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IPO market strong in Indonesia – Industry roundup: 11 July

Amman Mineral makes strong debut in Indonesia’s biggest IPO of 2023

Amman Mineral, Indonesia’s second-biggest copper and gold producer after Freeport Indonesia, has made a successful stock market debut, highlighting both the growing global demand for copper and the enhanced profile of the Indonesian initial public offering (IPO) market.

The IPO raised rupiah (INR) 10.73 trillion (US$713.43 million) in Indonesia's biggest IPO since the US$1.1 billion listing of tech group GoTo in April 2022

Jakarta-based Amman Mineral plans to use the proceeds to repay debt and fund several projects, including a US$980 million copper smelter it aims to complete in May 2024. CEO Alexander Ramlie said that the company’s business prospects were solid because of rising copper demand and the metal's importance in the global transition to renewable energy. Indonesia, Southeast Asia’s largest economy, is stepping up the use of renewable energy.

The company’s successful stock market debut by could also bode well for upcoming listings in Indonesia, one of the world's hottest IPO markets this year, amid a government drive to privatise some state-owned enterprises. First-time share sales in Indonesia have raised US$2.2 billion as of June, second only to China in the Asia-Pacific region and ahead of traditional powerhouse Hong Kong, according to Refinitiv data.

Next in the pipeline this month is a US$160 million IPO by Indonesia's largest cinema chain operator Nusantara Sejahtera Raya. Other upcoming IPOs in Indonesia include the upstream arm of state energy company Pertamina, Pertamina Hulu Energi, which could raise at least INR20 trillion. State-owned fertiliser company Pupuk Kalimantan Timur and palm oil producer PalmCo could raise US$500 million each.


Thames Water secures funding to avoid government takeover

Indebted UK water and waste services group Thames Water said that its investors have agreed to provide a further £750 million (US$960 million) in funding amid the threat of the government taking over the company. The utility also said that it will be looking for an extra £2.5 billion in funding between 2025 and 2030.

The news has partly alleviated concerns that other UK listed water utility companies such as Pennon, United Utilities and Severn Trent will also be able to attract needed funding. When the UK government privatised the water industry in 1989 it wrote off its debts, but in 2020 it was estimated that the nine privatised companies in England had collectively amassed debts of £48 billion over the subsequent three decades.

“Thames Water’s institutional investors have made the difficult decision to provide the lifeline to help refloat the company, rather than risk seeing their holdings potentially evaporate if the government took emergency control,” commented Susannah Streeter, head of money and markets at financial services group Hargreaves Lansdown.

“However, this is very much an emergency pumping operation, rather than shoring up Thames Water’s finances for the longer-term. The sum agreed to be paid is less than the £1 billion Thames Water said it initially needed, so there is a shortfall in financial lifeline. In addition, the investors will be staring at the huge bill for the infrastructure work needed to mend the leaks and sewage discharges which the company keeps being fined for.

“Thames Water is a casualty of the rapid escalation of interest rates but is also suffering because it was stripped of a cash float which should have protected it when monetary tides turned. Its profits were siphoned off in the good times, rather than being used to build up a bulwark for when borrowing costs surged back upwards. Thames Water’s debt amounts to roughly £14 billion or, reportedly, around 80% of the value of its business. That makes it the most heavily indebted of England and Wales’s water companies.”

Streeter added that although UK publicly listed companies are less heavily indebted, the next regulatory timeframe looms for the period 2025 to 2030, which is likely to be marked by much bigger demands from regulators on infrastructure improvements to reduce sewage spills, increase capacity, and meet net zero targets.

“Capital expenditure will have to increase sharply as a result – United Utilities, Severn Trent and Pennon have already had to push up spending, but budgets will need to expand, and debt levels are set to rise,” she forecast.

“With inflation and high interest rates set to linger for longer, the cost of servicing debt for water companies will remain expensive. As a result, we could see margins come under pressure and cashflows get increasingly squeezed. However, longer term, high levels of inflation are likely to be a net benefit for a lot of water companies.

“That’s because inflation increases the amount of revenue the group's allowed to earn on its assets, which cushions the impact of rising costs. But, right now, it’s proving to be a big drain on resources.”


Lufthansa signs new partnership with Deutsche Bank and Mastercard

Deutsche Bank has won a credit card deal for the frequent flyer scheme operated by Germany’s national carrier, Lufthansa.

In a switch scheduled to take place in two years’ time Deutsche Bank will become the new issuing partner for the Lufthansa Miles & More Credit Card while Mastercard will remain a partner for the card. “In a global tender, both companies prevailed in the bidding process,” a release noted.

In the future, the Lufthansa Miles & More Credit Card will be issued by Deutsche Bank. Mastercard remains partner for the cards.

“I look forward to working with strong partners to offer our customers even better and more innovative services,” said Christina Foerster, Member of the Executive Board of Deutsche Lufthansa AG. “In the Lufthansa Group, we are continuously expanding our premium offering – far beyond the actual flight. Long-term and trusting customer relationships are fundamental to this.

“Together, we will continue to develop Europe’s leading loyalty programme for our customers around the world.”

