www.BondsLoans.

com July/August 2017

TEN YEARS AFTER THE GFC

Why banking regulations are still neededH1

A SHARIAH-COMPLIANT DEFAULT?
What Dana Gas sukuk dispute means for Islamic Finance

IS KENYAS ECONOMIC MODEL SUSTAINABLE?

Private sector credit could be depressed for years

PARAGUAY MAKES CAPITAL MARKET STRIDES

Paraguays new Minister of Finance on developing the local markets

TRANSNEFT VS. SBERBANK

Derivatives in Russia just got a whole lot riskier

CHINESE BONDS, FROM

SHORE TO SHORE
Will Bond Connect really develop the market?
 From The Editor
Dear Reader,

It may be hard for some to believe that ten years

has passed since the Global Financial Crisis began
to sweep global markets by storm. At the time, most
market observers were certain they knew what was
coming to emerging markets.

Chief Executive Officer and Publisher While the worst never came to pass for EMs, a
Alex Johnson huge liquidity mismatch seems to have persisted
T: +44 (0)20 7045 0922 since, highlighted most recently by an impressive
E: Alex.Johnson@GFCMediaGroup.com rally in emerging market assets that today seems
Managing Editor all but unstoppable once again raising questions
Jonathan Brandon about whether the market is totally mispricing risk.
T: +44 (0) 20 7045 0937 Appropriately so.
E: Jonathan.Brandon@GFCMediaGroup.com
Against that backdrop, many questions continue to
Deputy Editor linger ten years on about how regulations passed
Yevgeny Kuklychev since the crisis have influenced global financial
T: +44 (0) 20 7045 0904
institutions ability to remain profitable and agile.
E: Yevgeny.Kuklychev@GFCMediaGroup.com
While many argue new banking rules have been
Director, Business Development & Publishing more detrimental than good in this regard, others
Harry Williams believe more regulation is needed to contain banks
T: +44 (0) 20 7045 0926 unyielding exuberance.
E: Harry.Williams@GFCMediaGroup.com
Many emerging markets are still grappling with the
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phase-in of these rules, at a time when the tides on
Aveen Prasad
the cost of global capital are turning. As the worlds
T: +44 (0) 20 7045 0928
E: Aveen.Prasad@GFCMediaGroup.com major central banks start to tighten monetary policy
and unwind years of asset purchases, ending an
For reprints please contact:
unprecedented era of cheap money (and moving in
Julia Wallace
the opposite direction of many EM central banks), we
T: +44(0) 20 7045 0949
may finally get a sense of whether the current rules
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and safeguards go far enough.
GFC Media Group
Unauthorised photocopying is illegal. The contents We hope you enjoy reading Issue 9 of the Bonds &
of this publication, either in whole or part, may not Loans magazine.
be reproduced, stored in a data retrieval system or
transmitted in any form by any means, electronic,
Kind regards,
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May / June 2017 3

