A decade in Asia’s debt markets
1 February, 2010
Malaysia’s Democracy on Trial
2 February, 2010
Show all

Asiamoney, February 2010

The global financial crisis tested banks and corporates alike. In Asia, the vast majority of both camps survived. But as treasurers and their forex bankers emerge from the other side of crisis, how has their relationship changed?

For many, the answer is not so much about product but relationship: the rigour with which banks and companies seek to understand each others’ creditworthiness, a growing need for documentation and a shared focus on risk management. Some paint this as a deeper relationship than before; others, a more hard-headed one in which credit is tighter and far less is taken on trust.

Talking to treasurers, one would think nothing has changed. There are plenty of stories in Asia about companies that came unstuck because of unwise attitudes to forex: the worst was Citic Pacific, which announced in October 2008 that it faced HK$14.7 billion (US$1.9 billion) in losses after currency market positions it had taken on the Australian dollar and the euro went wrong. But mercifully the Citic Pacific story is unusual. The best-run companies in Asia were not involved in speculative derivative transactions to start with and are very keen to make that clear. So a common response on the product side is that business is the same today as it was two years ago.

“We have always hedged all exposures transactionally using mainly plain vanilla spot and forward contracts,” says Jayant Parande, senior vice president and group treasurer at Olam International, the Singapore-based soft commodity group. “Therefore there has not been any change or additional requirements post-crisis.”

At Taiwan Semiconductor Manufacturing Corp, treasurer Wendell Huang takes a similar view. “In terms of foreign exchange derivatives, we only do hedging. We do not do speculation or trading: for us our primary mission under any circumstances is to hedge our positions.”

And in Manila, San Miguel’s treasurer, Sergio Edeza, says he has seen little change. “Companies in the Philippines are not as sophisticated in their requirements for FX and derivatives as they are elsewhere, especially because the central bank is very restrictive on what local banks can offer corporations here,” he says. “As a result, there were probably very minimal changes in terms of transactional needs from companies here. What we have here are sufficient for corporate requirements: forward spot and forward foreign exchange dealing, including non deliverable forwards, swaps and to some extent currency options.”

But senior forex figures at the banks who deal with treasurers talk about the last two years in an altogether different tone, detailing significant shifts in corporate treasury behaviour and bank relationships. “A lot of things have changed,” says Ray Franzi, head of FX structuring for Asia at Deutsche Bank. “Business is being conducted in a much more conservative manner than it was three years ago.”

More than anything, what comes through is a toughness from banks towards their clients. One senior foreign exchange figure at an international bank speaks to Asiamoney on condition of anonymity in exchange for “telling you what’s really happening.” “We’re asking for information from corporate customers now that we never would have done in the past,” he says. “We insist on a client telling us categorically if they could be over-hedged across the full range of their counterparties; whether they have thought through the worst case scenarios and are prepared to absorb them if they happen.”

This bank, like many, is now insisting on many counterparties collateralising – putting money or assets on the line to underpin whatever credit is extended to them. “In the past, they could expect to be given a clean credit line from the majority of the banks, but we are more discriminating now. Most are moved into a collateralized arrangement or struck off our counterparty list.

“That’s a shock to the system if the corporate treasurer is used to ample credit lines,” he adds. “Under this new regime it’s easy to think the bank doesn’t value the client. It’s actually nothing to do with that: it’s to do with the fact that capital is more scarce.”

And in exchange for that capital, banks expect more business. “Rolling over loans is not as easy as before,” says the banker. “Corporates are increasingly expected to give their ancillary business to the lending banks as well, such as commodities, FX, interest rate derivatives. It’s a more two-sided relationship now: it’s not like when there was too much liquidity and we were all bending over backwards to serve treasurers.”

Others are less blunt in their assessment, but there is clear evidence of a change in stance.

“If we are looking at vanilla products, like plain forwards, before we were only looking at the market prices, with less scrutiny of the credit of our clients,” says Franzi. Now, he says, pricing reflects the credit standing of the other party. While that might not sound good news for the customer, Franzi argues it is to everyone’s benefit. “It shows a maturing of our business. The fact that we are applying this to as many of our customers as possible makes us a much more valuable and credible partner for the corporate.”

This is where bankers and corporates find common ground in their views on the impact of the crisis. “Before we go into dealings both they and we are very interested in pricing in all the risk that they have, and going much deeper with the clients to understand what those risks are,” Franzi says. “Before, we had an easy conversation:  we have revenues that are x, we want to hedge them. Now we do checks and take the dialogue to the balance sheet level.”

Still, if banks are getting tougher, it’s a two way street. One foreign exchange banker recalls, now with some amusement, that in the depths of the crisis “half our customers thought we were going down and we thought half our customers were going down.” Franzi puts it like this: “We are more demanding with our customer but they are more demanding with us.”

And corporates can give as good as they get. Treasurers who were previously willing to countenance working with all manner of banks with little differentiation between them have got smarter. One, asking not to be named, notes that two years ago it would have bracketed Lehman Brothers, Citi, Barclays and JP Morgan as being roughly the same sort of counterparty. No more.

“We require an even higher credit standing from the banks,” says Huang. “To give you an example, we may have dealt with some local Taiwanese banks which may not have had an A- rating or higher. But during the crisis we started to exit from these banks, in terms of placing deposits. Now, our banks are pretty much at least A- rated.”