Christian Sewing, Chairman of the Management Board and CEO of Deutsche Bank, added: “Miles & More has one of the leading credit card portfolios in Germany and Europe. We are delighted that Lufthansa is relying on Deutsche Bank’s payments expertise and reach for this growth product.

“We have a strong position in Germany in the business of issuing credit cards. Through Miles & More, we will further advance our important payments business as part of our growth strategy as a Global House Bank.”

A release outlining the agreement added that the common goal is to redefine loyalty, while customers will benefit “from even more personalised offers and digital applications. In addition, existing card services will be expanded, such as additional insurance services and offers that support sustainable consumer decisions.

Johann-Philipp Bruns, Managing Director of Miles & More, added: “Miles & More has over 30 years of experience in the field of loyalty, which we want to use in the interests of our customers. With Deutsche Bank and Mastercard, we have two partners at our side with whom we can tap into new growth potential.”


South Korea opens up to new banks

For the first time in 30 years, South Korea is allowing new entrants to the banking sector as the government seeks to spur competition.

In February President Yoon Suk Yeol accused the country’s banks of enjoying a “feast” of bonuses and making easy profits at the public’s expense through a rate gap between deposits and loans.

The government will allow more online banks, permit commercial banking licenses for existing financial companies and ease the loan-to-deposit rules for local branches of foreign banks, the Financial Services Commission said. The measures come into effect immediately.

“We will boost competition in various aspects as our banking industry has made easy money amid a lack of competition,” said FSC chair Kim Joo-hyun. “The public perception is that the industry has not made enough effort to become global financial players suitable for the country’s economic standing.”

South Korea’s banking sector has been dominated by five lenders: Shinhan Bank, Kookmin Bank, Hana Bank, Woori Bank and NongHyup Bank. Daegu Bank, a regional banking unit of DGB Financial Group, is expected to become the first beneficiary of the new rules. It plans to apply for a licence to become a nationwide lender, according to the FSC.

While the measures have been welcomed, critics said that they were not enough to increase competition in the sector. In South Korea, chaebol — family-controlled conglomerates such as Samsung and Hyundai — are banned from entering the banking sector on concerns they could potentially use their banking affiliates to illegally fund business expansion or enrich their major shareholders.

South Korean banks are not allowed to engage in investment banking and asset management, making them reliant on interest income.


Argentina inflation forecast “eases” to 142%

Expectations for Argentina’s consumer price inflation remain solidly in triple-digit territory, a monthly analyst poll shows, although the forecast edged down slightly compared with last month's survey.

Analysts polled by the South American country’s central bank now forecast annual inflation for 2023 at 142.4%, against the figure of 148.9% seen in the bank’s June poll.

Rampant inflation has impacted on Argentina’s economy, as the ranks of the poor swell and the peso currency steadily weakens. Economic activity in April was 4.3% lower than a year earlier.

The analysts polled expect prices to have risen 7.3% in June, following the 7.8% monthly inflation recorded in May. Looking ahead, by 2024, the analysts see the annual rate of rising consumer prices edging down to 105%.

Latin America’s third-biggest economy has also been dented by a prolonged drought that has worsened an ongoing currency crisis. The survey found that economic activity is expected to shrink by 3% in 2023 compared to 2022, further exacerbating the challenges faced by the country.

Rising prices and shrinking foreign reserves pose a tough challenge for Argentina’s left-leaning government, ahead of general elections in October. The government must navigate the impact of high inflation on the population and the economy while seeking to maintain stability and address the ongoing currency crisis.

The central bank surveyed 39 participants from June 28-30 to gather insights into inflation expectations and economic projections. The survey results provide valuable information for policymakers and analysts monitoring the situation in Argentina.


UK SMEs cite rising interest rates as their biggest challenge

Small and medium-sized enterprises (SMEs) in the UK  regard higher interest rates as their biggest challenge over the next 12 months, closely followed by high inflation and securing finance as the cost of living bites.

The findings come from research by financial services group Manx Financial, which polled UK SME brokers. Among the other findings:

  • Higher interest rates rose significantly in terms of the biggest challenge facing SMEs from fourth in last year’s survey to first. Higher inflation fell from first to second while supply and logistical issues and recruitment issues dropped off this year’s top three concerns.  
  • SMEs felt that the ongoing cost of living crisis will mean that within their business, securing finance will be most affected, followed by new markets expansion, mergers & acquisitions and new product launches.
  • 40% said artificial intelligence (AI) would be used to further facilitate commercial finance application decisions while 20% of SME brokers thought it would be used to identify new business opportunities.
  • Two in five SME business owners have had to stop or pause an area of their business because of a lack of finance over the last couple of years. 
  • Despite concerns over rising interest rates, higher inflation and the cost of living crisis, 96% (83% in 2022) of brokers believe that SME overall sentiment is positive.
  • With appropriate external finance, earlier research suggested that most SMEs believe they could grow their business by up to 19%. 


PAG launches sustainability-linked facility for private credit

Asia-Pacific based investment firm PAG has established a sustainability-linked subscription line credit facility for funds managed by its private debt strategy. The facility, which links the interest rate margin to the sustainability performance of the fund, marks an important milestone for the private credit industry according to the firm.