 CONTENTS
Global Themes
5 Regulators Need to Streamline Bond
Fear and Loathing in Emerging
Markets: EM Investing After the Crisis
Greylock Capitals Head of Research
Jonathan Prin on the state of liquidity in
EMs after 2008
7 Olam Africa, Middle East CFO:
Ten Years After the Banking Crisis: Why
Regulation Still Matters
They may not be perfect, but less
regulation is not the answer to banks
profit worries
10
For Emerging Market Investors,
Gaining Deep Insight into ESG Still a
Huge Challenge
Issuers could struggle to get green
funding without the right level of
transparency
Middle East & Turkey
12
A Shariah-Compliant Default? The
Curious Case of Dana Gas Sukuk
What this could mean for the Islamic
Finance industry more broadly
14
Exploring the Next Frontier in the GCC
Capital Markets: Saudi Arabia
HSBC on the next stage in the
development of Saudi Arabias capital
markets
Africa
16
Is Kenyas Economic Model
Sustainable?
A series of factors are conspiring to
threaten Kenyas long-term economic
outlook
4 www.BondsLoans.com
18
Dufil Prima Foods COO: Nigerias
Compliance Process
Madhukar Khetan, COO, of Dufil Prima
Foods talks to Bonds & Loans about the
companys upcoming bond issuance
20
Challenging Times, Huge Growth
Opportunities in Agribusiness
Bikash Prasad on Olams quest to
position Africa as the worlds
farming hub
22
Corruption Woes Still Weigh Heavily on
South Africas Business Climate
After Zumas sixth non-confidence
motion, investors are starting to grow
increasingly impatient
Americas
24
Signal Versus Noise: The Case of Brazil
Ashmores Jan Dehn on why bad news
can often mean good investment in
emerging markets
26
Paraguays New Finance Minister on
Developing the Local Capital Markets
and Green Bonds
Lea Gimnez, the countrys recently
appointed Minister of Finance on
fostering a vibrant local market
28
Top Dealmaker: Yamur Munoz, HSBC
The Director of Debt Capital Markets
for HSBC Mexico on developing the
countrys green bond market
29
Will Argentinas Unions Stand in the
Way of Macris Reforms?
A powerful group of labour unions
could derail the centre-right leaders
efforts to reform the economy
Russia, CIS & Europe
30
Kazakh Megamerger Brings Relief as
Concerns over CIS Banks Linger
The countrys largest bank merger will
leave its financial system better off
32
Transneft vs Sberbank Ruling
Threatens to Derail Russias
Derivatives Market
What a court decision to award
damages to the Russian pipeline firm
means for Russias derivatives market
33
EuroChem Group CFO on Finding the
Right Window to Optimise Cost of Debt
Group CFO Andrey Ilyin on managing
a high-CAPEX business at a time of
declining output prices
Asia
35
Can Bond Connect Hong Kong and
Mainland China Markets?
Investors are positive about the move,
but some experts say its not enough
36
CDL Breaks New Ground with
Singapores First Green Bond
Chief Sustainability Officer Esther An on
launching the countrys first green bond
38
Case Study: Indias Rural Electrification
Corporation Debuts with US$450mn
Green Bond
The state-owned company became
the first of its kind to issue a US dollar
denominated green bond
Fear and Loathing in
Emerging Markets:
EM Investing After
the Crisis
When it became apparent, after the collapse of
Lehman Brothers, that the global economy was
encountering something more than just an ordinary
downturn, most market observers were certain they
knew what was in store for emerging markets. After
all, the three decades prior to 2008 were littered
with crises in developing economies from Mexico to
Malaysia. Still, while the worst never came to pass
for EMs after 2008, a huge liquidity mismatch has
persisted since.
Jonathan Prin, Head of Research, Greylock Capital
I
t was certainly true that, until 2008, emerging economies
had been growing, and there was no particular reason for
EM investors to expect that they would become victims
of a crisis of confidence as Lehman unravelled. But periods
of panic in EM had become defined by contagion, where a
decline in one market led to the decline of a second market,
even without any obvious reason why the second market
should be influenced by the first.
In some cases, contagion made sense. If two small emerging
economies sell similar products on the world market, a
decline in the first country's currency could place pressure
on the exports of the second country. Similarly, during
the European ERM crises of the early 1990s, the fall of the
British pound was expected to reduce the competitiveness
of French exports calling into question the ability of France
to remain committed to the fixed currency that eventually
became the Euro.
Far less obvious, however, was the economic reasoning
linking past declines of the Argentine peso to declines in the
Mexican peso. Or why the currency crises of Malaysia and
Indonesia led to pressure on the economy of South Korea.
In both cases, the latter countries are separated by great
geographical distances from the former, and the shape of
their economies bear little resemblance.
Of course, these market reactions do not necessarily need
to be explained by economic fundamentals. One just
assumes that panic caused investors to reduce all sorts of
holdings, which, when combined with some opportunistic
speculative attacks, created a cycle which led to currency
runs and bank failures, regardless of economic justification.
So, the expectations of market pundits during the collapse
of Lehman were understandable, grounded as they were in
the experience of the past thirty years. Emerging markets
had been received substantial foreign investment, and
that investment was sure to shrivel up as the financial
crisis evolved. If those economies didn't deserve the
market punishment they received, so what? Nothing had
prevented contagion before, and there was no reason to
believe that the experience of 2008 would be any different.
The outcome, however, was better than many had
expected. Although growth in output from EM economies
collectively experienced substantial decline, there were
no balance of payments or currency crises, and no
widespread bank failures comparable to those of the past.
The market also demonstrated an ability to distinguish
between emerging markets, both during the crisis and
since. During the 2013 "taper tantrum", most of the fallout
was limited to the fragile five, all of which had large current
account deficits, and so should have been expected to be
sensitive to Fed policy.
It is difficult, even in retrospect, to identify what exactly
changed to keep contagion mostly contained through
the crisis of 2008 and beyond. But reforms implemented
through the hard-won lessons from the past, combined
with the arrival of new forms of capital, surely helped EM
avoid a harsher outcome.
The Washington Consensus
By 2008, many formerly crisis-afflicted countries had
implemented what came to be referred to as the
'Washington Consensus', a set of policy prescriptions that
recommended low amounts of external debt, high levels
