Global Finance (March 2006)

HUNGER FOR YIELD DRIVES LEVERAGED PAGE 22 LOAN GROWTH

BRAZIL SHOWS IT CAN EUROPEAN CORPORATES SAFELY NAVIGATE LEAD IN USE OF EQUITY PAGE 47 CHOPPY WATERS PAGE 25 DERIVATIVES

SURVEY WORLD’S BEST TRADE FINANCE BANKS

MARCH 2006

Lucrative payouts are fueling a growing controversy over executive compensation

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GOING FOR GOLD

CONTENTS

COVER STORY 18 Going For Gold

COVER STORY BY GORDON PLATT

With M&A activity heating up, concerns are growing that executives’ parachutes may be getting too billowy and their landings too soft.

FEATURES 22 Leveraged Loans Yield-hungry investors are piling into a market that offers high returns, reduced risks and a muchappreciated degree of inflation protection.

25 Country Focus: Brazil After enduring some stormy times, Brazil is beginning to see the results of President Lula’s careful—but often controversial— economic management.

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World’s Best Treasury Providers Global Finance selects the best treasury and cash management banks and the best providers of treasury management systems and services by category.

47 Equity Derivatives As the trend toward using equity derivatives in corporate finance sweeps Europe, the situation in the US couldn’t be more different.

MARCH 2006 | VOL.20 NO.3

REGULARS 2

Dear Reader A letter from the editor.

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New Fed chief Ben Bernanke staves off a slump in the dollar; Morgan Stanley CEO John Mack loses out once again; Argentina’s Kirchner begins to win grudging respect; and the Enron trial starts with a whimper, not a bang.

SECTOR FOCUS BY LAURENCE NEVILLE

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COUNTRY FOCUS: BRAZIL BY ANTONIO GUERRERO

Newsmakers

Milestones Flows between countries in the southern hemisphere now account for one-third of all FDI going to developing countries; RZB intensifies its push into Russia; private equity flows into India are skyrocketing; and Japan’s consumers open their purses.

12 Emerging Markets Roundup The latest news from India, China, Brazil and Russia.

AWARDS: TREASURY & CASH MANAGEMENT BY ANITA HAWSER

16 Emerging Markets Investor Key information for investors in emerging markets.

49 Global Equity/DRs

CORPORATE TOOLBOX BY DENISE BEDELL

Russian energy companies, as well as banks and industrial corporations, are scheduled to raise billions of dollars of capital in the GDR markets in London and Luxembourg this year.

52 Foreign Exchange The dollar’s yield advantage to the euro and the Japanese yen is supporting the greenback, despite worries about the US current account deficit.

54 Corporate Debt The recent increase in worldwide mergers and acquisitions is resulting in a rise in large corporate bond issues to help pay for the takeovers and to take advantage of low long-term rates.

55 Mergers & Acquisitions Sparks flew when Mittal Steel, the world’s largest steel company, which is 88%-owned by the Mittal family of India, made a hostile bid valued at $25 billion for Arcelor, the world’s number-two steelmaker, based in Luxembourg. 2 0 0 6

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An Investment In Openness here can be few things in the corporate world that are more complex, contentious and, frankly, confusing than the issue of executive compensation. It is into this confounding and controversial area that we wade in this month’s cover story.The timing is no coincidence:With expectations running high that 2006 will turn out to be another record year for M&A, the chances are that multi-million-dollar payouts to top executives of takeover targets will making headlines once again. While the details of the payouts may be new, the premise of the headlines is likely to be anything but. Every so often a story emerges that triggers a wave of condemnation for the everincreasing size of payouts to senior corporate managers. It usually follows the revelation that a departing executive is leaving a company with his pockets stuffed with cash.This year it is more likely to focus on accusations that an executive primed a company for takeover specifically so they could get their hands on a lucrative golden parachute. By and large the arguments trotted out by supporters and critics alike are much the same. Proponents of mega-payouts will always say they encourage executives to act in the shareholders’ best interests. Critics will invariably point out that the managers’ and shareholders’ best interests are very often quite different. Unfortunately, both sides of the argument are flawed. Rare is the manager who can honestly say they act only for the shareholders, disregarding his or her own personal interests. Similarly, though, it’s hard to find fault with the assertion that a manager who is promised a rich reward for doing their job well will try to do just that. If that reward is in the form of shares in the company, won’t that manager do their utmost to ensure those shares become more valuable? The problems arise in the details. Some compensation schemes are so complex that it is almost impossible for investors or regulators to assess their fairness or appropriateness. Others may simply be badly designed, offering the executive too many opportunities for self-enrichment and too few incentives to enrich the company. The SEC’s efforts to force companies to calculate and reveal the true value of their top executives’ compensation packages (see page 20) are laudable. If successful, the new rules should ensure investors have access to much more information than ever before. But legislation is not enough. Corporations must be more open about the lengths to which they are going to attract and retain their key top executives. After all, if the company is confident the executive is worth the investment, why keep it a secret?

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Dan Keeler [email protected]

EDITOR IN CHIEF AND CHAIRMAN: PAOLO PANERAI PUBLISHER AND PRESIDENT: JOSEPH D. GIARRAPUTO ASSOCIATE PUBLISHER: MATTEO GABBA

EDITOR: DAN KEELER EUROPE EDITOR/LONDON: ANITA HAWSER CONTRIBUTING WRITERS: GORDON W. PLATT, JR., DENISE BEDELL, LAURENCE NEVILLE, ANTONIO GUERRERO, THOMAS CLOUSE, AARON CHAZE, KIM ISKYAN PRODUCTION MANAGEMENT (MILAN): GIULIANO CASTAGNETO ART DIRECTION: ER CREATIVITY/ENRICO REDAELLI, CLARA CIOCCHINI COPY EDITOR: TINA ARIDAS

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MKT’G COORD, SPECIAL PROJECTS/EVENTS: NATASHA TRAJKOVA PUBLISHING ASSOCIATE: LAURA GALLETTI MANAGING DIRECTOR, OPERATIONS: CHRISTOPHER GIARRAPUTO ACCOUNTING MANAGER: YAWO GBEGNEDJI ADVERTISING OFFICES LONDON 44-207-583-7588 NEW YORK 1-212-447-7900 RIO DE JANEIRO 55-21-2274-3099 ADVERTISING REPRESENTATIVES: Bulgaria: Elka Koleva, Adia Advertising Agency. China: Mary Yao, Media Gateway International Ltd. Hong Kong, Singapore: Godfrey Wu, MHI Limited. India: Faredoon Kuka, Ronny Mistry Assoc. Pvt Ltd. Indonesia: Rita Jayadi, PT Mediarep. Israel: Asa Talbar, Talbar Media. Japan: Shigeru Kobayashi, JAC Media. Malaysia: Adil Jilla. Mexico & Costa Rica: Xavier Romero Goytortua. Philippines: Abdel Teodoro. Russia/CIS Baltic States: Arkady Komarov. South Korea: Heinz Kim, Heinz Communications Inc. Taiwan: Keith Lee, Advance Media Services Ltd. Thailand: Nartnittha Jirarayapong, N.J. International Media Company, Ltd. Turkey: Lemi Tanca GLOBAL FINANCE MEDIA INC CHAIRMAN: P. PANERAI VICE CHAIRMAN: A. BASODAN DIRECTORS: G. CAPOLINO, J. GIARRAPUTO, A. MATTEI, I. MAJEED, V. TERRENGHI SECRETARY: L. PANERAI FOUNDING EDITOR: CARL G. BURGEN March 2006, Volume 20, Number 3. Global Finance (ISSN 0896-4181/USPS 006-578) is published monthly except a combined July/August issue in July by Global Finance Media Inc, 411 Fifth Avenue, New York, NY 10016. Telephone: 1-212-447-7900. Fax: 1-212-447-7750. E-mail: [email protected]. London editorial office: The Associated Press Building, 12 Norwich Street, London EC4A 1QU, UK. Telephone: (44-207) 436-1356; Fax: (44-207) 436-1568. Periodicals postage paid at New York, NY, and additional mailing offices. Postmaster: Please send address changes to Global Finance, PO Box 2028, Langhorne, PA 19047, USA. Copyright © 2006 by Global Finance Media Inc. All rights reserved. Reproduction in whole or part without permission is prohibited. Microfilm and article copies are available from UMI. Telephone (313) 761-4700. Subscription: one year, US $350. Single copies: US and Canada $30.00 each prepaid; $33.00 outside US prepaid. Customer Service: (212)4477900 ext. 227. Reprints available. Contact: PARS International Corp. Telephone: (212) 221-9595. Fax: (212) 221-9195. Printed in the United States.

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BERNANKE SAVES THE DAY FOR THE DOLLAR

MORGAN STANLEY’S CEO LETS ANOTHER BIG ONE GET AWAY

n his first semi-annual testimony before Congress on February 15, the new Federal Reserve chairman, Ben Bernanke, sounded more like a grizzly than the “Gentle Ben” that some analysts had anticipated. His upbeat assessment of the US economy and hawkish comments on monetary policy kept the dollar from falling on simultaneous news of a sharp decline in foreign demand for US treasury securities. A source of critical financing for the US trade and currentaccount deficits, foreign buying of US treasury bonds dropped to a six-month low in December of $18.3 billion from a record $54.5 billion a month earlier.The falloff raised worries in the currency markets about a potential reversal of petrodollar flows to the US bond market that could undermine the dollar. Bernanke’s hints that

John Mack, CEO of Morgan Stanley, who took over the firm last June following the ouster of Philip Purcell, made it clear that major acquisitions would be a significant par t of his game plan for reinvigorating the company. Last November Morgan Still looking: Morgan Stanley’s John Mack Stanley offered to buy hedge-fund manager FrontPoint Partners, but the deal fell through because the price was too high. Now Mack has let another big target slip away. BlackRock, one of the largest investment management firms in the United States, agreed last month to combine with the asset management business of Merrill Lynch to create an independent company with nearly $1 trillion in assets under management. Two weeks earlier, Mack broke off talks to buy a controlling stake in BlackRock, after failing to agree on a price with Pittsburgh-based PNC Financial, which holds 70% of BlackRock’s stock. Merrill Lynch agreed to sell its asset management business to BlackRock for a 49.8% stake in the combined entity. Spinning off the asset management segment reduces the perceived or real conflicts of interest that may occur when advisers sell products that are sponsored by their own firms, says Fitch Ratings, which affirmed Merrill Lynch’s ratings after the announcement. Stan O’Neal, chairman and CEO of Merrill Lynch, says, “We will gain what amounts to a half-interest in a firm twice the size of our unit, with enhanced growth prospects.” BlackRock CEO and chairman Laurence D. Fink will keep those posts in the combined firm. Fink was one of the people wooed by Morgan Stanley to succeed Purcell last year, but he told the search committee that Mack would be a better choice. Meanwhile, look for Mack to make a significant acquisition of an asset manager before too long, if he can find one at the Simon Zadek right price. –GP

additional interest rate increases might be needed to contain inflation were enough to lift the dollar, which has been sensitive to rate differentials between the US and other major economies. “The economy now appears to be operating at a relatively high level of resource utilization,” the Fed chairman said. “The risk exists that, with aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path, leading ultimately—in the absence of countervailing monetary policy action—to further upward pressure on inflation,” he said. Bernanke made it clear that monetary policy will depend on a careful analysis of economic data.With the economy appearing to remain strong, economists have begun talking about the possibility that rate increases could continue in the second half of 2006, which would be bullish for the dollar. For his part, the new Fed chairman managed to get through his first HumphreyHawkins testimony, as the ritual is known, without making any blunders and, in fact, winning some praise from market participants and analysts for his straightforward presentation. Bernanke: Straightforward presentation —Gordon Platt

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KIRCHNER’S SUCCESS CONFOUNDS HIS CRITICS fter being regarded as the scourge of the international financial community when he completed the largest-ever sovereign debt restructure—a more than $100 billion deal with somewhat draconian haircuts—Argentine president Nestor Kirchner is redeeming himself. Investors can hardly ignore Argentina’s recovery, with GDP expanding by 9.1% in 2005—the fastest growth rate in 13 years. Last year marked the third consecutive year of growth above 8%, following a fouryear recession unleashed by the 2001 $95 billion debt default that produced a 10.9% GDP contraction in 2002. Last year’s strong showing was

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fueled by a 21% increase in government spending, an average 20.3% wage hike that sparked domestic demand, and record exports of $40 billion (versus $26 billion in 2002). The economy is expected to expand by 6.5% in 2006. In fact, some analysts are concerned that the economy is perhaps overheating. Inflation remains worrisome, hitting 12.3% last December—the highest jump since May 2003—and 12.1% in January 2006, compared with 7.2% a year earlier.While economists argue that increased investments will serve to thwart inflation, which should end the year closer to 10%, economy minister Felisa Miceli has

negotiated temporary price controls with key retailers. Kirchner, one of the leaders of Latin America’s “pink tide” of left-leaning regimes, was happy to rid Argentina of IMF controls by prepaying its $9.8 billion debt to Kirchner: Making new friends the multilateral.The former three-term governor So far, his compatriots are of Santa Cruz province is also standing firmly behind their proud of the drop in leader. Recent polls show unemployment from a peak Kirchner enjoyed a 75% of 25% in 2002 to 10% in approval rating in February, January this year. He hopes to making him one of Latin bring joblessness below 10% America’s most popular next year. He reports poverty leaders. He now needs to get rates also fell to 34% in 2005 investors back onto his from 57.5% when he took bandwagon. office in May 2003. —Antonio Guerrero

UNITED STATES

‘TRIAL OF THE CENTURY’ BEGINS WITH EMPTY SEATS he landmark trial of Jeffrey Skilling, Enron’s former chief executive, and Kenneth Lay, its former chairman, could have a widespread effect on corporate governance in America and the confidence of investors in financial markets. One would Ken Lay arriving at the courthouse never know the stakes were so high, however, judging by the empty seats in the courtroom when the Enron trial finally opened, more than four years after the company collapsed in December 2001, destroying thousands of jobs after it was revealed that an estimated $40 billion in debts had been hidden in secret accounts. The Houston courtroom of US District Judge Sim Lake was seldom more than three-quarters full in February, and the trial is expected to run well into May.

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The case may yet grab the attention of the American public, however, once the government’s star witness, Andrew Fastow, former chief financial officer and the architect of Enron’s off-thebooks partnerships, takes the stand. Television ratings will surely rise if Skilling and Lay testify in their own defense, as they say they will, to prove their innocence. One of the early witnesses, Ken Rice, former CEO of Enron Broadband Services, said that he had lied to Wall Street analysts, his employees and the company’s board about how the EBS business was faring. “I knew that Mr. Skilling and I had misled investors on a number of occasions about the prospects of our business at EBS,” he said under cross-examination. Skilling is facing 31 charges, including conspiracy and fraud. Lay, once one of Houston’s most respected philanthropists, is facing seven charges. Skilling and Lay are expected to testify that they truly believed that Enron’s prospects were as bright as they portrayed them, even when the company was on the brink of disaster. The prosecution could have a difficult time of proving the defendants were lying, especially when they are forced to rely on witnesses who admit they were lying as well. —GP

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“SOUTH-SOUTH” FDI FLOWS GROWING

ECONOMY BOOMS AS JAPANESE SHOPPERS LOOSEN PURSE STRINGS

ndia’s Tata group was putting the final touches on a proposed $2.5 billion investment in power, steel, fertilizer and coal projects in Bangladesh as Global Finance went to press.The company warned that it may move the projects elsewhere if its terms are not accepted, but regardless of the outcome, the proposed deal highlights a growing trend in foreign direct investment in emerging markets. An increasing share of the FDI is coming from countries in other emerging markets, often neighboring nations. So-called south-south FDI now accounts for one-third of all FDI going to developing countries and is growing much faster than north-south FDI, according to a study by Dilek Aykut and Joseph Battat of the World Bank.This is good news, they say, because

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south-south FDI typically reaches very poor and remote developing countries. Multinational companies based in emerging markets are more familiar with the oftendifficult local conditions and practices.They also like to invest close to home, although some of the larger multinationals from the south have become global and have made significant south-north investments. Mexico’s Cemex, for example, acquired British construction-materials company RMC last year in a $4.1 billion cash transaction that included the assumption of debt. Overall FDI flows to developing countries continued to rise in 2005, gaining 13% to a record $274 billion, according to UNCTAD data released in January. For the first time since 1999, however, FDI to China, the largest recipient of any developing country, did not increase. FDI to South Korea and Malaysia fell last year. In Latin America, such major economies as Mexico, Brazil and Chile all registered smaller inflows of FDI than in 2004. In Russia, FDI more than doubled, however, to $26 billion last year, as high oil prices stimulated inward investment. —Gordon Platt

apanese consumers, known for their tight-fisted s p e n d i n g habits, are finally beginning to loosen up. This change in behavior could be a blessing, not only for the deflation-ravaged Japanese e co n o my, b u t fo r J a p a n’s neighbors and t ra d i n g p a r t The urge to splurge: Demand is on the rise ners as well. Japan’s economy, the second largest in the world, grew at an annual 5.5% rate in the fourth quarter of 2005, thanks largely to the revival in consumer demand. That was five times higher than the 1.1% annualized rate of growth in the US economy in the same period and three times higher than GDP growth in the eurozone in the fourth quarter. Japan’s GDP deflator was softer than expected in the final three month of last year, however, declining at a 1.6% year-over-year rate, and most likely delaying the end of the Bank of Japan’s zero interest rate policy. “No wonder the yen didn’t know which way to turn,” says Charles Dumas, chief economist at London-based Lombard Street Res e a rc h . “ T h e e c o n o m y i s b o o m i n g a n d d e f l a t i o n intensifies!” The quarterly growth rate of Japan’s GDP has risen 4.5% over four quarters, making up for the 2004 slowdown, Dumas says. This pickup in growth was not thwarted by the Chinese domestic demand and import slowdown in early 2005, which for a while held back Japan’s net exports. Later in 2005, the US boom took over as the dominant factor for net exports, but the chief force for Japan’s GDP growth has been domestic demand, according to Dumas. Japanese consumer confidence is at a 15-year high. The current acceleration in the US economy could mean that Japan’s GDP will grow even faster in the first and second quarters of 2006, Dumas says. Now, if only Americans can learn to save more, while the Japanese spend more, global imbalances could begin to correct themselves. —GP

