Global Finance (April 2005)

KAZAKHSTAN LOOKS COSTLY COMPLIANCE: RISK MANAGEMENT: FOR OPPORTUNITIES COMPANIES APPEAL INSURERS ADAPT TO A BEYOND OIL & GAS PAGE 39 FOR HELP PAGE 41 CHANGING WORLD PAGE 43 SURVEY WORLD’S BEST DEVELOPED MARKET BANKS

APRIL 2005

A revitalized industry prepares for a bumper year

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CONTENTS

COVER STORY 12 Project Finance Activity Reaches Fever Pitch

PROJECT FINANCE BY GORDON PLATT

REGULARS 2

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Japanese parent company.

6 ROUNDTABLE: TURKEY

country’s property market.

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Russia and Brazil.

GLOBAL CUSTODY GUIDE

Key information for investors in emerging

45 Focus: Mergers & Acquisitions The European private equity market is growing rapidly, as US buyout firms seize opportunities to help restructure

COUNTRY REPORT: KAZAKHSTAN BY PAULA L. GREEN

corporate Europe.

49 Foreign Exchange Asian central banks may tilt the US yield curve upward by cutting back on their

Costly Compliance As the full demands of complying with Sarbanes-Oxley become clear, companies are increasingly calling for help in reining in the costs.

43 Insurers Seek New Role In A Changing World

10 EM Investor markets.

39 Country Report: Kazakhstan

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Emerging Markets Roundup The latest news from China, India,

30 Global Custody Buyer’s Guide

Kazakhstan has immense energy reserves, but its government is determined to diversify the country’s economy. Its efforts are bearing fruit—slowly.

Milestones Mystery money from the Caribbean and Bermuda sends the dollar on a wild ride; and the People’s Bank of China pulls out all the stops in its attempt to cool the

24 Roundtable: Turkey

In our 15th annual listing, we provide a comprehensive guide to the services of the world’s top custodians.

Newsmakers Colombia’s finance minister, Alberto Carrasquilla, battles in vain to keep his country’s currency from rising against the slumping dollar; and Sir Howard Stringer, the Welsh-born head of Sony America, becomes chairman and CEO of the

BEST DEVELOPED MARKET BANKS BY PAULA L. GREEN & ANITA HAWSER

Global Finance unveils its annual list of the best banks in developed markets around the world.

At a recent meeting in Istanbul, Global Finance brought together some of the key figures in Turkey’s banking and finance industry to discuss the country’s prospects.

Dear Reader A letter from the editor.

The project finance industry had a banner year in 2004.This year looks set to be even better.

FEATURES 16 Best Developed Market Banks

APRIL 2005 | VOL.19 NO.4

buying of US treasury bonds.

51 Corporate Debt COSTLY COMPLIANCE BY PAULA L. GREEN

Samurai and kangaroo bonds are hopping as US companies seek to diversify their sources of funds.

52 Global Equity/DR

Insurers are getting more involved in helping their corporate clients understand the risks they face.

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APRIL 2005 | VOL.19 NO.4

Place Your Bets KAZAKHSTAN LOOKS COSTLY COMPLIANCE: RISK MANAGEMENT: FOR OPPORTUNITIES COMPANIES APPEAL INSURERS ADAPT TO A BEYOND OIL & GAS PAGE 39 FOR HELP PAGE 41 CHANGING WORLD PAGE 43 SURVEY WORLD’S BEST DEVELOPED MARKET BANKS

APRIL 2005

A revitalized industry prepares for a bumper year

PROJECT FINANCE REACHES FEVER PITCH

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ith corporate misbehavior and accounting shenanigans apparently under control, the focus of the conversations among the financial chattering classes has moved on. In fact, it has become a dual focus—on the fall of the US dollar and on the rise of the hedge fund industry. The two came together last month with speculation that hedge funds had been buying up US securities in such quantities that their purchases were reversing the downward trend of the dollar. (See Milestones, page 6.) At first glance, that seems a pretty strange thing to do, given that hedge funds are more likely to want the dollar to fall further so they can ride it down. Currency markets had already been seriously rattled by reports that Asia’s central bankers were starting to diversify their banks’ holdings away from dollars, but the revelation of the near-$40 billion purchases helped reassure the markets that the dollar wasn’t about to fall off a cliff— and marked the start of a 10-day dollar rally. It is not easy to see how hedge funds could benefit from propping up the value of the dollar, but there are some intriguing echoes of 1992.That was the year that George Soros catapulted hedge funds into the limelight with his raid on Sterling that forced Britain’s currency out of the European Exchange Rate Mechanism—and left the Bank of England out of pocket by about a billion pounds. Soros, who believed Britain’s currency was significantly overvalued, had a simple strategy: borrow billions in Sterling and then use it to buy Deutschmarks and French francs.The selling pressure forced the British to give up defending the pound, which then plummeted, leaving Soros with his gargantuan profit. By temporarily pumping up the value of the dollar, hedge funds and currency speculators could be setting the stage for the mother of all currency raids. If they are, and they pull the plug any time soon, the effects will be dramatic and painful. Any organizations that have not yet hedged their exposure to the dollar would be wise to remember that it is not only the Alan Greenspans of this world who can move the markets.

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Expanded Emerging Markets Coverage On page 10 of this issue you’ll find a new section: EM Investor. covering subjects of interest to investors looking to put their money into emerging markets.We’re excited about our expanded emerging markets coverage and we hope you find it interesting and, most of all, useful. Until next month,

Dan Keeler [email protected]

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

EDITOR: DAN KEELER EUROPE EDITOR/LONDON: ANITA HAWSER CONTRIBUTING WRITERS: GORDON W. PLATT, JR., SANTIAGO FITTIPALDI, PAULA L. GREEN, AARON CHAZE, FRASER RICHARDSON, KIM ISKYAN, LAURENCE NEVILLE

PRODUCTION MANAGEMENT (MILAN): GIULIANO CASTAGNETO ART DIRECTION: ER CREATIVITY/ENRICO REDAELLI, CLARA CIOCCHINI COPY EDITOR: TINA ARIDAS

VICE PRESIDENTS, SALES: SEBASTIAN CAZEIRO, LEWIS GALATI, PETER RIORDAN, THOMAS GEORGIADES, GRAEME McQUEEN, SALES DIRECTOR, EUROPE AND ASIA, RICHARD SCHOLTZ, SALES MANAGER, EUROPE 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. Germany: Erhardt Eisenacher, Eisenacher Media. Hong Kong, Malaysia, 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. Mexico & Costa Rica: Xavier Romero Goytortua. Pakistan: Imran Ahmad, Pace. 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 April 2005, Volume 19, Number 4. 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: 1-212447-7750. 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 © 2005 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)447-7900 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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AROUND THE WORLD

COLOMBIA

JAPAN

FINANCE MINISTER WRESTLES WITH AN IRREPRESSIBLE PESO

CAN SIR HOWARD STRINGER GET SONY BACK ON COURSE?

inance minister Alberto Carrasquilla of Colombia has pulled out all the stops to keep the country’s currency from rising against the slumping dollar. Sadly, nothing seems to work. The peso rose 16% last year, making it one of the strongest currencies in the world, to the chagrin of the country’s exporters, who complain they are losing their competitiveness despite a new free-trade agreement with the US. “Nobody wants to buy dollars because buying means losing money,” Carrasquilla says. Last year, the government and the central bank bought more than $3 billion in US currency in an attempt to curb the peso’s rise.The central bank slashed interest rates three times, bringing the

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benchmark rate down to 6.5%, but still the peso rose. Last December, President Alberto Uribe signed an executive order restricting the inflow of short-term investments by requiring international investors to keep their money in the country for at least a year.The capital controls proved virtually useless in stemming the peso’s appreciation and will be abandoned within the next few months, Carrasquilla said in a recent interview with US news service Bloomberg. The latest plan is for Colombia’s central bank to sell the government at least $1 billion in foreign reserves, which the government will use to help prepay international debt, Carrasquilla says. The dollar reserves were accumulated during the central bank’s foreign exchange market intervention. Colombia’s central bank is independent by law, but Carrasquilla is president of its seven-member board. He says that prepaying debt will help meet the International Monetary Fund’s requirement that Colombia trim its debt to less than 40% of gross domestic product. Draining off the central bank’s reserves could also spur some peso selling. Meanwhile, Carrasquilla says, the central bank will keep buying dollars. —Gordon Platt

Sir Howard Stringer, the Welsh-born head of Sony America, has been named chairman and CEO of the Japanese parent company. The gaijin CEO, rare in Japan and a first for Sony, may implement some drastic turnaround measures that would have been difficult for a Japanese manager to implement. The genteel Sir Howard, known for his people skills and sense of humor, will Sir Howard Stringer wield the corporate axe with an iron hand and kid gloves. He also will have to resolve Sony’s identity crisis. Is it an entertainment company or an electronics company, or both? Now that the Sony Walkman has been displaced by the Apple iPod, the Japanese company is losing its reputation for being first to market with the latest technology and quality products. The Oxford-educated executive was appointed to Sony’s top position only weeks after the company warned that profits at its electronics division would fail to meet their target for the second straight year. Sir Howard already has been credited with breaking down the management silos between Sony’s US entertainment and electronics operations, and he just might have the vision to steer Sony successfully into the broadband age. Last year, he oversaw the purchase of Metro-GoldwynMeyer and its film library. Now he has to find a way to convince consumers to tap into Sony’s media cache with advanced devices, such as the popular PlayStation Portable game console. Sir Howard, a former journalist who became president of CBS, has nine individual Emmys to his credit and is firmly grounded in the content side of the business. However, the decorated Vietnam War veteran has the guts, the talent and the versatility to succeed in his latest multicultural, and multi-media, challenge of helping Sony to realize its global potential. He plans to live in the UK with his family and travel regularly to Tokyo and New York. —GP

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UNITED STATES

CHINA

MYSTERY INVESTORS BUY US SECURITIES DESPITE THREAT OF FALLING DOLLAR

CENTRAL BANK PUTS THE BRAKES ON AS ECONOMY SPEEDS AHEAD

he US Treasury International Capital Systems, or TICS, report has become one of the most closely followed monthly data series in the financial markets at a time when many investors are worried about funding the current account deficit.The dollar jumped last month when the report showed that foreign investors plowed a near-record net $91.5 billion into US stocks and bonds in January.That was more than $20 billion above the mostoptimistic of analysts’ forecasts. The dollar dropped the next day, however, on news that the US current account deficit widened in the fourth quarter of 2004 to a record $187.9 billion.The deficit for all of last year was $665.9 billion, also a record.“Foreign investors have not lost their appetite for US securities,” says Michael Woolfolk, senior currency strategist at The Bank of New York. January was the strongest month for net purchases of US equities by foreign investors since May 2001. According to Woolfolk, the dollar’s recovery in January from record lows in December not only was a technical rebound, but was driven by real money flows. The source of that money, however, was somewhat

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mysterious. It didn’t come from Asian central banks, at least not directly. Japan was a net seller of $5.6 billion in US treasury securities. China and South Korea, other big holders of dollar reserves, also were net sellers of US treasuries. Net capital inflows from the Cayman Islands of $18.6 billion in January included $6.7 billion of US treasury bonds. A $20.7 billion inflow from Bermuda was mainly in US treasury securities. Recent large transactions through Caribbean tax havens, often attributed to hedge funds, could include some central bank buying,Woolfolk says.“Why the central banks would redirect official flows isn’t clear,” he says.“It needs to be studied.” —Gordon Platt

Strong growth puts pressure on the yuan The People’s Bank of China introduced new tightening measures to cool the property market last month, as the economy showed no sign of slowing and investment growth continued well above the government’s target. The central bank increased the five-year benchmark mortgage rate from 5.31% to 6.12%. It also raised the required down-payment ratio from 20% to 30% in areas with rising prices. The average price for residential housing rose 15.2% last year, much higher than the rise of other price indexes. A spokesperson for the central bank said that the rise in housing prices could lead to financial risks, and that the rate rise would help guide the housing sector down the proper track. These were marginal steps, according to analysts, who expect the PBOC to raise other rates soon to slow the economy. Last October, interest rates were increased by 27 basis points. China’s fixed investment rose at an annual rate of 24.5% in the first two months of 2005, still well above the government’s 16% target. Along with other data reported for the period, it appears that China’s economy is growing much faster than the government would like, analysts say. Recent management changes at the country’s big state banks seem to suggest that the central bank is breaking down local governments’ resistance to tightening measures, according to analysts at HSBC Bank. This shows that Beijing is serious about reducing the excessive amounts of investment in the Chinese economy, they say. Premier Wen Jiabao said last month that government planners face a multitude of problems as they try to keep the economy growing at a rapid but sustainable pace. “Some people strongly demand that we raise the yuan’s value, but they haven’t given much thought to what sort of problems would ensue,” he said. “This is very irresponsible.” —GP

US securities are still popular

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EM ROUNDUP BRAZIL

INDIA

CENTRAL BANK FINDS ITSELF IN THE SPOTLIGHT

FOREX RESERVES SURGE WITH FLOOD OF INVESTMENT

he Brazilian government may have put itself in a Catch-22 situation, as it fights inflation through interest rate hikes but chills domestic demand and cools economic growth prospects.While Brazil’s hyperinflation of the mid-1990s remains a bogey for the administration, local business and labor leaders charge that high interest rates are punishing jobs and investments. The central bank’s monetary policy committee (Copom) has been raising its Selic benchmark rate since September 2004, taking it to a 17-month high of 19.25% in March from a low of 16% in May 2004.While the hikes aim to keep inflation under control, observers contend that the government’s 5.1% inflation target for 2005 may be ambitious.They point to a 15% minimum wage hike and salary increases for judicial workers as ways in which the administration may itself be fueling inflation. There are signs that inflation is already stabilizing, though, having risen by a modest 0.58% in January and 0.59% in February.That still brings annual inflation to 7.4% for the

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12-month period to February, which is higher than the stated 2005 target but below last year’s 7.6% and 2002’s 12.5%. Copom is expected to increase rates yet again in April, to a hefty 19.5%, in what may be the last upward adjustment for the year. In late February, an OECD report on Brazil noted, among other things, that lack of credit and high interest rates could threaten the country’s economic recovery by halting investments. Meanwhile, Congress in March revived a decade-old debate on granting the central bank autonomy. Opponents argue that central bank directors must be accountable to the government in order to ensure that monetary policy remains in line with public and private sector interests. —Santiago Fittipaldi

Brazil’s central bank president Henrique Meirelles

The McGraw-Hill Companies (MHC) made a long-awaited move and announced an intention to acquire a 55.67% stake in CRISIL, India’s leading credit rating agency, through S&P LLC, its wholly owned subsidiary. MHC currently owns 9.5% of CRISIL. Even though Narendra Patni, CEO, Patni Computers the proposedGERMANY, investment is SWITZERLAND, small, at just $55 million, it is being viewed as a significant development since it indicates S&P's growing confidence in the Indian economy and could be a sign that more aggressive FDI flows are on their way. S&P’s move is by no means an isolated development. Global banks, too, are signaling their interest in investing in India by making small but strategic purchases of smaller regional Indian private sector banks or rapidly expanding their own banking presence. Canada’s Scotiabank has recently acquired a 7% stake in the Bank of Punjab. The current regulations do not allow foreign investors to hold more than 10% of the voting shares of private sector banks, but the view being taken is that this restriction will be eased soon. HSBC has said that it would pump in $243 million to organically expand its existing Indian operations. High-quality listed Indian banks from the public sector, too, are issuing equity, largely to provide an entry opportunity for foreign institutional investors. Punjab National Bank, one of the nation’s larger banks, floated 80 million shares in the first week of March, attempting to raise $650 million, with a 50% reservation for foreign institutional investors. That portion of the book was oversubscribed by 11 times within minutes of opening. The capital-raising bug is spreading to other sectors as well. Patni Computers, one of the stellar IT hardware stories in India, is looking at a $150 million ADR issue and a subsequent Nasdaq listing, cashing in on the growing demand for Indian equity. As foreign investors continue to lap up the India investment story, the foreign exchange inflow has continued unabated. According to the Reserve Bank of India, forex reserves climbed to a record $137.5 billion, largely due to sustained investment inflows. —Aaron Chaze

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LEADERS POUR OIL ON TROUBLED WATERS Donald Tsang, currently Hong Kong’s chief secretary for administration, is favored to take over as chief executive of the former British colony following Tung Chee-Hwa’s resignation from the top job on March 10. Tsang will fill the role on an interim basis until Beijing elects Tung’s successor. Tung, who gave deteriorating health as a factor behind his resignation, had struggled to recover from public disaffection with his leadership—demonstrated most vividly when half a million Hong Kong residents took to the streets in July 2003 to protest against a proposed anti-subversion bill, which was later shelved. The former shipping magnate has accepted a largely ceremonial post as vice chairman of the Chinese People’s Political Consultative Conference. The opening of the National People’s Conference saw Wen Jiabao, China’s Premier, deliver a speech focusing on the need to aim for greater economic balance and equality. The Premier’s speech stressed the need to continue to control fixed-asset investment and reduce the economy’s dependence on trade as a source of growth. Officials will this year target a 15% increase in export and import volumes, which would represent a dramatic slowdown from last year’s 36% growth rate. Wen Jiabao indicated that China would this year focus on addressing urban/rural disparities, environmental is-

sues and improving the quality of economic growth. The country’s leadership also attempted to allay US fears that the EU’s proposed lifting of its arms embargo, imposed in 1989, will result in a flood of weapons purchases. Li Zhaoxiang, China’s foreign minister, has stated that China doesn’t have the money to buy “expensive and useless” weapons. Washington is concerned that the lifting of the embargo would allow a transfer of technology to China, changing the balance of relations between China and Taiwan. Relations within China’s corporate world were Donald Tsang shaken by the unfamiliar sight of a hostile takeover bid. Shanda Online Entertainment, the country’s largest online entertainment company, plans to acquire Sina.com, the nation’s largest web portal. Sina’s initial response to Shanda’s raid, in which it bought 19.5% of Sina’s shares, was to put in place a poison pill allowing Sina to issue discounted stock and dilute an unwelcome bidder’s stake. If the merger goes ahead, it will create a group with an estimated market capitalization of $3.9 billion. —Fraser Richardson

