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Shipping industry nears emissions reduction deadline– Industry roundup: 2 August

Shipping industry “unprepared for new emissions rules”

Concerns are rising in the shipping industry that most of its fleet of tankers, bulkers and containerships will not be compliant with a new rule due to be introduced at the start of 2023 to reduce annual greenhouse gas emissions.

The International Maritime Organisation (IMO) has set a target of reducing emissions in shipping by at least 40% by 2030 and wants a 70% reduction by 2050. As part of the initiative the IMO, through the Marine Environment Protection Committee (MEPC) has adopted amendments to the International Convention for the Prevention of Pollution from Ships (MARPOL) Annex VI. These changes will implement major new technical rules called the Energy Efficiency Existing Ship Index (EEXI) and the Carbon Intensity Indicator (CII).

The regulations are due to take effect from 1 January 2023. The EEXI is a measure related to the technical design of a ship. Ships will have to attain EEXI approval once in a lifetime, by the first periodical survey in 2023 at the latest.

However, a report by VesselsValue, which provides data and analytics for the maritime and aviation markets, suggests that with less than five months to go until EEXI is introduced, more than 75% of vessels won’t meet the requirements. “The challenge of decarbonisation will extend to all areas of shipping, and EEXI alone will present a myriad of challenges to owners, operators and financiers,” the report states.

Industry experts such as Simon Hodgkinson, head of loss prevention at the West of England Protection & Indemnity (P&I) Club have suggested that the new rule could be one of the most significant new shipping regulations in years, potentially leading to a fundamental shift throughout the industry.

“Knowledge is a shipowner’s best friend, and owners that do not yet know their EEXI scores should find out as soon as possible. The only way to guarantee a smooth compliance journey as possible is to use this information to start planning now,” Hodgkinson wrote recently.

But with little time left until the EEXI is introduced, there are warnings that ship owners will have no other option but to order ships to operate at lower speeds to reduce emission levels, although this is likely to reduce available ship capacity and further intensify the current global food and energy crises.

“IMO decarbonisation targets will cause ships to slow down delaying food shipments and people will starve,” a global security analyst told the US maritime news and information service gCaptain. “How many people will die as a result of the IMO’s environmental, social and governance (ESG) efforts is unknown at this time. I don’t think most shipowners even understand the severity of the EEXI threat, but it could be millions of lives.”

China’s ‘Belt and Road’ shifts to smaller projects in Africa

China’s banks increasingly balk at African debt distress and the country’s ‘Belt and Road’ (BRI) infrastructure projects in Africa are shifting from mega infrastructure projects to smaller, more profitable ventures as Beijing aims for private entities to take a bigger role, reports the South China Morning Post.

It notes that at the third BRI symposium last November, Chinese President Xi Jinping said high-quality “small and beautiful” projects, which are sustainable and improve people’s livelihoods, should be a priority in overseas cooperation. China’s central bank, the People’s Bank of China (PBOC) has since issued new regulations capping external lending by the country’s banks.

China’s loans to Africa have already dropped from a high of US$28.4 billion in 2016 to about US$1.9 billion in 2020, according to data from Boston University’s Global Development Policy Centre and the China Africa Research Initiative at Johns Hopkins University.

A report by the Green Finance and Development Centre (GFDC), at Fudan University’s Fanhai International School of Finance, notes that the average deal size for construction projects is also getting smaller, dropping from US$558 million in 2021 to US$325 million in the first half of 2022.

However, the average deal size for investment projects has increased, driven by a single US$4.6 billion transaction in oil.

“We see two types of large projects to continue: strategic investments (such as in ports and resources), and resource-backed deals (such as in mining, oil and gas),” the GFDC study noted.

Large infrastructure projects in roads and rail have become more difficult to finance due to sovereign debt issues and accordingly an increasing risk,” Christoph Nedopil Wang, GFDC director and author of the report, said.

Smaller projects, such as in information technology or renewable energy, should be easier to finance, Wang said. “Chinese stakeholders have also continued to engage in larger resource-backed projects, particularly in countries with already existing infrastructure,” he added.

Wang attributed the shift in financing to the changing economic risk evaluation in the aftermath of the Covid-19 pandemic, with lower growth rates and higher sovereign debt risks leading to a stronger interest in less risky assets, such as resource-backed deals.

