Showing posts with label Distribution. Show all posts
Showing posts with label Distribution. Show all posts

Wednesday 29 December 2021

Dramatic shift in India's Oil import sources - from OPEC to non-OPEC

The world's third largest oil importer and consumer importing 85% of its crude, India continues to import crude from OPEC producers but a dramatic shift towards new non-OPEC sources seems to be under way as illustrated by these two charts from Reuters:
Back in October of 2021 India's Oil secretary had contemplated forming a group seeking to bring together state-run and private refiners to seek better volume based crude import deals. In November, India's crude imports reversed a declining trend to hit its highest level in 10 months. As reported by Platts, January through November 2021 saw India's oil product exports rise 3.2% on the year to 54.7 million mt, or 1.3 million b/d.

Thursday 14 February 2008

What makes a Bank Guarantee a tradable security? – Part 2 of the series on Bank Guarantees and MTNs

In the previous posting I described how Bank Guarantees are used primarily to finance trade. In this posting I will describe the aspects of a Bank Guarantee that make it a tradable security and why this trading activity attracts opportunists (read Intermediaries) in spades to get a piece of the action of this lucrative trade.

The large majority of Bank Guarantees issued by major trading banks worldwide have a term of just over a year (more specifically 1 year and 1 day). A bank will issue a bank guarantee to their (primarily corporate) clients based on the clients’ credit worthiness and their relationship with the bank. The client typically puts up between 50 to 60% of the face value of the bank guarantee. In other words, a bank may issue a bank guarantee of a certain face value to a client against a cash deposit by that client of between 50 to 60% of that face value. It is this feature of a bank guarantee of being issued at a discount to face value that makes it similar to a zero coupon bond and makes it a tradable security.



The clients of a bank guarantee are large major trading corporations such as Nike or Apple and the face values of issued bank guarantees are typically US$ 500 million and up although they can certainly be issued with a face value of amounts lower than this. In addition to providing a negotiable instrument to transact international trade for these clients, the bank guarantee is also used by these clients as a means of raising extra capital by selling the bank guarantee.

The clients to whom the bank guarantee is issued may sell that bank guarantee to a third party (such as a securities house like Morgan Stanley) with a markup (usually 10 to 20%). The third party may then sell the bank guarantee to another private party (such as a pension fund) with another markup (again 10 to 20%). This private party may then choose to hold on to the bank guarantee and redeem it for full face value at maturity (at the end of the 1 year and 1 day period). It is important to note that the issuing banks themselves never enter into agreements to sell their financial instruments and a third party buyer’s bank will not enter into an agreement to purchase the financial instrument. The private agreement to trade the bank guarantee is always between the buyer and the seller. No banker or securities officer will act on behalf of the buyer or seller. That being said, this is where informed intermediaries come into the picture arranging private buy/sell transactions between buyers and sellers for a “consulting fee” of typically 1% of the transaction amount for the buyers and sellers representatives. When the face value of the bank guarantee is US$ 500 million in multiple tranches, the “consulting fee” for the introducing intermediaries can be a king’s ransom indeed. This is exactly what attracts the hoards of intermediaries and the broker chains.

Since Bank Guarantees are issued by banks to their clients for the first time (known as “fresh cut” bank guarantees in industry jargon), they do not appear on any Central Securities Depository screens such as DTC or Euroclear for screening, authentication, or settlement. The MT-103 is used to send a conditional SWIFT transfer of cash funds used for fresh cut bank guarantees. Hence settlement of payments for Bank Guarantees must be transacted through NON-Euroclear Delivery Versus Payment (DVP) procedures agreed in advance by transacting parties. Non-Euroclear DVP Protocol Settlement Procedures do not require such things demanded by intermediaries such as proof of funds, proof of capability, financial capability letter, MT-760 (Bank Guarantee), MT-543 (Bank Commitment), or MT-799 (Confirmation of funds on deposit). This is handled in the bank to bank call, after the contract between buyer and seller is signed and in place. Bank to bank confirmation of funds replaces any need for POF.