RUSSIA

EMBATTLED PRESIDENT PUTIN FACES CHALLENGES ON MANY FRONTS

Troubled times: Putin’s summit with Bush was a disappointment

t seems that the so-called Yukos affair just won’t lie down. Now, on the domestic Russian front, a messy struggle has broken out between governmentowned oil company Rosneft

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and government-owned gas company Gazprom over control of Yuganskneftegas, the main production unit of Yukos. The conflict throws into doubt the Kremlin’s apparent overarching aim of creating a single, monolithic statecontrolled energy company to be used as a foreign policy tool. Russian President Vladimir Putin faced frustration on another front, too, after a longanticipated summit with US President George W. Bush yielded no significant breakthroughs.While still cordial, the relationship between the two leaders has clearly cooled since their chummy meetings of a few years ago. Putin’s popularity ratings fell

to new lows, largely over painful social reforms that started to be implemented in January. But despite the decline, most polling agencies report that he enjoys approval ratings in the 60% region—well below the 85% readings of his peak, but reflective, nevertheless, of broad-based support. The Russian President will be hoping that support does not erode further, as a number of high-profile figures are emerging to challenge him. On the one-year anniversary of his sacking from the position of prime minister, Mikhail Kasyanov publicly criticized the Kremlin for turning away from democracy and hinted that he may run for president in 2008. Later,

Russian chess champion Garry Kasparov announced that he was retiring from the game in order to challenge what he called the “dictatorship” of President Putin. Kasparov already heads a group called 2008: Free Elections, which is focused on preventing Putin from seeking a third term in office. In the latest blow to Russia’s imperial ambitions— following the rise of Viktor Yuschenko in Ukraine—the victory of the ruling communist party in Moldova positioned the country to make a decisive turn away from Russia, in favor of closer links with Europe and the United States. —Kim Iskyan 2 0 0 5

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EM INVESTOR COMPANIES TO WATCH: OYAK GROUP/TURKEY

DR NEWS

PENSION PERFORMER

EMERGING EUROPE MARKET ACTIVITY GROWS

he Oyak (Ordu Yardimlasma Kurumu) Group,Turkey’s first and largest private pension fund, has built itself up to become the country’s thirdlargest industry conglomerate behind the family-owned Koc and Sabanci groups. Described by some observers as a “sleeping giant,” Oyak is a hybrid of a military pension fund and private equity investor, which manages funds for its 220,000 members, including senior officers and civilian workers of Turkey’s armed forces, through portfolio and equity investments. It Coskun Ulusoy also manages

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the companies it invests in, including a joint venture with French car manufacturer Renault and French insurance company Axa Group. In 2002 its financial services division OyakBank bought Turkey’s Sumerbank to create a mid-size bank with a network of more than 270 branches. CEO Coskun Ulusoy says the fund’s investment approach stemmed from the fact that Turkey’s capital markets were relatively underdeveloped. “The fund had to do something to make money, so they invested in companies,” he says, to boost the fund’s income beyond the 10% mandatory wage deduction levied on members. Oyak is now one of Turkey’s largest and highly profitable industrial and services companies. —Anita Hawser

Debt instruments such as convertible bonds and securitization are growing forms of investment in emerging markets, says Michael Cole-Fontayn, managing director, global issuer services, The Bank of New York. But, Cole-Fontayn says, depositary receipts are still the most popular means for companies in these markets to raise foreign capital. “We continue to see significant demand for emerging markets, and we certainly see some significant flows in depositary receipt programs, both in terms of ADRs and GDRs,” he says. SWITZERLAND, GERMANY, STATES Activity in Russia has beenUNITED particularly high, princiCole-Fontayn pally focused around the oil and gas sector. However, in recent months a number of Russian companies in the telecom, steel, mining and cosmetics sectors have come to market. Russian telecom company Mobile TeleSystems was the largest DR transaction last year. According to Cole-Fontayn, up to 80% of Russian companies’ market capitalization is in DR programs, with emerging market and country funds owning in excess of 850 million receipts, worth $42 billion. There is also increasing DR activity in Hungary, Poland, the Czech Republic, Romania, Bulgaria and the Ukraine. “DRs provide an opportunity to get into these markets quite early in an infrastructure-efficient way,” Cole-Fontayn explains. He says DRs can also mitigate risks associated with early-stage investment in emerging markets. Criteria companies must meet in order to list DRs on international exchanges can also lead to improvements in domestic corporate governance. —AH

NEWS

SOVEREIGN BONDS FIND FAVOR n EU accession countries such as Turkey, eurobond sovereign order books are being met with strong investor interest. “The pull towards EU membership is going to make Turkey increasingly attractive,” says Martin Hibbert, managing director, Deutsche Bank.

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Turkey’s recent €1 billion, 12-year sovereign bond lead managed by Deutsche Bank and UBS constituted the strongest domestic response for a euro sovereign issue. With the advent of the euro as a full-fledged currency, Hibbert says more investors have switched out of equity

into debt. “The sheer weight of demand means people are more credit aware, and you are seeing investors that bought AA four years ago now buying BBB rated.”The markets hope investor response to sovereign issuance in markets such as Turkey, the Czech Republic and Poland

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will encourage corporates and banks in these markets, which normally raise money via the syndicated loan market, to issue eurobonds. “In emerging markets generally, there really hasn’t been a lot of corporate issuance,” notes Hibbert. “I expect corporates will start to issue as well.” —AH

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COVER STORY BY GORDON PLATT

PROJECT FINANCE Activity Reaches Fever Pitch The project finance industry had a banner year in 2004. This year looks set to be even better. s activity in the project finance industry picks up, a handful of global banks are jostling to lead the market, while a host of local and regional banks, including China’s stateowned banks, are gaining a foothold.The race to lead the market is hardly surprising given the stakes. Global volume reached $170 billion last year—the highest level since 2000 and a 50% increase on the previous year. This year, volumes are expected to be at least as high. BNP Paribas of France and Citigroup

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of the United States finished in a virtual tie for the lead as mandated lead arrangers of project finance transactions worldwide in 2004, according to London-based Dealogic ProjectWare, which maintains a global database. Citigroup was first and BNP Paribas second in global project finance loans, according to New York-based Thomson Financial, which put such borrowing at $116 billion last year, an increase of 67% compared to 2003. Bankers and industry participants say

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the revival of the market indicates that limited-recourse financing will remain an important technique to finance transportation infrastructure, electric-power generation and energy projects worldwide. “The basic strength of the project financing market is its ability to attain the proper allocation of risk,” says Christopher Hasty, managing director and global head of infrastructure and energy finance at Citigroup. “The advantage of limited-recourse financing is the access it provides to multiple capital markets, in-

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cluding equity and bond markets, bank loans, export credit agency programs and mono-line wrapped issues with insurance guarantees,” he adds. According to Hasty, all of these markets proved their worth during the difficult patches encountered a few years ago, showing they have fundamental strengths on which the project finance industry can draw. A strong pipeline of transactions, particularly in the energy and infrastructure sectors, and a continued global recovery in power suggest that the project finance deal flow will be sustained throughout 2005. Four of the market’s major sectors—infrastructure, power, energy and metals—are rising simultaneously, Hasty says. “We saw an uptick last year, and I am hopeful for another uptick,” he comments. Few doubt that activity will grow again this year, but there are differing views on how much the market will expand.“We won’t see another 50% rate of increase in 2005, but the level of activity will be at least as high as last year,” says Christophe Rousseau, head of the project finance division at BNP Paribas.The expanding global economy is creating growing demand for oil and gas and other commodities, he says, adding that China’s demand for metals has been especially strong. BNP Paribas offers project financings of conventional and renewable power generation, oil and gas, refining and petrochemical and infrastructure, as well as telecom financings covered by structured finance. The bank witnessed strong performance in all of its regional markets in 2004, and the Middle East and Australia were particularly active, according to Rousseau. High oil prices not only have improved the position of equity investors in energy projects, but also have boosted liquidity supplied to the project finance market from Middle East oil exporters, he says. “The current high level of oil prices doesn’t change how we look at project risk,” he explains. “We use conservative estimates of future prices, and we work

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TOP 10 PROJECT FINANCE DEALS, 2004 Project Name

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Qatar

12-15-2004 06-22-2004

1 Qatargas 2 LNG Complex 2 Auna Refinancing

5.45

Spain

3 Tengiz Oilfield Expansion

4.40

Kazakhstan

11-19-2004

4 Incheon International Airport Railway

4.01

South Korea

10-27-2004

5 Texas Genco Acquisition

3.74

US

11-28-2004

6 Tube Lines Refinancing

3.70

UK

05-12-2004

7 Baku-Ceyhan Pipeline

3.60

Azerbaijan

02-03-2004

8 UPC Distribution Refinancing

3.50

Netherlands

01-16-2004

9 Azeri-Chirag-Gyunashli Oilfield Phase I

3.20

Azerbaijan

02-03-2004

2.96

Australia

11-18-2004

10 Mitcham-Frankston Freeway Project Source: Dealogic ProjectWare

GLOBAL TOP 10 MANDATED LEAD ARRANGERS, 2004 Bank

Value ($billions)

Number of Deals

% Market Share

2003 Rank 4

1 BNP Paribas

5.25

40

4.9

2 Citigroup

5.17

28

4.9

3

3 Barclays

4.51

20

4.2

17

4 Royal Bank of Scotland

4.18

34

3.9

1

5 Credit Suisse

3.62

11

3.4

34

6 SG

3.45

24

3.2

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7 Korea Development Bank

3.16

4

3.0

8 Calyon

2.98

31

2.8

2

9 Sumitomo Mitsui Banking

2.87

28

2.7

9

2.65

29

2.5

22

10 ABN AMRO Source: Dealogic ProjectWare

with top-notch clients. We look for projects with the lowest-quartile costs, because they will most likely be a winning proposition,” he says. “We aren’t going to back a new energy project because of a short-term rise in oil or natural gas prices.”

Middle East Boosts Financing Boom Project financing consists of financing assets on a long-term basis and, as such, is similar to long-term lending. Repayment of the debt is accomplished by the longterm cash flow of the project, without a full guarantee from the shareholders.The trend is for projects to grow larger and larger, Rousseau says, noting that BNP Paribas coordinated a group of 36 commercial banks that committed to $100

million each for the $3.6 billion bank facility for the Qatargas II project financing that closed in December 2004.The $9.3 billion project, a joint venture of Qatar Petroleum, with a 70% stake, and ExxonMobil, with 30%, will deliver liquefied natural gas from Qatar to the UK. One innovation in the structure of the deal is that the participating banks will rely on the price of natural gas instead of oil in calculating cash flow. More LNG projects in Qatar and in Sakhalin in the Russian Far East are likely in 2005, with additional projects planned for Nigeria and Indonesia, Rousseau says. LNG, a relatively small part of the energy sector five years ago, now represents a significant portion of the industry, as well as of project finance

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activity. Qatargas II, the largest oil and gas are developed simultaneously, says Raj nanced major projects in Southeast Asia, project financing ever, will produce 15.6 Pande, head of Asia project finance at inincluding Indonesia and Thailand. China million metric tons of LNG per annum. ternational law firm Paul, Hastings, plans to build four additional LNG ter“The vertical integration of the project Janofsky & Walker. “In order to support minals, as well as several large petrois exceptional, with Qatar sharing in the the supply of LNG, special-purpose veschemical plants. investment in the re-gasification plant in sels need to be constructed,” Pande says. the UK and in the LNG shipping busiUS Power Market Lags Behind “The first step is to secure long-term ness,” says M. Chandrasekaran, head of Meanwhile, there are more than 40 contracts for sale of the gas.The linchpin project and structured finance at BahrainLNG projects in the pipeline in the US, in the whole project is the receiving terbased Gulf International Bank, which was including a handful that already have minal,” he says. a lead arranger of the Qatargas II facility. been approved by the Federal Energy Pande is currently representing The same project partners developed the Regulatory Commission and a dozen Petronet in its development and financentire supply chain, from wellhead to imthat are awaiting US Coast Guard clearing of India’s first LNG receiving, storage porting terminal, with integrated financance, says John Hawkins, Stamford, Conand regasification terminal at Dahej, Guing. Qatar also secured sufficient capacity necticut-based chair of the global projarat, involving $3.2 billion in project to produce specialized LNG ships to jects group at Paul Hastings. “The cost chain financings. In addition to its sucmeet its future exporting plans. and logistics may be prohibitive in some cessful financing on a project basis, According to Chandrasekaran, high oil cases, and communities have expressed Petronet had a domestic initial public ofprices mean there is no shortage of fundsecurity and environmental concerns,” he fering before the terminal facility being available in the region. “Project fisays. “Communities near receiving tercame operational. “The Asian Developnancing activity is booming in the Middle minals have expressed concern about the ment Bank took an equity stake at a East, where there is abundant liquidity as a potential release of gas in a highly popupremium,” Pande notes. result of the high oil prices,” he says.The lated area,” he explains. “They also fear Pande is also currently representing volume of project finance in the MENA the LNG tankers could be targets for terthe project lenders to the Guangdong region rose 68% in 2004, to $18.5 billion. rorists.Actually, the LNG wouldn’t likely LNG project in southern China, inThe number of transactions rose to 22, explode if a tanker were attacked but volving a chain financing of the tankers from 15, according to Dealogic. would most likely flare off,” he says. that will carry the LNG from Australia. Regional water and power projects, Meanwhile, the US power sector has The project is being developed by BP stabilized following the California entransportation infrastructure, as well as and CNOOC.The construction of the ergy crisis and the Enron turmoil, alenergy and mining projects are all on the receiving terminal and distribution though it may be another year or two drawing board for 2005. Saudi Arabia pipeline was entirely financed by the before there is a major upturn in activity, Mining will build the world’s largest Big Five government-owned Chinese Hawkins says. “Most of the big utilities phosphate concentrate plant, valued at banks on a fully non-recourse basis for and independent power producers that $1.9 billion.Two railway projects linking up to 18 years, the longest term ever for filed for bankruptcy protection have the eastern region of Saudi Arabia with such a financing. emerged, and most large portfolios of asthe western part of the kingdom are set Flush with liquidity, the Chinese banks sets have been sold,” he notes. to cost about $2.7 billion. are likely to continue to be active in the There is a tremendous amount of liqIn January Qatar began construction local and regional project finance maruidity in the US market, with private of a $5.5 billion airport that will be one kets, Pande says. They already have fiequity and investment funds of the biggest in the world. A M. Chandrasekaran, dedicated to energy making $4 billion airport expansion is Gulf International substantial investments, and under way in Dubai. MeanBank investment banks becoming while, Qatar’s Ras Laffan LNG more involved in buying assets is adding additional “trains,” or and trading power, Hawkins gas-liquefaction facilities, to says. “But it will take more supply Petronet in India and time before there is substantial Edison Gas of Italy. Large funew development of power ture trains are planned to supprojects in the US,” he adds. ply LNG to the US. The volume of project fiLNG projects involve com- Christopher Hasty, Martin Frank, Bank nancing in North America inplex “chain” financings, Citigroup Austria Creditanstalt creased 75%, to $26.3 billion, whereby co-dependent assets

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John Hawkins, Paul, Hastings, Janofsky & Walker

Jeff Thornton, Royal Bank of Scotland

in 2004, according to Dealogic. Refinancings accounted for $10.5 billion of last year’s total, and acquisitions another $8 billion.The largest deal in the region was the Texas Genco acquisition, worth $3.7 billion.The Houston-based company is one of the largest wholesale electric-power generators in the US. European issuers were the most active in the project finance market last year, with more than $64 billion of transactions, an increase of 62% from 2003, according to Dealogic. The largest deal in Europe in 2004 was the $5.5 billion refinancing of telecommunications operator Auna in Spain. Refinancings accounted for 40% of the region’s volume last year. “Judging by the number of deals in the pipeline, the project finance volume will certainly be maintained in 2005,” says Jeff Thornton, head of the infrastructure finance group at Royal Bank of Scotland. “There will be more rail and road infrastructure projects in Europe this year, including France, Spain and Portugal and the EU accession countries, such as Hungary and the Czech Republic,” he says. The financial closing for the Perpignan-Figueras high-speed rail line, which will link the French and Spanish highspeed rail networks with a tunnel under the Pyrenees, was announced in February 2005.Totaling more than €1 billion, the project is the first cross-border rail line financed by the private sector since the deregulation of the European railfreight market and the construction of Eurotunnel.The financing includes a 35year debt maturity, which is unusual for a

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Christophe Rousseau, BNP Paribas

Raj Pande, Paul, Hastings, Janofsky & Walker

project of this type. Meanwhile, the Italian government is officially looking for a contractor to build the world’s largest suspension bridge, across the Strait of Messina, linking the island of Sicily to the Italian mainland. An independent judging commission is scheduled to hold its first meeting on April 27 and will select a general contractor by mid-year to prepare the final design. When completed in 2011, the main span of more than two miles would nearly double the current record held by the Akashi Kaikyo Bridge in Japan. The total cost of the project is estimated at $5.5 billion.This includes the crossing itself, as well as its road and rail links. The majority of the capital for the project will be met through loans on international financial markets that will be guaranteed by the cash flows generated during the 30-year operating period.The bridge will be designed as part of a broad plan to improve the transport infrastructure in southern Italy. One major UK infrastructure project, the planned $17 billion east-west rail link under London, known as Crossrail, now seems unlikely to be funded with project financing techniques, according to Thornton of RBS.The project, which is still being debated in Parliament, may instead rely on direct government subsidies and a pr ivate-sector contr ibution through a special tax.

