A 20-year Morgan Stanley veteran and former US skating champion, Dee has spent 15 years of his career in the global fixed income markets, most recently based in Hong Kong as co-head of Asian Debt Capital Markets. He transferred to Singapore at the beginning of the year.
FA: What has struck you most since your arrival?
Michael Dee: Having worked in New York, London, Hong Kong and now Singapore, I?ve been immensely impressed with Singapore?s innate thirst for excellence in virtually every aspect of its functioning. Singapore has a very unique infrastructure that it can and does use to its advantage. It has a robust legal and regulatory system and extremely good government. I believe a recent FinanceAsia poll shown Singapore rated #1 in quality of government in Asia with a notable gap to second place. The civil service is well paid and consequently attracts some of the best and brightest. Singapore is a meritocracy and a very honest society. You would never put corruption and Singapore into the same sentence. It's very clean, safe and is attractive to a diversity of talent from around the world. Its enterprises and their management are of a very high quality when measured on a global scale and contrary to popular belief it?s a fun place to live.
Singapore inc is often criticized for being overly conservative and obsessed with control though.
Current economic problems notwithstanding, I would note that Singapore's success since independence in 1965 has been nothing short of remarkable. The oft-stated issue of control is vastly overblown and the government internalizes the merits of the market. An element of conservatism isn?t necessarily problematic, especially as it relates to safety, quality of life and financial prudence. You have to remember where Singapore has come from and where it?s situated. I?ve been told that Lee Kwan Yew has sung four national anthems during his lifetime.
Because of regional volatility, Singaporean companies have always been more prudent and conservative in the way they manage their finances. They?ve traditionally had low leverage and high cash on their balance sheet. If you live in a wooden house in an area known for forest fires, you make sure you keep a lot of water on your property right? As a result, the financial sector here has been rock solid, even during the Asian financial crisis. NPL's for the Singaporean banking sector are, and have been relatively low. Based on their historical prudence, they're now in a situation where the government and leading companies can look at how they can increase their growth and efficiency, improve EVA (Economic Value Added) and ROE, as well as expand their regional and global footprint.
As local companies try to improve return on equity (ROE) by gearing up their balance sheets, do you think credit ratings will drop?
Singapore has a Aa1/AAA rating, but only a handful of corporates are rated. DBS, PSA, OUB, OCBC, SingPower and ST Engineering are the only entities, which have gone through the rating process. There are situations where the optimal rating for the best local companies should be in the double-A band and others where a single A is appropriate - it really is case specific. Leverage is not the issue, it's what you're spending the money on which counts. What we have been seeing over the past year is local companies strategically and prudently inreasing leverage by expanding domestically and regionally.
In what ways?
Over the past year, Singapore?s leading companies have executed both regional expansion and domestic consolidation. This makes a great deal of sense in terms of reducing overcapacity in the banking sector for instance and building strong regional platforms as PSA, DBS, SingTel, SingPower, SingAir and Raffles Hotels have done among others.
And what of Morgan Stanley's position in Singapore? You've always traditionally had a strong hold on business here, but there's a lot more competitors to contend with these days.
We have the full complement of the firm?s services in Singapore and our franchise extends far beyond just our Investment Banking business. Singapore has a quality financial services infrastructure because clients demand world class service. While we strive to be our customers ?first choice? we know we are not the only choice. And that means it?s not just about having people on the ground locally, it?s whether they're deeply plugged into a strong global network. This global network and our reputation for integrity is the backbone of our franchise, and that makes a difference in Singapore. We're very protective of our franchise and because of that, are willing to advise clients not to do things even it means we don't get any fees. On the other hand, we will push for those situations which are strategically and economically sound. I honestly don?t have time to worry about my competitors. I?d rather focus on what we can control to continue to be the leader in our industry.
So you're not cutting staff as you might be elsewhere in Asia?
I?d says we?re sized about right for the current environment and continue to selectively add or relocate quality people to our talent pool. In total, we have about 200 employees in Singapore whereas about three years ago, Morgan Stanley had about 65 staff here. The increase occurred in tandem with Singapore's continued emergence as an international financial centre such that now 17 business groups are represented in Singapore.
You're also moving product people down here as well aren't you?
Yes. We've recently added equity and debt capital markets point people, as well as industry group professionals. On the equity side, John McLean moved up from Australia earlier this year and on the debt side, we have someone coming down from the Hong Kong-based team later in the year to service our South East Asian debt franchise. So you can see that while the absolute numbers are going up, we're not going out and hiring lots of people. It?s selective and in many instances, simply a case of re-locating existing staff.
And what about on the client side? Are you finding it hard to retain your old relationships in the face of increased competition?
For us it?s all about the customer and Singapore is no different to anywhere else in the world. Some clients like to use the same firm and some like to spread the business around. Our role is to have the full suite of capabilities available for our customers on demand. A good example was when Singapore Power acquired Powernet in Australia. Morgan Stanley not only advised on the transaction, but provided the bridge financing and highly innovative permanent funding in the domestic A$ market on a fully hedged basis. Competition has and will continue to exist in the region, yet the strength of our franchise has allowed us to increase our ability to service our customers as they expand internationally and we are improving our share of business through continued capability based investments.
