Euromoney Asian treasurer profiles: Ayala, Capitaland, Country Garden, Delta Dunia, Lenovo

Euromoney, May 2012

Asian corporate treasurer profiles 

Ayala Corp – Delfin “Chito” Gonzales, CFO

Ayala Corp is an exceptionally powerful group within the Philippines, combining leading national businesses in real estate (Ayala Land), financial services (Bank of the Philippine Islands), telecommunications (Globe Telecom), utilities (Manila Water Company, among others), and various BPO, IT and automotive arms.

For Chito Gonzales, CFO of the holding company for all these businesses, the emergence of local liquidity, and hence local banks, has been a key theme. “If we wanted to raise peso bonds and go to the local capital markets three to five years ago, the international banks would have a bit of an edge because they would be able to put things together,” he says. “But in the last few years, so long as it’s a peso loan or bond, the international banks no longer have an advantage over the locals.” Partly that’s because of international banks pulling back their own liquidity, he says, but also it’s about the market itself. “A lot of the peso liquidity that has grow over the last three years has basically gone to the local banks rather than the international banks.”

The emergence of peso liquidity really caught the eye of investors when San Miguel Brewery raised Ps38.8 billion in a debut deal in March 2009, breaking the local current debt issuance record in pesos by a multiple of four in the middle of the global financial crisis. And Ayala has since found new frontiers in the currency, raising Ps10 billion in 15-year funds – the longest ever maturity in the Philippines – last year and paying just 120 basis points over government bonds to do so.

It’s interesting to look at the bank selections on that deal as an illustration of who has benefited most from this growing local liquidity.  Eight bookrunners were used, mixing five locals (BPI Capital, BDO Capital, First Metro Investment Corp, RCBC, SB Capital) with three internationals (HSBC, ING and Standard Chartered). “That was a benchmark deal, so we wanted to make sure we had the banks that could support it,” Gonzales says. “But the international banks were ones that were already operating here, with good access to either high net worth individuals or local corporations and were able to add value to the process.” Other deals have varied in their selection of bookrunners; a Ps6.45 billion block trade in July was sole led by Deutsche Bank “because they clearly had one of the strongest market shares in Philippine trades,” while Ayala Land raised Ps13.6 billion in a primary share sale the same month with a mixture of local and international names.

Gonzales says he typically sends out an RFP and then takes into consideration “who can give us the best deal at any point in time”, bearing in mind existing relationships but generally concluding that “we would have to go with whoever gives us the best pricing.” He says: “we need to work with banks with a fairly large balance sheet, but additionally are looking for banks that are innovative, creative, and can offer us new solutions.” Outside of the capital markets, the group is also open to new ideas on more mainstream transactional needs; it used JP Morgan to implement a new cash solution at Globe Telecom, for example.

If anything, Ayala suffers through its sheer scale. “The banks are limited to single borrower limits, and we have to make sure there is room for the rest of the group to borrow,” he says. “Sometimes other members of our group are sharing the same statutory limit that’s imposed on the banks.”

Among internationals, Gonzales notes that “it’s only been in the last couple of years that many international banks have been able to get out of the problems they’ve faced globally,” and finds that in the meantime Japanese banks have stepped up. “Before the crisis, European and American banks would clearly be our natural partners when it comes to dollar borrowing.”

Capitaland

One could argue Capitaland is a corporate equivalent of its Singapore counterpart, DBS Bank, which is perhaps no surprise given their common state part-ownership through Temasek. Just like DBS, Capitaland is something of a flagship of the island nation, and has sought to grow from domestic roots. Today Capitaland and DBS are similarly diversified: as of December 2012, Singapore accounts for only 33% of total assets and 44% of group EBIT; China is 39% of assets, Australia 16%, Europe 3% and elsewhere in Asia 9%.

Along the way Capitaland has pretty much pioneered the REIT market in Singapore, considered the region’s most diversified and successful; it has six REITs around the region and $37.1 billion under management in them and other financial products.

This expansion has brought a need for more complex banking services. “We have become more sophisticated,” says Capitaland, in written answers to Euromoney, noting that as it has grown it taps its network relationships with the banks in the regions where it has grown.