Changing Times, New Techniques “Project finance structures worldwide are becoming more and more aggres-

PROJECT FINANCE

sive,”Thornton says.The Chicago Skyway project,for example,which involves a $1.8 billion long-term lease of a 7.8-mile toll road in Illinois to a Spanish-Australian consortium, includes a Spanish-style “miniperm” short-term structure with a bullet repayment that requires refinancing. Meanwhile, project financing volume in Eastern Europe and the former Soviet Union rose to a record €11.4 billion in 2004, more than five times the level of the previous year. The spurt in activity was concentrated in three large oil and gas projects and related pipelines in Azerbaijan and Kazakhstan. “Last year was an excellent year for project financing,” says Martin Frank, head of the corporate finance and public sector division at Vienna-based Bank Austria Creditanstalt. “We can top that still in 2005, but it’s going to be tough,” he says. Bank Austria, which handles the CEE market for its German parent HVB, has a staff of 40 project finance bankers in the region. The countries that joined the EU last year can benefit from the full range of infrastructure funding possibilities, including the Structural and Cohesion Funds and the Interreg and Trans-European Transport Network initiatives.European Investment Bank loans are also available. The Cohesion Fund is project-based and cofinances projects in the environment and transport fields. The fund is contributing to improvements in water resources and treatment of urban wastewater. “Municipal financing of sewer projects to bring investment up to EU levels could be an important areas for banks because of the availability of Brussels funds and co-financing,” Frank says. In the telecom and media sector, there is more activity in leveraged buyouts and acquisition financing, rather than projects, Frank says.While the volume of new projects globally in 2005 likely will remain below the peak years of 1999 and 2000, some of those earlier projects are reaching the stage where they will be refinanced at cheaper rates, says Rousseau of BNP Paribas. ■

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BEST DEVELOPED MARKET BANKS Global Finance unveils its annual list of the best banks in developed markets around the world.

evenues are rising, profits are up, prospects for growth are improving, and new opportunities are blossoming around the world. For the world’s top developed market banks, the future—as well as the present—is looking rosier than ever. In many developed markets, banks enjoyed a year of strong growth in 2004 and look well placed to do the same this year. For many of the banks, however, notching up such good results has been challenging, to say the least. Markets, particularly in Europe, have been choppy, and many of those banks that have significantly increased their profitability have done so through aggressive cost-cutting or by focusing their resources on higher-margin business. Such strategies, of course, put the banks in prime position to repeat

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their successes in the years to come. As usual, in selecting the winning banks we considered factors that range from the quantitative objective to the informed subjective. Objective criteria were growth in assets, profitability, geographic reach, strategic relationships, new business development and innovation in products. Subjective criteria included the opinions of equity and credit ratings analysts, banking consultants and others in the industry. The winners are leading banks that may not be the largest, the oldest or the most diversified in a given country or sector, but rather the best—the bank with which corporations around the world would most likely want to do business. Contributors: Anita Hawser and Paula L. Green

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NORTH AMERICA BERMUDA BUTTERFIELD BANK Bermuda’s oldest and second-largest bank, with roots dating back to a merchant trading firm founded in 1758,Butterfield Bank today provides a full array of retail, corporate banking and treasury activities from its offices in Bermuda, Barbados and the Cayman Islands. Since becoming The Bank of N.T.Butterfield & Son in 1858,this financial institution has also successfully evolved into a specialist offshore financial services group that provides private banking, wealth management and fiduciary services,and investment and pension fund administration. These services were strengthened last year when it successfully integrated the Leopold Joseph group of businesses in the UK and Guernsey into its operations. And despite the losses suffered in Cayman after Hurricane Ivan roared through the region last September, the bank posted a 27.7% increase in net income, to $90.5 million for 2004, while operating revenue jumped by nearly 33%, to $311.2 million. Alan Thompson, president and CEO www.bankofbutterfield.com

CANADA SCOTIABANK As Canada’s most international bank, Scotiabank has offices in 50 countries spread through five regions that stretch

from its head office in Toronto all the way to Beijing, halfway around the planet.The third-largest bank in Canada keeps successfully wielding a business strategy that stresses diversity in both its lines of business and its geographic reach. It’s a strategy that envelops retail and commercial banking operations in Canada and abroad as well as integrated corporate and investment banking functions through Scotia Capital. And it paid off again in 2004 with an 18% increase in earnings at the end of October that totaled $2.36 billion.That was up from $2 billion in net income for the previous fiscal year that wrapped up on October 31, 2003. Assets for the latest fiscal year totaled $225 billion. Earnings for the first quarter that ended at the end of January of this year total $636 million, up from $555 million for the same period a year ago. Richard E. Waugh, president and CEO www.scotiabank.com

UNITED STATES CITIGROUP Whether in the news for the $11.5 billion sale of its insurance operations or drawing the wrath of Japanese financial author ities for its banking activities in that Asian nat i o n , C i t i g ro u p ke p t c a p t u r i n g

headlines over the past year.Yet even with the rash of negative news and the litigation r isk posed by events like its controversial European gover nment bond trades in Ger many last summer, Citigroup remains a financial powerhouse that is tough to beat. It consistently remains among the top tier of US banking institutions that corporations turn to for traditional corporate lending, more complex investment banking services or their nuts-and-bolts treasury operations. And cor porate clients know they can remain comfortably at home and use other Citig roup units—such as the Smith Bar ney Pr ivate Client Group or Smith Bar ney Global Equity Research—for other specialized financial needs. Analysts regard the sale of its Travelers Life & Annuity unit to MetLife earlier this year as a positive step that will eliminate big earnings swings and free up $6 billion in capital. The group saw a 5% drop in net income in 2004, to $17 billion, which was partially a result of increased litigation reserves, and Citigroup still posted an 11% jump in net revenues, to $86.2 billion for the year. Charles Prince, CEO www.citigroup.com

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EUROPE AUSTRIA ERSTE BANK Last year’s winner, Bank Austria Creditanstalt (BA), faces challenges in terms of boosting the efficiency of its domestic operations and dealing with the growing competition in its core CEE market. As a result, Erste Bank, one of BA’s key competitors in this region, is this year’s winner. Erste Bank has controlling stakes in banks in Hungary, the Czech Republic, Croatia and the Slovak Republic, making it the second-largest player in CEE by total assets (€28.6 billion), behind Belgium’s KBC Bank. Its 98% stake in Ceská Sporitelna gives it a 32% retail market share in the Czech Republic, and its merger with Postabank created Hungary’s second-largest retail bank. Gaining controlling stakes in these banks puts Erste Bank in a better position to benefit from growth in consumer lending in CEE. Andreas Treichi, CEO and chairman www.erstebank.com

BELGIUM FORTIS BANK Last year was a profitable one for Fortis Bank, which posted an impressive net ROE of 26% for the first half of 2004. While some of this could be attributed to exceptional gains from the sale of its US

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insurance subsidiary, FitchRatings said the result underscored a “generally positive trend in core earnings.” However, its strategy of investing in financial service providers in a multitude of countries does carry an element of risk, which is reflected in its AA- long-term counterparty credit rating.Yet analysts believe that the group’s expertise in managing a network of banks and its strong position in the Benelux region afford it a stable base. Jean-Paul Votron, CEO www.fortis.com

DENMARK DANSKE BANK Scandinavia’s second-largest banking group is a consistently strong performer. In the nine months to October 2004, net profit reached DKr6.8 billion ($1.2 billion), a slight increase on the previous year. In an effort to stimulate growth outside its home market, it also finalized its acquisition of two banks in the Irish market, Northern Bank and National Irish bank, which will expand its retail and corporate customer base. The two banks will be integrated into Danske Bank’s IT platform. However, the merger does contain an element of integration risk and cost for Denmark’s largest bank. Peter Straarup, CEO www.danskebank.com

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FINLAND NORDEA BANK Nordea Finland dominates the Finnish market with its share of the retail (35%) and commercial (46%) markets. Its performance is bolstered by its solid banking franchise throughout the Nordic region. Net profit for year-end 2004 increased by 28% on the previous year to reach a record €1.9 billion.Total income increased 8% to €1.5 billion, with net interest and commission income increasing by 4% and 10%, respectively.While it faces growing competition, Nordea’s position is strengthened by its focus on cost containment and consistent profitability. Lars G. Nordström, president and group CEO www.nordea.com

FRANCE BNP PARIBAS The largest bank in the eurozone, BNP Paribas is at its peak in terms of ratings (AA). Despite tough market conditions, the group’s asset management division posted 21.9% growth in operating revenue. The bank’s performance was bolstered by a 19% increase in private lending and 22% rise in mortgage loans in the domestic market. Loans at its international retail banking operations BancWest and

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consumer credit provider Cetelem also increased by 11% throughout 2004, providing the French bank with a well-diversified revenue stream at a time when capital markets remain under pressure. Baudouin Prot, CEO www.bnpparibas.com

GERMANY DEUTSCHE BANK Deutsche Bank, is the most profitable of the German banks, with increases in net commission and trading revenue contributing to net income of €1.5 billion in the first six months to June last year. However, Deutsche Bank still has some way to go if it is to catch up to its international peers. Although net ROE (10.9%) in the first half of last year was the highest of the major German banks, it is still much lower than its European peers. Its cost-to-income ratio also remains high at 76.1%, and concerns remain around the performance of its asset management business and revenue mix in general. Josef Ackermann, CEO www.db.com

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ICELAND KAUPTHING BUNADARBANKI Last year’s winner, Kaupthing Bunadarbanki, doubled in size with the acquisition of Danish bank FIH. Operations outside its core Icelandic market are expected to contribute more than half of its earnings, and the past year saw Iceland’s largest bank and the Nordic region’s eighth largest get off to a good start with a 106% increase in net earnings, to €189 million. Although trading income declined in the fourth quarter, commission income was boosted by an upsurge in M&A. The bank also managed to reign in expenses, with its cost-to-income ratio declining from 58% to 50%. Hreidar Már Sigurdsson, CEO www.kaupthing.net

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IRELAND BANK OF IRELAND Repeat winner Bank of Ireland is slightly higher rated (A+) than its closest rival Allied Irish Bank (A) due to its lower risk exposure to markets such as Poland and the US, where AIB has operations. This has also helped Bank of Ireland achieve an impressive 54% cost-to-income ratio. All divisions recorded increases in profitability last year, particularly the retail division, which was up 20% on the back of strong lending growth. Its UK Financial Services Division in the form of its Bristol & West subsidiary also saw mortgage and business lending increase 12% and 18%, respectively. Brian Goggin, CEO www.bankofireland.ie

GREECE EFG EUROBANK ERGASIAS Repeat winner, EFG, Greece’s thirdlargest bank, continues to post strong earnings performance, with a 35.1% increase in net profit (€368 million) at the end of 2004. Net interest income and fee and commission income recorded bigger increases than its competitors, increasing by 22% and 17% respectively. Operations in the Balkans contributed 4% to overall profitability, and the bank anticipates that South Eastern Europe will account for 20% of group net profit by 2009. Its revenue streams are diversified, encompassing retail, commercial, asset management and investment banking. Nicholas C. Nanopoulos, chairman www.eurobank.gr

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ITALY UNICREDITO ITALIANO Stiff competition from other Italian banks in the sale of commercial derivatives,which Unicredito pioneered in the Italian market, saw net interest revenue affected in the first half of last year as the volume of derivatives sold declined. Still, Unicredito remains the most profitable bank in Italy, with net interest income rebounding (+8%) in the third quarter of last year. Its ROE (16%) is the highest of the Italian banks and in line with its European peers. It also is the most cost efficient of Italy’s major banks, with a cost-to-income ratio of 62.2%. Alessandro Profumo, CEO www.unicredito.it

LUXEMBOURG BANQUE ET CAISSE D’EPARGNE DE L’ETAT Luxembourg’s only true domestic bank, BCEE has a stronger domestic retail focus than some of its competitors, which are more exposed to the volatility of the capital markets. Given its more retail focus, it is also less likely to be affected by the EU directive on taxation of savings,which is likely to have an impact on those banks that rely on foreign business. Although its profitability, which largely stems from net interest income earned on retail activities,is modest on an international scale, its sound asset quality and low risk profile is favorable. Its financial strength is also enhanced by the fact that it is fully owned by the Grand Duchy of Luxembourg. Recently it has sought to bolster its position in its domestic market by acquiring a minority stake in Raiffeisen bank’s network. Jean-Claude Finck, CEO www.bcee.lu

NETHERLANDS ABN AMRO While the other Dutch banks struggle to contain costs with cost-to-income ratios in

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the region of 70%,ABN AMRO has been more successful at holding down operational expenses. It is also perceived to have better risk management systems in place than its competitors. Bottom line profitability was also boosted by the sale of stakes in Bank Austria, Bank of Asia and LeasePlan,but,not accounting for proceeds from these sales, net profit in full-year 2004 still increased 17.4%, with increases across most business lines. However, the US market,which accounts for 40% of its revenues, has become a more testing environment, with a decline in mortgage lending. Rijkman Groenink, chairman www.abnamro.com

NORWAY DNB NOR GROUP Norway’s largest banking group is the best bank again this year. Last year was one of its most profitable years on record, thanks to continued cost cutting and cost synergies gained via the merger of DnB Nor and Gjensidige NOR to create a dominant force in Norwegian banking, with a market share of 50% across most business sectors. Last year saw profits rise 37% to NOK7.4 billion ($1.2 billion).As a result of the merger, the group realized NOK705 million ($113 million) in cost synergies. Return on equity for 2004 was a healthy 17.4% before goodwill. Costs remained low, with a cost-to-income ratio of 53.4%. Svein Aaser, CEO www.dnb.no

PORTUGAL BANCO COMERCIAL PORTUGUES A difficult economic environment has meant tough trading conditions for Portuguese banks. However, leading banks such as this year’s winner BCP have proved resilient.Although profitability has been restrained by a decline in net interest revenue, BCP has implemented a range of

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cost-cutting measures at its foreign subsidiaries—most notably Bank Millennium, where operating costs have fallen by more than 12%—and focused on shoring up net commission income, which increased 11.6% in the first half of last year. This helped boost net income, which increased 18%, to €281.6 million. BCP has also disposed of high-risk activities such as insurance, and Belgium’s Fortis Group has taken a 50% stake in its bancassurance activities, which analysts believe will bring additional expertise and relieve pressure on its capital ratios. Jorge Jardim Gonçalves, CEO and chairman www.millenniumbcp.pt

SPAIN BANCO SANTANDER CENTRAL HISPANO Spain’s largest bank in terms of assets, Santander guaranteed its position as a major European retail-banking provider with its acquisition of UK high street bank Abbey. Analysts are waiting to see how it will rebrand and integrate Abbey, although Santander is no stranger to this, having successfully integ rated acquisitions within the Brazilian market.The Abbey acquisition has also decreased the bank’s exposure to the volatile Latin American market, where currency depreciation of the US dollar has had some impact— although this was counteracted by volume growth in the form of operating revenues, which increased 12.2% in the first half of last year. Emilio Botin, chairman www.gruposantander.com

SWEDEN SVENSKA HANDELSBANKEN A major player in the Nordic region, this year’s winner, Svenska Handelsbanken, saw operating profit increase

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12% last year, to SEK9.7 billion ($1.4 billion). Although net interest income declined slightly, net commission income increased by 19%, and net trading income increased by12%. Shareholders saw a 15.8% ROE, and the bank, which has operations in Norway, Finland, Denmark and Sweden, also has one of the lowest costto-income ratios (44.9%) of its European peers. Lars O. Gronstedt, president and CEO www.handelsbanken.se

SWITZERLAND UBS Shareholders in the Swiss banking giant saw a remarkable net ROE of 24.7% last year. Although market conditions remain challenging, bottom line profitability continues to improve, with net profit climbing to

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$6.8 billion, the bank’s best annual result so far. Despite a weakening US dollar, operating income grew across all business lines, and UBS continues to reap the rewards of its focus on pr ivate clients, with fee and commission-based income from this line contr ibuting 52% to total operating income. However, c o s t s - t o - i n c o m e re m a i n h i g h a t 71.5%. Peter Wuffli, CEO www.ubs.com

UNITED KINGDOM HSBC HOLDINGS In ter ms of profitability, 2004 was another remarkable year for the HSBC group, which announced a 3 7 % i n c r e a s e i n g ro u p p r e - t a x profit, to $17 billion, compared to $12 billion in 2003. Net interest income made a substantial contr i-

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bution, increasing by 21%, to $31 b i l l i o n , i n 2 0 0 4 . E u ro p e, N o r t h A m e r i c a a n d H o n g Ko n g m a d e sizable contr ibutions to profitability. In North Amer ica, HSBC’s acquisition of Household Inter national has helped boost ear nings, although income growth has been lower than some analysts expected, which some attr ibute to HSBC’s r isk management appetite. In the UK, it has also tr ied to expand its share of the consumer retail market in a joint venture with Marks & Spencer retail financial services. It is also trying to boost its investment banking division but is a rela t i ve l y l a t e s t a r t e r i n t h i s a r e a c o m p a re d t o t h e U S a n d S w i s s banks. Stephen Green, CEO Sir John Bond, chairman www.hsbc.com

ASIA/PACIFIC AUSTRALIA COMMONWEALTH BANK OF AUSTRALIA This year’s winner, CBA, recorded an impressive increase (28%) in after-tax earnings in 2004, reaching A$2.6 billion ($2.05 billion). Profitability was underpinned by strong consumer asset credit and lending growth. Of the four

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major Australian banks, CBA’s exposure to the housing market is highest: Home loans in 2004 increased by A$17.3 billion. Analysts say this has benefited write-offs and non-performing assets, but the housing market is showing signs of weakening. Any weakness is likely to be offset by growth in other areas, particularly retail banking. In 2004, 38% of total loan

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growth at CBA was funded by retail deposits, an area that is coming under increasing pressure from online providers. However, CBA expects to solidify its position in the market with a group-wide transformation project, which it anticipates will produce material financial benefits. David Murray, CEO www.commbank.com.au

