Market opportunities as seen by ABN AMRO Rothschild

Busy start to the third quarter by joint venture which has defied sceptics saying it was doomed to fail - a decade ago.
The correction that hit global equity markets in May and June looks to have resulted in more deals than normal being deferred from the end of the first half to September when the hope is fund managers will return with newfound confidence and a revived appetite for risk after their holidays in August. Indeed many investors appear to have already shifted their reading priorities from term sheets to the latest bestsellers, but some banks just donÆt seem to have noticed.

ABN AMRO Rothschild is clearly one of them, having started the third quarter on a very strong note, and in the second week of July the equity capital markets joint venture between Dutch bank ABN AMRO and French/British investment bank Rothschild practically ruled the Dealogic league tables for Asia ex-Japan û although admittedly the total issuance was on the thin side.

Still, fresh from its ten-year anniversary celebrations, ABN AMRO Rothschild got more league table credits than any other bank that week with $310 million, did more deals with three out of the 13 completed issues, and generated one third of the total $9 million in revenue. It also brought the weekÆs largest deal in the form of a $250 million convertible for Chunghwa Picture Tubes

Here, John Moore, joint head of ECM since 2005, takes time out from his busy schedule to talk about the bankÆs aggressive start to the second half, what opportunities he sees in the region, and why the ABN AMRO Rothschild JV came to be in the first place.

Two of the transactions you completed last week were deals that had been postponed only a few weeks earlier because of the weak market environment. Was it not a gamble to bring them back so soon given that secondary markets are still volatile and many investors are now starting to head on holiday?

The two transactions that we had suggested be deferred clearly were so ready to go that they could be done very quickly. With the Cambridge REIT for example, the roadshow had been completed and we were able to re-launch the transaction on an accelerated basis - two days and it was done. Unless we would have had one very disastrous day in the market, we were very confident that the transaction was there.

ProMOS was a situation where, going back a month, we had the book covered but looking at the price on the day and the discount to that, the company quite fairly said it was below where it wished to do the deal. But the price recovered from about NT$10.50 to NT$11.50 and we were able to get the deal done at an absolute level that the company was happy with. There was no point in waiting.

What do you expect with regard to new issuance going forward and when, in your view, can we expect the deal flow to resume?

I think this summer will be a more traditionally quiet summer in terms of issuance as opposed to last year when it was extremely busy. Nobody will attempt to relaunch transactions that were deferred as a result of the market correction in late July or August.

But subject to international markets and obviously what is happening in the Middle East - itÆs still a bit of an unknown what impact that will have on markets û as long as there is some degree of stability over the next couple of months, I think we are in for a pretty busy end to the third quarter and fourth quarter. There are definitely deals sitting in the pipeline.

There has been a lot of chatter in the ECM market in recent months about the benefits of doing off-market deals that pay higher fees versus doing deals that result in a lot of league table credit. WhatÆs ABN AMRO RothschildÆs approach?

I think you need a mixture of both. Purely going after things for league table purposes, certainly in the short-term, doesnÆt generate much in terms of fees. But then again, it is important to have a profile so that clients see that you are a player in the market. There have been instances in the past 12 months where we have stepped away from transactions where we felt the economics were getting uncompelling.

Some of the transactions that took place in the equity-linked space in India were a case in point. We did the HDFC deal in the middle of last year, which at half a billion dollars was the largest CB out of India at the time, so we donÆt feel we need to prove our credibility in the Indian CB space. Because of that I donÆt think we are in a position where we are willing to lose tonnes of money for the sake of one deal.

So, what kind of deals do you focus on and where do you see opportunities going forward?

On size, obviously we have a minimum. I certainly donÆt want people to focus on very small deals, but it depends on what sort of deal it is and in what market, as there are exceptions to every rule. We definitely focus on large deals with our role on the $2.2 billion ADRs for LG.Philips LCD being an obvious example. In Australia, we are the only bank that has been involved as global coordinator in all three Telstra transactions (with the third one expected later this year) and we were also a bookrunner on Rosneft (the $10.4 billion IPO that was completed earlier this month was the worldÆs fifth largest equity transaction ever) so internationally we do as many big deals as a lot of our competitors.

