the house with the consistent track record that takes the prize, and UBS has remained among the leaders for a decade now.

In our period under review its landmark transaction was advising St George on its takeover by Westpac. Competitors find this a simple deal notable only for its A$18.6 billion size; in fact from St George’s perspective, with the deal taking place through the depths of the financial crisis, it was a vital deal and secured a good outcome for shareholders. It’s also a rare example of a deal that looks positive for all sides, something that can’t be said for, say, the Rio Tinto/Chinalco deal.

Elsewhere UBS advised Zinifex on its $12 billion merger with Oxiana, and helped Cadbury and Vodafone on Australian asset deals. It was also part of the trend of bringing China into Australian assets, and although it ran into regulatory barriers, it appeared at the time of writing that the restructured takeover of most OZ Minerals assets by China Minmetals was likely to go through successfully.

China’s companies have begun to branch out over the last 10 years, taking stakes in foreign enterprises or bidding to acquire them outright. They’re likely to do so much more in the years ahead: many of China’s biggest companies are cash rich at a time when western companies have seen their valuations slashed and are in many cases desperate for capital.

This trend has implications for governance practices both inside China and at the acquired companies. It brings into focus cultural differences and the learning curve Chinese companies must go up about accepted practices overseas.

But before one even gets to that, there is a broader problem of perception, chiefly a political concern. Many western countries have reacted with suspicion and distrust when Chinese companies have sought to buy assets in their countries. CNOOC’s attempt to buy Unocal is one of the clearest examples of this: see the interview for CEO and chairman Fu Chengyu’s thoughts on this. But one sees it again in Australia today with the reaction to bids for OzMinerals and Rio Tinto assets by China Minmetals and Chinalco respectively: many politicians voice very strong objections to these assets being sold to companies controlled by the Chinese state.

“For many years, the West has viewed China’s state-owned enterprises in black or white,” notes Jonathan Woetzel, a director at McKinsey in Shanghai. “In one portrayal, they are infiltrators to be viewed with suspicion.” He cites Chinalco’s bid for a stake in Rio Tinto, which raised fears about just what China was up to in trying to acquire Australian resources, as example. “The other version sees state-owned companies as muscle-bound goons: without the smarts of a private company, but with plenty of brawn. In this characterization, they are relics of a failed economic experiment that still dominate the national economy, controlling natural resources, utilities, and many other vital sectors. Their power and influence – particularly their links to the ruling Communist Party and government – give partners and competitors pause.”

Woetzel finds those stereotypes inappropriate, and says that using out-of-date impressions of Chinese state owned companies “masks both opportunities and threats facing multinationals. A more current view would, for example, have them consider more favourably the value that certain state-owned companies might bring to a global partnership.”

Lawyers and companies who work in China find western attitudes towards their companies curious. They argue that when Chinese companies acquire overseas they will be at pains to understand management and governance practices in those countries and will mirror them accordingly.

“For any Chinese company when they go overseas, it terms of corporate governance it will be much better for sure,” says Guy Cui, managing director at Hopu Investment in Beijing. “They are going to a new country, they have less experience, so before they go out they’re going to carefully study the laws and regulations in that country and make sure everything complies.

“China generally does not have a lot of experience internationally: it’s only opened 30 something years ago and very few people understand foreign countries,” he adds. “So if China acquires a company let’s say in Australia, this company will be the same as all other Australian companies: they will make sure they use a company lawyer, for example, whereas in China they might not.”

Jane Jiang at Allen & Overy in Beijing agrees. “Chinese clients before they go overseas are well aware they need to understand the legal regime wherever they go, and that will include the corporate governance requirements,” she says. “I think the local management of Chinese companies when they go overseas are pretty professional and well prepared for the changes they have to go through.”

Chinese acquisitions overseas have run into criticism, but so far it has rarely been for governance issues. One of the real landmark transactions was Lenovo’s purchase of the home computer division of IBM in 2004. This transformed the company into a truly global player and was an indisputable landmark for Chinese corporate development. Today the company runs two headquarters, in Beijing and in the USA, and its board structures look much like boards do in the west. (Chinese boards do tend to have a lot more people on them – for one thing, there’s one regular board of directors and another supervisory board – but while that differs from the US model, for example, it is very common in other western markets such as Germany.) Lenovo had to accept some restrictions as a result of American political concerns in order to get the deal through.