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HONG KONG HSBC HSBC Asia Pacific continues to benefit from its membership in the wider HSBC group,which reported a staggering 37% increase in group pre-tax profit for 2004 to $17 billion. Despite a difficult economic environment in the Hong Kong market and weakened loan demand, which has put pressure on net interest margins, it continues to report strong profitability and well-diversified earnings, with 40% of its revenue coming from non-interest income, a higher percentage than its peers, which are more reliant on interest-based earnings.Although the US now contributes a substantial portion of the group’s overall revenues,its Hong Kong operations still remain a major contributor to overall revenues. It has also made inroads into China with the purchase of a 19.9% stake in China’s fifthlargest bank,Bank of Communications. Stephen Green, CEO www.hsbc.com.hk

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BANK OF TOKYO MITSUBISHI Improving economic conditions in Japan have helped boost the performance of Tokyo’s top banks, with Bank of Tokyo Mitsubishi’s parent company, the Mitsubishi Tokyo Financial Group (MTFG), leading the way. Net income as a percentage of shareholder equity reached a high of more than 12% at MTFG, its best performance in more than a decade, according to FitchRatings. Although trading gains were down compared to its competitors, fee and commission income for the fiscal year ended March 2004 was ¥518 billion ($4.9 billion). It was also one of the few Japanese banks to see an increase in net interest income. Disclosed non-performing loans (NPLs) are also among the lowest of the Japanese banks. Shigemitsu Miki, president and co-CEO Akio Utsumi, chairman and co-CEO www.btm.co.jp

DBS Wi t h n e t i n t e re s t i n c o m e u n d e r pressure from weak demand for bank loans, Singapore’s main three banks have had to become less complacent about fee-based income. DBS has aggressively tackled this, focusing on bond trading and treasury activities. Net fee income, which constituted 3 8 . 4 % o f o p e r a t i n g i n c o m e, i n creased by 19% in the first half of last year. Net profits increased by a staggering 90% (the highest of the Singaporean banks), which excluded exceptional gains. Most of the gains came from declines in loan loss provisions, which fell by 80%. Jackson Tai, vice chairman and CEO www.dbs.com

MIDDLE EAST ISRAEL BANK HAPOALIM Israel’s largest bank continues to demonstrate impressive profitability, with net profit for the first nine months of last year increasing 61.8% to $365 million. Return on equity increased from 10.5% in 2003 to 15.8% in 2004. Operating income, which increased

15% to $689.6 million, benefited from strong capital market activity on the Tel Aviv Stock Exchange as well as fees earned by mutual fund management. Hapoalim boasts a 300-strong branch network within Israel as well as 40 overseas subsidiar ies in Latin Amer ica, North America and Europe. The shares of its US private banking operation, Signature Bank, were the first shares of an

Israeli bank to be traded on Wall Street. While the bank’s operations continue to thrive, investor confidence in the bank was dented recently by revelations of alleged money laundering at a Tel Aviv branch of the bank.As Global Finance was going to press, it was still unclear how damaging the incident would prove. Zvi Ziv, CEO www.bankhapoalim.com

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ROUNDTABLE TURKEY

MODERATED BY JOSEPH GIARRAPUTO

Turkey’s Transition At a recent meeting in Istanbul, Global Finance brought together some of the key figures in Turkey’s banking and finance industry to discuss the country’s prospects. GLOBAL FINANCE: Will recent improvements in Turkey’s economic fortunes prove sustainable in the long term? SUREYYA SERDENGECTI, governor, Central Bank of Turkey: Important lessons have been learned from stabilization programs in the past that have failed; probably that explains why this final stabilization program has been successful. For the first time, all areas of the program went hand in hand. Also, there was nowhere else to go compared with the past; the government could no longer deviate from its track of strict fiscal policy. LEVENT CELEBIOGLU, financial institutions assistant general manager, Türk Ekonomi Bankasi: This time we have a very stable political environment.We have

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a single-party government that respects what the bureaucrats are doing, so the bureaucrats, the politicians and the private sector are working in harmony. HAYRI CULHACI, executive vice president, strategic planning, Akbank: Having a strong, independent central bank has helped a lot. For the first time in our history we have a central bank that is seriously enabled to control inflation. ERKAN UYSAL, head of research department, Capital Markets Board of Turkey: International developments have helped, too. Due to the low levels of return in developed countries, international funds are flowing to emerging markets, which has helped them finance current deficit and restore stability.

HAKAN ATES, president and CEO, DenizBank:There’s a long way to go. Sustainability of this condition requires three changes: tax reform, social security reform and privatization. If necessary, deregulation and structural reforms should come next to maintain the sustainability of these conditions. HÜSEYIN IMECE, executive vice president,Yapi Kredi: The economic achievements are very impressive, but a good part of this can be seen as normalization after a long period of chronic instability and crisis. But it might be difficult to maintain the existing successful environment. While the banking system has cleaned up in the last three or four years, the corporate sector has not yet. ZEKI ÖNDER, executive vice president, Sekerbank: We have to also give credit to the people.The single-party government became successful implementing the economic plan, but from time to time they wanted to follow their own agenda, and it was always public pressure—and the markets—that brought them back on the path. NESLIHAN TOMBUL, managing director and senior representative,The Bank of New York: Success has to be homegrown. Even though the IMF and the EU served as very important anchors in setting Turkey on a straight path, most of the work was done inside Turkey. We should not rely too much on the IMF and EU if we want it to be sustainable and permanent.

Celebioglu: There is huge potential for trade with the countries surrounding us

GF: How has Turkey managed to bring inflation under control, and will price increases remain at such levels?

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ROUNDTABLE SERDENGECTI: It’s not a miracle; we finally did what we needed to do. The first step was central bank independence and then strict fiscal and incomes policies. Shaping the expectations of the public has been important, too. We have to achieve lower inflation levels in time.The current level—about 9%—is still higher than many other emerging markets. By applying the present policies, we can achieve better results in the future. CULHACI: The restructuring in the banking sector has also helped, because there’s always a correlation between high interest rates and high inflation rates, so having had a moral hazard in the banking system up to 2001 never gave a chance to the players in the market to pull the interest rates down. Continuous appreciation of the Turkish lira has helped to instill confidence and encourage capital inflows. IMECE: Further improvements in inflation may require changes on the supply side—structural reforms where productivity increases. ATES: We should also consider real interest rates, which are as big as inflation itself. Fiscal policy measures need to be carried out hand in hand with price stability and inflation targeting measures. CELEBIOGLU:The main reason for the lower inflation is the breaking of the inflation inertia.The private sector used to make their own targets and price adjustments; even small retailers made price adjustments monthly because they expected inflation to be 60% to 65%.After the successful implementation of the past three years, the private sector, the banks and others are making budgets more in line with the central bank’s forecast. UYSAL: Turkish success in lowering in-

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Culhaci: Having a firm foothold in Turkey will give a bank strong potential across the region

flation is very important. Now both the real sector and the financial sector believe that there will be lower inflation rates and, more importantly, lower real interest rates in Turkey for the near future. Uncertainty has been eliminated. GF: How can Turkey balance the fact that it occupies a neighborhood that is politically challenging while at the same time offering significant economic potential for Turkish companies and banks? ATES: Trade with our neighboring countries has helped us to overcome the crisis, and of course it will continue to be so. Nevertheless, there is unrest in some neighboring areas, which of course is harmful for our economy, but hopefully it will get better soon. TOMBUL: Turkey enjoys very friendly

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Uysal: Both the real sector and the financial sector believe that there will be lower inflation rates

relations, politically and economically, with most of the countries surrounding it.There is a lot of activity in the region that both Turkey and its neighbors are benefiting from. There’s room to grow here as well. Politically it enjoys favorable relationships, even though it can be a difficult neighborhood at times. CELEBIOGLU: There is huge potential for trade with the countries around us, particularly Iran and Iraq. Before the Iran-Iraq war, these two were among Turkey’s top-five trading partners. With the slowdown in Europe, exporters are starting to look at these markets, which within three years could represent as much as 25% of our foreign trade. IMECE: I think the challenges outweigh opportunities for Turkey, especially with Syria, Iran and Iraq. In the

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long run, yes, there are opportunities there, but in the short run there will be more challenges. CULHACI: From a banking point of view, there are enormous opportunities in the future, but in the short run we are not totally able to take that opportunity because of the risk concerns. Having a firm foothold in Turkey, though, will give a bank strong potential across the region as those countries become more stable. ÖNDER: We have connections with our neighbors, culturally, ethnically and historically, so Turkey’s efforts should be guided by a focus on their well-being. The more prosperous they are, the better partners they become for us.

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GF:What is the future for Turkey and the IMF or with IMF programs? SERDENGECTI: We have to continue with the IMF, as this is a mediumterm program. The credibility built up by the present government and the central bank is simply not enough since we have a very bad past track record behind us. Also people are suggesting that with the possible EU accession we no longer need the anchor of the IMF. But most people fail to realize the IMF and the European Union are not competing an-

chors but complementary anchors. CELEBIOGLU: Another IMF agreement is not crucial for Turkey because we are in a very stable environment.We can now borrow from international markets easily. Domestic and international borrowing maturities have been extended. The IMF is not as important from a financing point of view, but the markets are already giving credit to the government for the decision to make another threeyear standby agreement with the IMF. ATES: Turkey and the IMF have a good relationship, but the work is not finished yet. The emerging market crises and the problems in 2000 and 2001 showed the IMF was not well enough organized, so Turkey has become a role model. The coming three-year standby agreement is important for Turkey, but it is as important for the IMF. CULHACI: There’s been a paradigm shift. IMF agreements are the new reality of our time. It is not compromising on sovereignty because it is the same case for anyone—not only for Turkey but for developed countries, too. ÖNDER: The program just completed was significant because it was the first ever successfully completed, and it was basically designed by Turkish technocrats in line

Ates: This country is under-banked; it’s a land of opportunities. Real growth … will continue

Imece: The challenges outweigh opportunities for Turkey, especially with Syria, Iran and Iraq

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with the needs of the economy and supported by the IMF.The one about to be signed is very important because it will be a support for Turkey’s effort for a more stable environment. IMECE: The IMF program has done a lot for Turkey’s success, but we’re seeing some loss of momentum on the government’s side. In the upcoming year there is a lot of difficult work we need to do— like the structural reforms—so it will be good to continue to work with the IMF. TOMBUL: What happens when the IMF leaves? The markets have enjoyed having the IMF around because they know the Turkish government will abide by a whole host of rules, but three years from now will any Turkish government be able to maintain that momentum and keep it going? Governments tend to make more populist moves when they don’t have somebody watching them. GF: Is it fair to describe Turkey’s accession to the EU as “far in the future and painful but inevitable”? ÖNDER: There are all kinds of opinions on how long it will take, but the process will be politically and economically extremely beneficial for Turkey. It’s a very healthy process. TOMBUL: Look at other members that resembled Turkey’s profile, like Spain and Greece and Portugal.They had very similar issues to deal with, and they have become rising stars within Europe—real success stories. CELEBIOGLU: Turkey is already a part of the European Economic Union because we have the customs union—we have all the benefits of that economic environment—but we are not in the social part. I believe in the long run Turkey will become part of the social union as well. UYSAL: Europe has to show more that they are willing and sincere to accept Turkey as a full member in the future. There is mutual benefit to Turkey and Europe, and also it will contribute to global stability if Turkey becomes a full member. If sincerity is established, I believe it is not painful and far in the future. SERDENGECTI: The process of the

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next 10 years is more important than the eventual outcome itself.We have to make the public conscious that we simply have to do all of this social reform for ourselves, not because Europeans want it. ATES: The process itself is very important to our country, but there’s a big chance for Europe, too. It is inevitable both for Europe and Turkey, but it doesn’t necessarily need to be painful. CULHACI: It is clear that Europe will have many benefits from taking Turkey within the union—economically, politically, socially. The common wisdom for Europe says that Turkey is inevitable for the future of Europe. GF: Turkey’s banks are stronger and better run than in the past but still face challenges.Where are they headed? TOMBUL: Two things concern me. How will these banks be able to grow profitability, and can they better match their assets and liabilities? They’ve diversified the way they generate revenues but into some low-margin,highly competitive businesses. Secondly, many of their deposits are short term—about three to four months—but the assets on the complementary side are longer in maturity.They have to convince the Turkish public to leave their money for longer periods. SERDENGECTI: Important steps have been taken to reform the banking system. The process has been quite painful and is still continuing, but now the financial system in this country offers quite a number of opportunities for potential investors, domestic or foreign. ATES: Capitalization of the banks is important, so consolidation will continue. It turned out to be a seller’s market, though: There are lots of potential buyers and just a few sellers.Turkey is under-banked; it’s a land of opportunities. Real growth in the banking sector will continue. CULHACI:The party has not started yet. When the interest rates stabilize at low levels, then the challenge for the banking system will be making a profit with those narrow margins.The only option will be to increase leveraging, increasing the vol-

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Önder: Accession to the EU will be politically and economically extremely beneficial for Turkey

ume of assets.Today, deposits are not sufficiently funding the assets of the banking system. GF: What can be done to attract even more FDI to Turkey? CULHACI: The low inflation environment was important, and that has already been mostly achieved and seems sustainable. Now it’s up to the government to reduce bureaucracy and give some incentives for FDI. CELEBIOGLU: Brazil allows all FDI, but it’s not creating any foreign currency for the country, and the profit transfers cause big deficits on the country’s balance of payments Should Turkey impose rules that FDI should create foreign currency? Secondly, why should FDI come to Turkey? Price and cost stability is not enough. Turkey is an attractive market, but there are other countries such as Bulgaria or Romania, where utilities and labor are far cheaper than Turkey. TOMBUL: There are still a lot of inefficiencies in the market that represent opportunities for foreign investors. There is a huge potential—in the local market more so than exporting. There’s a huge young population—70% is under 30—

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Tombul: We should not rely too much on the IMF and EU if we want our success to be sustainable and permanent

but unfortunately they don’t have high disposable incomes. But there is a lack of transparency here, and the rule of law has always been sort of nebulous. IMECE: We may be nearly there in terms of macro stability, but we need to create a fairer playing field.Without corporate sector restructuring, it will be very difficult for international companies to compete fairly. An efficient and competent bureaucracy also is needed—and a well-functioning legal environment. ATES: If you look at FDI from a banking sector perspective, foreign banks may first improve the quality and availability of financial services in the domestic market and stimulate the development of the supervisory and legal framework—but there is evidence that the non-interest income and overall expenses of domestic banks are negatively affected by foreign bank entry. Because foreign banks pay relatively low taxes, they have an incentive to shift profits out of high-tax jurisdictions. Foreign banks may cause a lowering of credit standards by increasing competition and may suddenly cut their domestic activities when faced with problems at home.The same could apply for companies in any other industry. ■

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BUYER’S GUIDE 15TH ANNUAL BUYER’S GUIDE

GLOBAL CUSTODY BUYER’S GUIDE

2005 ong considered one of the less dynamic areas of global finance, the global custody industry is increasingly moving to the forefront of product and process innovation. Burgeoning investor interest in emerging markets and in alternative investment classes, for example, is prompting custodians to develop global systems with a single interface that can handle complex cross-border transactions. And as banks increasingly compete on a worldwide basis, they are looking to their custodians to provide services that allow them to efficiently manage money and assets throughout their global networks.

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Custody assets: 2004: $1.13 trillion 2003: $900 billion Ratings: Fitch A+ (long-term) Client profile: By location: Amer icas Susan Livingston 39%, Europe 48%, Asia/Pacific 13%. By investor type: investment managers 51%, banks 36%, insurance 2%, pension funds 8%, other 3%. Foreign: 75% of assets represent cross-border investment; BBH’s global custody solutions service a worldwide

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The growing demands on the custodians are prompting a continuation of the industry’s decade-long consolidation. Industry giants are snapping up specialists, such as technology providers and outsourcers, as they try to maneuver ahead of their competitors. At the same time, the market for custodians is growing. The total custody assets declared by the 14 companies in this year’s guide grew from less than $39 trillion at the end of 2003 to almost $45 trillion by the end of last year—an increase of more than $5.75 trillion. With global banks’ increasing dependence on the custodians, that number will only continue to grow.

clientele, including Asian banks, American fund managers, European financial institutions, offshore alternative investment advisers and Latin American pension plans. Capabilities/services: Global custody, fund administration (including compliance support), fund accounting, securities lending, foreign exchange, modular outsourcing solutions, Infomediary® communications platform, brokerage, investment management, commercial banking, corporate finance. Top emerging markets: BBH provides custody services in more than 90 markets, including 66 emerging markets. Business developments: Significant growth in alternative investments, including real estate investment funds and fundof-funds; several successful full-service

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outsourcing projects to date with global investment managers and financial institutions; more than 55 clients and 325+ client counterparties connected through Infomediary® communications platform. Outlook: Financial institutions and investment managers will continually rely on service providers to seamlessly support their investment goals. Providers in turn must be increasingly ready to solve complex challenges in addition to processing transactions. BBH’s main focus is constant improvement in the level of relationship excellence we enjoy with clients by delivering superior solutions with exceptional client service.