Subsequent sales of Bank Guarantees to third parties make them a “seasoned instrument”. There is no such thing as a “slightly seasoned instrument”. Bank Guarantee Instruments are either “fresh cut” which is a new issue to the bank's client that has never been sold to anyone yet or registered with a buyer or they are “seasoned” which is an instrument that has already had a registered owner. The prices of these seasoned instruments depends on the quality of the issuing bank (Bank Guarantees issued by AAA+ banks command a premium) and may be sold typically at 85 to 97% of the face value in these subsequent sales. If Bank Guarantees are sold to securities houses in subsequent sales, the securities houses may register the Bank Guarantee as a security and issue them a CUSIP or ISIN number but this is not the norm.

In part 3 of this series we will investigate how intermediaries attempt to trade bank guarantees and the channels of distribution used by them.

- Eric

Monday 31 December 2007

East of Eastern Europe: a rich distribution landscape emerges in 2008

With the inclusion of 10 previous eastern block (and since 2004 European Union) countries into the Schengen agreement as of December 21st, 2007 the old iron curtain effectively moved eastwards. This area which I call East of Eastern Europe and includes giants such as Russia, Ukraine and Kazakhstan, I predict will bring rich harvests in asset gathering in 2008 for the discerning investment products distributor. I will begin my arguments starting with a survey of almost 400 major wealth and asset managers by Euromoney magazine which found that private banking income in Russia surged by almost 88% in 2007. Granted, this is not surprising as the New York Times has harped on multiple occasions that Russia now has over 50 billionaires worth a total of almost US $300 billion. The surprise here is that private banking as we know it is not developed in Russia and only a few mostly foreign banks offer private banking services. Russia is also reportedly proposing amendments to the current collective investments regulation to offer Hedge Funds to qualified domestic investors. Domestic mutual funds are also around 100.

In Ukraine, signs of conspicuous new wealth are also obvious. Along the tree lined R-12 highway south from Kiev in the suburb of Koncha-Zaspa, a wide array of luxurious multi-million dollar estates are going up at a speed which would make even the most industrious developers in Dubai envious. This wealth is arguably highly concentrated among the Ukrainian oligarchy. Rinat Akhmetov, who ranks 214th on Forbes’s 2007 global rich list with a fortune estimated by Forbes at $4 billion is the owner of System Capital Management which alone is responsible for 8 per cent of Ukraine’s GDP. Ukraine's capital market is relatively small, about US $80 Billion. Investing in Ukraine's equity market remains difficult due to limited investment and local investors have very limited choices among a handful of mutual funds. The scene is similar in Kazakhstan, where there are about 14 pension funds, 40 insurance companies and 113 mutual funds for local investors to choose from. In 2007, the government of Kazakhstan set up a regional financial center in Almaty, (the commercial capital of Kazakhstan) open to any foreign or domestic financial organization to set up operations. Local asset managers such as Almaty based Ansher Fund Management and chief investment officer of the firm's Central Asia Opportunity fund have recognized this unprecedented opportunity and have been very busy floating new funds.

A decade ago, East of Eastern Europe markets seemed very exotic and highly risky to the western investor and yet the tremendous growth offered in these markets over this period has been heady. Ukraine's equity market which was established as part of the country's privatization program started to take off in 2004 and by July 2007 provided the best returns of any equity market globally. From its inception in 1997 to Nov. 20, 2007, the PFTS index has yielded a 131% return. In the last three years, the index has yielded 514% and over 2,000% for the last five years. 2008 is indeed the right year to tap the asset gathering potential of East of Eastern Europe and set up distribution channels for investment products.

Friday 28 December 2007

A New Year's resolution for the Globalizing insurer

The day after Christmas on Wednesday, December 26th 2007, China Pacific Insurance Group Ltd., China's third-biggest insurance company, had a spectacular Shanghai stock market share launch with its 30 yuan shares (US$ 4) ending the day 61% higher as reported by Reuters. The company had put a billion A-shares up for sale on the Chinese mainland, taking in US$ 4.1 Billion - the sixth-biggest share launch in mainland Chinese history.