One might think that might favour international banks, but asked whether locals have grown into international banking areas, Capitaland responds: “Yes, there is a growth of prominence for the local banks.” That appears to be more the case in transactional than capital markets needs, though. “In the debt and equity capital markets, the local banks continue to make inroads in some products, but the international banks continue to play a more significant role simply due to the breadth of their network and expertise.”

In practice, Capitaland’s capital markets landmarks tend to mix locals (particularly DBS) and internationals known for a big local presence (both HSBC and Standard Chartered, for example, who accompanied DBS as joint leads on a landmark $645 million commercial mortgage-backed securitization in June 2011, occupy iconic buildings on the Singapore waterfront and are major local employers). Its most recent major IPO, of the CapitaMalls Asia shopping centre operator, combined DBS, JP Morgan, Credit Suisse and Deutsche.

Capitaland says it selects banks “based on the most optimal terms, advice, and track records of the banks,” regardless of their origin.

The company’s focus on China, which has grown dramatically in recent years and now represents the largest single constituent of the overall asset base, is going to create some interesting banking needs as the RMB becomes more international, but that appears to be for the future. Internationalization has had “no immediate impact as yet, as injecting offshore RMB into China for real estate business still requires regulatory guidelines,” the company says. “However, it is a trend we are watching closely given our extensive business in China.”

Estella Ng, CFO, Country Garden

Country Garden is among the savviest repeat issuers in Asian high yield, and is perhaps the leader among a cluster of Chinese real estate companies that have been frequent issuers in a range of currencies over the last 10 years.

Its latest deal, a $750 million 10 year non-call five bond issued in January, was typical: a 7.5% yield, more than decent funding for a BB rated emerging market corporate issuer, and with the order book covered 24 times over. Other landmarks over the years have included a US$900 million seven year non-call four global in 2011, deals of US$400 million (Reg S) and US$550 million (with 144a) the previous year, and an early example of a convertible bond denominated in RMB and settled in dollars, as well as equity deals such as a HK$3.102 billion block trade in Hong Kong in 2012.

In particular, it is known for its efforts to cultivate a global following in its paper. In the January deal, 31% went to the US, and a further 21% to Europe.

So how does this impact bank selection? Recent Country Garden deals mix local and international names; the January 10-year had Goldman Sachs and JP Morgan as bookrunners alongside Bank of China and Industrial and Commercial Bank of China as joint leads. “The biggest advantage of having the international banks is their experience and knowledge of international business and multinational corporations,” says Estella Ng, Country Garden’s CFO. “We need them for the execution. Local banks know the local culture because of the long history and extensive networks in the country. They can understand a local customer like us, and how regulators make decisions.”

The distinction between the roles of international and local banks is arguably sharper in China than elsewhere, as to a large extent regulation stops crossover taking place between the two camps. “The distinction still exists. Local banks still cannot provide all services in other markets, to be frank,” Ng says. “And local government and policy mean it is not easy for internationals to penetrate into the market.”

This attitude has often led Chinese issuers to appoint a great many lead managers to a deal – eight or nine are not unheard of, and often on relatively small transactions, to the considerable annoyance of international banks (http://www.euromoney.com/Article/3007664/Equity-capital-markets-AIG-deal-attracts-one-and-all.html) . Country Garden has not tended to do this – four is a fairly frugal selection for a Chinese issuer on a $750 million deal – perhaps because deals with a multitude of bookrunners often tend to use some of them not as investment bankers but unofficial cornerstone investors. Country Garden, having a wide investor following, hasn’t needed to take this route.

“We look at several factors when we select bankers,” says Ng. “We look at service, size and financial strength. They have to be financially strong or we will be restricted by the regulators. The fee must be competitive. Location is another; we try to find one with a branch locally, or close to a project location. And then is knowledge of the banker: one who can be a good sounding board, who can help with our strategy and objectives.” The issuer tends to stick with favoured and familiar names: Goldman and JP Morgan have been on most key international deals over the years, sometimes joined by Deutsche. For local joint leads, “a newcomer that joined the last transaction had a long-term relationship through construction loans,” Ng says.