Contact: Americas: Timothy J. Connelly Tel: +1 617 742 1818 [email protected]

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Asia/Pacific & Offshore: Susan C. Livingston Tel: +1 617 742 1818 [email protected] Europe: Andrew J.F.Tucker Tel: +44 207 588 6166 [email protected] www.bbh.com

THE BANK OF NEW YORK

Custody assets: 2004: $9.7 trillion 2003: $8.3 trillion Ratings: Moody’s Aa2, S&P AA-, Fitch AA Client profile: By loPatrick Curtin cation: Amer icas 68%, Europe (incl. UK) 26%, Asia/Australia 4%, Middle East/Africa 2%. By investor type: mutual funds/fund managers/UIT 29.5%; banks, trust companies, central banks 18%; insurance companies 16.5%; government agencies 15%; corporate and pension funds, endowment, foundation and TaftHartley 16%; broker/dealers 5%. Capabilities/services: Our comprehensive array of innovative and specialized securities services includes custody, investment/fund accounting, fund administration, securities lending, transfer agency, performance and risk analytics, investment compliance monitoring, portfolio transition management, brokerage commission recapture, hedge fund administration, alternative asset reporting, benefit disbursements, clearance and financial adviser services, collateral management, mid- and back-office outsourcing and depositary receipt services. We add additional value for our clients with our treasury management and investment management service offerings that include foreign exchange, electronic funds transfer, asset management and currency overlay. Top emerging markets: In 2004 the bank

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experienced an increase in the volumes in some emerging markets, but there was no demand to expand our market coverage beyond its current breadth of 101 markets. Business developments: In 2004 we broadened and deepened our expertise by acquiring and tapping into valuable intellectual and technology capital. The launch of a global risk services alliance with Wilshire Associates enabled us to pool our experience, insight and proven risk technology with that of another recognized expert. This creates a single source for performance measurement, analytics and attribution, compliance and universe comparisons, risk budgeting and advanced risk measures.We made a strategic investment in Netik, which provides market-leading data management and consolidated reporting capabilities. Netik enables investment managers to manage multiple parties and data sources and aggregate data for an enterprise-wide view. Outlook: Our continued focus is to provide a comprehensive array of essential services that enable institutions and individuals to move and manage their financial assets, successfully navigating the complexities of the world’s financial markets. Contact: Patrick Curtin Tel: +1 212 635 6460 Fax: +1 212 635 7334 [email protected] www.bankofny.com

CITIGROUP Custody assets: 2004: $7.9 trillion 2003: $6.8 trillion Ratings: Moody’s Aa1, S&P AA, Fitch AA+ Client profile: By location: Clients are Richard Ernesti domiciled in over 75 countries in all regions around the globe. By investor type: fund managers, pension funds, hedge funds, insurance companies,

GLOBAL CUSTODY

corporations, banks and broker/dealers. Foreign 60%, Domestic 40%. Capabilities/services: Citigroup offers integrated investment, execution, transaction processing, cash management, trustee, securities finance and funds services solutions.With the largest and most acclaimed proprietary network of incountry capabilities, Citigroup is uniquely positioned to support our clients’ international and domestic business growth with a global technology platform and flexible service structure. Top emerging markets: By client activity/interest: Brazil, China, India, Korea, Mexico, Poland, Russia and Taiwan. Also recently added Bahrain, Dubai, Iceland, Kazakhstan and Malta. Current plans for expansion include Cypress, Kuwait, Oman, Qatar and Saudi Arabia. Business developments: In 2004, Citigroup’s clients significantly increased volumes in alternative investments, transfer agency, middle-office outsourcing solutions and securities finance as a result of the continued enhancement of our services to meet changing client business requirements. Citigroup also continues to lead industry developments around the world, including piloting new services for restricted secur ities at the DTCC; inter national leadership in the G30 monitoring committees, SIAA, AGC, SWIFT and ISITC; as well as progressing the migration of local market practices toward global standards in emerging markets around the world. Outlook: Citigroup has developed many strategic business partnerships with its clients, keeping us at the leading edge of client solution development.We have developed solutions for and expect continued growth in alternative investments, SMA, middle-office solutions, messaging bureau services, compliance monitoring and reporting, and securities/liquidity financing solutions. Contact: Richard Ernesti Tel: +1 212 816 0363 [email protected] www.transactionservices.citigroup.com

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EFG EUROBANK Custody assets: 2004: $43.7 billion 2003: $37.1 billion Ratings: Moody’s A2/P-1/C+, S&P BBB+/A-2, Fitch A/F2/B/C-2 Client profile: By loAndrew Economides cation: All markets. By investor type: global custodians, foreign banks, mutual funds, broker/dealers. Foreign: global custodians, banks, institutions, broker/dealers; Domestic: mutual funds, broker/dealers, insurance companies, other institutions Capabilities/services: Eurobank is the most dynamic bank in Greece, offering a wide range of retail and corporate banking services.The bank enjoys a leading market share in most areas, including custody, derivatives trading and clearing, equity brokerage, equity placements and debt, and top ratings from credit agencies. Since 1992 the bank’s Securities Services Division maintained pole position in the custodian market for Greek institutional investors. Eurobank offers a full range of securities services for major foreign and local investors, including settlement, income collection, tax reclaim, corporate actions, proxy voting and customized reporting services for Greek equities and fixed-income securities. Eurobank is a registered member of the British Standards Institution (BSI). The Securities Services Division has ISO 9001:2000 certification. Top emerging markets: Eurobank, in order to service its large local institutional client base, has established a network of local and global agent banks. Currently the service is offered to our clientele through our network that consists of 35 countries. Business developments: The bank is committed to the development of alternative reporting channels, including electronic banking. In addition to SWIFT, which is the official reporting, we believe that there is also a need by operational

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staff for real-time and on-a-need basis reporting. Eurobank Securities Services has introduced a web-based application that focuses on foreign institutional investors servicing.“eCustody” provides an online real time window to information kept in the bank’s systems.The system offers details concerning holdings, settlement instructions, corporate actions, customer information and funds account information through a user-friendly graphical environment. Outlook: Eurobank’s vision is to become the bank of first choice for Greek and foreign clients, offering comprehensive service though a universal banking model and to develop a presence in the wider region (already in Romania, Bulgaria and Serbia), expanding its successful business model. In the Balkan region, the bank acquired additional stakes and management control of Banc Post in Romania, Post Bank in Bulgaria and Postbanka in Serbia-Montenegro (renamed EFG Eurobank Beograd). Plans for 2005 are to establish a securities services division in the Balkan region and especially in the countries in which Eurobank has bought a banking institution. Contact: Andrew Economides Tel: +30 210 3357191 Fax: +30 210 3357185 [email protected] www.eurobank.gr

GARANTI Client profile: Garanti Bank’s client base exclusively consists of non-resident institutional customers. As far as non-resident customers are concerned, our client base is diverse, comprising over 90 institutions. Our customer base includes US global custodians, broker/dealers, banks (mostly European global custodians), funds and asset managers, cash clearing clients (US and European banks) and ADR banks. Capabilities/services: The Securities Services Department was established as a stand-alone business. Today this department is totally dedicated to the custody

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and clearing needs of major non-Turkish/non-resident financial intermediaries. Our core services are custody and clearing, cash management, foreign exchange, income collection, corporate actions, proxy voting, asset reconciliation, MIS reporting and tax representation. Business developments: Garanti Bank has been providing custody and clearing services to non-resident institutional investors operating in Turkish capital markets since 1989 (previously through Ottoman Bank) and is the only indigenous provider with a significant market share. Privacy, promptness, timeliness, precision and quality service have always been the distinguishing characteristics of Garanti’s services. Garanti Bank has continuously developed its custody and clearing business and sustained its position as the preferred Turkish sub-custodian of the world’s most reputable and well-known financial institutions.With its experienced staff, know-how and strong technological infrastructure, Garanti Bank is determined to carry its custody and clearing business further in the upcoming years along with the growth and developments taking place in the Turkish capital markets amidst increased interest from international investors. Contact: Pelin Genç [email protected] Tel: +90 212 318 1310 Ertunc Gurson [email protected] Tel: +90 212 318 1329 www.garantibank.com/custody_clearing

INVESTORS BANK AND TRUST

Rob Mancuso

Custody assets: 2004: over $1.4 trillion 2003: over $1 trillion Ratings: 2005 counter party ratings. Moody’s A2, S&P A, Fitch A

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BUYER’S GUIDE

Client profile: By location: US 76%, Europe 24%. By investor type: Investors Bank provides securities processing for clients including mutual fund complexes, insurance companies, banks, alternative investment managers, endowments, foundations, employee benefit plans, public funds, unit investment trust sponsors and independent investment advisers. Foreign 24%, Domestic 76%. Capabilities/services: Our services include global custody, multicurrency fund accounting, fund administration, transfer agency, trade operations management, middle- and back-office outsourcing, investment adviser custody services, trustee services, master trust accounting, securities lending, foreign exchange, cash management, transition management, benefit payment services, performance measurement, strategic consulting and product development. Top emerging markets: Increased activity in Asia/Pacific, specifically Taiwan; smaller European markets, specifically Bulgaria and Romania;Turkey. Business developments: 2004 corporate growth exceeded 30%; implemented $160 billion outsourcing client in Europe; middle-office services now support over $900 billion in assets. Outlook: With constantly increasing industry regulations and higher operating risks, we will continue to focus our business on risk management, a commitment to excellence in client service and enhancement of our industry-leading middle- and back-office outsourcing services and continued outsourcing implementations in North America and Europe.

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Contact: Rob Mancuso Tel: +1 617 937 6226 Fax: +1 617 937 6033 [email protected] www.ibtco.com

JPMORGAN Custody assets: 2004: $9.3 trillion 2003: $7.6 trillion Ratings: &P A-1+ /AA-, Moody’s P1/Aa2 Client profile: By Nor th Christopher Lynch location: Amer ica 72.5%, UK 12.0%, continental Europe 6.2%, Asia/Pacific 5.1%, other 3.2%, Central and South America 1.1%. By investor type: asset managers 29.3%, banks & broker/dealers 27.6%, insurance companies 17.6%, corporate pensions & treasur ies 12.8%, other 6.2%, public/government agencies 6.0%, notfor-profit 0.4%. Foreign $6,944 billion in-country; Domestic $2,377 billion cross-border. Capabilities/services: JPMorgan helps investors optimize efficiency, enhance revenues and mitigate risks with a complete set of solutions, including custody and accounting, performance measurement and analytics, trade cost analysis, securities lending, transition management, short-term investments, benefit payments, fund administration and compliance, back-office outsourcing.

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Top emerging markets: As former Soviet-bloc countries develop market infrastructure and reduce risk, clients are showing particular interest in Russia and Ukraine. We also see investment activity in the 10 countries scheduled to join the European Union.We see increased interest in emerging market debt in Asia and Eastern Europe. Other areas of interest are the China AShares market and the Middle East, including Qatar and other Gulf-region markets, given the recent double-digit rates of return across many of the region’s exchanges. Business developments: JPMorgan Investor Services created a Separately Managed Account solution that streamlines communication between managers and sponsors, automates account opening, portfolio rebalancing and tax optimization, and offers performance measurement and management reporting tools. JPMorgan acquired Tranaut, a pr ivately owned hedge fund administration services company, expanding on the range of services currently provided to longonly funds. A significant upgrade to our reporting platform integrates accounting, custody, compliance and performance measurement information into a single business intelligence toolset. Features include a customizable dashboard and home page, folders for grouping and filing of report templates, quick inquiry functions and advanced report delivery capabilities. Outlook: The custody industry has grown from its original purpose as a

BUYER’S GUIDE

provider of core securities movement and control functions; today, investors seek support from an organization that understands their complex investment structures and strategies. The scale, depth and breadth of JPMorgan Chase offers clients access to world-class capabilities, customized and forwardlooking solutions, and personal attention that cannot be matched by single-product providers. These are powerful competitive differentiators; we know it, and our clients know it. We know our clients and understand how to couple service and solutions to help them optimize efficiency, mitigate r isk and enhance revenue. We are uniquely positioned to offer a suite of global secur ities services products backed by the flexibility and strength of a leading financial powerhouse. We have built a strong global servicing platform and are committed and positioned to drive the evolution of the industry and support the growth of our clients. Contact: Christopher E. Lynch Tel: +1 718 242 7555 Fax: +1 718 242 6700 [email protected] www.jpmorgan.com/tss

NATIONAL BANK OF GREECE Custody assets: 2004: $50 billion 2003: $40 billion Ratings: Moody’s A2, S&P BBB+, Fitch A-, Capital Intelligence AClient profile: By John Avgoustis location: Europe and US (mainly). By investor type: Global custodians, commercial banks, mutual funds, investment companies, insurance companies, pension funds, broker/dealers and individual investors. Foreign 23%, Domestic 77%. Capabilities/services: Local and global

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custody: safekeeping of securities, trade settlement, corporate action processing, income collection, proxy voting, tax reclamation, securities lending, full SWIFT capabilities, daily pricing, performance and compliance reporting, cash planning tools, custody newsletters, treasury and foreign exchange, brokerage, as well as other banking services. Top emerging market: Russia. Business developments: A major upgrade of our custody system in 2004 to support global custody services, adapt to client and market needs, further automate procedures and provide our clients—among others—with detailed MIS and STP reporting. Implementation of a web access tool for client euro cash accounts. Expansion of local and international servicing. Outlook: Firm commitment to offering quality custody services and provide solutions that enhance client satisfaction. Continuous upgrades of our custody system to meet market and client needs. Compliance with ISO 15022 (SR 2005). Ongoing development of automation and STP. Expansion of our custody product list. Contact: John D. Avgoustis Tel: +30 210 3342 181 Fax: +30 210 3340 311 [email protected] www.nbg.gr

NORTHERN TRUST Custody assets: 2004: $2.6 trillion 2003: $2.2 trillion Ratings: Moody’s Aa3, S&P AA-, Fitch: AAClient profile: By location: 39 counSteven Appell tr ies. By investor type: international/fund services 35%, US corporate ERISA 31%, foundations/endowments 16%, US public

GLOBAL CUSTODY

funds/ Taft-Hartley (union) 10%, insurance 8%. Capabilities/services: Include safekeeping and settlement in approximately 90 countries, income collection, contractual settlement and income policies, tax reclamation, cash management, corporate actions, proxy voting, foreign exchange, securities lending, investment risk and analytical services, cross-border pension pooling, commission recapture, trade execution analysis, consolidated online/Internet reporting. Top emerging markets: South Korea, Taiwan, South Afr ica, Mexico, Malaysia, Thailand, Brazil, India, Poland, Indonesia. Business developments: Acquired Financial Services Group (FSG), the institutional fund administration, custody and trust services arm of Baring Asset Management. Opened an offshore center in Luxembourg. Continued enhancement of cross-border pension pooling solution. Enhanced corporate governance reporting. Announced new investment operations outsourcing deals. Outlook: Cross-border pooling enhancements for multinationals, pursuit of investment operations outsourcing opportunities, and Financial Services Group capability integration.

Contact: Northern Trust North America Steven J. Appell Tel: +1 312 444 3677 Fax: +1 312 630 1735 [email protected] Northern Trust Europe, Middle East, Africa Penelope Biggs Tel: +44 207 982 2200 Fax: +44 207 982 2235 [email protected] Northern Trust Asia Pacific Lawrence Au Tel: +65 6437 6601 Fax: +65 6437 6609 [email protected] www.northerntrust.com

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PFPC Custody assets: 2004: $450.6 billion (as of 12/31/04) 2003: $400.5 billion (as of 12/31/03) Ratings: Senior debt: Moody’s A2, Standard & Poor’s A-, Bill Salus Fitch A Client profile: By location: Americas 95%, Europe and Asia 5%. By investor type: mutual funds 81%, international funds 6%, institutional 8%, other 5%. Capabilities/services: For more than 30 years, PFPC has been a leading provider of global custody services to a broad base of clients, including mutual funds, investment advisers, partnerships, institutions, insurance companies and trusts. With a complete set of custodial services and connections to major depositories, PFPC accommodates virtually any security-processing requirement. From investment securities to income collection to corporate actions, we provide an array of global services in a straight-through-processing environment. PFPC also offers a personalized, global securities lending program to the investment management industry. Our securities lending capabilities focus on enhancing revenues and maintaining a low risk profile, offering clients the opportunity to generate incremental income on portfolio securities that would otherwise remain idle. Top emerging markets: Brazil, India, South Korea, Mexico,Taiwan. Business developments: Strategic development of our Global Enterprise Platform—our open, flexible technology architecture—to provide further integration across various products while expanding web-based information delivery solutions through our data repository and analytics suite. Outlook: PFPC continues emphasis on operational enhancements, including ex-

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panded SWIFT utilization as well as corporate actions and reconcilement. These capabilities provide end-to-end, straightthrough-processing (STP) solutions to investment managers as they continue to outsource more middle- and back-office functions to custodians and concentrate on their core competencies. Contact: Bill Salus Tel: +1 302 791 2000 [email protected] www.pfpc.com

RBC GLOBAL SERVICES

Custody assets: 2004: $1.4 trillion 2003: $1.2 trillion Ratings: Moody’s Aa2, S&P AA-, Fitch AA Client profile: By location: North AmeriTony Johnson ca 77%, Europe 12%, other 11%. By investor type: global money managers 44%, pensions 24%, financial institutions 19%, insurance 13%. Foreign 56%, Domestic 44%. Capabilities/services: Through its award-winning web-based portal, Viewfinder, RBC Global Services provides services including global custody; fund administration services for funds domiciled in Canada, Australia, Cayman Islands, Channel Islands and the UK; global securities lending and finance; triparty repurchase; treasury and foreign exchange services; cash management; pretrade currency flow analysis; portfolio analytics and attribution; risk management; transition management; commission recapture; benefit payments; derivative support services; Canadian subcustody and correspondent banking. Top emerging markets: Korea, Taiwan, Thailand, South Africa, Malaysia. Business developments: In 2004, RBC Global Services introduced BENCHMARK RiskManager, a web-enabled

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GLOBAL CUSTODY

tool to help identify and measure sources of risk; launched electronic proxy voting capabilities for the UK market; implemented Charles River Compliance in Australia to provide real-time compliance monitoring; was named best in the world for global custody services in Global Investor’s Global Custody Survey; was ranked #1 for quality of global custody service to both UK and North American clients in R&M Consultants’ Global Custody Survey; and awarded Top-Rated status in Global Custodian’s annual Agent Bank Review for the 16th straight year. Outlook: RBC Global Services will continue to roll out solutions that minimize our clients’ risk and optimize their portfolio returns, including new products and services from our BENCHMARK suite of investment analytics and optimization products. Contact: Tony Johnson Tel: +44 207 653 4096 Fax: +44 207 248 3946 [email protected] www.rbcglobalservices.com/iis