Beijing has said it wants to see more private entities engage in Africa, noted Christian-Geraud Neema, a Congolese mining and policy analyst.

“Private businesses are profit-driven, so we should expect them to seek small and low-risk projects,” said Neema, also the francophone editor at The China Global South Project.

“Without the backing of the big policy banks, private businesses don’t have all the necessary tools to navigate complex and unstable environments like in Africa. So, aiming for low-risk projects is the logical choice.”

Barclays gets go-ahead for Taiwan subsidiary

Barclays has received the approval in Taiwan to establish a subsidiary, providing brokerage and underwriting services to its global and Taiwanese corporate and institutional clients.

The bank has been actively expanding its presence in key markets in Asia Pacific (APAC), including Australia, China/Hong Kong SAR, India, Japan and Singapore. In December 2021, Barclays was granted a license to operate as a foreign authorised deposit-taking institution (ADI) in Australia.

Taiwan is a strategically important market for Barclays’ APAC. The bank said that through the establishment of the wholly owned subsidiary, called Barclays Securities Taiwan Ltd (BSTL), it aims to leverage its global Corporate and Investment Bank (CIB) expertise and footprint to provide clients access to key regional and global capital markets, as well as cross-border investment opportunities. Subject to obtaining the relevant licensing approval, BSTL is expected to be fully operational in Q3 2022. It will be led by Shella Wang, currently Head of Macro Distribution, North Asia, who has also been appointed chairman of the subsidiary.

“The buildout of our platform in Taiwan demonstrates our commitment to growing our Asia Pacific franchise,” said Barclays’ Head of Asia Pacific, Jaideep Khanna. “The Taiwan subsidiary will enable us to further engage with our Taiwanese institutional clients and help them gain access to our suite of world class corporate and investment bank product offerings and solutions.”

“The onshore subsidiary will further seize growth opportunities in environmental, social, and governance (ESG)-linked financing and investment, as well as the Formosa market in Taiwan,” added Ms. Wang. “Over the years, we have demonstrated our strength in our cross-asset product business and have been building a strong pipeline with our Taiwanese clients. The announcement marks the firm’s commitment to deepening our client reach and investment in this market.”

Carry traders “use weak euro to win in emerging markets”

The euro’s sharpest depreciation against the US dollar since 2005 has been welcomed by carry traders, who have felt the impact of the greenback’s recent rally and higher US borrowing, according to Bloomberg.

It has compiled data that suggests investing in emerging-market currencies with borrowed euros is producing profits of as much as 29% this year depending on the choice of the higher-yielding currency. The gains are being driven by the euro’s 10% drop against the dollar, which recently took the cross to parity for the first time in two decades.

Traders who funded the same carry positions with the greenback had much less favourable results: not only the overall strategy is failing for a third successive year, but most individual emerging-market currencies are also producing losses. Even in Latin America, profits have stalled after a stellar start and  traders are understandably switching.

“Funding carry trades by selling euro is becoming more common,” Brendan McKenna, a currency strategist at Wells Fargo in New York, told Bloomberg. “The European Union looks more likely to fall into recession and geopolitical developments should weigh on the currency, making emerging-market carry trades funded by the euro an interesting option.”

There are already signs that the trade will stay profitable for at least the rest of the year. With the growing possibility of a recession in the eurozone, the ability of the European Central Bank (ECB) to raise interest rates aggressively is limited. That means the yawning gap in interest rates between emerging markets and the continent faces little prospect of shrinking, which dampens the outlook for the common currency. 

“It doesn’t look good for the euro in the second half,” said Marek Drimal, the lead strategist for Central and Eastern Europe, Middle East and Africa at Société Générale SA. “Even if the ECB surprises with another large hike, there are still substantial risks for the euro before we see a turnaround.”

The report notes that it isn’t always the case that the euro’s weakness offers emerging-market currencies a carry advantage. More often than not, weakness on one side coincides with losses in the other, leaving little scope for arbitrage. But this time round, the dollar’s surge was more harmful for the euro than to developing-nation exchange rates.

