‘Part greed, part absence of control’

Barclays Capital or BarCap as it is also  known is the investment banking division and profits superstar of Barclays Plc. It provides financing and risk management services to large companies, institutions and governments.

 

 In recent years, it has proved itself as a leader in the Gulf bond market, managing billions of dollars of debt issues for top corporates Nakheel, DP World and Aldar.
 

Emirates Business sat down with Jean Marc LeJeune who is BarCap’s first MD appointed in Dubai to discuss corporate finance and the crisis plaguing world markets.

The US sub-prime crisis and the subsequent credit crunch has hit financial markets hard. What’s your view?

The credit structure part of it has been hit massively. We may discover in a couple of years that things are not as bad as we thought. The confidence needs to return to normal.

When you look at the securitisation market and  sub-prime where everything started, a few vehicles started to fail and that’s when people started asking questions. It can derail quite quickly.

 

Two years ago no one was scared. But when you push a machine too far...Look at it globally. Investors don’t put their money in the system – put it on deposit but do not invest it. Because banks don’t trust each other they put their money with the central banks.

 

 They must re-inject the liquidity into the system. The system is broken for a couple of years but it will restart. The balance sheets of the banks will have to grow to absorb this. Or we will head straight into a recession.

 

There are signs of a recession but it is not a recession yet. In the early 1990s I remember reading that a recession was coming and of course when everybody says it is coming, it comes. Central banks and governments have reacted. They are in control of what is going on.

Usually banks have a huge balance sheet and huge diversification that the impact of one sector should not be so dramatic. Although when you see the impact of the sub-prime crisis on Merrill Lynch, Bear Stearns and others it is very significant.

The time you need to rebuild this is enormous. The amount of business you can do, how you can use your balance sheet is proportional to your equity for a bank. Losses like this mean that you can’t maintain the previous level of business.

 

It’s part greed, part absence of control. A lag also. A lot of these industries have been driven by systems, automatic decisions based on statistics. When you start to correct your decisions you are already very wrong. Probably some abuse of the financial system also.

Why has this crisis been so far reaching and not contained to one sector or part of the world, like the Asian crisis in the late 1990s was, for example?

Everybody was leveraging everything.

 

You put one dollar and ask the bank to put 99 per cent – everybody is saying its AAA so it can’t default. But this is only valid so long as the market doesn’t go beyond a certain threshold, you don’t have to put more money in and you don’t have to unwind the position.

 

 Most of these products were structured with thresholds in place. So they had to sell, everybody had to sell.

 

How can confidence be restored then?

It’s has been a self-perpetuating problem. Because credit spreads are going down you force the system to sell and the system can’t absorb all this selling at the same time.

But most of the credit that is on the line is still entirely safe in reality. If you restore the confidence then automatically spreads will reduce and the market value of those good assets will increase.

 

How can the industry prevent this from happening again?

It would be easier if effectively the overall industry was also looking at itself and was starting to implement some mechanism for more control. The rating agencies’ responsibility in all of this is huge.
 

The confidence in their methodology is huge but it relies also on the fact that they will be given the right information and figures and that they apply the due diligence properly.

 

Does the credit rating system need reform?

Rating agencies are paid by the people who run the companies that they are rating. To have a stronger mechanism it should be less commercial.

Some rating agencies have been complacent. Deal after deal came yet they keep the same rating, say nothing has changed. Rating agencies have no reason not to change their opinions, they lose nothing.  

 

It’s true and it’s not true. The banks have a lot of liquidity in local currency, UAE dirhams for example, but it is difficult for them to access the international capital markets. The problem is that if they buy in dollars they are at risk from a revaluation of the dirham against the dollar.

What has been the impact of the speculation over the dollar-dirham peg on the local financial markets?

They [UAE banks] keep their dirhams in deposits and are not invested completely day to day [in case of a revaluation].

The problem is that your credit limits go only to a few counterparts in the region, which means the diversification of your credit is limited. One of the few places to put your money is real estate. A lot of banks are full of real estate - a concentration of risk. 

What is the outlook going forward for the local capital markets?