STATE STREET Custody assets: 2004: $ 9.5 trillion 2003: $ 9.4 trillion Ratings: Moody’s Aa3, S&P AA-, Fitch AAClient profile: By location: North AmeriScott Fitzgerald ca 84%, Europe 13%, Asia/Pacific 3%. By investor type: mutual funds/investment managers 50%, pensions/endowments, foundations and other non-profits 31%, insurance 7%, other 12%. Foreign 16%, Domestic 84%. Capabilities/services: Services include global custody, multi-currency fund and public accounting, insurance accounting, fund administration, hedge fund servicing, daily pricing, brokerage and transition management, investment management, multi-asset-class trading

BUYER’S GUIDE

and research, cash management, securities lending, performance measurement and analytics, and investment operations services. Top emerging markets: South Korea,Taiwan, India, Brazil, Greece. Business developments: Implemented an active Chief Compliance Officer program, introduced an SAS 99 product to meet new financial disclosure rules, broadened the capabilities of our Tax-Efficient Lot Selector service and expanded our automated wash sales reporting, added to our investment operations outsourcing client base by contracting to provide full middle-office services to several of the world’s largest investment managers. Outlook: State Street will continue to provide a complete and connected set of industry-leading services that help institutional investors control their costs, develop and launch competitive new investment products and expand globally. New regulations and other developments will support the resurgence of the industry’s reputation and restore investor trust and confidence. State Street will work closely with customers to create industry best practices and to offer the services needed to strengthen their operations and better serve their constituencies. Contact: Scott Fitzgerald Tel: +1 617 662 2820 Fax: +1 617 662 2839 [email protected] www.statestreet.com

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location: Americas 76%, Asia/Pacific 19%, Europe/Middle East/Afr ica 3%. By investor type: banks 53%, investment manager s 25%, mutual funds 21%, other 1%. Foreign 3%, Domestic 97%. Capabilities/services: Include fully integrated secur ities processing and controls for US and foreign markets, with a single point of contact for processing and inquiry needs; flexible information delivery, including direct access and electronic delivery from real-time integrated processing and accounting system, supporting US and global processing on a single platform. Top emerging markets: Brazil, Korea, Malaysia, Taiwan, Thailand. Business developments: We introduced our new Online Trust & Cust o d y s y s t e m , a c o m p r e h e n s i ve, web-based account information management service that features advanced security, access to essential account information, and user-customized reports and downloads. Demo available at uboc.com/trustandcustody. Outlook: Continued commitment to securities processing, securities custody and securities lending. Contact: Kevin Galvin Tel: +1 415 296 6789 Fax: +1 415 291 7405 [email protected] www.uboc.com

WACHOVIA

UNION BANK OF CALIFORNIA Custody assets: 2004: $204 billion 2003: $153.6 billion

Kevin Galvin

Ratings: Moody’s A1, S&P A-, Fitch A Client profile: By

Custody assets: 2004: $996.4 billion 2003: $887.3 billion Ratings: Moody’s Aa3, S&P A, Fitch IBCA A+ C l i e n t p rof i l e : B y i n ve s t o r t y p e : financials 24%, global 9%, public funds 12%, non-profit 25%, corporate 30%.

GLOBAL CUSTODY

Capabilities/services: Best-In-Class provider of US custody services; direct participant in both Euroclear and Clearstream; US and Global Securities Lending ranking as one of the leading providers of third-party agency lending services; US securities clearance for banks and broker/dealers; brokerage commission recapture; transition management; institutional asset management; treasury services; short-term cash management; SWIFT and web-based reporting off-shore services; performance measurement; foreign exchange; contractual settlement income policies. Top emerging markets: Asia, Latin America. Business developments: We continue to focus on our recognized core competencies: US custody, agency securities lending—both as custodian and third-party—and US securities clearance. Our award-winning service model is based on a market-segment approach, combining both product and industry expertise in alignment with the institutional markets served by Wachovia Bank. We differentiate ourselves from our competitors by both our flexibility in meeting clients needs and an uncompromising commitment to quality service and building client loyalty—the foundation to being the best, most trusted and admired financial institution in the US. Outlook: We continue to invest in our core services and in expanding our products and services to meet the needs of the markets we focus on: public funds, financial institutions, corporations, non-profits and international firms investing in the United States. Contact: Michael Barrett Tel: +1 704 383 4621 Fax: +1 704 383 6559 [email protected] www.wachovia.com

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COUNTRY REPORT KAZAKHSTAN

BY PAULA L. GREEN

Branching Out Kazakhstan has immense energy reserves, but its government is determined to diversify the country’s economy. Its efforts are bearing fruit—slowly. ith enor mous untapped fossil fuel reserves and several major oil and gas projects set to begin operation over the next few years, Kazakhstan is in line to become one of the world’s largest exporters of oil over the next decade.This Central Asia nation of more than 15 million people has attracted many of the world’s major energy companies to its oil and gas fields, and foreign direct investment in the sector now totals between $3 billion and $4 billion a year. Wary of relying solely on its energy wealth, however, the government of President Nursultan Nazarbaev is intent on expanding Kazakhstan’s economy into other areas, from agriculture and food processing to transportation and consumer goods. To make this shift from the reliance on the oil and gas sector, which accounts for about one-quarter of the country’s gross domestic product, the government has created several development agencies to support private sector projects. The agencies include the Development Bank of Kazakhstan (DBK), the Investment Fund of Kazakhstan, the Innovation Fund and the Export Credit Corporation. So far, though, loans to the private sector have been limited. DBK, for example, made only $268.3 million worth of loans in 2003, according to ratings agency Standard & Poor’s. The major portion of the loans—nearly 32%—was

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Kazakhstan’s oil and gas industry is already well developed

earmarked for agriculture and food processing businesses. Nearly 30% went to transport and communications infrastructure, while rubber and plastics goods industries received 14.4% and textiles slightly more than 10%. “There’s great opportunities in agriculture, such as producing wheat and cotton, as well as in agro-businesses,” says Marc Luchand, associate director of sovereign ratings at Standard & Poor’s in London. But, he says, developing viable consumer products in Kazakhstan will be difficult because the locally produced goods must compete with less expensive imported items. Early last month, the Kazakh govern-

ment announced it was setting up a special economic zone in the south to tap into the region’s textile and cotton industries. Government officials say they hope to create a cluster of textilerelated industries in this cotton-producing region that will help break the country’s dependence on imported textile products. Businesses operating in the economic zone, which will be called Ontustik or South, will receive corporate tax breaks.

Foreign Investment Is Slow To Arrive Analysts say the jury is still out on whether the development agencies’ efforts at diversifying Kazakhstan’s econo-

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my will be successful. “It is really too early to tell, as they have only been created in the last few years,” says Sharon Raj, a director in the sovereign department at Fitch Ratings in London.“Certainly economic statistics show that the non-oil sectors have been doing well recently, but critics would say that this could simply be due to the favorable inter national environment and the spillover of high oil prices.” Gary Litman, vice president for Europe and Eurasia at the US Chamber of Commerce in Washington, says the government has not been very successful in either attracting foreign investment into the non-oil and metals industry or in persuading locals to set up shop. Litman believes there is a lack of entrepreneur ial spir it among most

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lishing initiatives aimed at promoting the country. This September, for example, the US embassy in Kazakhstan is teaming up with several US business groups to host a conference in San Diego that will focus on business opportunities in the former Soviet republic. Government ministers from Kazakhstan are to discuss opportunities in information technology, telecommunications, healthcare and other sectors. As the government works to diversify the economy, the country’s oil sector and the increase in world oil prices is keeping its economic outlook bright. Economic growth in this giant nation, about the size of Wester n Europe, topped 9% last year and is expected to increase by at least 8% this year as inflation remains steady at 6.5%.

“WITH THE OIL AFFLUENCE, THEY FELT THEY WERE ENTITLED TO THE PROCEEDS WITHOUT BEING ENTREPRENEURIAL” “They have not developed an entrepreneurial class.” —Gary Litman, US Chamber of Commerce Kazakh citizens.“It’s a cultural issue,” he says. “They made a huge leap into the 21st century after the Soviet era, and then, with the oil affluence, they felt they were entitled to the proceeds without being entrepreneurial themselves. They have not developed an entrepreneurial class.” Litman adds that one bright spot is a government program that has been sending thousands of graduate students abroad each year for the past three to four years. “The government is funding graduate education for the best and the brightest, and they are going to the best business schools,” says Litman. Many return home to work in government ministries or in commerce. Foreign organizations are also estab-

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Analysts laud economic officials for adhering to a tight fiscal and monetary policy that has led to strong macroeconomic indicators and little government debt. And while the government and its people may not be pushing for much change, analysts like its stability.“The political leadership is stable,” says Jonathan Schiffer, senior credit officer at Moody’s Investors Service in New York City. The country also has a strong banking system that is well regulated and not fragmented, with the three largest banks accounting for nearly 70% of banking assets. Direct government involvement in the banking sector is limited. Litman says the banks are not risk-takers, and there is not much loan activity to companies without tangible assets. Foreign

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KAZAKHSTAN

firms have expressed minimal interest in the banking sector, although Litman believes the government would welcome foreign investment. Kazakh banks “need the know-how and capital and technology,” he says. Luchand at Standard & Poor’s believes the government could help encourage the development of private enterprises by “getting rid of the red tape, corruption and tax problems that interfere with the businesses. If you’re not a big guy, dealing with all the authorities can be difficult—and even a bit dangerous for the little guy,” he says. Corruption is a big issue. Kazakhstan scored 2.2 out of a possible 10 in the 2004 Corruption Perceptions Index, which is published by Transparency International, a Berlin-based group that fights corruption worldwide. “It’s like Russia: There is corruption and demands for bribes at all levels,” says Dick McCormack, a senior adviser at the Center for Strategic and International Studies in Washington. “There’s not the same legal protections that other companies have in other places.” Yet officials at ChevronTexaco remain undeterred. The giant oil company is Kazakhstan’s leading oil producer and has been operating in the country since 1993 when it became a partner in the Tengizchevroil (TCO) venture. Today, ChevronTexaco has a 50% stake in TCO, which produces about 280,000 barrels of oil and 298 million cubic feet of natural gas per day.The San Ramon, California-based oil company is committed to financing half of a $4 billion expansion project of TCO. It also has a 20% equity interest in the country’s other large oil field, Karachaganak. “We’ve always had an excellent relationship with the government,” says company spokesperson Don Campbell. “That relationship has been beneficial to Chevron and to the Kazakh people.” And it is exactly the sort of relationship that the country is looking to build in other sectors. ■

SARBANES-OXLEY THE REAL COSTS

BY PAULA L. GREEN

Costly Compliance As the full demands of complying with Sarbanes-Oxley become clear, companies are increasingly calling for help to rein in the costs. t’s only a three-sentence section tucked inside the 64 pages of the Sarbanes-Oxley Act—that sweeping piece of federal legislation aimed at curbing corporate corruption in public companies—but Section 404 is costing corporations at home and abroad billions of dollars in compliance costs and missed business opportunities. The cost of complying with the controversial section, which forces companies to monitor the internal controls they have in place to ensure their financial reporting is accurate and requires outside auditors to vouch for those controls, can tally several million dollars for a mid-size company. Although there is no formal movement to persuade Congress to revamp the legislation that was quickly pushed through in 2002 after financial scandals at Enron, WorldCom and others, the vociferous and constant complaints of companies—from giant multinationals to struggling start-ups—has finally forced the US Securities and Exchange Commission (SEC) to react. While carefully noting that the federal securities agency is only implementing legislation mandated by the US Congress, SEC officials have take a series of steps aimed at easing the burden on the most vulnerable companies and simply listening to the woes of executives now facing onerous compliance costs. The most definitive step taken by the SEC to relieve the burden was its deci-

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Thomas Bergqvist, Trema Group

sion in early March to extend the compliance dates for Section 404 for small US companies and foreign firms by a year, to July 15, 2006. SEC spokesperson John Heine says the agency extended the deadline in order to make sure companies implement the rule correctly. “We want to make sure that people are getting it right,” he adds. The extra time also gives smaller companies a chance to see what steps a newly created SEC commission might take to temper the compliance burden. Established in December, the SEC Advisory Committee on Smaller Public Companies will examine the impact that the Sarbanes-Oxley Act and other aspects of the federal securities laws are having on smaller firms. Early last month the

SEC named the 19 additional members of the committee after announcing the co-chairs in December. SEC chairman William H. Donaldson said the committee would look at whether the costs for small companies of complying with the regulations are worth the benefits. Another step aimed at quelling the complaints surrounding Section 404 is an SEC decision to hold a roundtable discussion at commission headquarters in Washington this month. Attendees can vent their complaints at the April 13 meeting, which is open to the public. The commission is also accepting written feedback from company executives, auditors, investors and other parties on their experiences in implementing the Section 404 rule.

Conflicting Views Industry observers say it’s too early to tell whether the federal securities watchdog will take any specific actions to reduce the growing costs of compliance. Companies are laying out millions of dollars: salaries for new staff needed to handle the extra paperwork, outside auditors to ensure the proper internal controls are in place, fees for attorneys, information technology costs and printing costs.The list goes on. “I think the regulators are taking a step back and looking at the bigger picture,” says Scott Cohen, editor of Compliance Week, a Boston-based newsletter on corporate governance and compliance issues.

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the opportunities that are lost because management is worrying about compliance and not running their business,” says Oakley. “It’s dampening the entrepreneurial spirit.”

“COMPANIES NEED MORE FLEXIBILITY AND BETTER GUIDANCE IN HOW AUDITING FIRMS ARE REACTING”

Costly, But Beneficial

“Right now, the auditors are going overboard and interpreting everything in a conservative way in order to not come up short.” —David Chavern, US Chamber of Commerce

“But it’s too early to tell if the burden will ease. The business community has been talking about the challenges and looking to pressure everybody that they can.” David Chavern, director of the corporate governance initiative at the US Chamber of Commerce in Washington, says companies are not trying to change Section 404. “No one is looking at repealing or altering Sarbanes-Oxley, but companies need more flexibility and better guidance in how auditing firms are reacting to the rules and standards,” he says. “Right now, the auditors are going overboard and inter preting everything in a conservative way in order to not come up short.” Yet Scott Powell, a visiting fellow at the Hoover Institution at Stanford University in California, thinks SarbanesOxley should be revamped in a manner similar to how the Securities Act of 1933 was reworked by the subsequent Securities and Exchange Act of 1934. Powell recently wrote a paper for the Hoover Institution titled “SarbanesOxley: A Cure Worse than the Disease?” He says the 1933 legislation was passed in an environment similar to Sarbanes-Oxley, after market excesses such as conflicts of interest, accounting irregularities and fraud led to a market crash and subsequent calls for government intervention to protect investors. Powell believes that Congress can correct the overreach of Sarbanes-Oxley by making the Section 404 mandate on in-

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ternal controls voluntary and letting company executives or shareholders determine the appropriate level of controls for their company. He says that less intrusive legislation would give shareholders and managers more say than the government in deciding how to spend corporate resources. It would also let company executives return to managing their businesses. “Companies need to be outward looking and focus on newer and better products and services,” says Powell.“Complying with Sarbanes-Oxley has become a full-time job that forces management to take their eye off the ball.” Daniel Oakley, director of knowledge management for Ernst & Young’s financial services practice, agrees. “The unmeasurable costs are SECTION 404 COSTS Percent Of Revenue

Revenue

404 Costs

$7 billion to

$10 million

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Insufficient Data

0.14 % NA

$10 billion $2 billion to $7 billion $1 billion to $2 billion $750 million to $1 billion $500 million to $750 million $250 million to $500 million Under $250 million

$2.4 million

$1.71 million

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$1.56 million

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$2.03 million $1.78 million

Source: A.R.C. Morgan. Average cost of Section 404 compliance for external resources only.

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Even with all the costs and energy being expended in executive offices on both sides of the Atlantic, Sarbanes-Oxley can still offer managers the proverbial silver lining. For the heads of corporate information technology departments, compliance with the myriad regulations of the law can provide the ammunition they need to persuade their top managers to purchase comprehensive enterprise resource planning systems. “Treasury departments are getting more support from top management on implementing more comprehensive platforms,” says Thomas Bergqvist, chief marketing officer at Trema Group in London, a technology supplier to large corporations in the US and Europe. “If you have four different systems, compliance is an extremely tedious process. Investing in a comprehensive system is sound risk management.” Les Stone, an executive based in the Boston office of Accenture, also sees ways in which corporations can use some of the regulations of Sarbanes-Oxley to improve their overall performance. The law’s accelerated reporting requirements for corporate quarterly and annual financial results, for example, can be used by chief financial officers to get their financial information to Wall Street more quickly and earn a premium on their stock price in the process, says Stone, who is an associate partner in the consulting firm’s finance and performance management service line. “If you’re going to spend all this money on compliance, companies need to learn how to manage the information and turn it into a good story that gives them a competitive advantage,” says Stone. ■

RISK MANAGEMENT INSURANCE

BY LAURENCE NEVILLE

Insurers Seek New Role In A Changing World Insurers are getting more involved in helping their corporate clients understand the risks they face.