While terms of the facility were not disclosed, it is believed to be the largest of its kind for a private credit fund in Asia-Pacific and the first to feature a sustainability-linked framework with multiple targets.

The firm’s development of this facility, which aims to use sustainable investment principles to create measurable positive impact on returns for its investors, was supported by five joint sustainability coordinators – Australia and New Zealand Banking Group, Mitsubishi UFJ Financial Group, National Australia Bank, Société Générale Group and United Overseas Bank.

ISS Corporate Solutions issued a second-party opinion for the facility, verifying its alignment with the Sustainability-Linked Loan Principles, a widely accepted set of global standards published by the Asia-Pacific Loan Market Association (APLMA).

The sustainability-linked facility interest rate margin is linked to performance against four environmental, social and governance (ESG)-related key performance indicators (KPIs):

  • Achievement of climate-related milestones by borrowers during their loan terms
  • ESG-focused training for PAG’s investment teams
  • ESG-focused training for borrowers
  • Measurable improvements in borrowers’ ESG management and performance during their loan terms.

Achievement or non-achievement of targets associated with each of these KPIs results in a commensurate decrease or increase (respectively) of the facility interest rate margin. Consistent fulfilment of these targets annually will see a reduction in the total interest paid by the fund over the facility term.

“Positive ESG impact drives long-term value for our investors and is an integral part of our culture and investment process,” says Anshumann Woodhull, PAG partner and co-head of private debt. “This landmark sustainability-linked facility is the latest example of how our focus on ESG directly translates into enhanced returns for our investors.”


Banks using covered bonds to lock in cheap funding with record sales

Financial sector volatility and the ending of central bank support have spurred more than €175 billion issuance of so-called covered bonds to investors in the first six months of 2023, surpassing the previous high in 2011, according to data from S&P Global Ratings.

The Financial Times reports that banks have sold a record amount of ultra-safe mortgage-backed debt over the six months, rushing to lock in a cheap source of funding during a turbulent period for the sector with lenders facing growing political pressure to offer more attractive interest rates to depositors.

The business daily notes that covered bonds are a largely European phenomenon, but increasingly popular with lenders in Australia and Canada, and are a form of usually triple A rated debt not only backed by the bank that issues them, but also an underlying pool of assets, typically mortgages on the bank’s balance sheet. The extra layer of protection makes them a particularly inexpensive form of borrowing and an extremely safe, although low-yielding, asset for investors.

Advocates are fond of boasting that not a single covered bond — which lie at the opposite end of the risk spectrum to racier additional tier 1 (AT1) bonds — has defaulted since their debut in the court of Prussia’s Frederick the Great more than 250 years ago.

“Covered bonds are a very dull product but because they’re pretty safe they’re seen as a beacon of stability, a funding tool for banks made for rainy days,” said Joost Beaumont, an analyst at ABN Amro. “We haven’t seen this amount issued by this stage ever before.”

The flurry of issuance has also been fuelled by the winding down of pandemic-era support from central banks for debt markets and the banking sector. Some banks rushed to issue during the tail-end of the European Central Bank’s (ECB) quantitative easing (QE) programme, under which it has bought hundreds of billions of euros of covered bonds over the past decade, analysts say.

The central bank stopped buying covered bonds in primary markets in March, three months before it halted purchases in secondary markets, in effect removing a safety net for new issuance.

Insolvency highlights importance of surety bonds, says IUA

A recent high-profile company insolvency demonstrates the importance of payment and performance bonds issued by surety insurers, says the International Underwriting Association (IUA), representative body for the London surety market.

Building firm Henry Construction Projects, the main contractor for several major regeneration projects, had been hit by nine winding up petitions from suppliers in the past year, although a number were withdrawn after Henry agreed to make payments. The company finally appointed administrators last month “highlighting the continued uncertain and challenging trading environment for many UK businesses,” the IUA reports. Surety cover, however, “can provide a necessary protection for firms dealing with rising supply-chain and operational costs.”

Chris Jones, Director of Legal and Market Services at the IUA said: “The Henry Construction insolvency is a very large insured exposure for the surety market, but a clear example of where insurers are assisting clients to meet their obligations by providing quick and meaningful claims handling support. The economic protection offered by such cover mitigates the devastating effects that insolvencies can have on third party contractors, employees and the wider economy.”

“Surety bonds and guarantees are also an important tool for companies to maintain financial flexibility and cashflow liquidity in their day-to-day operations and help satisfy counterparties’ own security requirements in trading.”

The IUA operates a Surety Committee, made up of senior underwriters and legal counsel from across the sector. The group provides a forum to discuss technical questions, emerging risks and promotes best practices across the market.

The committee is urging businesses to consider the value of surety bonds and guarantees as a crucial financial implement to ensure their operations thrive and overcome times of difficulty.

“Surety bond providers in the UK are highly capitalised and regulated and have extensive experience in managing companies and projects in difficult economic circumstances across the world,” says the IUA. “Collectively, they provide protection for insured exposures totalling hundreds of billions of pounds and provide significant further value in assisting clients with risk management support throughout their business.”

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