“Since the financial crisis we noticed international banks being less available for liquidity, because fundamentally the way banks can do business has changed,” she says. “Banks need more collateral and buffers than they did in the past.”

There is more to Country Garden’s needs than the capital markets. “As we grow, we need more transactional banking services,” Ng says. “The property business is capital intensive, so cash is very important. It can be the biggest factor limiting us, and over-stretching can be fatal. We have a structure to pool cash and improve funding.” Like Lenovo, the company has some expenses in dollars while revenues are chiefly in RMB, although as Country Garden has expanded into Malaysia the sources of revenue have begun to diversify. “We welcome the internationalization of the RMB, and a stronger currency will benefit us,” she adds.

Thomas Husted, Finance Director, Delta Dunia

Delta Dunia is the listed holding company of PT Bukit Mamkur Mandiri Utama, or BUMA, the second largest coal mining contractor in Indonesia.

It’s an interesting company to speak to, for two reasons. One, the acquisition of BUMA in 2009 has caused Delta Dunia to be a regular fixture in the bond and loan markets, raising $600 million of debt financing, including a $315 million issue of senior secured notes subsequently refinanced through the loan markets. And two, the nature of the company makes its banking needs quite distinct.

“We have more than 11,000 employees, and 10,000 of those are located in Kalimantan,” explains Delta Dunia finance director Thomas Husted; Kalimantan is a vast Indonesian province covering most of the island of Borneo. “So cash dispersement and payroll is managed by local banks with branches in remote mining sites. We’re a bit different from other companies who can solely rely on international banks. We end up having diversified banking relationships that match a bank’s strengths to our needs. We use international banks for offshore revenue collections, liquidity management, capital markets and loans, and local banks for cash management, payroll, loans and FX.”

On top of that, capital market ventures have covered the high yield bond markets and 144a placement, and then international loans. “Since 2011 we have accessed the bank syndication market for $1.4 billion in total funding,” says Husted. “Bank participants are the international banks, typically with regional offices in Singapore, and a group of local banks with deep dollar liquidity. Over the last few years, local banks have become much more competitive on pricing, tenor and terms.”

How exactly are local banks changing? “There’s a few things. Aside from larger balance sheets, there’s been a rise in sophistication, in the form of both products and systems. On the systems side we have internet banking now with all our local banks where we can do FX online, US dollar and rupiah transfers, and payroll administration. The product is at international bank standards.

“And on the capital markets side there is an increased savviness in how they do lending. They have much larger balance sheets, a lower cost of funds, and as Indonesia’s rating has come up, that cost of funds has gone down significantly.

Like many commodity companies, BUMA is largely a dollar-based company with local operating expenses and salaries are in rupiah – historically, not the most stable of cross-rates. Here, too, the line between international and local standards has blurred. “With FX trades, we find the large local banks like Mandiri to be very competitive with any foreign bank. Pricing, systems and process are well delivered,” he says.

Differences do arise elsewhere. In terms of processing credit, he says foreign and local banks follow a significantly different process. “Local banks are savvy in regards to what exposure they want, and are much more aggressive with the balance sheet, but are less concerned with legal drafting and there is not a local equivalent to the APLMA standardized process found offshore.” Like many other treasurers, he reports the return of the Japanese banks as big lenders, as well as Singaporean homegrown names like DBS. “If you want a big loan in this market, those are the core banks to go to along with key local banks like Mandiri.” He reports that 18 months ago many European banks, traditionally strong in this market and particularly in project finance, stepped away, but have returned in the last six months.

Damian Glendinning, Treasurer, Lenovo

When you’re cash rich, as Lenovo is, you tend to take a traditional view of your banking requirements. “The main thing we go to them for is: obviously we need a place through which to process cash transactions,” he says. “They do actually still fulfil that somewhat useful social service, despite what’s in the press, and we’d be somewhat buggered without it.”

“All the basic stuff of cash management: where you pay it from and where you receive it, and transferring it from one place to another. People do forget it. But it is the whole reason we exist.”