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PRIVATE EQUITY INVESTING IN INDIA SHIFTS INTO HIGH GEAR ndian technology companies have long been in demand from private equity investors, but now that demand has enveloped sectors ranging from retail to real estate. In addition, global investment structures are emerging in the private equity drive that show the market is both maturing and getting stronger. First, New York-based Coller Capital, which specializes in the global private equity secondaries market, has carried out what is considered to be the first secondaries transaction in the Indian private equity/venture capital space by buying assets being liquidated from ICICI Ventures-managed Advantage Fund I. Coller has reportedly committed $35

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million. Second,Thomas Weisel Partners Group, a San Francisco-based private equity firm, has created a $300 million US-based fund of funds for venture capital and private equity going into India. It is thought to be the first such fund. Both these developments underscore the serious interest that global investors have in the Indian market and the fact that private equity flows are now moving into higher gear, with greater liquidity being created for long-term institutional players. So far, a lot of the private equity flows into India have come either from corporations looking to invest in new technologies pertaining to their sectors or from large funds that

have a diversified global base and adequate resources to enable a plunge into India. Companies such as Cisco, Intel and AMD have committed huge resources for private equity in India. Now the evidence is that smaller and more specialized deal shops are getting in on the act. One of the largest private equity investments into India came from Warburg Pincus, which invested more than $1.1 billion in Indian companies. One of its earliest investments, a $300 million investment in Bharti Televentures, made between 1999 and 2001, was a huge success.Warburg sold twothirds of its investments for a

total of $1.1 billion, including a single block sale of $560 million in the first quarter of 2005. Private equity successes like Bharti Televentures have prompted other large private equity groups such as Carlyle and Blackstone to commit to India, while Citigroup Venture Capital (CVC), which is also one of the larger funds active in India, has decided to look for larger deals compared to the smaller-size deals it did in the past. —Aaron Chaze

RUSSIA

RZB BUILDS PRESENCE IN RUSSIA Raiffeisen International’s expansion strategy in CEE stepped up a gear in February with its acquisition of Russian retail bank Impexbank for $550 million, making it the largest foreignowned banking group in Russia. Impexbank, which is owned by seven Russian companies and has ¤1.2 billion in assets, boasts an extensive retail network encompassing 190 branches. The acquisition, which is still to be approved by the central bank of Russia, will allow Raiffeisen to expand its presence in the region without further investment in its own branch network. Describing the deal as commercially and

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strategically valuable, Raiffeisen International’s CFO Martin Grüll said that it would save a minimum of four years versus organic development of its own branches in Russia. The Austrian bank also hopes to capitalize on growing demand for banking services among private individuals and SMEs in Russia. The purchase price of $550 million will be paid in two tranches, with the first amount of $500 million payable upon presentation of the bank’s 2005 audited financial results. Combined, Raiffeisen International and Impexbank will constitute the seventh-largest bank in Russia. Further consolidation is needed in Russia’s overcrowded banking sector, which comprises 1,500 institutions. Raiffeisen has operated in the Russian market via its ZAO Raiffeisenbank Austria subsidiary since 1997 and has a strong track record in the country as an arranger of syndicated loans. Impexbank is the ninth acquisition for the Austrian banking group since 2000. Six months ago it also acquired Bank Aval in the Ukraine. –Anita Hawser

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The Reporting Dilemma Solved With Increased Regulations and Growing Competition Can Technology Help Close The Gap? aced with increased regulations, demanding ACCESSsm portal.The VIEWS platform enables clients and intense competition, financial clients to integrate external market data with executives are turning to technology to help JPMorgan’s extensive databases to develop them keep pace with ever growing requirements sophisticated long range cash forecasts over an to report activities and monitor and enhance unlimited timeline. performance. “Executives indicated that they are looking for To meet this need, JPMorgan Worldwide superior technology, combined with a Securities Services conducted performance measurement extensive research with its and analytics reporting system. clients—some of the largest and The VIEWS tool helps our most influential banks, money clients achieve greater management firms, insurance efficiencies when dealing with companies and pension funds their own clients,” Baker in the world—to discuss Balady said. technological innovations that JPMorgan VIEWS also saves would give them the best time by providing the critical competitive edge. high quality of reporting “As part of our ongoing needed to present directly to commitment to help clients be directors. more successful, we wanted to “JPMorgan VIEWS features hear first hand what would advanced multi-tiered make a real difference to their technology that allows businesses.They told us they extensive customization of want a powerful, advanced client reporting, including Mary Baker Balady, Global head of Custody more extensive risk system for reporting custody, fund accounting, securities calculations, broader lending and for monitoring compliance and performance and attribution calculations. In performance. And they want a system that is addition to the technology, executives also gain comprehensive, easy to use, has real-time the benefit of having some of the most information with reports that are fully knowledgeable financial professionals in the customizable,” said Mary Baker Balady, Global global marketplace help interpret and analyze head of Custody at JPMorgan WSS. their data,” added Baker Balady. Executives say they want a single system that The Performance Measurement system provides easy access to, and integrates data across provides extensive analytics and risk models multiple disciplines.They want to be able to including Atlas, Axiom, BARRA, BlackRock, look at a full history of millions of issues and Bloomberg, Compass, Risk Metrics and Zephyr, multiple public indices. Ideally, the same system as well as proprietary attribution and universe would support the creation of clienttools. It is supported by a large team of customizable investment ledger and cash professionals with extensive plan sponsor and forecasting reporting, and provide a link to portfolio management experience. performance measurement. JPMorgan Worldwide Securities Services In response to this growing demand, understands the rapidly changing regulatory JPMorgan Worldwide Securities Services is in environment and has developed its suite of the process of rolling out multiple phases of intelligent reporting tools to provide financial JPMorgan VIEWS, its advanced investment executives with improved real-time access to reporting system, available via the JPMorgan highly accurate data. ■

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STATE TAKES AIM AT THE WEALTH GAP

AIRPORT PRIVATIZATION FINALLY ON THE RUNWAY

tate-owned Bank of China (BOC) has yet to set a date for its initial public offering as it reportedly debates a possible dual listing in the Hong Kong and the domestic A-share markets.The eagerly anticipated IPO was originally planned for Hong Kong in the first quarter of 2006. Concerns over China’s struggling domestic stock markets, however, have strengthened calls for Chinese companies to list on domestic as well as foreign stock markets. China’s other IPO hopefuls are adjusting their strategies as they try to avoid listing at the same time as BOC or the Industrial and Commercial Bank of China (ICBC), China’s largest state-owned bank, which will probably list late this year. While foreign investors are salivating over the profits they hope to make on such deals, many in China itself will find little reason to cheer when the banks hit the market. A State

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Development and Reform Commission (SDRC) report cited by state-controlled Xinhua news agency reveals that China’s urban income gap has reached “an unreasonable and alarming level.”The report says the lowest-paid 20% of urban workers garnered only 2.75% of the country’s total urban income, or just one 20th of the amount paid to the country’s highest-paid 20%. In response to income disparity concerns, policy makers have scrapped agricultural taxes and raised the minimum threshold for income taxes. Further measures are planned. China has stepped up efforts to fight pollution after a series of recent accidents, including a November chemical spill that released 100 tons of toxins into the Songhua River in northeastern China.The State Environmental Protection Agency (SEPA) has threatened criminal consequences for officials who do not report chemical spills and other environmental accidents within one hour of their occurrence. According to Xinhua, 70% of China’s rivers and lakes are polluted, and more than 300 million people in rural areas do not have adequate clean water supplies. —Thomas Clouse

Policymakers finally approved the privatization of two major airports in early February—those of Mumbai and New Delhi. This was a long-awaited and contentious development that the labor unions and the government’s communist allies had sworn to oppose. A consortium led by Indian conglomerate the GMR Group and including German airport operator Fraport won the New Delhi airport, while Strikers block the road into another consortium led by InNew Delhi’s airport dia’s GVK Industries and including the Airports Company of South Africa won Mumbai. Even though the airport employees went on strike almost immediately over the fear of job losses, the government has refused to back down and says that the deal is irreversible. The privatization deal includes provisions for the expansion, modernization and management of both airports. Confidence has increased not only at the government level but at the corporate level as well. Two leading Indian generic pharmaceutical companies are reportedly vying for control of Betapharm Arzneimittel, Germany’s fourth-largest generic drug maker. Ranbaxy Laboratories, India’s largest generics maker, with $1.2 billion in revenues, bid ¤500 million ($593 million), while Dr. Reddy’s Laboratories bid ¤450 million. The British parent company of Betapharm put the business up for sale several months ago, and other firms, including Teva of Israel, have reportedly put in bids, too. Indian generic drug makers have been on an acquisition spree of European and US generic companies for the past few years, and the volume and size of deals have been steadily increasing. Ranbaxy, for example, has received approvals from shareholders to raise up to $1.5 billion for acquisitions. The key Indian stock index, the BSE Sensitive, continues to rise, topping 10,000 for the first time ever. The market has been building up momentum steadily for months, backed by significant buying from foreign institutional investors. Foreign investors have been pumping almost $1.5 billion a month into Indian equities, driving prices higher. —Aaron Chaze

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BRADY BONDS BUYBACK BONANZA aking advantage of high international reserves of nearly $57 billion and strong international liquidity, the Brazilian National Treasury launched a program in January to buy back its outstanding Brady bonds as well as other short-term government instruments maturing before 2010. An estimated $16 billion to $20 billion worth of government securities fit the profile. The program, which will run through the end of the year and will be managed by the central bank, aims to improve Brazil’s debt profile. The government is dipping into its reserves to fund the program. Authorities announced that they had already bought back an

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estimated $2.3 billion worth of debt on the secondary market by mid-February. The amount could soar if a government proposal to exempt foreigners from a 15% tax on securities trading is approved.While the government contends the measure would attract investors and improve the country’s debt profile, both of which could bode well for the sovereign’s much-awaited upgrade to investment grade, exporters are concerned that strong dollar inflows could further strengthen the real and dampen competitiveness. After posting a $44.7 billion trade surplus in 2005—its largest ever—Brazil is concerned over the pace at which imports are growing,

particularly from China. Both countries signed an agreement in February by which Brazil will limit the amount of textiles it imports from China through 2008. Brazilian imports of Chinese textiles jumped by 35% in terms of volume (43% in terms of value) year-on-year in 2005, having already jumped by 98% in volume (65% in value) in 2004. Brazil’s companies are enjoying increased credibility as a growing number achieve investment-grade status. In February Aracruz Celulose, a major paper producer, became the eighth Brazilian company to receive an investment-grade rating, this time from Moody’s.The rating agency already rates oil giant

Petrobras, mining company CVRD, paper company Aracruz and airplane manufacturer Embraer as investment grade. Standard & Poor’s rated Votorantim Celulose e Papel (VCP), one of Latin America’s largest paper producers, as investment grade in early February, after granting similar recognition to Grupo Votorantim, the industrial conglomerate that controls VCP, and to the local operations of mining multinational Alcoa. Fitch and S&P both rate AmBev, Brazil’s largest bottler, as investment grade. Companies expect the upgrades will attract institutional investors, particularly international pension funds. —Antonio Guerrero

RUSSIA

KREMLIN CONTINUES TO TIGHTEN GRIP umors circulated that metals giant Norilsk Nickel has discussed merging with state-owned diamonds giant Alrosa, suggesting that the Kremlin is accelerating its drive to control key sectors of the economy. Meanwhile, the management of RusAvtoVAZ’s joint venture with GM is on the rocks sia’s largest automaker, AvtoVAZ, was taken over by a state agency. There is now intense speculation that the AvtoVAZ joint venture with the US’s General Motors will collapse. The government is also slated soon to release the details of its anticipated consolidation of the aerospace industry, which will increase Kremlin control over the sector. Russian president Vladimir Putin tacitly admits that he is concentrating power in the Kremlin, and in what has become an annual January marathon news conference he contended that Russia “needs strong presidential rule” and said that voters—

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and not him—would decide who would succeed him as president in 2008. He denied reports that he would move on to head Gazprom after leaving the Kremlin. Investors have continued to have a sanguine view of potential succession problems, bidding up the Russian stock market to new highs, with shares gaining close to 20% in 2006 through mid-February. Russia’s efforts to nudge Iran away from the brink of confrontation with the West over its nuclear development program looked likely to fail. A high-risk effort to broker talks with Hamas further symbolizes Russia’s intensifying efforts to translate its growing status as a global energy power into political heft. Russia was also demonstrating political heft of another kind last month. Following the New Year’s cutoff by Russia of natural gas supplies to Ukraine (and thus much of Europe) due to a price dispute, the two countries finalized a compromise. Under the terms of the deal, the price paid by Ukraine is roughly doubled, with a shady middleman company of partly indeterminate ownership collecting much of the windfall. Putin resisted pressure from the G-8, which Russia currently heads, to liberalize his country’s gas market. —Kim Iskyan

EMERGING MARKETS

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PRIVATE CAPITAL FLOWS MAY DECLINE

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rivate capital flows to emerging markets rose to a record net $358 billion in 2005, an increase of $40 billion from a year earlier and well above the previous record of $324 billion in 1996, according to the Washington, DC-based Institute of International Finance.While such flows are expected to continue to be strong in 2006, the net total likely will slip to about $322 billion, the IIF says. Favorable global growth, high levels of liquidity and the search for yield by investors supported the 2005 flows, the institute says. Pre-financing of debt coming due in 2006 by many emerging-market countries contributed to the

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advance. Given the prefinancing, the IIF anticipates that net new bond flows from non-bank investors will decline to about $68 billion this year from $83 billion in 2005. Josef Ackermann, IIF chairman, says emergingmarket countries have improved economic policy management in recent years, which has led to greater growth, lower inflation and lower ratios of public debt to gross domestic product. William Rhodes, the IIF’s first vice chairman, says investors will need to be especially cautious and pay close attention to economic fundamentals as the global liquidity environment changes and interest rates potentially rise. —Gordon Platt

COMPANY TO WATCH: RELIANCE INDUSTRIES/INDIA

REVAMPED RELIANCE RUSHES INTO RETAIL umbai-based Reliance Industries, India’s largest private-sector company, has spun off its power, telecom, financial services and natural resources units to settle a feud in the Ambani family, which holds a 34% stake.The petrochemicals and energy

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conglomerate is led by Mukesh Ambani, the elder son of Dhirubhai Ambani, who built up the group by keeping costs and prices low to increase volume. Dhirubhai died intestate in July 2002, leaving Mukesh and his younger brother Anil to fight for control

oreign companies that list their shares on US as well as domestic exchanges, known as cross-listing, enjoy sustained higher market valuations, a recent study shows. The study found that global investors were more confident when non-US companies bond to US capital markets and submit to US laws and regulations. The study, which covered the period from 1997 through 2004, was carried out by Craig Doidge, an assistant professor of finance at the University of Toronto, and G. Andrew Karolyi and René Stulz, professors at Ohio State University. It was prepared in conjunction with an academic research agreement with the New York Stock Exchange. The cross-listing premium averaged 13.9% over firms that listed only in their home markets and was 31.2% for foreign companies SWITZERLAND, GERMANY, UNITED STATES that listed on the NYSE or Nasdaq. The premium was concentrated in the fastest-growing companies and especially among those from countries with relatively poorer financial institutions and less-developed economies. A recent study by Citigroup of 367 non-US companies that have cross-listed their shares in the US or London using depositary receipts found that there was a performance advantage for liquid DRs—those that had the highest dollar value of trading. The study found that those companies in the most-liquid quartile had on average 46% higher valuation as measured by price-to-book value and a higher proportion of their global trading in DR form. “These findings suggest that…cross-listed companies that take steps to increase their DR liquidity through improved investor relations and strong corporate governance can achieve even higher valuations,” says Nancy Lissemore, head of depositary receipt services for Citigroup. —GP

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of Reliance’s multi-billiondollar businesses. Mukesh and Anil buried the hatchet last year in a deal brokered by their mother. Mukesh was left in charge of the core assets of Reliance, including its oil exploration, refining, petrochemicals and textiles businesses.Anil will lead the units being de-merged. Reliance, which owns the world’s third-largest oil refinery, is expanding into retail gasoline

sales and already has 1,000 gas stations along India’s newly constructed highways. The company is preparing to move deeper into the retail sector by creating huge shopping and entertainment malls to cater to India’s growing ranks of middle-class shoppers.As the government studies a proposal to allow overseas ownership in the retail sector, Reliance is making an early move. —GP

COVER STORY EXECUTIVE COMPENSATION

BY GORDON PLATT

GOING FOR GOLD Mergers inflate golden parachutes as payouts to CEOs of target companies soar.