China Pacific is the third domestic insurer in China to have a spectacular debut in Shanghai this year after China Life Insurance Co Ltd. and Ping An Insurance (Group) Company of China Ltd. I want to use this as an example of how globalization of insurance is contrary to popular opinion helping not hurting the domestic insurance industry in newly opened markets such as China. Countries such as China have moved away from protectionism or state control and have deregulated and privatized insurance to encourage a stable, properly managed, and thriving insurance industry. This increases the professionalism in the domestic insurance industry as domestic companies scramble to apply best practices developed by new foreign competitors and start providing superior customer services, introducing new products and transferring technological and managerial know-how.

A historical precedent for this spectacular success of the effect of globalization on the Chinese domestic insurance industry was ironically set by China’s arch rival Taiwan. Before Taiwan opened its insurance market to foreign competition in the 1980s, life insurance premiums accounted for less than one percent of Taiwan’s GDP, with local players such as Taiwan Life Insurance Company enjoying 100 percent of the market. After almost 15 years of the globalization of Taiwan’s life insurance market, it accounts for over 4 percent of GDP. Taiwan’s overall GDP has more than doubled from 1987. The foreign insurance companies had extremely good rates of growth but as did the domestic companies who are now in 2007 larger and more profitable than ever before and still dominate the Taiwanese life insurance market. These same Taiwanese companies, who once vehemently opposed opening their market to foreign competition, are now themselves going global by establishing operations in other countries in Asia.

The Economist published an article on December 19th, 2007 in their Buttonwood column on the crises to watch for in 2008 which I read with great interest. The article identified two areas of worry in 2008: the commercial property market and (surprisingly) the former iron curtain countries of Eastern Europe. I raised my eyebrows reading about the Eastern Europe bit, because up until recently, insurers going global such as Swiss Re were touting this post communist region as one of the key areas of insurance growth in the world along with Asia and Latin America. I predict that in 2008, domestic and foreign insurers in Central and Eastern Europe will globalize further and increase their market share thanks to removal of regulatory barriers to market entry as regulators share their expertise across borders creating a more uniform regulatory environment, privatization of state monopolies, consolidation and reform in pension and health and workers' compensation insurance. As we saw in the Taiwan example, this in turn will help to boost the GDP in these countries in the long run, so this area of worry identified by the Economist may just be a bit of false alarm.

A New Year’s resolution for insurers in 2008 should be that even if they have no intention of establishing a global presence, they must be prepared to compete successfully with insurers who do, because they can be certain these insurers are assessing the potential of their corner of the world. Today, Chinese media said that China Pacific Insurance Company now planned as soon as possible to go ahead with a second listing in Hong Kong, where it would issue 900 million shares valued at not under the Shanghai launch price.

Tuesday 25 December 2007

Top 5 places in the world to distribute Hedge Funds and Private Equity in 2008

The ultra rich today may include people as diverse as Russian oligarchs, Arab oil sheiks, American tech moguls, English aristocrats, Chinese manufacturers or Indian software barons. As a group, they form the biggest investors in Hedge Funds and Private Equity after institutional investors. As a group, they also have a deep distaste for the local tax man and like to be close to their money. Small surprise then, financial centers with the friendliest tax regimes and proximity to the ultra rich have emerged as the top places in the world to distribute Hedge Funds and Private Equity. So, what are the best places in the world for Hedge Fund or Private Equity companies to gather assets in 2008?

Dubai, which has now become a byword for fantastic utopian glitz, arrived on the scene of the ultra rich long before the architects at Skidmore, Owings & Merrill designed the now nearing completion Burj Dubai tower with 156 floors. The tower reportedly cost over 20 billion dollars to build and 900 condominiums offered for sale in 2004 at undisclosed (albeit reportedly outrageous) prices sold out in 2 nights, for cash payments. One realtor in Dubai estimates that Russians own half of “The World”, Dubai’s multi-million dollar development of 300 man made islands in the shape of the world. There may be a credit crunch in the western world, but in this gulf oasis of finance, there is quite literally an avalanche of liquidity and all this liquidity swilling around has to be mopped up rather quickly. Mark my words, in 2008, Dubai will emerge as the #1 place in the world where assets for Hedge Funds and Private Equity will be raised.