There are also deals that are not necessarily spectacular in themselves, but repeat transactions that we are very proud of. We think that is evidence of the fact that we do a good job for our clients, not just in terms of pricing and structuring, but also in the smoothness of the execution and our work with the clients to get the results they want. Last weekÆs transaction for Chunghwa Picture Tubes was, I think, the sixth transaction in ECM that we have done for either CPT or Tatung, which is its parent.

We have been very active in China, especially over the past 18 months, but we have not been a bookrunner on any of the large banks that have come to market so far. IÆm not saying that we rule ourselves out from those, but to date it hasnÆt been a focus. Our focus in that market has been much more on the Gomes of this world. They may end up being slightly smaller transactions, but in its space (consumer electronics retailer) Gome is quite a large company by a lot of international standards. ItÆs a private sector company and those transactions have often ended up better pickings for us.

Another focus is the smaller privatisations that come out of the municipalities. Tianjin Port and the other transactions we have done for the Tianjin municipality and other companies associated with it have been very, very important to us. Again, slightly smaller, but just as attractive to investors, if not more so, and playing in spaces that are geared towards ChinaÆs growth.

Outside China, Taiwan has certainly been a big focus for us. There are various issues to do with Taiwan in terms of international issuance and the volume hasnÆt been there for the past year, but we have done two deals in the last 10 days for ProMOS and Chunghwa Picture Tubes so to the extent that there is issuance out of Taiwan, IÆd like to think that we will be a major player.

And India?

India is a market that everyone is focusing on. The correction a month ago has dampened issuer enthusiasm because prices are not where they were, but we firmly believe in the Indian story. Only five or six years ago, India was one of those markets where the window for equity issuance would open and then slam shut again three months later. But over the past couple of years India has been in the top three in terms of ECM in Asia with a sustained period of issuance and I donÆt think that is going to stop.

The reason is that you have a lot of Indian companies there that are no longer Indian, but global companies, particularly in the outsourcing space. These companies are now buying things in Europe and the US and eventually all of them are going to need capital. On top of that the economy is picking up.

When the JV between ABN AMRO and Rothschild was established, a lot of sceptics suggested it was doomed to fail. Obviously, that hasnÆt happened, but the JV remains a unique structure in the world of investment banking. Can you explain the thinking behind it?

ABN AMRO and Rothschild had worked together prior to the JV, most notably on the KPN privatisation in 1994. Rothschild had an incredibly strong track record advising on privatisations in Britain and across Europe, but the expansion of the number of firms operating in the city (of London) and American banks coming in, Rothschild, which didnÆt have the equity distribution and didnÆt have a huge balance sheet, was increasingly becoming constrained.

At the same time, ABN AMRO, which was itself formed in 1991 from the merger of ABN and AMRO Bank, had a lot of ambition to get more into the investment banking product. It had acquired Hoare Govett in London, which gave it a distribution platform and they had a lot of balance sheet, but didnÆt have the track record, particularly within privatisations.

Working on KPN, basically the two teams worked out that on a number of levels they fit together very well. The two team leaders û Tony Alt (who is today vice chairman of Rothschild) and Wilco Jiskoot (who today is a member of the managing board of ABN AMRO) û got on very well personally and thought the two houses should do something more permanent together to utilise their comparative strengths. So the idea of the JV was born and it officially started trading on July 1, 1996. People in the City gave it 12 months, and I think everyone is quite proud of the fact that weÆve managed to keep it going for 10 years.

Still, for the past three years, ABN AMRO Rothschild has typically hovered slightly below the top 10 in the overall ECM league table for Asia ex-Japan. Are you ready to move to the next level?

As I said, we havenÆt been a bookrunner on the very large privatisations out of China. If you look at who is in the top five, those big deals really do bias the Asian league tables. So you will see BOCI, for example, higher up in the league table, but the only deals they do are those large privatisations. That probably accounts for a few spaces, but I agree that the start to this year (outside the top 10) is not where we want to be. However, we have somewhat made up for that over the past couple of weeks.

On equity-linked though, we were fifth in Asia ex-Japan last year and while JPMorgan was the clear leader, the second, third, fourth and fifth ranked banks we were all close to each other.
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