Add up all the refinancing projects rumoured or talked about to come in the GCC and we are already at the equivalent of $70 billion in terms of debt – it can be bonds or loans. It’s not the complete picture either there could be more issues.
 

Most of this we expect to come in the capital markets, sukuk for example. But it is difficult to imagine how we can sell that much on our own in the GGC.  Part of it will have to be sold in the international market.

 

There have been varied estimates about the debt to GDP ratio that the Government of Dubai has taken on. Do you have a clearer picture?

The difficulty is how do you compute these things including the nature of the risk and the connection of the state to industry. The credit rating agencies will tell you that they have difficulty in this regard.

But they assume that the government will support these entities. Is the government forced to support DP World, for example? No, but you assume they will. For simplicity assume the government will be there in  any event. But in a scenario where the economy if flat, you might need to change that judgment.

 

When it comes to issues like DP World, Nakheel and Aldar which BarCap acted on how do you answer investors’ questions in relation to this issue?

Take for example, PCFC [What was the Dubai Ports, Customs & Free Zone Corporation and is now DP World after its takeover of P&O] which was so big, so large and issued by a public entity representing the state.

It was impossible to separate this entity from the state. However, we are really interested in what the government is doing in Dubai to make clear what is government supported and what is not. This is quite confusing in terms of ratings.

 

This assumed level of support is good in economic terms but it does not impose the serious financial policy that you should have if you are not supported. Okay, so the cost of debt is cheaper now.

 

But if in the future the economy is not going well and companies are not used to paying the right price for accessing markets then the investor will withdraw everything.

 

Compared to six to 12 months ago it is harder to find the liquidity. But it’s all about liquidity at the right price. Just recently there are signs of a reopening of the market – in the US that is, Europe is closed, almost nothing is happening.

But you see a deal by Vivendi, a deal by Gazprom. Vivendi, didn’t pay that much [The French firm plans to raise $1.4bn in a US bond issue]. Gazprom paid a lot but they were issuing more [The Russian energy group has a $30bn issuance programme].

 

A small trade around a billion dollars and you’ll get it. Any bigger and you will have to pay much more. It’s perception. 

What are the advantages for your clients choosing to access the debt markets over equity markets?

This debate is a permanent one with all our clients because we are very strong in the convertible bond market. This is about perception and the answer is different depending on the sector. There is no tailor made answer.

Is the timing of an issue crucial?

The question is much more about how much business can I drive if I issue now even if it is not the best time to do it. Positioning in a difficult market may mean in the long-term you are rewarded even if it costs in the short-term.

If the story is right and the strategy is right you can make it successful.  If you have seen an opportunity you go for it. It’s all about the communication with the debt investors. Sometimes that is where the problem is.  

It is more difficult now in the markets. Anyone who wants to issue by year-end should already be on the road now preparing. The more difficult the environment the more you need to communicate.

 

 And what is more difficult is that you need to broaden your investor base. The only way is to go on the road.

There are a few local banks already developing products in the derivatives market. There needs be more of an awareness. Here people don’t see all their exposure as a risk and its not obvious to them to manage it. Liquidity is an issue.
 

In UAE dirhams it is not easy to find a simple ten year swap. The reality is that a GCC single currency will allow a lot more derivatives trade because there are more counterparties like what happened in Europe after the euro.

 

The derivative market there grew two or three times in size. There is a commitment from BarCap to developing derivatives here. We have brought someone from London, hired another and will have by this summer three people here. Going from one junior to two senior and one junior working in derivatives.

Jean-Marc LeJeune  joined Barclays Capital in July 2001 from Deutsche Bank, where he was an Associate Director in the Debt Capital Market team. Previously, LeJeune was Director at Credit Logement Assurance, a French insurance company. 

He participated in the creation and management, and specialised in the delivery, of credit insurance on portfolios of residential mortgages.

 

LeJeune is a specialist in highly structured financing solutions and has been involved in originating and structuring ground-breaking transactions in many fields such as structured bonds, equity linked, securitisation, principal finance, hybrid capital and liability management and Islamic finance.

He holds a Diploma of Engineering in Physics from the Institut National des Sciences Appliquées de Rennes and two postgraduate degrees respectively in finance and business administration from IAE in Aix en Provence.