You have a number of privatization mandates including PSA Corp and Media Corp of Singapore. Have you been disappointed that they haven't been executed this year?
The only thing that disappoints me is that the equity market has been all but shut down this year, but I?ve seen this before in the last 20 years. Privatization will be back on the agenda when global equity markets improve, and they will. The point is that the Singapore government doesn't need the money, so why rush to take high quality enterprises into difficult and challenging markets.
What we have seen is a lot of subordinated debt issuance by the Singaporean banking sector. Earlier in the summer spreads seemed to be under pressure when OCBC completed its jumbo $2.14 billion offering. What was your take?
I don't actually think there's been a tremendous amount of issuance. It?s all relative. The DBS paper we placed from 1999 to 2001 is very tightly held and what is an additional $2 billion in the context of global debt capital markets that sees issuance of over a trillion dollars a year. It?s not even a blip on the radar screen. Singapore has an exceptionally high credit standing and global investors can?t get enough debt from the corporates given its scarcity and quality. SingTel has recently indicated it plans to raise US$2 billion and I would expect it to be a blowout.
(Picture left: Dee in his Olympic figure skating days prior to his arrival in Singapore)
OCBC received some criticism for rushing into the market and raising a lot of money in a number of different currencies, which required pricing each different tranche wider than the last. Do you think it was deserved?
OCBC did an outstanding and creative deal. OK so the euro-denominated tranche may have been a little wider than the dollar tranche, but that's where the demand was and there?s much less arbitrage between the dollar and euro markets than people sometimes like to think. When a borrower needs to raise a lot of money, the most obvious strategy is to maximise the number of investors targeted. The bank was a new name to the credit markets and there was M&A volatility. OCBC was the first issuer from Singapore to raise money in euros and the make-whole provision structured by OCBC (which allowed them to call the deal if the M&A deal fell through) was very unique and thoughtful.
And what of the bond deal you structured for SingTel as part of its acquisition of C&W Optus. That was criticized for being priced too widely and has now set quite a strange benchmark after C&W decided to sell the bonds back into the public markets? The bonds aren't listed or registered and will surely be the kind of illiquid benchmark that no debut borrower would want to set?
No problem. I?d note that the bond tranche was to allow C&W to protect its capital, which was a priority following the PCCW experience. The bonds were resold on a swapped basis mostly to the Singapore banks and when SingTel decides to bring a liquid benchmark, the acquisition debt will have very little bearing on the benchmark?s pricing. When the five and seven year tranches were priced, those were the right spreads for the market at that time. Between pricing and the completion of the acquisition, the market improved slightly and C&W was able to make some money on the bonds, but equally, they accepted the potential downside.
Where do you see future opportunities?
One of the limiting factors over the past few years has been the difficult economic and political status of South East Asia. Without minimizing the complexities created by the events of September 11, there's a window of opportunity for the region now that there are new governments in Thailand, the Philippines and Indonesia - here lies the opportunity. While there are many current issues to overcome, the economic prosperity of the region depends on the ability of the region to work together for the common benefit of ASEAN. As China continues to reform and attract FDI away from South East Asia, the political will to get on with it has an urgency to it.
In Indonesia, for example, the political leadership which created the instability that plagued the country since the Asian crisis, seems to be behind us. The US and other major countries in this region are keen to get behind it and Megawati seems to a found a broad international consensus. The country has a great opportunity to make a fresh start. However, the events of September 11 have entered a new political dimension which is too early to handicap at this stage.
All the fears about Malaysia turned out to be unfounded as well. The Renong-UEM transaction has also now got a lot of people like myself very excited. It presents a serious opportunity for Malaysia to move forward with corporate restructuring. And with respect to the currency controls, every central banker owes a debt of gratitude to Bank Negara and the government of Malaysia as well. It's given them an added arrow in their quiver. Where other countries raised interest rates and destroyed their economies in a vain attempt to protect their currencies, Malaysia did the opposite to protect itself from the global volatility. It never took a dime of IMF money and never lost its investment grade rating. Many people have argued that the pace of reform is too slow, but what the government seems to have been saying is that it doesn't want to be operating on too many fronts all at once. First it stablized the macroeconomic platform, then reformed the banks and is now moving on to the corporates. Pragmatic and smart is what I would call it. Dr. Mahathir and Dr. Zeti don?t get enough credit for this in my mind.
Do you believe that Singapore can play a leadership role in Asean?
Yes, but while Singapore works to provide leadership regionally the other countries must step up as well and Indonesia, due to its size, is key. The geopolitical complexities of the World Trade Center attack and the coalitions' response are very high and in the near term, this will attract a great deal of attention regionally and the outcome could set the tone and pace of economic development for the rest of the decade if not longer. Asean's 500 million people produce the equivalent GDP to China. If ASEAN is able to cooperate on a larger scale and harmonize its policies, it could act both as an economic counterweight and in cooperation with China thus providing its people a growth platform for the next 20 years.