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ust four years ago insurance was a necessity rather than a dynamic component of a company’s business strategy—a determinedly unsexy but essential part of operations. Then, almost overnight, the insurance market changed. After the terrorist attacks on September 11, 2001, corporates had to rethink their own risks and how and why they used the insurance market. Ian Clark, insurance partner at Deloitte in London, whose clients include Cable & Wireless and British Nuclear Fuels, recalls that prices in the insurance market increased substantially in the wake of 9/11 as the insurers involved sought to replenish their balance sheets. “There was a significant hardening in both pricing and terms,” he says. Clark adds that “some corporates thought that what had occurred went beyond what was an acceptable price for technical risk transfer.” As a result, those corporates sought alternative means of obtaining insurance. Chief among those was a greater use of captive insurance companies—offshorebased ar ms of non-insurance subsidiaries. Parent companies transfer some of their risks to captives, which then usually keep some on their own books and pass on the remainder to reinsurers. Andy Bulgin, group director of risk

at Coca-Cola HBC in Athens, one of the largest bottlers of non-alcoholic beverages in Europe, agrees that increased prices and cover withdrawal by insurers forced businesses to look beyond the traditional retail route of buying insurance directly and instead encouraged companies to look at wholesale insurance through captives. “Large companies, such as FTSE100 companies, already had sophisticated alternative risk financing strategies including captives,” explains Bulgin,

“but the price increases forced many companies to realize that retail insurance might not be tenable in the long term. Even if you manage to avoid ridiculous price increases, you would have had to accept stricter conditions of cover; compromises would have to be made.” Traditionally, captives had been used as a mechanism for efficient low-level risk retention, but as costs have increased, so has the scale of risk retention. “The hard market post-Septem-

INSURERS TACKLE NEW RISKS hile the fundamental role of insurance has not changed in recent years, awareness of risk issues has certainly increased, Neil Irwin, European development director at insurer Marsh (UK), believes. “In our recent survey of over 900 European companies, the five key concerns were increased competition, adverse changes in customer demand, reduced productivity due to staff absenteeism and turnover, losing key staff to competitors, and changing demographics—risks that less than half of respondents felt comfortable with,” he says.

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What is noticeable is that these are risks that are not insurable or at least difficult to insure. “Insurers are always looking to expand their business, and we have seen increased movement by the industry into specialist areas such as environment, security, brand and political risk,” says Irwin. “Of course, there are alternatives available for some of those risks—such as weather derivatives or catastrophe bonds—and the choice of companies will depend on their size and their market sophistication.” But insurance is still a very efficient mechanism for distributing risks with an established infrastructure. “Other markets have yet to become so established, resilient or flexible,” says Irwin, “nor in many instances can they offer the same type of balance sheet protection offered by insurance.” Andy Bulgin, group director of risk at Coca-Cola HBC, agrees alternative mechanisms for risk management still have some way to go. “Something like a weather derivative works on the correlation between bad weather and performance,” he explains. “That sounds ideal for a soft drink company. But even for us the correlation is not that clear.” He adds that the expense and complexity of derivatives make them less attractive. “The purchase of insurance is a conservative reaction to your business,” he says. “Any alternative way of reducing your risk is inherently more aggressive and therefore harder to convince the board of.”

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ber 11, 2001, has led to a substantial increase in the level of retained exposure held by corporates through their captives,” says Deloitte’s Clark. Neil Irwin, Euro p e a n d eve l o p ment director at insurer Mar sh (UK), agrees that companies are more willing to consider taking risks they understand on their own balance sheet. “The evaluation of the right level of retention of risk is something that has been increasingly explored by companies as the expense of primary cover has gone up,” he says. As these captive companies have retained more risk, they have become a natural focus for corporate risk management, according to Clark.“The advantages of captives were historically largely tax related,” he says, “but in recent years they have become a mechanism for efficient risk management.”

Changing Attitudes to Risk At the same time as companies have been transferring more of their risk to captive subsidiaries, there have also been major changes in the way they understand and manage risk in their operations and how they convey that to retail insurers. “Attitudes to risk among corporates have changed significantly in recent years,” says Marsh’s Irwin.“Many companies have invested substantially in r isk management strategies.” Those investments were in response to a number of events—9/11 and the collapse of Enron being only the most prominent.“The time invested by corporates in understanding risk has increased substantially in recent years, particularly with regard to operational

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risk and its implications for corporate governance,” says Clark. Insurance companies have picked up on this increased interest in risk management and have tried to encourage it. “Those [corporates] without clear risk management strategies in place or who don’t understand the risk they are facing are less likely to be able to secure competitive access to the insurance market than in the past,” says Irwin. “We encourage clients to invest time with their underwriters to ensure a fuller appreciation of their risk management strategy and assure themselves that the right measures have been taken. The process has benefits for all parties involved. Companies that can demonstrate that they understand and manage those risks are always better placed.” Coca-Cola’s Bulgin says there is some truth in saying that the insurance market is making efforts to better understand its clients—but it only goes so far. “The insurance market has become more scientific in the quality of risk being offered, and they are willing to try to understand your business,” he says. “But you have to be proactive. We always make a point of talking to insurers about both finance and risk management so that they can more fully understand our business.” Equally, Irwin says, risk managers at some companies now do see risk management in a broader sense—that it’s not just about buying insurance anymore. “But the situation differs considerably between companies,” he says. “There are a few progressive companies that have recognized the clear link between effective risk management and improved business performance; they know it’s about anticipating and manag ing your business environment.As one company in Germany stated in our survey, ‘Effective risk management is about not missing opportunities.’” ■

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CORPORATE FINANCING FOCUS

As European Companies Restructure, They Find Americans at the Gate

T

Sandy Wong

he European private equity market is growing rapidly, as US buyout firms seize opportunities to help restructure corporate Europe. The value of mergers and acquisitions in Europe that were financed by private equity firms rose 25% last year, to $147 billion, according to Dealogic. The rash of deals in recent months with financial sponsors seems to portend another big year for private equity buyouts in 2005, according to industry participants. In February Apax Partners, a USbased private equity firm, agreed to acquire Woolworths, a London-based retailer of general merchandise and home entertainment products, in a $1.5 billion leveraged buyout. Also in February Texas Pacific, another active US private equity firm, planned to acquire British Vita, a Manchesterbased manufacturer and wholesaler of polymer-based products, in a $1.2 billion LBO. But the deal that attracted the most attention in February was the offer by US buyout group Blackstone to buy a majority stake in Wind, the third-largest Italian telecom, in a bid that valued the company at $16.6 billion. If successful, the Wind buyout would be the largest LBO ever in Europe, and worldwide it would rank second only to Kohlberg Kravis Roberts’ buyout of RJR Nabisco in 1989. Meanwhile, Barclays Private Equity announced the final close of its second European Mid-Market Fund in February. The fund attracted €1.65 billion within two months. “We

only started formally marketing the fund in December 2004 but have still had to turn many potential investors away, as we were very quickly oversubscribed,” says Brian Blakemore, director of investor relations at Barclays Private Equity. The fund intends to invest in up to 50 companies in Britain and continental Europe over the next four years. While economic growth around the world is strong, European economic growth is spotty and must be viewed on a country-by-country basis, says Jeffrey Montgomery, managing partner at London-based GMT Communications Partners, Europe’s largest independent private equity group focused on the media and telecommunications sectors. “Yet European media and telecom buyout activity remains very high in 2005, as does the level of corporate merger and acquisition activity,” he says. The trend toward higher levels of deal activity will continue well into 2005 and perhaps beyond, Montgomery says, noting that Europe is at an early stage of its industrial restructuring. “There is a lot of work to be done,” he adds. The debt markets continue to provide strong support for dealmakers, Montgomery says, and the supply of equity financing continues to be strong as well. “The current high-yield and debt-issuance pipeline volume is high and heavily populated with buyout transactions and a healthy percentage of media and telecom issuers,” he says. “The increased deal volume is also taking place against a background of stronger growth 2 0 0 5

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in advertising spending in Europe,” he adds. state national law, say attorneys at Debevoise & Plimpton, Growth in advertising spending in Europe was 3.3% in but the job is far from done, and significant differences 2004, compared to 2.8% in the US, according to exist between the member countries in substantive law and Montgomery. Advertising expenditures in Britain rose deal practices. 6.5%, followed by 4.7% in Italy, an economy with very Private equity funds on the prowl in the US market low growth in gross domestic product, he says. have been most active in the healthcare sector, in which Europe is unexpectedly outperforming the US in this they invested more than $20 billion last year, according area, Montgomery says. Last year, Europe’s advertising to Dealogic. growth accelerated, while growth in the US gradually The largest successful financial-sponsor bid in 2004, slowed compared with initial expectations. “We view however, was Sony’s acquisition of Metro-Goldwyn-Mayer for $4.8 billion. Sony was backed by Providence Equity continental Europe as most appealing now,” he says. Partners, Texas Pacific and DLJ Merchant Banking “Europe usually follows the US advertising cycle, which Partners. had been strong.” Citigroup was the top advisor to private equity firms last GMT Communications Partners closed its latest private year, with $24.2 billion in volume from 19 deals, according equity fund of €365 million at the end of 2000, from to Dealogic. which it is still actively investing. “We are about 80% Meanwhile, overall US-targeted M&A in the healthcare invested and will likely start a new fund sometime this year,” sector totaled more than $12 Montgomery says. billion in the first two months The uptrend in the European European Private Equity Volume of 2005, a 79% increase from private equity market is being By Target Nation the same period of 2004. driven mainly by major $ billion 60 The biggest US healthcare takeovers. “Prices are shooting deal so far this year, according up due to the stiff competition 2003 50 to Dealogic, is the $2.4 billion between bidders,” says Jürgen 2004 acquisition in late February of Schaaf, analyst at Deutsche Bank 40 Tennessee-based Accredo in Frankfurt. The debt portion Health, which provides of deals has risen significantly, 30 specialized contract pharmacy he says. services, by New Jersey-based “The flipside of the buy-out 20 Medco Health Solutions. dominance is that financing for early-stage investments is 10 increasingly drying up,” Schaaf Border Crossing says. Practically no money is 0 going into seed money to Cross-border M&A UK Germany France Netherlands finance technology startups. transactions within Europe Source: Dealogic The German private equity reached an announced $43.9 market as a whole is growing solidly, with buy-outs billion between January 1 and March 10, 2005, compared essentially determining the rate of growth, Schaaf says. to $17.5 billion in the same period of 2004, according While Germany attracts a large number of foreign private to Dealogic. equity firms that finance big takeovers, it has virtually no Intra-European cross-border deals accounted for 42% of domestic participants in this sector, according to Schaaf. all European-targeted merger activity in the 2005 period, up from 10% in the year-earlier period. The biggest such cross-border deal in 2005’s year-to-date No Pan-European Market total was the acquisition of Spain-based Amadeus Global A homogenous pan-European private equity market is Travel by UK-based private equity firms Cinven and BC not in sight, Schaaf says. The private equity markets in Partners. Europe are still highly fragmented, even though a riskMeanwhile, Switzerland-based Novartis became the capital market for all of Europe has been a strategic world’s largest maker of generic drugs by agreeing in objective of the EU. However, the amount of capital February to buy Hexal of Germany and 68% of Eon Labs available to be invested has increased dramatically, due to of the US for a total of more than $8 billion. US private equity investors seeking diversification and Novartis plans to acquire the remainder of Eon Labs for perceiving opportunities for higher returns in Europe, about $1 billion through a tender offer and to merge it, as according to Debevoise & Plimpton, an international law well as Hexal, into its Sandoz unit, which is currently the firm that publishes a handbook on the European private number two generic-drugs manufacturer worldwide. In the financial services sector, Sweden-based Swedbank equity market. The EU may be in the process of harmonizing member- agreed to acquire the remaining 40% stake it did not 4 6

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already own in Estoniabased Hansabank for $1.8 billion.

Retail Sale In the largest M&A transaction in the US market in February, Cincinnati, Ohio-based Federated Department Stores, which owns Macy’s and Bloomingdale’s, agreed to buy May Department Stores to become the secondGMT’s Montgomery: “European biggest department-store media and telecom buyout activity remains high in 2005” owner and operator in the country. Federated agreed to acquire St. Louis, Missouri-based May in a stock-swap transaction valued at $14.4 billion, including the assumption of an estimated $6 billion in liabilities. May owns such brands as Lord & Taylor and Marshall Field’s and other stores primarily in the US Midwest. The deal will create a department-store chain with more than 1,600 stores and $31 billion in annual sales. The major US department stores are consolidating to attain economies of scale to compete with discounters, as well as luxury chains. The merger of Sears Roebuck and Kmart Holding, announced in November 2004, will create a company with about 3,400 stores and $55 billion in annual revenue.

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MasterCard accounts, agreed in March to buy New Orleans-based Hibernia, the biggest bank in Louisiana, for $5.3 billion in cash and stock. The combined company will become one of the top 10 consumer lenders in the US. Hibernia already has branches in the fast-growing Texas market, and Capital One plans to expand the bank under its national brand. The acquisition will give Capital One a growth platform and access to an additional source of lower-cost funding, says Richard D. Fairbank, chairman and CEO of the credit-card company, which also is active in auto financing and provides a wide range of financial products and services. “This acquisition is a natural extension of the diversification strategy that we have been pursuing for some time,” Fairbank says. Capital One’s managed loan portfolio totaled nearly $80 billion at the end of last year. Credit Suisse First Boston advised Capital One on the transaction. JPMorgan Securities and Bear Stearns advised Hibernia. —Gordon Platt AMERICAS M&A: TOP DEAL ADVISERS

Goldman Sachs Merrill Lynch UBS Morgan Stanley Credit Suisse First Boston Industry Totals*

Biggest Bank In World

In the US financial services sector, Maryland-based Capital One Financial, one of the largest issuers of

118,749 79,471 63,708 56,645 46,681 209,541*

1 2 3 4 5 -

56.7 37.9 30.4 27.0 22.3

31 19 9 17 17 1,264

EUROPE M&A: TOP DEAL ADVISERS

Sumitomo Mitsui Financial Group, or SMFG, Japan’s third-largest bank, withdrew its offer to buy UFJ Holdings, the country’s number four bank. By withdrawing its hostile bid, SMFG cleared the way for UFJ to merge with Mitsubishi Financial Tokyo Financial Group, or MTFG, Japan’s number two bank. Following eight months of wrangling over the merger ratio, MTFG and UFJ definitively agreed in February to merge in a stock-swap transaction valued at more than $41 billion. The merger of the two banks, effective next October, will create Mitsubishi UFJ Financial Group, the world’s largest financial services company, surpassing both Japan’s Mizuho Financial Group and Citigroup of the US. Meanwhile, Mitsubishi Securities, a 52.3%-owned unit of MTFG’s Bank of Tokyo-Mitsubishi subsidiary, agreed to merge with UFJ Tsubasa Securities.

Capital One Buys Hibernia

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

Adviser

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

Adviser Goldman Sachs Citigroup JPMorgan UBS Rothschild Industry Totals*

9,232 7,661 7,106 7,021 6,465 60,403*

1 2 3 4 5 -

15.3 12.7 11.8 11.6 10.7

10 10 21 7 22 1,302

ASIA M&A: TOP DEAL ADVISERS Adviser Nomura Merrill Lynch Morgan Stanley Mitsubishi Tokyo Financial Lazard JPMorgan Industry Totals* January 1, 2005 – March 4, 2005

Rank Value % Mkt # of ($million) Rank Share Deals 50,477 48,698 47,775 44,974 41,431 41,431 82,715*

1 2 3 4 5 5 -

61.0 58.9 57.8 54.4 50.1 50.1

25 9 11 10 2 2 1,126

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 5

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TOP MERGERS AND ACQUISITIONS (FEBRUARY 1, 2005–MARCH 1, 2005) AMERICAS Date Announced

Target Name (Target Advisers)

2/28/05

May Department Stores (Morgan Stanley) (Peter J. Solomon)

US

2/11/05

MCI (JPMorgan) (Greenhill) (Lazard)

2/14/05

Country

Acquirer Name (Acquirer Advisers)

Ranked Value ($billion)

Country

Description

Federated Department Stores (Credit Suisse First Boston) (Goldman Sachs)

US

Agreed to acquire owner and operator of 15.41 department stores, in a stock-swap transaction; includes $6 billion in liabilities.

US

Qwest Communications International (Merrill Lynch)

US

Made an unsolicited challenging offer 6.26 to acquire MCI in a stock-swap transaction.

MCI (Greenhill) (JPMorgan) (Lazard)

US

Verizon Communications (Bear Stearns)

US

Agreed to acquire MCI in a stock-swap transaction; includes assumption of $4 billion in liabilities.

5.52

2/14/05

CalPERS/First Washington retail centers

US

Investor group (Wachovia Capital Markets) (JPMorgan) (Citigroup)

US

Definitively agreed to acquire 101 retail centers from real-estate investment trust.

2.74

2/15/05

Circuit City Stores (Goldman Sachs)

US

Highfields Capital Management (UBS Investment Bank)

US

Made an unsolicited bid to acquire retailer of consumer electronics, in a going-private transaction.

2.63

2/23/05

Accredo Health (Raymond James Financial)

US

Medco Health Solutions (Lehman Brothers)

US

Definitively agreed to acquire provider 2.50 of specialized contract pharmacy services, for cash and stock.

2/14/05

Sprint’s wireless communication towers (Banc of America Securities)

US

Global Signal (Morgan Stanley) (Citigroup)

US

Real-estate investment trust was 2.30 granted an option to acquire 6,600 wireless communication towers.

2/1/05

American Ref-Fuel Holdings (Credit Suisse First Boston)

US

Danielson Holding (Goldman Sachs)

US

Definitively agreed to acquire owner and 1.94 operator of waste-to-energy facilities; includes assumption of $1.2 billion in liabilities.

2/27/05

USF (Morgan Stanley)

US

Yellow Roadway

US

Definitively agreed to acquire provider of 1.71 trucking services, in a stock-swap transaction.

2/21/05

Eon Labs (Merrill Lynch)

US

Novartis (Goldman Sachs)

Switzerland Definitively agreed to acquire 67.55% interest in pharmaceutical manufacturer.

1.49

2/21/05

Hexal

Germany

Novartis (Goldman Sachs)

Switzerland Definitively agreed to acquire pharmaceutical maker and wholesaler, for cash.

5.69

2/9/05

Somerfield UK (Dresdner Kleinwort Wasserstein)

Baugur (Merrill Lynch)

Iceland

Made an unsolicited bid to acquire owner and operator of grocery stores.

2.02

2/13/05

Fiat Auto Poland (Citigroup) (JPMorgan)

Poland

General Motors (Goldman Sachs)

US

Agreed to acquire a 50% interest from Fiat to regain complete ownership of its assets in Powertrain joint venture.