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rising tide of mergers and acquisitions in 2005, led by Procter & Gamble’s $57 billion purchase of Gillette, is expected to continue in 2006, triggering huge payouts to chief executives of target companies, say compensation consultants and analysts. James Kilts, CEO of Gillette, pocketed $165 million in stock options and severance pay as a result of the sale of the Boston-based razor maker to P&G last year. In addition, the Cincinnatibased consumer products company agreed to pay Kilts $23 million, including stock and options, to serve as vice chairman for one year and for agreeing not to join a competitor before 2009. That brought the Kilts exit package, or golden parachute, to $188 million. Another instance that grabbed headlines—and raised hackles among shareholders— was Bruce Hammonds, chief executive of MBNA, who was given more than $100 million in restricted stock and stock options by the Delaware-based credit-card company, which was acquired by Bank of America, effective January 1, 2006. Hammonds became president of Bank of America Card Services. Not only are golden parachutes getting bigger, but they also are becoming commonplace, says Don Delves, president of Chicago-based Delves Group, a consulting firm specializing in corporate governance and executive com-

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Costelloe (left) says CEOs should be paid for performance. Delves (right) questions if big payouts are necessary.

pensation. These change-of-control provisions, which kick in when a company is bought or sold, have become a standard clause in executive contracts, he notes. “It is accepted dogma that CEOs should receive three times their annual salary and bonus and immediate vesting of their stock options if there is a takeover,” he says.“I question whether such big payouts are necessary just to keep someone from leaving.”

The Price of Protection According to Delves, the reason most often given by corporate boards for approving such cushy compensation agreements is to protect the shareholders. “This rationale is in direct opposition to the truth,” he says.These agreements are ver y expensive to shareholders, and the payouts influence whether a deal gets done and the price

a company can realize in a takeover, Delves says. “Normal severance provisions are usually 1.5 to two times salary and bonus, so why should payouts be three times normal compensation in the case of a merger?” Delves asks. “If a CEO is that good, why does he need to be paid three times his pay while he looks for a new job?” Kilts cashed in on his exit agreement with Gillette only five years after getting $70 million in connection with the sale of Nabisco to Philip Morris, now Altria. Originally introduced as poison pills to thwart takeover attempts in the 1980s, golden parachutes, also known as golden handshakes, are now more commonly used to attract and retain executive talent. CEOs taking on risky tur naround challenges, in particular, are demanding and getting large amounts of restr icted stock and

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non-cash compensation in the event there is a change in control of the company. As a result, golden parachutes are getting bigger and the landings for CEOs are getting softer. Executive compensation consultants say that each situation is different and that it is never easy to say how much reward is justified for a CEO who helps create billions of dollars in shareholder value, often by restructuring a company and firing workers.

“You have to peel back the onion,” says Doug Friske, a managing principal in the Chicago office of Towers Perrin, who is responsible for the US central region executive compensation and rewards practice. “Some CEOs have held the same job for long enough to accumulate sizable stock holdings, and stock prices have risen,” he says. Major corporations in general have increased long-term incentives an part of a trend toward pay for performance, he notes. The goal is to introduce more objectivity into decision-making. “I would hope that these parachute agreements help to focus the CEO’s thinking on maximizing shareholder value, which is directly aligned with the interests of shareholders,” Friske says. Ultimately, a company’s board is responsible for deciding whether or not a deal gets done, and not the CEO, he says. Performance-based pay as a share of

HOW BIG IS YOUR PARACHUTE? ollowing are some of the biggest exit agreements paid out in the past several years. Many other chief executives have negotiated similar promises that will have to be paid if their company is taken over or there is a change in control.

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RICHARD A. GRASSO, former chairman and CEO of the New York Stock Exchange, was forced to quit in September 2003 after it was revealed that he received a lump-sum payment of $139.5 million. He says the exchange still owes him about $50 million.

JAMES M. KILTS, former CEO of Gillette, received $165 million in stock options and severance pay when Procter & Gamble acquired the shaving-products company last year. He also got options worth $23 million to stay on as vice chairman of the combined firm for one year. This was his second golden parachute. Five years earlier he received $70 million in connection with the sale of Nabisco to Philip Morris, now Altria. WALLACE D. MALONE JR., former CEO of SouthTrust Bank, received a golden parachute of about $135 million when he retired as vice chairman of Wachovia in January 2006. Wachovia acquired Alabama-based SouthTrust in November 2004. Malone also holds about $473 million of Wachovia stock from the sale of SouthTrust. PHILIP PURCELL, former CEO of Morgan Stanley, retired after a struggle for control of the firm last year and walked away following a $113.7 million golden handshake. In addition to giving him an office and secretarial expenses for the rest of his life, Morgan Stanley will make $250,000 in charitable donations a year in Purcell’s name. BRUCE L. HAMMONDS, former CEO of MBNA, was given more than $100 million in restricted stock and options when Bank of America acquired the credit card company, effective January 1, 2006. He became president of Bank of America Card Services.

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total remuneration for CEOs worldwide ranges from 14% in India to 62% in the United States, according to a study released by Towers Perrin in January.The size and frequency of stock and other long-term incentives is increasing in most parts of the world.While CEOs in the US have the largest pay packages, the gap with Europe is narrowing. Meanwhile,Asian countries such as Singapore, Malaysia, Taiwan and China are offering annual bonuses of 10% to 15% of salary for professionals, which is above the 5% to 10% of salary that bonuses average in North America and Europe, the Towers Perrin study found. “The US is a more dynamic market in terms of executive-search firms,” Friske says,“and CEO turnover is higher in the US than elsewhere.”The average tenure for the CEO of a major US company is about three years. When companies in different countries are battling for similar types of executives, the price tends to go up, says Edward Hauder, Chicago-based principal in the compensation consulting practice of Buck Consultants. “A properly defined change-of-control agreement is an incentive for top-of-house officers to consider a takeover bid,” he says. “It makes them neutral to a proposed acquisition.” Announced global mergers and acquisitions increased by 38.4% to $2.7 trillion in 2005, which was the mostactive year for global M&A since 2000, according to Thomson Financial. Many of the forces that spurred a rise in mergers last year remain in place, including large pools of private equity, relatively easy access to capital and demand for energy assets.

Control Issues Change-of-control agreements didn’t go away during the lull in M&A, says Friske of Towers Perrin. “The golden parachutes have been there since the dot-com era. They are fairly standard across US companies.” Many of these agreements don’t get much attention or

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publicity, however, until after a takeover is completed. That could be about to change, however, under new disclosure rules proposed by the Securities and Exchange Commission that would require companies to spell out total pay and benefits, including stock options and pensions, for top executives. For the first time, companies will have to make a calculation of the value of parachute awards, most likely effective with the 2007 proxy season. “All board members will be far more attuned in the future to what the payments will be,” says Ann Costelloe, leader of Watson Wyatt Worldwide’s San

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Francisco-based executive compensation practice.“But good executive leadership is not easy to find, and CEOs should be paid commensurately with their skills,” she says. Increased disclosure of large exit agreements could tend to increase compensation further, Costelloe says, citing the me-too effect. “But the greater influence on the size of these agreements is the market for talent and the link of pay and performance,” she says. Institutional investors don’t like golden parachutes because they fear that a CEO could be induced to sell a company at a price that is too low, Costelloe says.A survey last year by Pearl Meyer &

SEC SHINES SPOTLIGHT ON EXECUTIVE PAY AND PERKS s his first major initiative as chairman of the US Securities and Exchange Commission, Christopher Cox on January 17, 2006, unveiled proposed new rules that will require companies to clearly report pay and benefits, including stock options and golden parachutes, for their top five executives and all directors. The agency said it is trying to help investors see how much of the money they invest in corporations is being paid to top executives. “Companies will have to make a calculation of what the parachute payment will be,” says Don Delves, president of the Delves Group, a Chicago-based consulting firm. “This has never been disclosed before,” he says.

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Compliance with the quantification requirement could be difficult and confusing, according to corporate lawyers. Companies would be required to make assumptions about the dates of an employment termination or proposed transaction in order to calculate change-in-control payments. They also would have to estimate the price of the transaction or stock price at the time of termination and consider potentially complex future tax positions of the executives, according to a memorandum by Wachtell, Lipton, Rosen & Katz. The new rules for company proxy statements, which likely will be adopted this spring following a 60day comment period, would require companies to explain in plain English how they arrived at a total compensation figure, including equity holdings, pensions and post-employment arrangements. The Compensation Committee Report will be replaced by a new compensation discussion and analysis section in the proxy statement. A summary table will list a total annual compensation figure, salary and bonus, stock-based awards, long-term incentive cash payouts and other compensation. The latter category will include all perks with a value of more than $10,000, instead of $50,000 under current rules. Supporting tables and narrative will describe how specific compensation levels are determined. A second set of tables will elaborate on outstanding equity awards and vesting terms. If adopted, the new rules would be effective with the 2007 proxy season. Analysts say that while increased disclosure is a necessary first step, it won’t put a cap on rising executive compensation. Boards may take a longer and harder look at the whole issue of accounting for the expense of stock options, however, while shareholders will remain worried about the potential dilution of their holdings. In a survey of institutional investors last year, Pearl Meyer & Partners said nearly 80% of respondents regularly consider dilution in making decisions on whether to buy or sell a stock. Executive stock ownership and corporate governance were cited by about 65% of those surveyed as being important investment criteria. The proposed new pay-disclosure rules would not apply to non-US companies that register with the SEC to sell securities in the United States. They would require that a US company disclose whether each director or nominee is independent and describe any relationships that were considered in making such a determination. Companies also would have to disclose audit, nominating and compensation committee ——GP members who are not independent.

COVER STORY

Par tners, New Yorkbased compensation consultants, found that institutional investors say CEOs of major US companies are overpaid and that golden parachutes serve no useful corporate purpose. Threequarters of the respondents at 88 major institutional investors said compensation for CEOs was too high, and not one thought CEOs were underpaid.

The View From Europe While executive compensation and golden handshakes are smaller in Europe than in the US, they have been making headlines in Germany. In December the German Supreme Court, or Bundesger ichtshof, ordered a retr ial of Deutsche Bank CEO Josef Ackermann and five co-defendants for approving a

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total of about $68 million of payments following the MannesmannVodafone takeover battle in 2000. Deutsche Bank, Ger many’s biggest bank, extended Ackermann’s contract on February 1, 2006, through the end of the bank’s annual shareholders meeting in 2010. Ackermann, one of Germany’s highest-paid executives, has boosted the bank’s profit, in part by slashing thousands of jobs. While German companies are not required to publish details of executive compensation, a few disclose pay packages voluntarily under the Cromme Code, which was drawn up in 2002. The United Kingdom, which allows shareholders to make non-binding votes on remuneration policies at annual meetings, has the highest executive pay levels in Europe. Investors are essentially powerless to rein in billowing parachute agreements, says Delves of Chicago’s Delves Group. “The main power investors have is to decide not to buy the company’s stock,”

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he says. “In order for the birth of real corporate democracy, there will have to be vastly more profound changes than simply disclosing executive compensation,” he says. “The real underlying problem in executive pay is that shareholders can’t replace a bad management team,” according to Delves. It is not uncommon for CEOs to sit on compensation committees as directors of other companies, setting the pay of other CEOs. Executive pay consultants say the practice is helpful because these CEOs understand the requirements of the job. A study last year by professors at the Wharton School of the University of Pennsylvania, Stanford University and Canada’s Simon Fraser University found, however, that CEOs with strong links to directors received substantially higher pay, often hundreds of thousands of dollars more. Meanwhile, it remains very difficult for shareholders to remove directors who approve outsized benefit and compensation packages, or to gain access to the proxy to nominate board candidates in time for the annual meeting. As the 2006 proxy season unfolds, US shareholder resolutions seeking a majority vote on the election of directors will be one of the most hotly contested issues, says Hauder of Buck Consultants. Between 120 and 150 such resolutions will be filed this year, he says. Under the majority-vote system, an incumbent director who doesn’t receive the required majority for re-election will be required to resign. US computer maker Dell and chipmaker Intel both announced in January that their boards adopted a majority-vote standard for the election of directors in uncontested elections. Office Depot, Aetna and Honeywell adopted the majority-vote standard last year. These companies could be in the vanguard of a growing movement to make directors more accountable to shareholders.Whether that increased accountability will lead to lower pay remains to be seen. ■

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SECTOR FOCUS LEVERAGED LOANS

BY LAURENCE NEVILLE

A Borrower’s Market Yield-hungry investors are piling into a market that offers high returns, reduced risks and a degree of inflation protection.

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he success of the leveraged $100 billion in new issuance in 2005. package for the $15.1 billion leveraged loan market in 2005, when “The preponderance of large deals buyout of vehicle-rental company lending exceeded $500 bilwas one of the most notable elements in Hertz Corporation also demonstrated lion for the first time ever, has brought the record volumes of 2005,” says Dan the huge capacity of the market to abit to the attention of the broader fiToscano, head of loan syndication, sorb new issues. nancial community. Many observers Americas, at Deutsche Bank in New Bankers say so many investors are have declared that leveraged loans are York. “The market now has the depth lining up to invest in the leveraged now a mainstream product, and some to absorb a number of huge deals; there loan market that it is hard to imagine have talked of leveraged loans usurpwere 32 deals of over $1 billion last what size of deal would be prohibitive ing the high-yield bond market as a year, compared to 20 in the prior year. to success. “One of the primary probfinancing tool. That simply wouldn’t have been possilems we have is the number of inWhile the leveraged loan market— ble in the past.” vestors that want to be in this market,” essentially shorthand for below-inAmong the mammoth deals of 2005 says Tom Newberry, head of the syndivestment-grade loans with most iswas the $4 billion institutional-investorcated loan group at Credit Suisse in suer s being single- or double-B targeted loan for financial information New York. “Every week we have new rated—may have only begun garnercompany SunGard Data Systems in a people calling up to tell us they’ve ening headlines in recent years, it is a leveraged buyout worth $12 billion in tered the market and would like to be well-established market. It became a July. In December the $3.85 billion loan allocated paper.” significant product as early as the mid-1990s, and Expanding Issuer and use has g rown steadily Investor Requirements Issuance in the leveraged since then. loan market comes roughly But a combination of equally from two main factors—including strong sources: corporates and fimergers and acquisitions nancial sponsor activity. Isvolumes, increased private suance derived from finanequity activity and a cial sponsors—used to take growing appetite among a company private, coninstitutional investors— duct a leveraged buyout or combined to significantly finance a dividend to increase volume in 2005. shareholders—has inObservers estimate that creased sharply in recent the market was wor th years and helped to drive $570 billion in 2005 change in the market.“The compared to around $480 Dan Toscano (left): “The market now has the depth to absorb a private equity community billion in 2004. In connumber of huge deals.” Andy O’Brien (right): “Leveraged loans has a great deal of money trast, the high-yield marsimply add to the choices available.” to put to work in acquisiket generated less than

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tions, and therefore their requirement for loans is expected to grow,” says Newberry. Corporate borrowers, which use the leveraged loan market for a variety of reasons—including funding acquisitions, capital expenditure or refinancing existing debt such as bonds—have also increased issuance as general corporate activity such as M&A has grown. “Many corporations are relatively liquid and have consequently turned their attention to expansion either organically or through M&A. That again increases appetite for leveraged lending,” Newberry explains. The increased activity in leveraged loans has led to claims that it has replaced high-yield bonds as the market of choice for capital-hungry companies or cost-conscious private equity players. But Andy O’Br ien, head of US loan syndication at JPMorgan in New York, says that it is not an either-or choice for issuers between the two markets. “They tend to be done in tandem, especially for leveraged acquisitions,” he says. “The markets offer different products for different situations, and leveraged loans simply add to the choices available.” The benign economic environment of low interest rates and low bankruptcy rates has been central to the growth of the leveraged loan market. But the massive growth of investor funds entering the market has compounded the attraction

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of the leveraged loan market for issuers by driving down costs. “This is an exceptionally issuer-friendly market, and there appear to be no signs that it will end,” says O’Brien. Investors are drawn to leveraged loans for a number of reasons. Yields in the market have become increasingly attractive on a relative basis compared to high-yield bonds. In 2005 average returns on leveraged loans were over 5% versus around 5% in the high-yield market, which carries more risk. While such performance is an anomaly—absolute returns are almost always lower in leveraged loans—it served to highlight the opportunities available in leveraged loans and brought new investors to the market.

Low Volatility, High Returns Even if the returns of leveraged loans and high-yield bonds revert to their historical levels, leveraged loans are likely to remain in favor, especially among hedge fund investors, for other reasons—principally their low volatility of the asset class compared to high-yield bonds or other debt instruments. “Low volatility creates opportunities for investors such as hedge funds to increase leverage,” explains Toscano. “It means that they can, for example, raise $100 million of equity, leverage it eight times and have $800 million worth of buying power and income-generating capacity. Even after the leverage has been serviced, it can be possible to generate returns in the mid-teens or better with this strategy.” As another banker notes: “Banks are falling over themselves to lend money to leverage investments in the loan market. If returns fall in the market, greater leverage will simply be used to get returns up to an acceptable level again. Alternatively, attention will simply be switched to the higher-yielding but more subordinated second-lien market.” Already, interest in second-lien loans, which are lower in the capital structure

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but carry a higher coupon, has soared. “People are hunting for yield, and second-lien issuance has been the beneficiary of that,” says Newberry. “While most of the early second-lien deals were sold to hedge funds, they are now frequently being sold to accounts that traditionally would have only been firstlien lenders.” At the heart of the attraction of investors to leveraged loans is the market’s resilience in tough times.“What is very striking about the leveraged loan market is the low default rate and, more importantly, the high recovery rate in the event of default versus the high-yield market,” explains O’Brien. “If we do enter a more difficult credit cycle in 2006, as some people expect, those characteristics are likely to make the leveraged loan market even more attractive for investors.” Most observers believe that the credit cycle will begin to change in 2006, although any major increase in default rates is unlikely before 2007. The normal default rate for leveraged loans is around 3%, but in recent years defaults have averaged around zero

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THE ANATOMY OF A LEVERAGED LOAN he first-lien leveraged loan market is senior secured—the top of the capital structure—and is floating rate, being priced off Libor (London Interbank Offered Rate). Loans are usually callable—pre-payable at par—and also come with covenant packages offering investors greater security. Generally, leveraged loans have maturities of up to around eight years.