“Europe is on the brink of disaster,” Edouard de Langlade, the founder of hedge fund EDL Capital has written in a letter to clients. “We could move to a place where the dollar is not strong against everything, but the euro gets weak against everything.”

China’s investors have appetite for ‘dim sum’ bonds

Sales of international renminbi bonds have surged this year, reports the Financial Times. China’s fixed income investors, starved of decent returns at home, have taken advantage of new market access to snap up higher-yielding Chinese currency debt offshore.

The volume of so-called ‘dim sum’ bond offerings — renminbi-denominated debt sold in Hong Kong — has risen 145% from a year ago to renminbi (RMB)126.8 billion (US$18.8 billion), already surpassing the full-year total of 2021, according to data from Refinitiv. That puts the market on track for its best year since 2016.

The paper reports that the dim sum bond market has become both cheap for foreign issuers and attractive for domestic Chinese investors. The revival of Hong Kong’s long-stagnant dim sum market stands in sharp contrast to negative sentiment in China’s market for onshore renminbi debt, which foreign investors have been offloading at a record pace in favour of higher yielding dollar debt.

Chinese buyers have also benefited from the Southbound Bond Connect scheme, which launched last September and allows China’s financial service firms to access bonds traded in Hong Kong.

Turkey’s inflation surge drives company debt to distressed level

Some of Turkey’s biggest companies are coming under increasing strain and seeing their bonds enter distressed territory, as soaring inflation and one of the world’s worst-performing currencies impact on corporate debt levels. Turkish firms face more than US$16 billion of debt coming due by the end of 2024, reports suggest.

Consumer prices increased by 78.6% in June compared to June 2021, driven by the soaring cost of food and drink and transportation. Food prices have almost doubled in a year, while the cost of transport rose by 123%, according to data from the Turkish Statistical Institute. The inflation rate has returned to levels last experienced two decades ago.

At the same time, the Turkish lira (TRY) has lost more than 20% of its value against the US dollar since the start of this year, leading one of the country’s major business lobby groups to publicly criticise the central bank.

Erdal Bahçıvan, chairman of the Istanbul Chamber of Industry (ISO), said the Central Bank of the Republic of Turkey (TCMB), the Banking Regulation and Supervisory Agency (BDDK) and state-owned export-import bank Türk Eximbank were severely restricting credit to firms that were not major exporters. He was speaking on 29 July to an audience that included central bank governor Şahap Kavcıoğlu, Reuters reported.

The limit on loans to companies that are not major exporters is part of an economic plan that seeks to move Turkey’s big current account deficit to a surplus. But the ISO has already complained that the new regulations create a “bottleneck” for companies attempting to access financing and Bahçıvan repeated that the rules were hurting companies.

“Eximbank turning down the tap on loans and the BDDK’s steps that bring limits to lira loans based on companies’ forex assets are impacting firms negatively,” he said. “These are increasing problems to an irredeemable extent,” Bahcivan said. Companies expect authorities to normalise loan and financing conditions and to end or ease regulations incompatible with the reality of the real sector, he added.

Speaking after Bahcivan, Kavcioglu argued that the central bank’s regulations were creating favourable conditions for exporters to increase production.

“We have been focused on getting the most efficient results for our country’s economy through credit policies that will support a current account surplus,” he said.

Later, Kavcioglu said he did not understand why companies are complaining about problems in accessing affordable financing. Companies had a “FX obsession”, he added, and accused some of using loans to purchase foreign currencies.

“I am ready to do whatever is necessary for all firms to use these resources,” Kavcioglu said, dismissing criticism that some companies cannot access re-discount credits.

TD Bank nears US$1bn deal to buy investment bank Cowen

Toronto-Dominion Bank (TD Bank) is close to a deal to buy investment bank Cowen for US$1 billion, sources told The Wall Street Journal. The purchase promises to give TD Bank a larger presence in investment banking as well as in the US, where it has been expanding. Cowen would also provide the bank with more traditional investment banking capabilities, along with investment research and management.

TD Bank has already agreed in February to buy Memphis-based First Horizon Bank for US$13.4 billion, its biggest completed deal to date and also the first major US acquisition for CEO Bharat Masrani, who has indicated that the bank could be open to more purchases.

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