2.00

2/11/05

AS Hansabank

Estonia

Swedbank (Morgan Stanley)

Sweden

Planned to launch a tender offer to acquire the remaining 40.29% stake it did not already own in investment bank.

1.81

2/8/05

Woolworths (Credit Suisse First Boston) (Cazenove) (UBS Investment Bank)

UK

Apax Partners (Merrill Lynch)

US

Planned to launch a tender offer to acquire retailer, in a leveraged buyout.

1.38

2/3/05

British Vita (Deutsche Bank)

UK

Texas Pacific (Rothschild)

US

Planned to acquire maker and wholesaler of 1.26 polymer-based products, in a leveraged buyout.

2/16/05

Inalta (Deutsche Bank)

Spain

Red Electrica de Espana (JPMorgan)

Spain

Agreed to acquire the remaining 75% interest it did not already own.

2/18/05

UFJ Holdings (Merrill Lynch) (JPMorgan)

Japan

Mitsubishi Tokyo Financial (Mitsubishi Securities) (Morgan Stanley) (Nomura Securities) (Lazard)

Japan

Definitively agreed to merge to form Mitsubishi UFJ Financial Group, in a stock-swap transaction.

2/25/05

Daiichi Pharmaceutical (Merrill Lynch)

Japan

Sankyo (Nomura Securities)

Japan

Agreed to merge with manufacturer of prescription pharmaceuticals, in a stock-swap transaction.

6.22

2/23/05

Nippon Broadcasting System

Japan

Fuji Television Network

Japan

Fuji was granted an option to raise its interest to 64% from 5%.

2.83

2/17/05

UFJ Tsubasa Securities (GMD Corporate Finance) (Lehman Brothers)

Japan

Mitsubishi Securities (Mitsubishi Securities) (Deutsche Securities-Tokyo) (Morgan Stanley)

Japan

Agreed to merge in a stock-swap transaction.

2.37

2/3/05

Toyoda Machine Works (Nomura Securities)

Japan

Koyo Seiko (Daiwa Securities)

Japan

Agreed to merge in a stock-swap transaction.

1.78

2/14/05

Mitsubishi Motors (Mitsubishi Securities) (UBS Investment Bank)

Japan

Investor group

Japan

Raised its stake to 21.74% by acquiring an 11.32% stake, in a privately negotiated transaction.

1.14

EUROPE

0.96

ASIA

Source: Thomson Financial Securities Data 4 8

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Asian Central Banks May Tilt US Yield Curve treasury bonds as they have in the past, US bond rates could increase significantly. “If Asian central banks decide to invest less new money in the dollar, the lack of participation in primary US treasury bond auctions will be reflected in the bidcover ratios at the auctions,” says Michael Woolfolk, senior currency strategist at Bank of New York. “The Asians would no longer suppress the long end of the US yield curve, and the 10-year US bond yield would rise to around 5% or 5.5%,”Woolfolk says. At about 4.5%, the current

The Japanese, Chinese, South Korean and other Asian central banks have made it clear that they have no intention of dumping dollar-denominated securities and undermining the value of their massive reserve holdings. It won’t necessarily take foreign central bank selling of US treasury bonds, however, to have an effect on long-term interest rates in the US, analysts say. If the foreign central banks that are accumulating dollars as a result of their trade surpluses with the US simply stop buying as many new

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level of the 10-year US treasury bond is lower than it was at the end of last year and well below the 5.16% level when President Bush took office in January 2001. Federal Reserve chairman Alan Greenspan said recently that he didn’t have a good explanation for why rates on long-term debt have fallen despite the ongoing effort by the Fed to increase the cost of borrowing. “For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum,” Greenspan said in testimony before Congress. Since June 2004 the Fed has increased the overnight federal funds rate from 1% to 2.5% in six quarterpoint steps. But the cost of

home mortgages and longterm business investments has fallen. “If Asian central banks stop buying new US treasury bonds, Greenspan’s conundrum would disappear,”Woolfolk says. Long-term rates would rise gently, without the risk of a bond-market collapse, enabling the economy to continue expanding with no threat to price stability, he says. “This might curb some of the irrational appetite of consumers for real estate and lower the risk of a housing bubble,”Woolfolk says. The dollar needs to decline further in order to boost US exports and to begin to reduce the US currentaccount deficit, he says.

CURRENCY FORECASTS 0.7

1.0

Euro (Euro/US$)

0.9

UK (Pound/US$) 0.6

0.8 0.5 0.7

Source: Bank of New York

Forecast

Source: Bank of New York 0.6

Forecast

0.4 M

A

M

J

J

A

S

O

N

D

J

F

M A

2004

M J

J

A

S

O

N

2005

D J

F

A

M

J

2006

140

J

A

S

O

N

D

J

F

M A

2004

M J

J

A

S

O

N

D

J

F

2006

2005

1.6

Japan (Yen/US$)

120

M

Switzerland (Franc/US$)

1.4

100

1.2

80

1.0 Source: Bank of New York

Forecast

60

0.8 M

A

M

J

J

A

2004

S

O

N

D

J

F

M A

M J

J

2005

A

S

O

N

D J

F

M

2006

A

M

J

J

A

2004

TLFeBOOK

Forecast

Source: Deutsche Bank S

O

N

D

J

F

M A

M J

J

2005

A

S

O

N

D

J

F

2006

CORPORATE FINANCING NEWS FOREIGN EXCHANGE

G

CORPORATE FINANCING NEWS FOREIGN EXCHANGE

G

China needs to revalue its currency, instead of pegging it to the dollar, to enable the adjustment process to occur, he says. “The invisible hand of competition described by Adam Smith is not being allowed to function,” Woolfolk says. “The dollar is not going to collapse like an emerging market country’s currency,” Woolfolk says. “And a revaluation of the yuan is not going to eliminate the US deficit with China, although it will make it more sustainable,” he adds. The Basel, Switzerlandbased Bank for International Settlements says its commercial and central bank statistics provide some tentative evidence that deposits placed abroad by banks in Asia are being increasingly denominated in currencies other than the dollar. In its March quarterly review of the global economy and financial markets, the BIS says Chinese banks cut their share of dollar deposits abroad to 68% in September 2004 from 83% three years earlier. Indian banks reduced their share of dollar deposits abroad to 43% from 68% in the same period. The BIS was careful to point out, however, that the evidence was far from conclusive in indicating a general shift out of the dollar by Asia overall. It noted that the absolute level of the region’s dollar deposits has continued to rise. For all of the Asian banks covered in the BIS survey, the percentage of their deposits in dollars fell to 67% in September 2004 from 81% in the third 5 0

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quarter of 2001. Speculation that China would revalue the yuan fueled rapid growth in Asian foreign exchange trading last year, according to analysts at Brown Brothers Harriman in New York. Citing BIS data, they note that trading in the yuan itself grew by 530% between April 2001 and April 2004, to about $1.8 billion a day. The level of yuan trading is still very low, however, and remains below that of trading in the Indonesian rupiah, for example. Meanwhile, the Bank of Japan says it has no plans to diversify its reserve holdings. “This repeats previous Japanese statements, and matches past patterns,” according to Brown Brothers Harriman. Details on the currency composition of Japanese reserves are not available, BBH says, but the available data suggest that most of the $437 billion increase in Japanese reserves over the past two years has gone into dollar assets. Meanwhile, billionaire investor Warren Buffett, who is chairman of Berkshire Hathaway, said in his annual letter to shareholders last month that “US spendthrift behavior won’t be tolerated indefinitely.” Buffett said that the dollar has further to fall and that the US trade deficit risks turning the US into a sharecropper society. He said the trade gap and the growing dependence of the US on external financing could prompt the dollar to fall to such a degree that it would be unsettling to financial markets. —Gordon Platt

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CURRENCY FORECASTS 1.6

Canada (C$/US$) 1.4

1.2

1.0

Forecast

Source: Bank of New York M

A

M

J

J

A

S

O

N

D

J

F

M A

2004

M J

J

A

S

O

N

D

2005

J

F

2006

14

Mexico (Peso/US$) 12

10

Forecast

Source: Bank of New York 8 M

A

M

J

J

A

S

O

N

D

J

F

M A

2004 4.0

M J

J

A

S

O

N

D

2005

J

F

2006

Brazil (Real/US$)

3.5

3.0 2.5

Forecast

Source: Deutsche Bank 2.0 M

A

M

J

J

A

S

O

N

D

J

F

M A

2004 1.6

M J

J

A

S

O

N

D

2005

J

F

2006

Australia (A$/US$)

1.4

1.2

Forecast

Source: Bank of New York 1.0 M

A

M

J

J

A

S

O

N

D

J

F

M A

2004 9.0

M J

J

A

S

O

N

D

2005

J

F

2006

China (Yuan/US$)

8.8 8.6 8.4 8.2 8.0

Forecast

Source: Deutsche Bank M

A

M

J

J

A

S

O

N

D

J

F

M A

2004

M J

J

A

S

O

N

D

2005

J

F

2006

1600

South Korea (Won/US$)

1400 1200 1000

Forecast

Source: Deutsche Bank 800 M

A

M

J

J

A

S

O

N

D

J

F

M A

2004

M J

J

A

S

O

N

D

2005

J

F

2006

1.8

Turkey (Million Lira/US$) 1.6

1.4

1.2

2 0 0 5

TLFeBOOK

Forecast

Source: Deutsche Bank M

A

M

J

J

A

2004

S

O

N

D

J

F

M A

M J

J

2005

A

S

O

N

D

J

F

2006

L O B A L

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US HIGH-YIELD NEW-ISSUANCE VOLUME

Samurai, Kangaroo Bonds Hopping

20 18 2004

16

the only reason that foreign bond markets are attracting companies from outside the domestic market. In Australia, where interest rates are higher than in the US, the kangaroo bond market for issues denominated in Australian dollars is also hopping with North American corporate borrowers. The main reason for the growth in kangaroo bonds is a desire by corporate borrowers to diversify their funding, according to the Australian Bureau of Statistics, a government agency. About 70% of kangaroo bonds are sold to Australian residents. The growth of nongovernment bonds, such as kangaroo bonds, also is due in part to the reduction of Australian government bond

2005

14

($ billion)

Ford Motor Credit sold more than $1.5 billion of three-year samurai bonds in Tokyo in February, its biggest-ever sale of yendenominated bonds in a single issue. The US company paid a coupon of 1.71%, or a spread of 1.35 percentage points over the yen London inter-bank offered rate, or yen Libor. Bank of America sold $1.7 billion of five-year samurai bonds last November, the largest such sale in more than two years. Samurai bonds are debt securities issued by nonresidents in the Japanese domestic market. The appeal of the samurai market to foreign borrowers is obvious from the low interest rates that issuers pay. Low interest rates aren’t

12 10 8 6 4 2 0 Jan

Feb

Mar

Apr

May

EGL Acquisition AMR Real Estate Partners Navistar International Sanmina-SCI Valor Telecommunications Enterprises Meritage Homes DI Finance Mercer International Intelsat Zeus D.R. Horton Worldspan TTI Holding PQ Builders FirstSource Cincinnati Bell Las Vegas Sands Mohegan Tribal Gaming NTK Holdings Enterprise Products Operating Enterprise Products Operating Penn National Gaming

Offer Date Coupon %

Issue Type

issues. Foreign financial institutions have been the main issuers of kangaroo bonds for the past four years, accounting for about two-thirds of the total. Global foreign market issuance of debt securities totaled $10.6 billion in the first two months of 2005 and was evenly split between the three most-active markets: samurai, kangaroos and Yankee bonds,

7.625 7.125 6.250 6.750 7.750

Sr.Sub.Notes Senior Notes Senior Notes Sr.Sub.Notes Senior Notes

2/15/15 2/15/13 3/1/12 3/1/13 2/15/15

144A 144A 144A 144A 144A

660 480 400 400 400

2/24/05 2/1/05 2/9/05 2/3/05 2/4/05 2/7/05 2/25/05 2/3/05 2/8/05 2/2/05 2/3/05 2/3/05 2/10/05 2/15/05 2/15/05 2/24/05

6.250 9.500 9.250 0.000 5.250

Senior Notes Sr.Sub.Notes Senior Notes Sr.DiscNotes Senior Notes Floating Rate Notes Sr.Sub.Notes Sr.Sub.Notes Floating Rate Notes Senior Notes Senior Notes Senior Notes Sr.DiscNotes Senior Notes Senior Notes Sr.Sub.Notes

3/15/15 2/15/13 2/15/13 2/15/15 2/15/15 2/15/11 3/1/13 2/15/13 2/15/12 2/15/15 2/15/15 2/15/13 3/1/14 3/1/35 3/1/15 3/1/15

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

350 320 310 302 300 300 300 275 275 250 250 250 250 250 250 250

7.000 6.375 6.125 0.000 5.750 5.000 6.750

Sep

Oct

Nov

Dec

which are dollar-denominated bonds issued in the US by foreign companies. “Kangaroos have bounced back to 32% of foreign market issuance in the first two months of 2005, compared to a five-year low of 3% in the same period of 2003,” says Karl Waltré, analyst at Dealogic. The samurai issuance market share was 33% of the total in the 2005 period, up from 10% in the first two months of 2004.

Maturity Date Private/Public Amount ($mil)

2/3/05 2/1/05 2/23/05 2/16/05 2/8/05

8.875 7.500

Jul Aug

Source: KDP Investment Advisors

TOP US HIGH-YIELD ISSUES IN MARCH 2005 Issuer

Jun

Source: KDP Investment Advisors

Wind Power Issue FPL Energy National Wind, a subsidiary of Florida-based FPL Energy, closed a private offering of $365 million of 19-year senior secured bonds. Another subsidiary of the utility, FPL Energy National Wind Portfolio, placed $100 million of 14-year senior secured bonds. FPL Energy will use the net proceeds of both offerings to repay part of the investment it made in the development of nine wind power projects. —Gordon Platt 2 0 0 5

TLFeBOOK

A P R I L

5 1

CORPORATE FINANCING NEWS CORPORATE DEBT

G

L O B A L

GF

Israeli Companies List On London Exchange

5 2

A P R I L

F

I N A N C E

engines and aerospace components. One ADR is equivalent to one ordinary share. “Good recognition in external markets is crucial to any ADR program, and a depositary bank can play a key role in this,” says Patrick Colle, global head of ADRs at JPMorgan. The bank is the leader in reported ADR market capitalization, with $145 billion in institutionally held ADR assets, he says.This translates into $657 million in ADR investment per client program. JPMorgan is establishing an investor-relations advisory unit to help issuers to attract and retain investors. Colle says the unit will help the corporate issuer to communicate its investment thesis to the market and will be charged with delivering measurable results. The bank sees strong trends remaining in place that favor continued interest in ADR trading liquidity, such as a growing global economy, reviving corporate profitability, and dollar weakness.

market, LSE officials are encouraging Israeli companies to seek listings on London’s main market as well. In the case of Frutarom Industries, the company’s GDRs also were made available to qualified institutional investors in the US pursuant to Rule 144A. Frutarom’s offering comprised both a sale of new shares by the company as well as secondary sales by its majority shareholder, the ICC Group, for a total of $91.5 million.

Volvo Shifts JPMorgan Chase was appointed successor depositary bank by Sweden-based Volvo for its Nasdaq-listed American depositary receipt program. Volvo makes commercial transportation products, including trucks, buses and construction equipment, as well as marine and industrial

“For 2005 we expect Asian issuer capital raising to again dominate the DR offerings, particularly those companies linked with the privatization trend and growth associated with Greater China,” Colle says. The bank is also optimistic that Brazil-based issuers will be active in the ADR capital markets. “We also anticipate renewed interest in issuers using ADRs as acquisition currency for US companies, given the relative buying power of non-US currencies,” Colle says. Asian companies may soon join European companies as users of ADRs in stock-swap acquisitions, particularly as Japan will soon allow its companies to issue ADRs for takeovers, Colle adds. Meanwhile, Bank of New York established a Level-I ADR program for Australiabased Austal, which makes high-speed passenger and vehicle ferries and military vessels. It has shipyards in Perth, Australia, and in Mobile, Alabama. —Gordon Platt

REGIONAL ADR INDEXES 160

Latin America

140

Europe

Asia

120

2 0 0 5

TLFeBOOK

Feb 11, 2005

Feb 25, 2005 Feb 28, 2005

Jan 14, 2005

Jan 28, 2005

Dec 31, 2004

Dec 3, 2004

Dec 17, 2004

Nov 5, 2004

Nov 20, 2004

Oct 8, 2004

Oct 22, 2004

Sep 10, 2004

Sep 24, 2004

Aug 13, 2004

Aug 27, 2004

Jul 30, 2004

Jul 2, 2004

Source: Bank of New York

Jul 16, 2004

Jun 4, 2004

Jun 18, 2004

May 7, 2004

May 21, 2004

Apr 9, 2004

Apr 23, 2004

80

Mar 12, 2004

100

Mar 26, 2004

When Frutarom Industries, an Israel-based producer of flavors and ingredients for food and beverages, launched its initial public offering in February, it chose to list its global depositary receipts on the London Stock Exchange instead of in the US. The company’s underlying shares trade on the Tel Aviv Stock Exchange. Historically, most Israeli companies venturing into global markets have listed their shares on Nasdaq, but the LSE has been making inroads in the past year with a half-dozen Israeli listings. Frutarom Industries is the first large Israeli industrial company to seek a listing in London, according to lawyers at White & Case, which represented the company in its IPO. Adamind, a media software provider, recently became the second Israeli company to list in London this year. Israel is Nasdaq’s largest market in terms of listings of companies based outside of North America.The electronic exchange currently trades shares in 73 Israel-based companies. Nasdaq and the LSE both have sent teams of senior officials to Israel in recent months to drum up interest from Israeli companies, particularly those in the technology sector. LeadCom Integrated Solutions, an Israeli provider of wireless networks, plans to list in London this month. While focusing their campaign on London’s AIM, or alternative investment

Feb 29, 2004

CORPORATE FINANCING NEWS GLOBAL EQUITY/DR S

G

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