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In contrast, most high-yield bonds are subordinated in the capital structure, offer little or no covenant protection and often have maturities up to 10 years. A first-lien leveraged loan is typically broken into two tranches: a pro-rata or A-term loan, which is sold largely to banks, and a B-term loan, which is bought by institutional investors. The two tranches typically are rated the same but have different yields and average life. The B tranche is usually longer in duration and constructed so institutional investors get most of their payment for the loan toward the end of the term of the loan. This simplifies their investment profile and reduces re-investment risk caused by assets maturing early. The second-lien leveraged loan market has been growing apace in recent years. These loans typically rank one or two notches behind the first lien in the capital structure—so they are more likely to be hit in the event of a default—and have higher coupons. While such instruments were used primarily as rescue financing in the past, the continuing reduction in borrowing costs across the board have made the secondlien market more attractive to issuers while still offering value to investors relative to first-lien loans or high-yield bonds. “The second-lien market can be used as a bond proxy for issuers that either don’t want to, or aren’t in a position to, file the financial statements required by the market,” says Tom Newberry, head of the syndicated loan group at Credit Suisse in New York. “It is also possible to do second-lien deals that are smaller than what the market will traditionally accept, and they can offer greater flexibility in terms of call structures.”

alized loan obligation [CLO] managers—buying up to 60% of these loans,” says O’Brien. CLO managers buy up leveraged loans to repackage and

“LAST TIME THERE WAS A LOW POINT IN THE CREDIT CYCLE, THE MARKET WAS NOT DOMINATED BY INSTITUTIONS BUT BY BANKS.” “Necessarily, there will be a difference this time around.” —Dan Toscano, Deutsche Bank

percent to 1.5%. “It will be interesting to see how the market reacts to the increased defaults,” says Toscano. “Last time there was a low point in the credit cycle, the market was not dominated by institutions but by banks. Necessarily, there will be a difference this time around.” “Money managers and pension fund managers are now—along with collater-

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sell as securities issued against a wide pool of loan assets of different quality. Meanwhile, another characteristic of leveraged loans that should stand the market in good stead is that they are floating-rate instruments. They should become relatively more attractive to investors as interest rates rise because fixed-rate instruments such as highyield bonds will fall in price while

floating-rate instruments will not.

Threats on the Horizon? The weight of money in the market and investors’ quest for yield continue to increase the scale of deals that the market will take and reduce the costs at which they can be financed. Nevertheless, it will be difficult to match or surpass the $570 billion issued in 2005, says O’Brien. “A lot of the money raised in 2005 was refinancing of existing leveraged loans, which will not now come due for many years,” he says.“However, there will be a continued trend toward larger deals, and activity from private equity could increase issuance further.” Toscano agrees that the growing war chest being amassed by private equity firms for leveraged takeovers means that the demand for leveraged lending to facilitate investment will be huge. “The feeling is that there are now no companies off limits for taking private,” he says. “And that can only mean a greater number of larger deals will come to market.” ■

COUNTRY FOCUS BRAZIL

BY ANTONIO GUERRERO

Lula’s Scorecard Shows Promise After enduring some stormy times, Brazil is beginning to see the results of President Lula’s careful—but sometimes controversial— economic management.

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hen Brazilians go to the polls in October to choose a president and the nation’s legislators, many may be making their selections based more on economics than political dogma. If so, President Luiz Inácio Lula da Silva, whose administration has been mired in a yearlong corruption scandal, may have a better chance at reelection. Strong international liquidity, orthodox economic policies and easing interest rates are the winning combination helping the administration overcome the political upheaval unleashed in April 2005 amid allegations that the government, whose campaign platform had centered on fighting corruption, was found to be engaged in

some questionable activities. Since then, however, Lula’s star, though tarnished, appears to be on the rise again. Lula’s approval rating plummeted from a high of 75% in March 2003 to a low of less than 30% in June 2004, amid concerns over the country’s poor economic performance. After it bounced back to 66% by February of last year as the economy recovered, the political scandal sucked the air out of Lula’s reelection aspirations. Since then, however, Brazilians appear to have shifted their attention once again to the economy and are giving Lula an approval rating above 50%—and rising. While Brazil’s economic growth slowed to 2.5% in 2005 from 4.9% in 2004, growing domestic demand should

push growth rates higher this year. In an interview at January’s World Economic Forum in Davos, Brazilian central bank governor Henrique Meirelles predicted growth would rebound to 4% in 2006, though political observers charge traditional pre-election spending could account for much of the expansion. Brazil’s recent economic growth has been fueled by soaring exports. The country posted a record $44.8 billion trade surplus in 2005—the largest in Latin America and, on a global scale, surpassed only by Russia and China. Fiscal responsibility is producing results that will extend beyond the coming election. The budget gap fell to 3.3% of GDP in 2005 from 5.2% in 2003. The government forecasts a pri-

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mary surplus of 4.25% of GDP for 2006, which Credit Suisse First Boston expects will be closer to 4.4%, compared with last year’s 4.8%. The situation could give Lula a cushion to increase spending, particularly to address infrastructure needs, without hurting fiscal accounts. Inflation, Brazil’s decades-old bogey, is also being tamed. Despite some worrisome spikes in early 2006, inflation fell from 9.3% in 2003 and 7.6% in 2004 to 5.7% in 2005. The government’s 2006 target is for 4.5%. “People may complain, but we won’t give up the fight against inflation because we know that low inflation means money to the poorest portion of the population,” says Lula, a former labor activist with a populist agenda. Unemployment, which will be a key campaign issue, dropped to 8.3% at end-2005, according to the IBGE statistics institute, for the country’s lowest joblessness rate since March 2002. Market estimates had predicted a yearend rate of 9.6%. While some critics said the low figure was the result of new methodology and the seasonal year-end rise in retail and industrial jobs, others countered that the rate only measured urban employment and excluded rural jobs, where the agricultural sector has been booming. Even skyrocketing global oil prices are unlikely to cause any lasting headaches in Brasilia. After all, the state-controlled Petrobras oil company expects to achieve self-sufficiency this year. Its output rose 12.8% year-onyear in 2005, for average production of 1.68 million barrels per day. The 2006 target is for 1.9 million barrels per day. Petrobras discovered reserves of as much as 1 billion barrels of heavy crude in the Campos Basin in Rio de Janeiro state this year, where it will begin production along with partner Chevron by 2011. The improved economic situation allowed the government to pre-pay its total $15.5 billion debt with the IMF

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in January, as well as $2.6 billion in Paris Club obligations. The move will save the government some $900 million in interest charges and will free the country from IMF-mandated policies for the first time in two decades. Brazil, which had already pre-paid another $5.1 billion to the IMF in July 2005, had been the multilateral’s largest debtor. “We repaid the money to show the world that this country has a government and it is the owner of its own nose,” said Lula after announcing the pre-payment. The government, which had chosen not to renew its IMF program in March 2005, made the pay-off by dipping into its mounting international reserves, which closed 2005 at a high $67 billion.

Rate Cuts Ahead With inflation coming under control, the central bank began easing monetary policy last September, cutting the benchmark overnight Selic rate five times through February. The rate was slashed from a two-year high of 19% in September 2005 to 17.25% in February 2006. While the rate is Brazil’s lowest since 2004, it remains one of the world’s highest, which economists

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warn may hinder sustained growth. Budget minister Paulo Bernardo expects the central bank will cut the rate below the 14.75% that economists are predicting for 2006. The rate has never fallen below 15.25% since it was introduced in 1999. “Market economists are too conservative in their bets,” says Bernardo, who believes the expected rate drop will allow the government to trim its net debt to less than 50% of GDP in 2006, compared with 51.65% at end2005. He also feels it will contribute to a decline in the budget deficit to below 3% this year. “The gradual easing of monetary policy won’t compromise the important achievements attained in combating inflation and preserving economic growth,” policymakers said in their rationale for cutting rates in January. Treasury secretary Joaquim Levy predicts average domestic bond yields may drop to near 12% this year. His outlook was based on the sale of 10year real-denominated sovereign bonds on international markets at a yield of 12.75%, while also predicting that yields will be driven further downward by foreign investors attracted to the domestic bond market. “International investors who look at

Lula: Back from the brink, he is now leading the presidential race

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what has been happening here and compare it with other countries are coming with confidence,” explains Levy.To fuel foreign interest in domestic instruments, the government in February approved an exemption on the 15% tax on income and gains on trading of government bonds by foreign investors on the domestic market. Levy says the measure should boost foreign holdings of domestic government paper from $5 billion to as much as $10 billion by next year. Brazil’s domestic bond market is Latin America’s largest, with R$1 trillion in outstanding issues. Foreigners still represent only a small portion of investors. While the government will forfeit some $100 million in annual tax revenues through the exemption, Levy

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vestment grade. Moody’s argued that a stronger real was making it easier for Brazil to service its foreign currencydenominated obligations.The following month, Standard & Poor’s revised its outlook to positive from stable. “The continued reduction in public and private sector external debt and impressive export performance reinforce the trend decline in Brazil’s external debt burden,” said S&P analyst Lisa Schineller. Since then, a government plan to buy back its short-term debt, including outstanding Brady bonds, has further improved its debt standing. The political scandal pushed many of Brazil’s much-needed structural reforms to the back burner, as legislators focused on a series of political in-

“IT’S A COUNTRY THAT’S BEEN WELL MANAGED. IT’S MAKING PROGRESS AND WE SEE THE ECONOMY GOING WELL.” —Manuel Medina Mora, Citigroup counters the impact will be offset by lower borrowing costs for the government, as higher foreign participation should push yields on government bonds downward.

Waiting for the Rating Authorities are hopeful that a muchawaited investment-grade rating, which some analysts believe could come as early as next year, may be the catalyst for attracting even more foreign investors. Although still high by rating agencies’ standards, Brazil’s debt load fell to 51% after the IMF pre-payment, compared with 57% in 2005, putting it closer to a potential upgrade. In October Moody’s upgraded the sovereign’s foreign currency rating to Ba3 from Ba1 with a positive outlook, putting it three notches away from in-

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quiries. Some analysts in Brazil feel ratings agencies will wait for the scandal to die down and for the reforms to be put back on track before proceeding with an upgrade. The outcome of the election, with the winner taking office in January 2007, could also be a factor, although few believe there will be a shift in economic strategy away from Lula’s fiscal orthodoxy. While polls continue to show the president as the frontrunner for a second term, they also show São Paulo mayor José Ser ra as his strongest potential contender. Serra, a social democrat who lost to Lula in the 2002 race, would likely maintain the economic course. Meanwhile, as the gover nment awaits a nod from the rating agencies, by February eight Brazilian companies

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had already been granted an investment-grade rating, thereby easing financing costs. One such company, Companhia Vale do Rio Doce (CVRD), the world’s largest iron ore exporter, went on to complete the largest-ever bond issue—a $1 billion, 10-year deal—on global markets by a Brazilian corporate. Votorantim, a diversified industrial conglomerate that is also investmentgrade-rated, was granted the largestever loan to a private company by the Andean Development Corporation (CAF) in December.The $400 million loan package will allow the company to extend maturities on other outstanding debts.

Firing on All Cylinders Brazilian companies in general sold $2.3 billion worth of bonds abroad in January alone, with the 2006 issuance pipeline filling up quickly. Others are financing growth through the equities market, bringing seven IPOs to the São Paulo Stock Exchange (Bovespa) last year while others prepare to make offerings this year. The Bovespa index posted a 46% 12-month rally in February, setting new highs. The value of outstanding bank loans also rose by a healthy 13% last year amid a two-year boom in local credit issuance that, despite high interest rates, has been supported by a new bankruptcy law and improvements in credit scorings. The Brazilian Banking Federation (Febraban) predicts another 13% growth in credit issuance for 2006, to R$675 billion. The trend is prompting some banks to step up their local presence. Citigroup, for example, doubled its local branches last year to 124. Manuel Medina Mora, Citigroup’s Latin America chief, had already announced plans to expand the group’s Brazilian activities two years ago.“It’s a country that’s been well managed,” Medina Mora said in an interview. “It’s making progress and we see the economy going well.” ■

ANNUAL SURVEY TREASURY/CASH MANAGEMENT

BY ANITA HAWSER

WORLD’S BEST TREASURY PROVIDERS 2006 Global Finance selects the best treasury and cash management banks, globally and by region, and the best providers of treasury management systems and services by category.

ith companies casting their nets further afield for growth opportunities, there is increasing pressure on treasury and cash management providers to invest in global processing capabilities, innovative technologies and people that can smooth the way for companies wanting to do business in new markets. As a handful of truly global cash management banks compete for customer business with regional and domestic banks,

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servicing customers’ needs is a question not only of size but also of the ability to continually innovate, to customize solutions to suit local requirements, and to provide an onthe-ground presence backed up by in-depth knowledge of local markets and regulations. In the following pages Global Finance picks the banks and treasury management software providers we believe have successfully combined geographic diversification with

product innovation, investment in technology, as well as local and customer knowledge to meet the needs of their diversified customer base. Winners were selected using a range of subjective and objective criteria such as investment in new and innovative technologies, depth and breadth of product offerings, market leadership, competitive pricing and geographic spread. This year where appropriate we have also treated Africa and the 2 0 0 6

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Middle East as two separate regions in recognition of the different local market conditions and the level and maturity of treasury and cash management services that prevail in these markets. And as our list of winners demonstrates, the provision of treasury and cash management services is not just about scale or Web-enabled cash management

platforms that span multiple jurisdictions but also about the ability to be a truly local provider, with a strong branch presence and indepth knowledge of local market conditions, particularly in the more challenging developing markets in Asia, Africa and the Middle East, where customization, not a generic level of service, is key.

The Treasury Management Systems & Services awards now include 11 categories in recognition of the growing role non-bank providers play in terms of the provision of higher levels of transparency, connectivity and inter-system communication to help companies better manage their business, reduce cost and increase efficiency.

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local and national clearing systems is made easier by Citibank File Services, a single delivery channel that provides file translation capabilities across a range of formats and supports payments and collections in more than 90 countries.

tomers with secure digital signing capabilities for its ACCESS Internet cash management portal. It also launched Receivables Edge, which provides companies with a single online view of their receivables data.

GLOBAL WINNER Citigroup Citigroup has operations in more than 90 countries supporting more than 40,000 clients including corporates, banks and government organizations. Its global network, which includes more than 3,000 correspondent banking relationships, transmits transactions worth $1 trillion a day. It has a presence in most major and developing markets including North America, Latin America, Europe, the Middle East, Africa and Asia-Pacific, as well as direct access to clearing systems in most of the countries it operates in. Its product offering spans payments, receivables, liquidity management, investments, information services and commercial cards. Citigroup continues to innovate, harnessing the latest technologies and the Inter net to help companies better manage their payment flows globally. Its CitiDirect online banking platfor m ser vices 240,000 customers globally across more than 100 currencies. Last year saw the launch of a new service, TreasuryVision, which provides corporate treasurers with greater visibility into their cash positions globally. With companies doing business in more markets than ever before, the task of transmitting payment files to different

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REGIONAL WINNERS NORTH AMERICA JPMorgan Chase With Check 21 legislation forcing banks to develop more innovative check processing capabilities, JPMorgan Chase was an early adopter of check image-capture technology, which makes the check deposit process more efficient and cost-effective as well as enhancing companies’ ability to better manage their cash positions. With the emphasis on electronic forms of payment, JPMorgan Chase is the largest originator of ACH transactions in the world, processing up to $2.5 trillion in US dollar wire payments daily. It is also the numberone ACH originator. Its merger with Bank One will also boost its capabilities in being able to service the treasury, asset and investment banking needs of its more than 25,000 middlemarket corporate customers. It also continues to invest in product innovation, developing its patent-pending SecurID, which leverages advanced encryption technology to provide cus-

WESTERN EUROPE Deutsche Bank Last year saw the launch of Deutsche Bank’s innovative Global Cash Concentration (GCC) product, which allows companies to better cover their cash positions and manage liquidity across their global subsidiar ies by sweeping surplus dollar and euro cash balances to a designated Deutsche Bank account anywhere in the world. The development of its cash concentration solution underscores significant due diligence and investment in technology to facilitate the movement of funds from one balance sheet to another. Last year also saw the continued roll-out of Deutsche Bank’s Money Transfer New Architecture (MTNA) high value payments processing platform, which will replace legacy applications with a single system providing a more consistent level of service across clearing systems and reinforcing Deutsche’s position as a major currency clearer in euros, dollars and sterling. It is also an early adopter of the new SwiftStandards XML-based solutions such as SwiftNet Interact, which it will use to facilitate enhancements in the area of cash reporting.

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ASIA HSBC Asia is one of the more complex and challenging markets for treasury and cash management. Local knowledge of regulatory and market conditions and an on-the-ground presence is something that HSBC has in spades. HSBC has its roots in the region and is present in 20 countries. In 2005 it was awarded a pan-regional cash management mandate encompassing 17 countries in Asia—reportedly one of the largest ever granted in the region—by leading consumer goods company Unilever, whose selection criteria included in-depth regulatory and fiscal knowledge and the ability to deliver innovative liquidity solutions in tough countries, as well as meeting complex payment requirements in all countries. It is also active in developing Asian economies such as China,Vietnam and Korea. In most countries it is a domestic bank as well as an international bank, and in China, for example, it has a 19.9% stake in Shanghai-based Bank of Communications—the largest single foreign stake in a Chinese mainland bank. It also has banking branches in 10 mainland cities and conducts renminbi business with local corporations in seven cities. Recently it also bought a 10% stake in Vietnam’s Techcombank.