As the first jurisdiction in the world that allows retail distribution of Hedge Funds for individual retail investors who are able to subscribe to Hedge Funds with a mere US$ 50,000, Hong Kong remains one of my favorite bets for distributing Hedge Funds and Private Equity. Although, over the past 5 years, Singapore has steadily attracted Hedge Funds from Hong Kong through tax incentives and increasingly friendly regulation, Singapore lacks the one ingredient Hong Kong has for distribution success: proximity to and close relationship with the mainland Chinese ultra rich. It may be very likely that the overheated stock markets in Shanghai trading (Yuan denominated) A shares and Hong Kong trading (US$ denominated) H shares, after having returned almost 90% in 2007 will flatten out in 2008. Brokers in Hong Kong who are able to advise their ultra rich clients to book their massive profits and park the proceeds in arguably safer US or European hedge funds will be ideal partners for hedge funds seeking to raise assets. Hong Kong brokers also act as a channel for the excess liquidity spilling over not only from the overheated Chinese economy and Taiwanese speculators but also Japanese funds escaping Japan’s draconian tax regime.

In Europe, Switzerland and Luxembourg will continue to dominate the European Hedge Fund asset gathering scene. Tax dodging European ultra rich have traditionally parked their funds in Switzerland and they are now being joined in droves by the new ultra rich from former Eastern block countries. The ultra rich from the former eastern block (and now mostly EU countries) do not have a wide range of investment choices to choose from in their home countries and certainly not the types that have potentially high returns. In 2007, Luxembourg replaced former Byzantine regulation with new Hedge Fund friendly regulation making it as competitive as Cayman Islands or other distant, difficult to reach Caribbean islands.

New York still wears the crown as the king of Hedge Fund asset gathering in the Americas. New York attracts the top hedge fund strategy talent in the world and is always on the cutting edge of constantly seeking alpha. This is indeed where the money still is but frivolous litigation and regulatory hurdles are beginning to drive business away.

Wishing you a happy holiday season and a prosperous New Year.

- Eric

Monday 24 December 2007

Distribution is the key in the new age of cross border open architecture

The open architecture of distribution of funds or products has long been a staple in the US where investors have had a choice of funds to choose from among multiple best in asset class asset managers at their broker/dealer. This trend has recently catapulted with the increased proliferation of online trading platforms such as Scottrade, Charles Schwab and too many others to name. This does bring up the rather awkward question for asset managers, indeed one of survival: Given the plethora of fund choices for the investor, how do you distribute your fund products to fewer and fewer clients?

The answer lies in a new global revolution of cross border open architecture that is now driving the funds industry. In Germany for example, open architecture has taken off in a big way ever since Rainer Neske of the venerable Deutsche Bank appointed eight strategic foreign asset managers in 2003 who could sell their funds through every Deutsche Bank branch in Germany. Other European countries, notably France, Italy and Spain have arguably been laggards in implementing open architecture, but new regulation introduced since November 2007 across the European Union now makes it easier than ever to form strategic distribution partnerships with distributors across Europe with a relatively easy “single country registration” process. Goldman Sachs Asset Management whose distribution strength comes from sub-advising assets for other houses, not retail sales, has exploited this regulation (and earlier regulation) to vastly increase the depth of their product range to target European retail banks. Similar architectures of distribution are now also being introduced in many emerging markets as desperate as Kazakhstan and India.

Since investors now have a choice of upwards of 30,000 funds to choose from, churning out new fund products will not help attract new clients. Fund houses now need to focus their synergies in targeting distribution more effectively. Successful asset managers will form strong distribution partnerships with distributors serving clientele seeking solutions tailored to their needs. That old NYSE rule 405 (Diligence as to accounts) has never been more appropriate in this new age of cross border open architecture.


-Eric