Clearly Lenovo’s needs are more sophisticated than this, but Glendinning’s key relationships in banking are based on getting these essential things right rather than anything more esoteric. Beyond cash management, there is a clear need in foreign exchange, “because we do have a fairly significant mismatch between the currencies in which we sell [largely RMB] and the currency in which we principally incur our costs [largely dollars],” and this is an area he feels his commonly overlooked. “It happens to be the world’s largest market. It’s funny how little attention it gets.”

And the third main area is for funding. “Again, maybe I’m a little old fashioned, but I do think banks have a role to play in that. My view is, I would rather be dealing with a bank officer with whom I have a relationship, than dealing with an investment banker who is only interest in a bond issue and collecting his fees, and where what happens afterwards is not of interest or concern to him. Despite the bad press, I have been in several situations where banks have helped people through bad times. If you treat people well, people tend to treat you well in return.”

Set against this, Glendinning says he “gets 3,000 bankers a week saying they’d love to help us issue bonds,” and is less enamoured by them. Partly, this is because Lenovo has cash, and therefore doesn’t need capital market funding on top of the short-term funding he gets from lenders anyway. But additionally, Glendinning has doubts about the merits of the strong growth in Asian debt capital markets at all.

He says that the amount of liquidity looking for returns is driving supply, while bank funding has dried up and started to make bond markets relatively more attractive for issuers. “I think that is an exceedingly negative development.”

Why? “The first reason is it is fairly clear there is a bubble in the bond market, and that is going to go the way of all bubbles. When all the pension funds who buy these bonds decline because all the bonds have defaulted, are they going to be in a better situation?” Secondly, he thinks the bond market, with investor insistence on a healthy balance sheet and strong P&L, is going to discriminate against weaker companies that really need the funding. And third, he sees trouble ahead. “What is going to happen when all the people who can’t get loans issue bonds? Would you rather have the decision taken by a loan officer in a bank who knows the company and understands the risks, or an investment banker who is only interested in earning fees? Which one is going to produce the more prudent outcome? Right now the bond markets are booming because cash is looking for returns and everyone and his uncle can issue whether or not they are financially viable. What’s going to happen when that bubble bursts?”

Asked whether Asian banks have come into their own since the financial crisis, he says: “Yes and no.” The yes side stems from the withdrawal of some big international banks, “which were fairly important providers of liquidity. We have an excellent relationship with them but whenever we have said we need some funding, they have politely coughed and disappeared. Clearly you understand that it’s not that they don’t want to help, it’s just that they can’t.” That said, Lenovo is an absolutely key customer for international banks, even those that have pulled back the balance sheet. But while Glendinning appreciates the favoured status, it worries him too. “It’s OK if you happen to be one of the people that the banks like. But it is going to mean a lot of weaker companies, especially SMEs, are going to find life very difficult.”

Local banks themselves, he says, vary from one region to another. They do have balance sheet strength, “so we did get situations where they would come to talk to us, but the issue that arose was the first of all they are used to charging their customers prices that most MNC customers are not very interested in paying, and imposing T&Cs that most MNCs will not accept,” particularly around collateral and parent guarantees. For companies strong enough not to want to buckle on that – and while local banks are strong enough not to buckle either – “you still have this fairly significant cultural gap between what most Asian banks expect from their customers versus what most healthy MNCs are prepared to agree to. And I don’t see any immediate sign of that gap narrowing.” He also notes that, despite the efforts of DBS in particular, “the only truly pan-Asian banks are either British or American. Most Asian banks just don’t have the branch network and presence to provide a truly regional solution.”

He does note, though, that the global financial crisis has been accompanied by “the return of the Japanese. There was a time when the Japanese banks used to be a source of funding and their credit standards were not necessarily very stringent. Then they withdrew  – but now they are back, as they came out of the financial crisis relatively well. And they are looking to increase their market share again.”

Interestingly, for Lenovo, the opening of the RMB is not such a great outcome as one might think, despite the fact that it should make it easier to pool cash. The reason is the introduction of volatility in the RMB-dollar exchange rate, the single most crucial rate for the company. “I liked the old system, where the one thing that was certain was that the RMB was going to appreciate against the dollar. Now there’s two way volatility, that’s a lot less convenient.”