LATIN AMERICA Citigroup With an on-the-ground presence in 22 countr ies as well as more than 1,600 branches spread across Mexico, Latin Amer ica and the Car ibbean, Citigroup has a formidable presence in the region. Its dedicated regional team advises Latin American companies on the implementation of Shared Ser vice Centers. It has also been awarded regional and in-country cash management mandates based on its expertise in US dollar liquidity man-

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agement and streamlining local payments and collections. In Mexico, customers benefit from its relationship with Banamex, which has more than 1,400 branches nationwide. The region also benefits from the global bank’s investment in product innovation including its Electronic Check Deposit service, which it launched in Latin America and Mexico.

CENTRAL AND EASTERN EUROPE RZB Vienna-based Raiffeisen Zentralbank Österreich (RZB), via its subsidiary Raiffeisen Inter national, has the widest reach in the CEE region.While other banks’ coverage and commitment to the region is patchy, RZB has a longstanding presence in the region via its network of 15 banks encompassing 16 CEE countries. It has expanded its presence beyond markets such as Hungary into the emerging CEE economies of Serbia, Montenegro, Belarus and Kosovo. Raiffeisen International also benefits from RZB’s investment in technology with its Globus core banking system being rolled out to other banks in the CEE network. In 2004 Raiffeisen International increased pre-tax profitability by 23.7% to €342.2 million.

AFRICA Standard Bank Based in Johannesburg, Standard Bank has one of the largest footprints in the region, encompassing 17 countries with a strong presence in sub-Saharan Africa. Its history in South Africa dates back 142 years, and it boasts local knowledge and expertise in both wellestablished and developing African markets. Local corporate customers looking to do business abroad can also benefit from its presence in key European, US and Asian markets. Recently it sought to expand its African foot-

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print, entering into discussions to acquire a minor ity shareholding in Nigeria’s fifth-largest bank, Oceanic Bank.

MIDDLE EAST HSBC With more than 110 offices and more than 30 branches throughout the region (UAE, Oman, Bahrain, Qatar, Kuwait, Jordan, Lebanon and the Palestinian Autonomous Area) serving more than 17,000 corporate customers, HSBC is one of the most widely represented international banks in the Middle East. It also has a 40% shareholding in the Saudi British Bank. Banks, corporates and non-bank customers benefit from its global expertise, product innovation and network as well as its on-theground presence and local knowledge in tailoring solutions to meet customers’ diverse and unique needs. Last year, after a 30-year absence, HSBC reentered Kuwait, where it will provide corporate financing and trade services for local companies. It also has an Islamic financing division, HSBC Amanah, which provides companies with structured financing solutions.

BEST BANK FOR LIQUIDITY MANAGEMENT (INCLUDES CROSS-BORDER POOLING & NETTING) NORTH AMERICA Bank of America Bank of America provides a range of liquidity management tools including cash concentration, sweeping, pooling and the automated movement of funds globally. By constructing highly automated interfaces between its own systems and the treasury workstations of

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corporates, Bank of America has assisted companies wanting to manage their global cash flows on a same-day basis from a single location. Its Remote Deposit Service, which allows companies to deposit checks from their desktop using image capture technology, also helps enhance funds availability.

WESTERN EUROPE ABN Amro One of last year’s leading product innovations was the launch of ABN Amro’s multi-bank multi-currency cash concentration (MBCC) solution. ABN Amro’s solution allows companies to consolidate cash balances in multiple currencies held at more than 215 banks to a designated ABN Amro account.This allows companies to maintain local banking relationships in key markets while maximizing short-term investment opportunities through consolidation. It also provides a range of pooling solutions (physical, notional and cross-currency) to enable companies to exert more control over surplus funds at subsidiaries and reduce the administrative headaches associated with inter-company borrowing.

ASIA Citigroup Last year in Asia the bank made a number of new additions to its liquidity management product set, including a new multi-currency notional pooling service and multi-currency balance aggregation. It has also implemented innovative regional liquidity solutions for local companies, including one solution that swept excess liquidity in multiple currencies and locations in Asia to the company’s regional treasury center in Singapore. Citigroup also launched a new Web-based cash management tool, TreasuryVision, which enhances companies’ global liquidity management capabilities by providing them with agg regated real-time visibility of information pertaining to their cash, in-

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vestment and debt positions across multiple banks, countries and currencies.

LATIN AMERICA Citigroup To ensure cash balances are not sitting idle, Citigroup provides companies in Latin America with a range of innovative solutions, including end-of-day automated overnight sweeps to savings accounts and time deposits as well as money market mutual funds. Last year within the region it also won significant regional mandates from companies looking to better manage their liquidity on a regional and in-country basis. A California company is offering the bank’s new TreasuryVision platform in a pilot program throughout Latin America to help it identify surplus cash in local subsidiaries.

CENTRAL AND EASTERN EUROPE RZB Companies have set banks in the region the challenge of providing liquidity management solutions similar to the domestic and cross-border solutions they deploy in Western Europe. With the most extensive coverage in the region, RZB is well placed to address the needs of corporates wanting to better manage their liquidity across CEE. Its cross-border and cross-currency margin pooling solution helps companies optimize group-wide interest management. It also provides zero and notional balancing, and companies can access information pertaining to cash balances via Web-based reporting tools.

AFRICA Standard Chartered Bank Standard Chartered brings international financial expertise and proven technology to the emerging markets of Africa, Asia, the Middle East and Latin America. Outside of the UK, most of its

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assets are held in Africa and Asia. Its African network includes 130 branches in 12 countries. It has a strong track record in terms of helping companies better manage their cash by devising innovative solutions that leverage best-inbreed technology and the bank’s extensive on-the-ground expertise and local knowledge. Companies can benefit from its expertise in liquidity management with the provision of solutions such as domestic and cross-border sweeping of funds, notional pooling and instruments for investing surplus funds overnight.

MIDDLE EAST Citigroup Citigroup’s association with the Middle East dates back to 1955, when it first opened a branch in the region.Today its branch network spans 16 countries. Its Treasury Services Group provides FX execution capabilities in a range of Gulf currencies, including FX options in Saudi riyal and Kuwaiti dinar and FX swap capabilities in UAE dirham. It has also developed customized solutions tailored to meet the needs of local clients that bank with different banks in the Middle East. Leveraging its on-the-ground presence as well as its network of correspondent banks in the Middle East, Citigroup was able to provide a consumer goods company with a single regional solution for making better use of surplus funds.

BEST PROVIDER OF MONEY MARKET FUNDS NORTH AMERICA JPMorgan Asset Management One of the largest asset managers in the world, JPMorgan Asset Management provides a range of onshore and offshore money market funds. Its US dollar liquidity and treasury liquidity funds are triple-A rated by ratings

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Leading The Way In The Gulf Ahli United Bank is joining the Gulf’s leading financial institutions hli United Bank (AUB) has come a long way in the future. Ahli United Bank (UK), its London since its inception in 2000. In just five years subsidiary, handles the banking needs of its Ahli United has grown to become one of the regional clients in the UK and develops private Gulf ’s leading financial institutions. Formed by banking products and services that can be the merger of Al Ahli Commercial Bank of marketed across the AUB Group. Bahrain and the United Bank of Kuwait in Having a bank with this kind of reach is a London, AUB is now one of the largest critical development in the Gulf region.The Gulf commercial banks in Bahrain, and is fast has an extremely under-served wealth-base and developing into the primary regional bank there is great need for in the Gulf area, with domestic reach in one entity that can most countries and plans to build its provide cross-border presence across all markets in the region. services and offer The building blocks are now in place world-class products for AUB to reach its goal: developing a geared specifically for branch network in all eight countries retail and commercial bordering the Gulf and acquiring a clients in the region. minimum of 10% cross-border market AUB is one of the few share. Adel El-Labban, group chief banks that has fully executive officer and managing director, grasped the large gap says:“AUB’s strategy is to expand through that now exists in both organic growth regional service and acquisition in provision. Adel El Labban, AUB’s group CEO and MD order to act as a With a growing ‘multifaceted financial middle class and increasing bridge’ between the wealth in the region, there international financial is an unmistakable need to markets and its Gulf fill this gap. AUB’s focus on clients.” the retail market and on At present, AUB attracting client deposits is has a foothold in five a sign of the group’s clear of the eight countries and focused strategy.This is of the region. Since balanced by the objective its inception, AUB to achieve stable and has grown both sustainable income growth, organically and operational through acquisition. It has acquired an effective competitiveness, highest quality of service, 75% stake in the Bank of Kuwait and the maximum cost efficiencies and superior risk Middle East, which has 10% market share in the assessment capabilities. Kuwaiti market and it owns a 40% share in Ahli The bank is well on its way to reaching its Bank QSC, with 7% of the market in Qatar. goal—becoming the prime regional bank for the AUB has also acquired 49% of the Commercial Gulf with a broad footprint across each domestic Bank of Iraq, one of the largest private banks in market while maximizing value for all the country. stakeholders, from stockholders to clients. The bank also has also set up Future Bank as For both regional retail and commercial clients, an equal joint venture with Bank Melli Iran and and for international entities with an interest in Bank Saderat Iran. Plans are under way to the Gulf, Ahli United Bank offers a unique develop a presence in the remaining three service and product suite geared at managing countries—the UAE, Oman and Saudi Arabia— interests across the Gulf region.

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agencies. Its funds are considered to be safe and maintain a constant net asset value of $1 per share. Investments can be tightly integrated with cash management services via JPMorgan Access, the bank’s Internet cash management portal.

WESTERN EUROPE Barclays Global Investors The third-largest money manager in the world offers both euro and sterling liquidity funds, which are Aaa rated by Moody’s. It manages cash funds worth £91 billion. Its funds are ranked high when compared with those of its peer groups, and it provides for different riskreturn profiles with its sterling, dollar and euro funds. It boasts a seven-strong European cash management team with combined experience of more than 50 years in money market funds.

ASIA HSBC HSBC Investments provides liquidity funds in US dollar, euro and sterling. Its funds are Aaa rated by Moody’s. The funds are designed to provide investors with daily access to capital as well as security. HSBC has positioned itself for market leadership in investment management with HSBC Asset Management becoming HSBC Investments in 2004.

LATIN AMERICA Banco Bradesco Banco Bradesco’s asset and investment management business services the needs of SMEs as well as local and international corporations. It is the largest private asset manager in Latin America, with more than $33 billion in assets under management. Its asset management business continues to perform above its peers, and in 2004 it was Aaa rated by Moody’s for the high quality of its asset management business.

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CENTRAL AND EASTERN EUROPE RZB Raiffeisen Investment Fund Management provides a money market and liquidity fund. Raiffeisen Capital Management is the RZB Group’s asset management subsidiary, with €22 billion in assets under management. It manages more than 200 investment funds, which are highly rated by ratings agencies such as Standard & Poor’s. It also boasts the largest regional research network in the CEE.

MIDDLE EAST AND AFRICA National Bank of Kuwait The National Bank of Kuwait operates subsidiaries throughout the region, and NBK Investment Management is a wholly owned UK subsidiary. It also has branches in Paris, Geneva and New York. Its Bahrain branch provides money market, FX and private banking and is active in principal currencies in the region. NBK made a record net profit of $704 million in 2005, an increase of 37% on the previous year. In recent years it has expanded into new markets such as Qatar, Shanghai and Iraq via its acquisition of Credit Bank of Iraq.

BEST BANK FOR RISK MANAGEMENT NORTH AMERICA JPMorgan Chase JPMorgan Chase Treasury Services takes risk seriously. It advises companies about risk issues pertaining to disaster recovery, risk mitigation via credit default swaps, business continuity planning and strategic risk management. It has also invested heavily in its own risk management capabilities such as its Horizon operational risk management solution, which it has outsourced to

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other banks. Its i-VAULT solution provides companies with image archiving for protecting important documents from loss or theft.

WESTERN EUROPE ABN Amro ABN Amro’s emphasis on liquidity and working capital management is helping companies achieve greater transparency, control and visibility over their cash flows, requirements that are enshrined in regulations such as Sarbanes-Oxley. Its liquidity and cash pooling advisers can help companies determine the right liquidity and cash management structure for them in line with risk and regulatory requirements.

ASIA Citigroup With regulation emphasizing the need for corporate treasurers to have greater visibility and control over their cash flows, Citigroup’s investment in technology is helping treasurers do just that. Its new TreasuryVision platform provides companies with unprecedented transparency of transaction-related data across asset classes (cash, investments and debt) on a multi-currency, multicountry and multi-bank basis. Clients can then analyze the data on a regional or country-by-country basis. It also provides invoice-matching capabilities, which helps companies reduce errors associated with manual processing and increases reconciliation rates.

LATIN AMERICA Citigroup Well-integrated investment and cash management tools allow companies to better manage their working capital and liquidity needs, minimizing risk and exposure. Citigroup’s Automated Investments means surplus cash is invested for maximum return taking into consideration market practices, tax implications

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and the regulatory climate in each country. TreasuryVision provides companies with more timely information so they can better manage their cash, investments and risk. Companies can also limit risk exposure through innovative cash concentration and liquidity management solutions.

CENTRAL AND EASTERN EUROPE RZB RZB has achieved industry recognition from corporate treasurers for its innovative risk management solutions. Firms benefit from the bank’s wide-ranging expertise across CEE and its emphasis on monitoring and controlling exposures. It provides products for hedging exchange and interest rate risks. Its currency risk management advisory service covers all major currencies as well as CEE currencies, and it provides a range of derivatives products to help treasurers maximize their cash positions.

MIDDLE EAST AND AFRICA National Bank of Kuwait As Kuwait’s largest financial institution National Bank of Kuwait is ranked among the 300 largest banking organizations in the world and seventh in the Arab world in terms of capitalization (in excess of $1.3 billion). It boasts the highest credit rating awarded to any bank in the region. It is also one of the first banks in the region to implement software that allows it to detect fraud in the use of credit cards.

BEST BANK FOR PAYMENTS & COLLECTIONS NORTH AMERICA Bank of America Bank of America is one of a few banks

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with an internal payments clearinghouse, which handles all the processing associated with payment and remittance files. It also offer s an Explanation of Benefits (EOB) data capture image lockbox, which allows clients, such as the American Hospital Association, to convert paper payments and remittance information to electronic data by scanning documents and automatically capturing remittance infor mation, reducing time, money and errors associated with labor-intensive paper-based processes.

WESTERN EUROPE Deutsche Bank Deutsche Bank is a leading clearer in most major currencies including the euro, dollar and sterling. It provides a range of Web-based solutions that enable companies to initiate high- and low-value payments globally and access information pertaining to cash letter, collections, disbursements, lockbox, and account information and liquidity management. It provides check disbursement facilities throughout Europe via a single interface as well as online archiving of checks and credit advices for easier reconciliation.

ASIA HSBC HSBC’s Integrated Receivables Solution (IRS) allows companies to outsource their accounts receivable management. IRC can be integrated with companies’ ERP systems and includes a range of collections products that can be deployed throughout the Asia-Pacific region. In the Philippines, HSBC has begun offering a Domestic Collections Service, which allows participating companies to send receivables files to HSBC electronically. The bank prints the invoices, posts them, collects payment and automatically reconciles the invoice with the payment and then reports back to the treasurer via its Inter-

TREASURY/CASH MANAGEMENT

net banking platform HSBCnet or its host-to-host channel Hexagon ABC.

LATIN AMERICA Citigroup Citigroup provides a range of payment, receivables and information solutions that can be integrated with ERP systems, allowing companies to better manage and streamline their cash flows. Given its global reach, customers can access payment and collections capabilities in more than 90 countries and 100 currencies. Available in 21 countries across Latin America, Citigroup’s integrated domestic payments solution, PayLink, allows companies to complete payments in multiple formats, remotely print checks and transmit payment instructions electronically for processing. It boasts one of the largest collections networks in the region comprising branches and third parties.

CENTRAL AND EASTERN EUROPE RZB As a leading Western European bank with an extensive CEE network, RZB provides companies with a single point of access for managing their bank accounts and liquidity. Offered in conjunction with other Western European banks, RZB’s electronic central account management solution, UniCash, allows companies to manage all account information centrally via RZB. Payment information can be transmitted to other participating banks via RZB’s electronic banking software, MultiCash. Companies can also integrate account information pertaining to RZB accounts and other banking partners worldwide and initiate worldwide payment orders.

AFRICA Standard Bank Transaction and account information can be easily exchanged between the bank

and its customers via host-to-host connections and can be integrated with ERP and accounting systems for easier reconciliation. Its Business Online platform provides a single interface for accessing domestic and international account information, FX trading and investments.

MIDDLE EAST HSBC Using Hexagon AutoPay, companies within the UAE can electronically submit bulk payment information pertaining to domestic currency salaries, supplier payments and dividends from their accounting systems to HSBC. The bank’s proprietary cash management platform, Hexagon, provides timely account information pertaining to both domestic and international accounts as well as the provision of payment capabilities in more than 60 currencies.

BEST CLS-LINKED BANK OFFERING NORTH AMERICA Citigroup A founding member of CLS Bank, Citigroup is the largest CLS third-party service provider, with a total market share of 30%. Its share of the North American market is 45%. Since launching its CLS third-party services, Citigroup has implemented a number of innovations including customized paying-in and paying-out schedules and CLS access via SwiftNet Browser, which it is offering on a pilot basis. Its third-party customer base includes corporates, banks and non-financial institutions. It also provides fourthparty CLS services to clients including fund managers.