This is a comment echoed elsewhere. “We have been very selective in the banks we deal with because of their own financial position,” says Edeza at San Miguel. “We try to deal with more stable banks.” In the short term, this has helped domestic banks, who have the advantage of familiarity with local companies, although Edeza says: “I think foreign banks have a lot to offer in terms of their network and the ease of doing business.”

In practical terms, this shift in trust can be seen in changed attitudes to documentation. The two key documents that typically underpin foreign exchange derivatives are the International Swaps and Derivatives Association (ISDA) master agreement template, and the credit support annex (CSA) which regulates collateral support for derivatives transactions and is generally combined with an ISDA document. “They enable the netting of products, and decrease exposure for most of our clients,” Franzi says. The CSA has typically been seen as optional but in this new environment is becoming essential.

And while products have broadly shifted to the simpler end of the spectrum, banks argue it’s more about the way that products are used than the products themselves. “One lesson that has been learned is the need for rigour in the way companies approach risk management,” says one forex banker. “It used to be like this: I have exposure to the Japanese yen and would like to enter into a hedge; I have a view of the markets and if my view is correct the hedge will be better than a vanilla forward, and if I’m wrong, it will be worse.

“Now, people take a step back. You might still end up asking for a product that outperforms a vanilla forward, but first you will have asked: what are our exposures? Can we quantify the variables that will affect that exposure? Should we mandate treasury so that at least 50% of the exposure requires a hedge, 20% is unhedged and in between you can do an option structure? So the range of products isn’t necessarily more limited, it’s the way they are contextualised.”

The move to simplicity doesn’t particularly entice bankers. “There has been a preference for more vanilla products, but a lot of that is driven by a lack of understanding of derivatives at the highest level of companies,” says Adam Gilmour, managing director and co-head of corporate sales and structuring for Asia at Citigroup. “An unfortunate consequence of that is that if a hedge loses money, the guys at the top tend to blame the guy who put the deal on, when it might well have been the correct thing to do at the time.”

In Gilmour’s view, treasurers ought to be given a bit more slack. “We always talk to companies about core hedging and tactical hedging,” he says, referring to the difference between hedging a set percentage of your known exposure with a simple product, and taking a view on where currencies are going to go. “I say to treasurers: you are paid to have a view. Most people agree there is a degree of view-based hedging that is allowable.” Consequently, in his view, “the push back into more vanilla products is temporary.”

Be that as it may, it’s certainly there. San Miguel’s Edeza is uniquely placed to judge both sides of the debate: entering the financial crisis he was a banker, at Rizal Commercial Banking, before joining San Miguel in late 2008 (he is also the former national treasurer). “I was working for a bank during the time the crisis was happening, and the management decided to be more focused on the simple and straightforward products,” he says. “It’s true for many institutions, including local banks and it’s true in the corporate world as well.”

One view that does receive unanimous agreement is that the corporate treasurer’s job has got harder in the last two years. “The principle change is the need to be more focused on risk management,” says Edeza. “You need to be more probing in the financial products you would like to engage in, and weight very well the risks you are taking.” Or as Huang puts it: “Life has become more and more difficult.”

BOX: When it really goes sour

In some cases, relationships between treasurers and forex or derivative bankers have turned really nasty. Korea, China and Sri Lanka all have their examples, but Indonesia is arguably the focal point of these increasingly acrimonious disputes.

Five cases involving local parties and foreign banks stand out. HSBC found itself in the South Jakarta District Court twice last year, each with seafood exporters: PT Toba Surimi Industries and PT Fresh On Time Sea Food. JP Morgan was in the same court against the pharmaceutical group PT Kalbe Farma, and Citibank came up against palm oil group PT Permata Hijau Sawit. Standard Chartered crossed swords in the Central Jakarta court with PT Nubika Jaya, which manufactures olechemicals. One other thing binds these cases together: in all five cases, the foreign party lost. Every time one of these cases has reached a local court, the original contract has been declared null and void.

There are various reasons for the decisions: most of these contracts are callable rather than vanilla forwards, and have been interpreted as speculative by the courts, rendering them in breach of a Bank Indonesia circular (albeit one that came out after the contracts were signed). Other reasons include a claim that the transactions were not explained in Bahasa, breached the company’s master agreement with the bank, involved inadequate disclosure of risk or were signed by the wrong person.

The cases that have gathered the most publicity are those involving JP Morgan and Citi, and in neither instance is the dispute over. Each intends to appeal to higher courts. The JP Morgan one stands out because the derivative contract was structured under English law and was first heard in court in London, where JP Morgan was given a US$19.2 million award. The problem came when JP Morgan sought to get it enforced in Jakarta, only to see it overturned.

It remains to be seen who comes out on top when the disputes reach Indonesia’s more senior courts, in front of judges likely to be more familiar with the complexity of derivatives contracts. But in the meantime, foreign banks have all but axed their derivative sales in Indonesia, fearing that anything bar the most straightforward contracts will later be rendered unlawful, or that contracts won’t be respected. It’s not a good outcome for anyone.


Chris Wright
Chris Wright
Chris is a journalist specialising in business and financial journalism across Asia, Australia and the Middle East. He is Asia editor for Euromoney magazine and has written for publications including the Financial Times, Institutional Investor, Forbes, Asiamoney, the Australian Financial Review, Discovery Channel Magazine, Qantas: The Australian Way and BRW. He is the author of No More Worlds to Conquer, published by HarperCollins.

Leave a Reply

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