WESTERN EUROPE ABN Amro The Dutch Bank is one of only two

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providers currently offering CLS settlement services in all 15 eligible currencies. In conjunction with the Clearing Corporation of India, it is also working to expand its fourth-party CLS service by enlisting a number of Indian banks. It has also launched a new direct communication solution for large corporates wanting to seamlessly link CLS with their own back-office systems, and it plans to be among the first to offer new CLS instruments such as non-deliverable forwards and FX options premiums.

ASIA HSBC HSBC is one of the few CLS settlement providers to provide third-party services in the Korean won and one of only two to support all 15 eligible currencies. It has a significant number of third parties live and is growing its fourthparty business. For some of its larger CLS third-party customers, it processes in the region of 200,000 foreign exchange transactions a year. It was one of three banks originally involved in the testing of CLS software.

LATIN AMERICA Banco do Brasil One of Latin America’s largest banks is one of the first in the region to leverage CLS third-party services. It uses Bank of New York’s SafeSettle platform to settle eligible trades within CLS. Banco do Brasil uses CLS third-party services in its head office as well as its branches in New York,Tokyo and London.

MIDDLE EAST AND AFRICA Standard Bank With the addition of the South African rand as a CLS-eligible settlement currency, Standard Bank is one of the few banks in the region to become a settlement member and shareholder of CLS. It will offer CLS settlement services in the South African

rand to other third parties and will leverage the latest technology including SwiftNet Cash Reporting to keep third parties informed of transactions settled within CLS.

TREASURY MANAGEMENT SYSTEMS & SERVICES BEST ACCOUNTS PAYABLE SERVICES Bottomline Technologies Bottomline’s payment and invoice automation software enables companies to streamline the purchase-to-pay cycle and increase the visibility of their cash, as well as enhancing reconciliation and risk management. Its inView AP automated purchase-to-pay solution allows companies to make the transition from labor-intensive paper-based processes to electronic processes. Its purchase of UKbased purchase-to-pay solution provider Tranmit will allow it to provide a complete end-to-end solution for automating accounts-payable processes.

BEST ACCOUNTSRECEIVABLE SERVICES AvantGard GetPaid Last October SunGard bought GetPaid, a global provider of credit, collection and dispute-resolution software. Leveraging the technologies of both vendors will only enhance AvantGard GetPaid’s capabilities to provide companies with a total working capital solution that delivers real-time enterprise-wide visibility across accounts receivable, accounts payable and treasury.

BEST ELECTRONIC INVOICE PRESENTMENT & PAYMENT SERVICES Ariba According to Forrester Research, Ari-

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ba’s EIPP solution includes more robust accounts-payable functionality than some of its competitors. Its solution has global reach, and it has a relatively strong installed customer base and revenues. It also scores high based on its delivery approach, emphasis on technology and archiving capabilities. The Sunnyvale, California, company is also making the transition from a software-licensing model to a utility ondemand approach, which is winning it new customers (it added 30 new customers in the first half of this fiscal year), particularly among smaller to mid-tier companies.

BEST PAYROLL SERVICES Oracle Oracle’s purchase of PeopleSoft has enabled it to provide a more complete Internet-based enterprise payroll solution that allows companies to transfer employee information and updates from Oracle’s PeopleSoft Enterprise Human Resources Management system to their payroll system. Its tie-up with PeopleSoft and JD Edwards has taken it beyond payroll to more comprehensive business-process and human-resource management solutions, which free up staff to focus on more value-added tasks.

BEST CORPORATE CARDS & EXPENSE SERVICES PROVIDER Visa More than $1.8 trillion in products and services are purchased using Visa cards, which are available in more than 150 countries. Increasingly, Visa is investing in transaction-reporting tools that will enable it to deliver more sophisticated expense management solutions to its corporate customers. Its Visa Commercial platform integrates transaction data with Oracle’s E-Business Suite to provide companies with greater visibility of their cash flow and

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higher degrees of financial control over travel, entertainment and commercial expenditure.

BEST ELECTRONIC COMMERCE PROVIDER IBM One of the largest IT service providers in the world, IBM’s application server program includes an increasing number of processes and features for building B2C and B2B e-commerce sites. Not only does it provide the tools, but companies can also leverage the expertise of its technical advisers via IBM Global Services, which helps companies move their e-commerce projects from conceptual to development phase.

BEST LOSS-PREVENTION / BUSINESS CONTINUITY SERVICES SunGard Availability Services Leveraging its global reach, SunGard Availability Services provides business continuity, high-availability solutions, managed hosting, security, networking and software management. It provides uninterrupted access to important company data and systems for more than 10,000 companies and assists with company testing of business continuity plans. It also provides a Web-based portal for monitoring mission-critical systems.

BEST PENSION PLAN ADMINISTRATION SERVICES Watson Wyatt Worldwide Using Web technology and automation, Watson Wyatt allows companies to outsource the administration of their pension plans. It also advises some of the world’s largest pension funds on investments and has a truly global reach, with a presence in more than 30 countries. Its technical resources for managing pensions allow companies to better forecast and budget for administration expenses.

TREASURY/CASH MANAGEMENT

BEST TECHNOLOGY SERVICES PROVIDER EDS Consulting company EDS has enhanced its global development capabilities via an alliance with Cognizant Technology Solutions, which has expertise in the healthcare and financial services sector as well as strong offshore capabilities.The relationship will enable EDS to provide its customers with a well-developed offshore outsourcing offering.

BEST TREASURY WORKSTATIONS PROVIDER SunGard Treasury Systems SunGard AvantGard provides comprehensive cash management capabilities for both financial institutions and corporates. AvantGard ETX delivers realtime transaction processing information and facilitates straight-through processing between different counterparties in the transaction chain, including banks, broker/dealers and corporates. It will also incorporate Integrity Treasury Solutions’ Integra-T, a Web-enabled front-, middle- and back-office cash and risk management solution, into its AvantGard offering following its purchase of the UK-based company last year.

BEST TREASURY MANAGEMENT SOFTWARE XRT XRT is a leading provider of software solutions that help automate and streamline treasury processes such as payments, reconciliation and cash management, enabling companies to more accurately predict cash flow. Its solutions, which automate financial data exchange and account reporting, help companies solve common problems such as managing treasury operations in a multi-bank environment. It boasts more than 11,000 corporate customers spread across 50 countries.

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SOFTWARE DIRECTORY TREASURY & CASH MANAGEMENT

ACEVA

Client profile: By location: North America, EMEA, Asia-Pacific Capabilities/services: Aceva Technologies is a leading provider of enterprise application software solutions for revenue and receivables management. Aceva’s solutions for credit management, order quality, dispute prevention, inventory transaction reconciliation, deductions management, EIPP, collections management and cash forecasting directly address quote-to-cash process breakdowns, quality issues and automation requirements. Aceva’s products deliver end-to-end revenue and receivables visibility, continuous business policy monitoring, collections process automation and workflow, as well as comprehensive reporting and analytics. Product overview: Enterprise cash management requires a structured approach to working capital optimization focusing on investment and accounts receivable. By accelerating corporate collections and reducing accounts receivable balances, corporations unlock significant working capital trapped on the balance sheet.The Aceva Revenue and Receivables Management Suite allows companies to reconcile quote-to-cash transactions early in the cycle to ensure accurate invoicing and rapid dispute resolution, and to accelerate collections by automating the process and ensuring consistent application of corporate policy and strategy. Sanjay Srivastava Business developments: Ranked as the fastest-growing company in the receivables and collections space,Aceva is now used in 26 countries around the globe, processes more than 45 million transactions a month and has unlocked over $3.7 billion in working capital annually. Outlook: With over $1 trillion of working capital on the books of the 1,000

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largest US companies, revenue and receivables management solutions will play an increasingly critical role in driving down DSO and unlocking working capital. Analysts size the market opportunity at $5.5 billion in the next two years. DSO reduction and working capital optimization will be a greater focal point in the office of the CFO. Contact: Sanjay Srivastava Tel: 650 227 5540 Fax: 650 227 5501 [email protected] www.aceva.com

KYRIBA CORP

Client profile: By location: North America, Europe,Asia. Kyriba empowers customers to achieve an economic advantage with treasury solutions that enhance visibility and operational control. Client revenues range from $50 million to $80 billion, allowing treasury and financial professionals from any size group (currently ranges from 2-800 users and 1-300 entities) to access world-class treasury technology. Capabilities/services: Pioneering webbased treasury management since 2000, Kyriba offers “end-to-end” cash, liquidity and treasury management for corporate and financial institutions in a flexible and scalable deployment. True straightthrough processing can be achieved via direct connections to all banking partners proactively managed by Kyriba.The Kyriba suite supports seamless integration with all third-party applications while enabling Sarbanes-Oxley 404 audit trail workflow and control requirements. Product overview: Kyriba’s capabilities equal or exceed those of “installed” systems; all mission-critical data can be viewed, analyzed, processed and shared real-time across an enterprise via a rapidly deployed, scalable solution. Kyriba employs dynamic cash positioning, integrated cash flow forecasting, managed bank

connectivity, in-house banking, bank fee analysis and benchmarking, bank account administration, automated letter generation, debt/investment/FX portfolio management, automated general ledger processing, document management and user-defined reconciliations.

Business developments: 2005: Full bank relationship management/bank fee analysis. 2006: Multilateral netting & dynamic risk management. More than 150 corporate clients, including Interpublic Group of Companies, Commerzbank, Colas SA, Ferrero and Peugeot, use Kyriba solutions globally, with 40+ new clients partnering with Kyriba throughout 2005. Outlook: The ever-changing financial environment demands more effective working capital management and enhanced visibility to maximize liquidity and increase control. Kyriba remains ahead of the curve while offering significant flexibility and scalability to evolving treasury organizations of all sizes. Contact: Jennifer McCarthy Tel: 858 764 2458 Fax: 858 764 2459 [email protected] www.kyriba.com

SIMCORP: IT2

Client profile: By location: 80% Europe, 10% America and 10% Asia. By size: Corporate treasury clients have revenues from $200 million to tens of billions; financial institution clients range from small bank treasury departments to funding departments; also FX & MM deal processing in larger financial institutions. Capabilities/services: With IT2 cash and treasury management solutions SimCorp provides software and professional services solutions for treasury, cash and liquidity management, finance and investment management, foreign

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exchange management, accounting and risk management operations, deal processing and administration, settlements and account reconciliation. Product overview: IT2 is a system for management of a wide range of integrated treasury operations in a controlled environment. Reporting tools designed for business users make operational and adhoc reporting particularly efficient. Business developments: The focus has been and continues to be to provide cost effective access to the benefits of treasury management software. Over the past three years the company has implemented IT2 for close to 50 new customers. Outlook: SimCorp will continue to offer cost-effective integrated treasury solutions.With Sarbanes-Oxley increasing focus on treasury business process management and documentation, the company will continue to improve business process management and reporting capabilities IT2 provides its customers. Contact: Patrick Coleman Tel: +44 20 8741 3553 Fax: +44 20 8741 5175 [email protected] www.IT2Choice.com www.simcorp.com

SUNGARD: AVANTGARD . Capabilities/services: SunGard AvantGard is a leading provider of treasury, risk and trade receivables management solutions. SunGard solutions offer Internet-based cash management, debt and investment and accounting functionality. These are fully integrated with risk management, order-to-cash, accounting functionality and tools to measure and report financial compliance, all within a single environment. SunGard supports its clients with products and services tailored to the needs of financial institutions and corporations. Some of these include in-house banking, netting, global liquidity, foreign exchange and currency and commodity trading. Product overview: The AvantGard suite

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fosters collaborative financial management through the use of installed and ASP solutions for treasury management, electronic cash systems and order-tocash management. AvantGard also offers a secure real-time network that links clients/subscribers with financial institutions and other treasur y service providers, offering straight-through processing of treasury transactions and information via Internet messaging. Business developments: An overriding objective in the development of AvantGard was to provide economic alternatives to the executive financial managers that provide great business leverage. At the same time, AvantGard also gives them the security of knowing that their free cash flow and major financial market risks are being properly managed to a policy and reported accurately. Outlook: AvantGard's unique technology infrastructure will continue to offer both existing and new customers the ability to leverage this premiere technology base and provide real business solutions forging a network between treasury, finance, banks, suppliers, vendors and customers. AvantGard solutions will continue to be based on industry-leading technology implemented at premiere corporate treasuries around the world. Contact: Charlotte Brown Tel: 818 223 2300 Fax: 818 223 2301 [email protected] www.sungard.com/avantgard

XRT

XRT’s financial value chain management solutions encompass cash and treasury, payments, collection and business exchange (bank and ERP connectivity). Client profile: More than 7,000 organizations in 55 countries rely on XRT solutions to streamline their cash flow management, from collections to cash, liquidity, risk and payment processes.

TREASURY & CASH MANAGEMENT

From large multi-billion-dollar organizations to smaller operations, XRT is the vendor of choice around the globe. Organizations using XRT solutions range in size from $200 million to $10 billion and up. Capabilities/services: XRT provides financial flows management solutions designed to optimize the financial value chain of extended enterprises and international corporations. XRT’s innovative solutions help financial and treasury managers gain visibility and control over cash flow activity, streamline treasury management processes across the enterprise and facilitate financial communications with banking and business partners. Product overview: XRT offers genuine management autonomy as well as highly developed consolidation and data sharing functions. XRT solutions cover all areas of financial management: cash flow, liquidity, risk, collections and payments, as well as financial communications. Business developments: XRT will be introducing enhanced XRT enterprise solutions, using Microsoft .Net technology. XRT also recently unveiled TWS Express, an easy-to-use and affordable treasury software solution for North America-based mid-size companies that currently rely on spreadsheets or seek financial process improvements to meet Sarbanes-Oxley compliance. Outlook: XRT solutions encompass the entire financial value chain, from collections through treasury and risk management to payments, all with streamlined and secure exchanges of banking and financial data. Latest-generation XRT applications, based on Microsoft .Net technology, deliver the ultimate in flexibility and scalability for global organizations, allowing them to capitalize on local market expertise while delivering centralized visibility and control of an organization’s financial positions. Contact: David Cochran Tel: 877 973 2374 Fax: 610 290 0308 [email protected] www.xrt.com

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CORPORATE TOOLBOX EQUITY DERIVATIVES

BY DENISE BEDELL

Europe Leads The Way In Derivatives Development As the trend toward using equity derivatives sweeps Europe, the situation in the US couldn’t be more different.

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ompanies have long used equity derivatives to help manage equity-related risk. Now they’re finding an array of other uses for them, although development in some markets, particularly the United States, has been stymied by the lack of clarity in accounting standards. In stark contrast, markets across Europe have seen nothing but growth over the past year, with new uses being implemented and new products explored. How derivatives accounting will play out going forward is a big concern for many companies. Serge Marquie, global head of the strategic equity transaction group at Deutsche Bank, says, “The big issues have been with the lack of clarity in terms of what direction accounting changes were going to take.” In the United States, he says, the pendulum has swung toward relatively little use of derivatives. “For example, the typical put transaction: With accounting concerns and with stock values going consistently up, it just makes sense to buy stock outright rather than going into complex synthetic transactions,” he explains. Marquie adds:“The big trend now in the US is really the addition of relatively plain-vanilla derivative transactions

to classic public transactions. For example, it is very common to see the addition of a derivative strategy to a classic equity-linked transaction. In this case, it becomes essential to structure the derivative strategy in line with the accounting treatments of the public transaction.”The big push has been through the use of forwards instead of straight stock issuance. “In a bullish stock market environment, forward issuance al-

Forestier: “Using structured pay-offs with derivatives embedded may allow significant cost reduction.”

lows the issuer to lock in higher market prices without committing to an actual issuance,” he says.

Europe Forges Ahead Compared to the US, the European market has been alive with new issuance over the past year, and the use of corporate derivatives is growing within every product line. Philippe Parmenon, head of equity derivative sales at Société Générale, explains: “In Europe nearly every day there is a new transaction in the market, and corporates consider equity derivatives as useful tools with many different applications.” One of the main uses, however, continues to be in equity risk management—for example derivative positions in a company’s own shares. François Forestier, global head of strategic equity at BNP Paribas, says:“Borrowing money through equity financing structures, such as prepaid forwards, structured REPO transactions and so on, is cheaper than straight loans.These transactions can be combined with hedging strategies in order to reduce exposure to market moves.” In addition, the demand for structured employee schemes is growing in

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CORPORATE TOOLBOX

Europe with implementation of the new International Accounting Standards (IAS) rules. Forestier explains: “Companies having to disclose fair market value of stock options they grant will search for new structures that might allow significant cost reduction while keeping attractiveness of the scheme for their employees.”The move is the same for Employee Share Ownership Plans, where the discount granted to the employees as an incentive to subscribe to newly issued shares is now accounted as an expense. He adds:“Using structured pay-offs with derivatives embedded may allow significant cost reduction.” However, as in the US, there are still concerns over derivatives accounting under IAS, and some products, such as convertible bonds, have suffered as a result.

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away the most exceptional environment globally for corporate equity derivatives this year,” notes Marquie.

Derivatives Present Opportunities There are clear benefits in employing equity derivatives for emerging market companies, too, as Coca-Cola Femsa treasurer Ian Craig explains. “We have used them in the past, really on an opportunistic basis.The last time was during the Asian and Tequila crises,” he says. “Our share price was down so we used puts as a means to take a view on our stock price to make a profit on that.” Femsa is the largest Coca-Cola bottler in Mexico. Craig says the group did not want to repurchase outright as it could have affected their share liquidity. “This is not generally an issue for US companies be-

“CORPORATES HAVE BECOME MORE HESITANT TO USE DERIVATIVES IN GENERAL” —GEOFFROY WALLIER, RBS Geoffroy Wallier, head of equity derivatives structuring and marketing at Royal Bank of Scotland (RBS), says, “Corporates have become more hesitant to use derivatives in general in order to comply with IAS 39 rules and especially in cases where the rules are not very clear—for example with the convertible.” A convertible can be accounted either as an equity instrument or an embedded derivative, depending on the treatment that the issuer adopts in its accounts. Despite such anomalies, Europe has opened up to new products, according to Marquie—such as non-recourse financing of large undiversified equity positions—with various objectives, such as strategic acquisition or targeted investments. “The use of equity derivatives in this area is definitely in a growth phase, with a huge need for people to find assets and to acquire them in any possible way. Europe has been far and

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cause the market is so liquid, but here it is very important as the market is not as liquid, so making many share repurchases would really impact our liquidity,” he explains. Other emerging market companies can take similar advantage of fickle investor confidence and make money when stock prices are unduly low. However, because of the seeming complexity and risk of such products, it is usually only the top-tier entities that actually use equity derivatives opportunistically. Asia and Japan are progressively becoming more active in the use of corporate equity derivatives strategies. “Especially in Japan, we have seen the return of corporate use of equity derivatives,” says Marquie. “Our big push in Asia has been in India, where we are seeing significant market development with the application of many of the strategies seen in more traditional markets.”

EQUITY DERIVATIVES

However, there are risks associated with the use of equity derivatives, some of which are well known in the market and not lightly ignored, according to analysts. A Fitch Ratings study of corporate derivatives use found that 11% of study participants had derivative positions in their own shares. As the study’s author, Roger Merritt, notes:“Positions such as forward purchases or written puts on a company’s own shares have led to unexpected losses in the past. Further, equity derivatives can have unexpected effects on reported debt.” But Forestier at BNP Paribas says this should not be a big concern if the structure is set up properly: “The potential loss is not a real issue as long as the put option sale was originally disclosed properly, and this loss is equivalent from an economic point of view to the opportunity loss suffered by a company buying back its own stocks before a drop in share price.”

Derivatives Find Alternative Uses The prime use for corporates has been in terms of equity risk management. But another use is also gaining in popularity among some top-tier corporates—that of investment management. Says Wallier at RBS: “Corporates have not been investing in capital-guaranteed enhanced investment for some time, but considering the very low level of interest rates, the important cash reserve that corporates now have and the new offerings on investor products allowing the combination of equity with other asset classes—such as FX, interest rate or commodities—I see corporates investing more in capital-guaranteed equity and hybrid-linked notes.” This, however, is the domain of the largest, most highly sophisticated companies, which often look more like a financial institution than just a corporate. As Forestier notes, “Even if some equity derivatives structures are popular, thanks to tax or accounting gimmicks, the main market share remains on the fixed-income side.” ■

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CORPORATE FINANCING FOCUS

The Russians Are Coming To London and Luxembourg To Satisfy Appetite for Capital

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Sandy Wong

ussian energy companies, as well as banks and industrial corporations, are scheduled to raise billions of dollars of capital in the global depositary receipt, or GDR, markets in London and Luxembourg this year, bankers say. “Russian companies will dominate capital-raising in the form of depositary receipts in 2006,” says Patrick Colle, global head of ADRs at JPMorgan. Colle is based in London, where the US bank manages about 70 blue-chip ADR programs. While the overall number of initial public offerings and follow-on stock issues from Asian companies may be larger, the value of new issues from Russia will be far greater this year, Colle says.The planned London Stock Exchange listing of Rosneft, the Russian oil company that purchased the assets of Yukos last year, is expected to raise as much as $15 billion in June, making it one of the largest IPOs ever. The value of GDRs traded on the London exchange last year surged 166% to $226 billion, and much of this activity was in shares of Russian companies such as Lukoil, Gazprom and Unified Energy Systems. In December 2005 Russia’s Novolipetsk Iron & Steel raised $609 million in its London listing, which valued the company at about $15 billion. “The float from these GDR issues usually ends up in London, which is contributing to the surge in trading volume on the LSE,” Colle says. “A major trend in the market for depositary receipts in general is toward GDRs and away from ADRs,” Colle says. This is due in part to the fact that ADRs require the issuing company to adhere to US accounting standards and to register

with the Securities and Exchange Commission in the case of exchangetraded securities, he says. Some foreign companies listed on US exchanges have found it extremely difficult to de-register with the SEC, unless they have fewer than 300 US shareholders or their trading volume in the US is less than 5% of total trading in their shares.

SEC Opens the Exit Door It remains to be seen if there will be an exodus of foreignbased companies from US exchanges if the SEC’s proposed rule changes to streamline the process for de-listing from a national securities exchange and deregistering securities under Section 15(d) of the Exchange Act are adopted next month. Under the new rules, an issuer can de-list or deregister securities by filing an application on Form 25 with the SEC via the agency’s electronic system known as Edgar.The company must notify the exchange where it is listed and issue a press release on its website at least 10 days prior to filing a Form 25. Any company registered with the SEC, regardless of whether it is listed in the US or not, must comply with the Sarbanes-Oxley Act. The New York Stock Exchange already has seen a dramatic slowdown in non-US listings in the past few years as European companies in particular have sought to avoid the costs of compliance with Sarbanes-Oxley. “For many companies, a US listing has a lot of merit,” Colle says. “Every company is different.” A de-listing will 2 0 0 6

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not necessarily mean a termination of the company’s ADR program, he says. A company could decide to de-list from a US exchange and still keep its ADR program in the overthe-counter market. Using GDRs, it is relatively easy for a company to raise capital quickly. US accounting rules compliance is not required, and the entire process is less costly and less burdensome, Colle says. Patrick Colle, “More than half of the Global Head of ADR, capital raised worldwide JPMorgan in 2005 came from GDRs for the first time ever,” he says.

Still Room to Grow Meanwhile, the level of US investment in equity abroad is at an all-time high of $2.8 trillion, or 15.8% of portfolio allocation, which is also a record.The appetite from US investors for foreign equity continues to be strong, and there is room for further growth, with modern portfolio theory recommending 25% exposure to foreign stocks for diversification purposes, Colle says. “A tree doesn’t grow to the sky,” he says. “The question is where the growth ends.” And while demand remains strong for DRs, an even more striking story of growth can be seen on the supply side, according to Colle.“An inflection point was reached in 2005 when the $20 billion of capital raised through DRs was twice the level of the year before,” he says. The Asia-Pacific region accounted for 77% of global DR capital-raisings from 2003 through 2005, and the demand from this region will remain strong, Colle says. “The story of China last year was of very big bank and energy privatization IPOs tapping the DR market,” he says. “Contrary to two years ago, or even one year ago, none of them listed in the US because of the requirements and costs of Sarbanes-Oxley.”

Russia Sets Limits Russian authorities have set a new limit of 35% on the proportion of total capital companies can raise in the form of depositary receipts. On January 17 Russia’s Federal Financial Markets Service announced the tighter limit, which is down from 40% previously. In addition to lowering the limit for DRs issued on 5 0

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foreign stock markets, Russia is obligating domestic companies to issue 30% of their shares on local stock markets in the course of their initial public offerings.The measures are designed to strengthen Russia’s stock markets, which are too thin to handle major privatization issues. While Russian companies are expected to lead DR capital-raisings in 2006, a flurry of recent issues has come from modest-size technology companies in South Korea and Taiwan. On January 23, JPMorgan announced the launch of a Luxembourg-traded GDR program in connection with a $103.6 million offering by Powertech Technology, an issue in which it invested an additional $12 million by exercising its “greenshoe,” or over-allotment, allowance.The Taiwan-based company assembles, sorts and tests memory devices and products. Earlier in January JPMorgan initiated a $28.7 million GDR program, also traded on the Luxembourg Stock Exchange, for Taiwan Kolin, which makes color televisions, video recorders, refrigerators and air conditioners. In December, JPMorgan launched Nasdaq-listed ADR programs for two South Korean-based companies, in which the bank also invested by exercising its greenshoe options as underwriter. Seoul-based WiderThan, which made a $72 million initial public offering, provides programs that enable mobile-phone users to download music tones, games and information. Pixelplus raised $36 million in its IPO.The company designs and markets image sensors for use in mobile camera phones.

Latin American Steel Giant Forged by Argentina’s Group Techint from steel producers in Venezuela, Mexico and Argentina,Ternium raised about $497 million by selling 24.8 million ADRs at $20 each. Ternium, Latin America’s second-largest steelmaker, began trading on the New York Stock Exchange on January 31 and posted a first-day gain of 17%. ADR PROGRAMS MOST WIDELY HELD BY INSTITUTIONS (DECEMBER 2005) Company BP

Value ($millions) 39,431

Petroleo Brasileiro (Petrobras)

20,833

Royal Dutch Shell

20,788

America Movil

19,256

Cia Vale do Rio Doce (CVRD)

15,060

Teva Pharmaceutical Industries GlaxoSmithKline Nokia

14,131 14,073 13,113

Vodafone Group

12,858

Total

12,706

Source: JPMorgan, Thomson Financial

GF

L O B A L

Country

Value ($millions)

Lukoil

Russia

52,747

Norilsk Steel

Russia

16,551

South Korea

15,818

Gazprom

Russia

14,345

Surgutneftegaz

Russia

10,877

Samsung Electronics

Orascom Telecom

Egypt

9,167

United Energy System of Russia

Russia

8,137

Hungary

7,390

OTP Bank Reliance Industries Sistema

India

4,513

Russia

4,089

Source: London Stock Exchange

Techint sold a 12% interest in Ternium, which owns 70% of Mexico’s Hylsamex, 56% of Argentina’s Siderar and 77% of Venezuela’s Amazonia.The latter company controls Sidor, or Siderúrgica del Orinoco of Venezuela. Bear Stearns, which initiated research coverage of Ternium on February 3 with an “outperform” rating, says the company has many positives, including high cash flow, low-cost production, an experienced management team, limited domestic competition in Venezuela and Argentina, and favorable prices in Mexico. With half of the company’s earnings coming from Venezuela, however, the unpredictability and potentially adverse actions of President Hugo Chavez are the biggest key variable for Ternium, according to Bear Stearns analyst Daniel Altman.Ternium makes steel slabs for the automotive and appliance industries. 200 Overall Latin American equity capital market volume totaled more than $1.5 billion 180 for the period between 160 January 1 and February 8, according to Dealogic.That was a five-fold increase from 140 $246 million in the same period a year earlier. 120

Latin America

Europe

Asia

Jan 13, 2006

Jan 27, 2006 Jan 31, 2006

Dec 30, 2005

Dec 2, 2005

Dec 16, 2005

Nov 4, 2005

Nov 18, 2005

Oct 7, 2005

Oct 21, 2005

Sep 9, 2005

Sep 23, 2005

Aug 26, 2005

Jul 29, 2005

Aug 12, 2005

Jul 1, 2005

Jul 15, 2005

Jun 3, 2005

Jun 17, 2005

May 6, 2005

May 20, 2005

Apr 8, 2005

Apr 22, 2005

Mar 11, 2005

Mar 25, 2005

Feb 11, 2005

80 Feb 25, 2005

A number of major companies have selected new depositaries for their ADR programs so far this year. British Airways appointed

REGIONAL ADR INDEXES

100

Jan 31, 2005

Successor Depositaries

I N A N C E

Citigroup as successor depositary for its ADRs, which trade on the New York Stock Exchange. Koninklijke KPN, the Netherlands-based telecommunications company, appointed JPMorgan to handle its NYSE-listed program. KPN was the sixth blue-chip company to appoint JPMorgan as successor depositary in the past 12 months, according to the bank. Wal-Mart de México selected The Bank of New York as successor depositary for its ADRs, which trade on the overthe-counter market. MOL Magyar Olaj-es Gazipari, an oil and gas exploration and production enterprise that is Hungary’s biggest company, appointed The Bank of New York as successor depositary for its GDR program. MOL’s GDRs are listed on the Luxembourg Stock Exchange and trade on the International Order Book of the London Stock Exchange and on the Portal in the US 144A market.The company’s registered shares are traded on the Budapest Stock Exchange. Munich-based MorphoSys, a biotechnology company that focuses on the use of human and synthetic antibodies for therapeutic and research purposes, launched a sponsored ADR Level I program in the US with The Bank of New York as depositary. In January MorphoSys announced the acquisition of privately held Serotec, based in Oxford, UK. Serotec, one of the world’s leading antibody manufacturers, has a distribution network in the US, Britain, Germany, France and Scandinavia. MorphoSys develops and distributes technologies for the production of new drugs and the discovery of new disease-related target molecules. It recently entered into a global antibody sales agreement with Chemicon, a leading provider of tools used in stem-cell research. —Gordon Platt

TOP ISSUERS OF GDRS BY VALUE (OCTOBER 2005) Company

F

Source: Bank of New York

2 0 0 6

M A R C H

5 1

CORPORATE FINANCING NEWS GLOBAL EQUITY/DRS

G

CORPORATE FINANCING NEWS FOREIGN EXCHANGE

G

L O B A L

GF

Rate Differentials Keeping Dollar Strong The dollar’s yield advantage to the euro and the Japanese yen is supporting the greenback, despite worries about the US current account deficit, analysts say. Interest-rate spreads are what drive the currencies, not the change in the spread, says Carl B. Weinberg, chief economist at High Frequency Economics, based in Valhalla, New York. Ben Bernanke, the newly installed chairman of the US Federal Reserve, is more than likely to give the economy a “hello hike” at his first meeting of the Federal Open Market Committee on March 28, according to Weinberg.This means that spreads that already favor the dollar will become even more favorable, he explains. “Thus, we predict that the dollar will continue to appreciate this quarter and beyond,” he says. Those who contend that a failure to keep the spread widening will mean that the dollar will stop appreciating and move the other way ignore what economic and financial theory teaches us, Weinberg says. The economic linkages between interest rates and exchange rates come from the interest-rate arbitrage condition, he says. It would take a narrowing in the spread back to zero to stabilize the exchange rate, he asserts. Against the yen, the story is slightly different because of Japan’s current account 5 2

M A R C H

2 0 0 6

surplus, he says. Dollarsupporting spreads that are now over 450 basis points would have to narrow to 200 basis points or less to support the yen, which seems implausible anytime soon,Weinberg says. The dollar’s gains in early February are best understood as a growing realization that the Fed’s tightening cycle is likely to last longer and have a greater magnitude than previously thought likely, says Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York. The swing in expectations of market participants has been based on the view not only that the slowdown in US economic growth in the fourth quarter of 2005 was a fluke, but also that firstquarter 2006 growth is likely to be strong, Chandler says. In addition, the decline in the US unemployment rate to 4.7% in January plays to the market’s Fed-guided sensitivity to resource utilization, he says. Confirmation of a tighter labor market is recognized in the fact that hourly pay is rising at a 3.3% year-over-year rate, the highest since February 2003, he notes. The US economy is off to a strong enough start in 2006 to take up the diminishing slack in the economy, according to Chandler. “This could compel the market to rethink the likely trajectory of

F

I N A N C E

CURRENCY FORECASTS 1.0

Euro (Euro/US$)

0.9 0.8 0.7 0.6

Forecast

Source: The Bank of New York F

M A

M J

J

A

S

O

N D

J

F

M

A

M

2005 160

J

J

A

S

O

N

D

2006

J 2007

Japan (Yen/US$)

140 120 100

Source: The Bank of New York

Forecast

80 F

M A

M J

J

A

S

O

N D

J

F

M

A

M

2005 0.7

J

J

A

S

O

N

D

2006

J 2007

UK (Pound/US$)

0.6

0.5

Forecast

Source: The Bank of New York

0.4 F

M A

M J

J

A

S

O

N D

J

F

M

A

M

2005

J

J

A

S

O

N

D

2006

J 2007

1.6

Switzerland (Franc/US$)

1.4 1.2 1.0 0.8

Forecast

Source: Deutsche Bank F

M A

M J

J

A

S

O

N D

J

F

M

A

M

2005

J

J

A

S

O

N

D

2006

J 2007

1.6

Canada (C$/US$) 1.4

1.2

1.0

Forecast

Source: The Bank of New York

F

M A

M J

J

A

S

O

N D

J

F

M

A

M

2005

J

J

A

S

O

N

D

2006

J 2007

14

Mexico (Peso/US$) 12

10

Forecast

Source: The Bank of New York

8

F

M A

M J

J

A

S

O

N D

J

F

M

A

M

2005 3.5

J

J

A

S

O

N

D

2006

J 2007

Brazil (Real/US$)

3.0

2.5 2.0

Forecast

Source: Deutsche Bank 1.5

F

M A

M J

J 2005

A

S

O

N D

J

F

M

A

M

J

J

2006

A

S

O

N

D

J 2007

Fed tightening, interest-rate differentials could widen and the dollar could strengthen,” he says. Former Fed chairman Alan Greenspan implied in a speech he gave just days after leaving office that the federal funds rate likely will have to be increased still further to check inflation. David Gilmore, economist and partner at FX Analytics, based in Essex, Connecticut, says: “I am confident that Bernanke will get the path and the policy prescription correct on monetary policy. What worries me most is that it may not matter, because imbalances are far larger than a blunt set of policy tools can cope with, and at the end of the day, an economy immune to Fed policy treatment will be the Greenspan legacy.” According to Gilmore, a series of bubbles exists in financial markets, including Latin American and Asian currencies, gold, credit derivatives, copper, European equities and global bonds. Cheap credit chasing too few assets, multiple bubbles

L O B A L

GF

bursting and significant wealth destruction could be the result of Greenspan’s creation of the cult of the personality, Gilmore says. “Markets believe that the Fed has reduced risk across asset classes,” he says.This is a fallacy and is unsustainable, he asserts. Bernanke will be a breath of fresh air at the Fed, Gilmore says. “His chairmanship will be more about building the institution’s image and dismantling the cult of personality that Greenspan has left,” he says. Meanwhile, the return appearance of the 30-year US treasury bond in the February refunding highlighted the fact that foreign central banks remain willing to finance the swelling US trade and current account deficits, according to Ashraf Laidi, chief currency analyst at MG Financial Group in New York. Fully 65% of the bids at the 30-year bond auction were from “indirect bids,” which is a proxy for foreign central banks, Laidi says. “This was a key

F

I N A N C E

triggering a decline in the dollar. Investors have tuned in to trade tensions between the United States and China once again, according to a report by Jeffrey Young, head of currency research and managing director at Citigroup in New York. Rhetoric about the yuan from the US side has escalated since the lull at the end of last year, according to Young. While legislation is pending in the US Congress that would allow retaliation against China for subsidizing its exports through exchange-rate manipulation, there are reasons to think that trade frictions may be contained without serious protectionist measures, Young says. “The Bush administration has attempted to de-escalate the problem,” he says. “Growing economic interdependence between the US and China is creating a countervailing force of its own against protectionist acts,” he says. —Gordon Platt

auction for the dollar, as it relieves worries about successful financing of the US trade gap,” he says. Foreign official custody holdings of US treasuries at the Federal Reserve have largely stayed steady at around $1.1 trillion over the past seven months, Laidi says. However, foreign official holdings of US agency securities have been rising at a steep pace and are nearing $470 billion, he says. Agency securities have a slightly higher yield than treasuries. Japan, the largest owner of US treasuries, has allowed its holdings to slip slightly since reaching a peak of $698 billion in 2004. “Japan’s reluctance to accumulate an increasing amount of treasuries highlights the nation’s cautious approach to increase its exposure to dollar-denominated paper,” Laidi says. He says the Japanese government has refrained from making any references regarding diversification of the country’s foreign exchange reserves for fear of

CURRENCY FORECASTS 1.6

1400

Australia (A$/US$)

South Korea (Won/US$)

1200

1.4 1000

1.2 800

Forecast

Source: The Bank of New York 1.0

600

F

M A

M J

J

A

S

O

N

D J

F

M

A

M

2005

J

J

A

S

O

N

D

2006

J

A

M J

J

A

S

O

N

D J

F

M

A

M

2005

J

J

A

S

O

N

D

2006

J 2007

1.8

China (Yuan/US$)

9.0

M

2007

10.0

Forecast

Source: Deutsche Bank F

Turkey (Million Lira/US$) 1.6

8.0

1.4 7.0

Forecast

Source: Deutsche Bank 6.0

F

M A

M J

J 2005

A

S

O

N

D J

F

M

A

M

J

J

2006

A

S

O

N

1.2 D

J 2007

Forecast

Source: Deutsche Bank F

M

A

M J

J 2005

A

S

O

N

D J

F

M

A

M

J

J

A

2006

2 0 0 6

S

O

N

D

J 2007

M A R C H

5 3

CORPORATE FINANCING NEWS FOREIGN EXCHANGE

G

L O B A L

GF

F

I N A N C E

US HIGH-YIELD NEW-ISSUANCE VOLUME

Wave of Mergers Triggers Rise in Bond Issuance

18 16

2005

14

2006

12

The recent increase in worldwide mergers and acquisitions is resulting in a rise in large corporate bond issues to raise money to help pay for the takeovers and to take advantage of low long-term interest rates. Global corporate debt volume rose 14% to $216 billion in January from $189.5 billion in January 2005, according to Dealogic. Issuance in the US high-yield bond market rose 38% to $13.5 billion in January from $9.8 billion in December 2005, says Montpelier,Vermont-based KDP Investment Advisors. Redwood Shores, California-based Oracle sold $5.75 billion of investmentgrade debt in one of the biggest bond offerings ever by a technology company. The software company raised the money in January to pay for its acquisition of Siebel Systems, a customerrelationship services provider based in San Mateo, California. Teva Pharmaceutical Industries, based in Israel,

sold $2.75 billion of debt securities, including debentures convertible into American depositary receipts.The company sold $1.5 billion of senior notes in two series maturing in 2016 and 2036, as well as $750 million of convertible senior debentures maturing in 2026, which may be redeemed by Teva’s finance subsidiary in five years.The debentures also may be repurchased by Teva at the investor’s option in five, 10 or 15 years.Teva also offered $500 million of convertible senior debentures maturing in 2026, which may be redeemed in two years and repurchased by the finance subsidiary at the investor’s option in two, five, 10 or 15 years. Proceeds of the issues will be used to finance Teva’s acquisition of Miami, Florida-based IVAX, a rival generic-drug manufacturer In the US high-yield market, power producer NRG Energy, based in Princeton, New Jersey, sold $3.6 billion in bonds to help pay for its acquisition

($ billion)

CORPORATE FINANCING NEWS CORPORATE DEBT

G

10 8 6 4 2 0 Jan

Feb

Mar

Apr

May

of Texas Genco, a Houston, Texas-based power generator.The issue was the second-largest high-yield bond sale ever, following the record $6.1 billion issue in 1989 for Kohlberg Kravis Roberts’ leveraged buyout of RJR Nabisco. R.H. Donnelley, a Yellow Pages directory publisher based in Cary, North Carolina, sold senior notes generating proceeds of approximately $2.1 billion in a three-part sale in late January, in part to pay for its acquisition of Dex Media, an Englewood, Coloradobased publisher of telephone directories. In one debt issue that was not merger-related, EchoStar DBS, a subsidiary of EchoStar Communications, which

TOP US HIGH-YIELD ISSUES IN JANUARY 2006 Issuer

Offer Date Coupon %

NRG Energy EchoStar DBS R.H. Donnelley NRG Energy Ineos Group Holdings R.H. Donnelley Sanmina-SCI Quebecor Media Chesapeake Energy CCH II Amerigas Partner DRS Technologies R.H. Donnelley

1/26/06 1/19/06 1/13/06 1/26/06 1/31/06 1/13/06 1/30/06 1/11/06 1/31/06 1/26/06 1/10/06 1/20/06 1/13/06

Source: KDP Investment Advisors 5 4

M A R C H

2 0 0 6

7.375 7.125 8.875 7.250 8.500 6.875 8.125 7.750 6.500 10.250 7.125 6.625 6.875

Issue Type Senior Notes Senior Notes Senior Notes Senior Notes Senior Notes Senior Notes Sr.Sub.Notes Senior Notes Senior Notes Senior Notes Senior Notes Senior Notes Senior Notes

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Source: KDP Investment Advisors

Maturity Date Private/Public Amount ($mil) 2/1/16 2/1/16 1/15/16 2/1/14 2/15/16 1/15/13 3/1/16 3/15/16 8/15/17 9/15/10 5/20/16 2/1/16 1/15/13

144A 144A 144A 144A 144A 144A Public 144A 144A 144A Public Public 144A

2,400 1,500 1,210 1,200 750 600 600 525 500 450 350 350 332

has more than 12 million satellite TV customers for its DISH Network, sold $1.5 billion of senior notes in the US high-yield market.The proceeds of the 10-year notes will be used to redeem an outstanding issue to obtain a lower borrowing cost, as well as for general corporate purposes. “Even though credit fundamentals remain benevolent at this late stage of the credit cycle, the roster of issuers expected to benefit from potential upgrades [in their credit ratings] will diminish over time,” says Diane Vazza, head of Standard & Poor’s global fixed-income research group. “Factors that are supportive of potential upgrade momentum are weakening from peak levels,” she says. Credit spreads will creep higher in the next 12 months as markets re-price risk,Vazza forecasts.The pickup in debt-financed mergers and acquisitions could constrain creditquality improvement and serves as an early warning signal of rising default pressure in 2006 and beyond, she says. —Gordon Platt

L O B A L

GF

Mittal Steel’s $25 Billion Bid for Rival Heats Up Sparks flew when Mittal Steel, the world’s largest steel company, which is based in the Netherlands and is 88%-owned by the Mittal family of India, made a hostile bid valued at $25 billion for Arcelor, the world’s second-largest steelmaker, which is based in Luxembourg. European politicians and union leaders spoke out against the proposed merger, which they fear would result in plant closings and thousands of job losses in an industry that has been rapidly consolidating. Luxembourg’s prime minister Jean-Claude Juncker met with French president Jacques Chirac and later said the hostile takeover bid required a reaction no less hostile. Some 28,500 of Arcelor’s workers are French, and 6,000 are based in Luxembourg, where Arcelor is the nation’s largest employer. French, Luxembourg and Spanish steel companies merged in 2002 to create Arcelor, which is the largest supplier of highgrade, high-margin automotive steel to the European market. Mittal, the largest US supplier of automotive steel, passed Arcelor as the world’s largest steelmaker last year by buying International Steel of the United States and outbidding Arcelor to acquire Kryvorizhstal, which was privatized by Ukraine. Lakshmi Mittal, the

billionaire chief executive and chairman of Mittal Steel, who was born in India and now lives in Britain, says none of Arcelor’s 94,000 workers would be laid off following a merger. India’s trade and industry minister Kamal Nath asserts that European governments are opposing Mittal’s bid because of racism and xenophobia and that their intervention could derail global trade talks. “If the color of the shareholder, the nationality of the shareholder or the passport of the shareholder is to be looked at, then we will have to give new definitions to national treatment,” Nath said in an interview with the Associated Press. He added that Arcelor’s shareholders, not governments, should be allowed to decide the merits of Mittal’s bid. “There is a new global economic architecture emerging.They [Europeans] must come to terms with it,” he said. Arcelor’s French CEO Guy Dolle says his company’s products are like perfume, and Mittal’s are mere eau de cologne. Arcelor’s board rejected the proposed deal to create the first steel company with the capacity to produce more than 100 million tons a year, or a global market share of about 10%. CEO Mittal says the combined company would create a European industrial champion and

F

I N A N C E

that there is little overlap between the two companies. Mittal’s leading positions in Asia, Africa and Central & Eastern Europe would be complemented by Arcelor’s strong position in Western Europe, he says. While both companies are expanding in China and India, Mittal says the combined force of a merged company will enable them to accelerate the process. A spokesperson for Arcelor said the company is convinced that its strategy to expand on its own offers superior shareholder value. Arcelor is bidding $4.85 billion for Dofasco, based in Canada, which supplies

automotive steel to Ford Motor and Toyota. If Mittal’s bid for Arcelor succeeds, Mittal said it has agreed it would sell Dofasco to ThyssenKrupp, the Germany-based steelmaker, to satisfy any antitrust concerns. CEO Lakshmi Mittal purchased the most expensive house in London in 2004, paying more than $125 million for a 12bedroom mansion in Kensington Palace Gardens. He is the world’s third-richest man, behind Bill Gates, chairman of Microsoft, and Warren Buffett, CEO of Berkshire Hathaway. —Gordon Platt

AMERICAS M&A: TOP DEAL ADVISERS Rank Value % Mkt # of ($million) Rank Share Deals

Adviser Goldman Sachs Lehman Brothers JPMorgan Lazard UBS Industry Totals*

35,140 32,776 30,728 26,670 21,046 89,205*

1 2 3 4 5 -

39.4 36.7 34.5 29.9 23.6

12 7 14 5 14 643

EUROPE M&A: TOP DEAL ADVISERS Rank Value % Mkt # of ($million) Rank Share Deals

Adviser Merrill Lynch Deutsche Bank Credit Suisse Goldman Sachs JPMorgan Industry Totals*

42,262 40,934 39,682 3 3,149 27,389 8 1,971*

1 2 3 4 5 -

51.6 49.9 48.4 40.4 33.4

9 9 8 4 4 560

ASIA M&A: TOP DEAL ADVISERS Adviser

Rank Value % Mkt # of ($million) Rank Share Deals

Goldman Sachs Daiwa Securities SMBC Nomura UBS Nikko Cordial Securities Industry Totals*

6,993 3,704 1 ,9 12 1 ,643 1 ,461 24,246*

1 2 3 4 5 -

28.8 15.3 7.9 6.8 6.0

6 10 7 2 2 562

January 1, 2006 – February 1, 2006

Source: Thomson Financial Securities Data

* Figures may not add up, as more than one bank typically obtains credit for any one transaction.

2 0 0 6

M A R C H

5 5

CORPORATE FINANCING NEWS MERGERS & ACQUISITIONS

G

CORPORATE FINANCING NEWS MERGERS & ACQUISITIONS

G

L O B A L

GF

F

I N A N C E

TOP MERGERS AND ACQUISITIONS (JANUARY 1, 2006–FEBRUARY 1, 2006) AMERICAS Date Announced

Target Name (Target Advisers)

1/23/06

Albertsons (Goldman Sachs) (The Blackstone Group)

US

Investor group US (Lazard) (Lehman Brothers) (UBS Investment Bank) (JPMorgan) (Evercore Partners) (Wachovia Bank)

Definitively agreed to acquire owner and operator of supermarkets, in a stock-swap transaction; includes $6.1 billion in liabilities.

1/24/06

Pixar (Credit Suisse)

US

Walt Disney (Goldman Sachs) (Bear Stearns)

US

Agreed to acquire developer of digitalanimation graphics, in a stock-swap transaction.

1/3/06

Engelhard (Merrill Lynch)

US

BASF (Lehman Brothers)

Germany

Launched an unsolicited tender offer to acquire maker of technology-based performance products.

5.00

1/10/06

Gtech Holdings US (Citigroup) (Houlihan Lokey Howard & Zukin)

Lottomatica (Credit Suisse) (Goldman Sachs) (Lehman Brothers)

Italy

Agreed to acquire provider of online lottery services, for cash.

4.74

1/8/06

Guidant’s vascular US intervention and endovascular business (Merrill Lynch) (Bear Stearns) (Banc of America Securities) (JPMorgan)

Abbott Laboratories (Lazard)

US

Definitively agreed to acquire the vascular intervention and endovascular business of Guidant, in a sweetened offer.

4.60

1/24/06

Indiana Toll Road

US

Investor group (Citigroup) (Macquarie Bank)

Australia

Acquired a 75-year concession to own and operate the toll road.

3.85

1/26/06

Affiliated Computer Services

US

Affiliated Computer Services (Citigroup)

US

Planned to launch a Dutch auction self-tender for 47% of its common stock outstanding.

3.50

1/10/06

Hughes Supply (Lehman Brothers)

US

Home Depot (Morgan Stanley)

US

Definitively agreed to acquire distributor of construction products, for cash.

3.48

1/9/06

Texas Instruments’ sensors and controls business (Morgan Stanley) (Lazard)

US

Bain Capital (JPMorgan) (Morgan Stanley) (Banc of America Securities) (Goldman Sachs)

US

Agreed to acquire the sensors and controls business for cash.

3.00

1/10/06

Sally Beauty Supply (Goldman Sachs)

US

Regis

US

Agreed to acquire maker of health and beauty products, in a stock-swap transaction; includes $400 million in liabilities.

2.58

1/27/06

Arcelor (Deutsche Bank) (Merrill Lynch) (BNP Paribas)

Luxembourg Mittal Steel (Credit Suisse) (Goldman Sachs) (Citigroup) (HSBC Holdings)

Netherlands Planned to launch an unsolicited tender offer to acquire steel manufacturer, for cash and shares.

24.93

1/25/06

BOC Group (JPMorgan Cazenove) (Merrill Lynch)

UK

Linde (Morgan Stanley) (Deutsche Bank)

Germany

Planned to launch a hostile tender offer to acquire manufacturer of industrial gases, medical and healthcare products, for cash.

14.90

1/16/06

VNU (Credit Suisse)

Netherlands

Investor group (JPMorgan)

US

Planned to launch a tender offer to acquire newspaper publisher, in a leveragedbuyout transaction.

12.49

1/10/06

Peninsular & Oriental Steam Navigation (Citigroup) (Rothschild) (Morgan Stanley)

UK

PSA (Goldman Sachs) (UBS Investment Bank)

Singapore

Unit of Singapore Finance Ministry’s Temasek Holdings agreed to acquire the remaining 95.9% it did not already own in shipping company.

7.95

1/4/06

Smedvig

Norway

SeaDrill (Carnegie) (Enskilda) (Fondsfinans)

Norway

Planned to launch a tender offer to acquire oil and gas company, in a sweetened bid.

3.06

1/23/06

Advanced Info Service

Thailand

Investor group

Singapore

Planned to launch a tender offer to acquire the remaining 57.18% stake it did not already own in telecom service provider.

3.64

1/23/06

Shin

Thailand

Investor group (SCB Securities) (Goldman Sachs)

Singapore

Planned to launch a mandatory tender offer 2.40 to acquire the remaining 50.41% interest it did not already own in telecom services provider.

1/23/06

Shin

Thailand

Investor group (Goldman Sachs)

Singapore

Agreed to acquire a 49.59% interest in telecom, in a privately negotiated transaction.

1.87

1/25/06

Sanyo Electric

Japan

Oceans Holdings (Goldman Sachs) (Daiwa Securities SMBC)

Japan

Unit of Goldman Sachs agreed to acquire a 29.09% stake in manufacturer of consumer electronics, in a privately negotiated transaction.

1.08

Country

Acquirer Name (Acquirer Advisers)

Country

Description

Ranked Value ($billion) 17.37

6.13

EUROPE

ASIA

Source: Thomson Financial Securities Data

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