of hard currency reserves, and flexible exchange rates.
This allowed most EM central banks to respond to the
Lehman collapse without having to defend a currency at
the same time.
JULY / AUGUST 2017 5
 The fiscal discipline practiced by EM countries meant that
the average sovereign debt level for several years after
2008 remained relatively stable at 35% of GDP. By 2012
the major EM bond index reached an investment grade
rating for the first time. This allowed new types of investors
- primarily large institutional investors whose portfolios
required an investment grade rating for their portfolios -
to begin allocating funds to EM. The result was a dramatic
influx of funds that offered a new form of financing to
developing economies and corporations.
A Growing Asset Class
Investors had reason to be looking for new opportunities
in the aftermath of the financial crisis. Central bankers,
especially the Fed and ECB, responded to the crisis by
cutting their policy rates to nearly zero (or occasionally even
below); the yields of longer-maturity government bonds
correspondingly fell to historically low levels.
In an environment with disappearing returns, the demand
for securities with meaningful coupons led to an increased
interest in EM debt from both sovereign and corporate
issuers. Between 2004 and 2012, EM fixed income funds
received US$340bn of inflows, US$230bn of which came
after the 2008 crisis. The EM corporate dollar bond market
has now reached nearly one trillion dollars outstanding.
Much of this new capital came from funds mandated to
invest in EM debt. This has helped to mitigate the "capital
flight" that was a distinctive feature of past EM calamities. A
reverse in investor interest (i.e., outflows) would of course
make these outstanding bonds more difficult to re-finance,
but in the meantime EM borrowers, particularly the corporate
ones, have in aggregate benefited from the influx of capital.
In particular, bonded debt partially replaced shorter-term
bank financing, which in almost every past EM episode was
responsible for turning what could have been an unpleasant
but manageable downturn into a catastrophe.
Bonds Fill the Lending Gap
Throughout much of the 1990s, foreign banks had been happy
to lend to the rapidly growing economies of southeast Asia
through their local subsidiaries. When they suddenly became
concerned about the ability of their borrowers to repay, they
managed to create both a banking crisis AND a currency crisis.
These crises led to a deep slump in output, not only in the
economies that had seen the sharpest increase in lending, but
in other Asian economies as well.
Following the 2008 financial crisis, bank lending to EM countries
declined again. This time, however, the capital flight from banks was
partly offset by the influx of dollars from dedicated funds, which
provided not only a new source of capital, but one that possessed
some important advantages over the bank loans they replaced.
The primary benefit of bond financing for borrowers is that
bonds typically have a longer maturity than bank loans, partly
alleviating the 'double mismatch' that had been present during
the Asian crisis. The majority of bonds in the major EM corporate
indices have a maturity of over five years, a substantially longer
6 www.BondsLoans.com
time frame than most bank facilities. And unlike many bank
"demand" facilities, which can be called on short notice, most
bonds are not ordinarily permitted to request repayment of
their principal before the maturity date, making borrowers less
vulnerable at moments of stress.
Bond financing has extended the maturity structures of many
corporate borrowers. While this has arguably dampened
volatility at the borrower level, the growth of the bond market
has exposed investors to a different sort of risk: the (in)ability of
the secondary market to efficiently rotate bonds among holders
with different tolerances for features like liquidity and risk.
The End of Liquidity
Policy makers reacted to a financial crisis that could trace its
roots to banks' exposure to securities of questionable quality
by imposing regulations designed to limit the ability of those
banks to hold large quantities of bonds for their own account.
The recent febrile growth of the EM debt market has occurred
in the context of increased issuance of bonds of all types. Even
as that growth has occurred, however, an opposite evolution
has been occurring at the fixed income desks responsible for
making markets in these securities: the amount of inventory
held by dealers has fallen sharply. This reduced inventory
a proxy for bond market liquidity means that even though
there have never been more EM bonds outstanding, they have
never been more difficult to buy and sell.
The implications of this reduced liquidity will become apparent
when investor interest in EM debt begins to wane. It is easy
to imagine an environment where sellers, competing to
transfer their holdings to trading desks with limited capacity
to accommodate them, increasing volatility in those issuances
that exceeds any deterioration in underlying creditworthiness.
The worst fears for EM never came to pass in 2008, and
concerns about balance of payments problems and bank
failures moved to Europe, instead. In the years following the
crisis, EM debt enjoyed unprecedented growth as an asset
class, even as investors' ability to rotate that debt has eroded.
It will take future turmoil in the EM bond market for investors
to learn what distortions current events have created, and to
discover their consequences.
Ten Years After the Banking Crisis: Why
Regulation Still Matters
The regulations put in place after the financial crisis of 2007/2008 forced banks to keep their
books in check, ultimately helping them to become healthier institutions. However, as the global
economy stabilized, some experts are starting to question the necessity of these new laws, as
the regulatory framework takes a chunk out of banks profits.

T
en years ago, the world faced the
worst financial crisis since the
Great Depression. Companies
went bankrupt, thousands of people
lost their homes as foreclosures
skyrocketed on both sides of the
Atlantic, and the banks that were too big
to fail, did fail - only to be then rescued
to by billions of taxpayers dollars.

Governments and their financial regulators

were caught completely off-guard and
found themselves lacking the appropriate
regulatory framework to lessen the
impact of the crisis and to prevent it from
spreading deeper.

While the reasons for the crisis were

many, as were the culprits behind it,
one sector was quickly pinpointed
as the main bearer of responsibility:
banks.
The collapse of Lehman Brothers,
fourth largest investment bank in the
US, due to its exposure to the sub-
prime mortgage crisis, laid bare the
risk banks were running in search of
higher profits, risks than were going
unchecked by the regulators up until
the point it was too late.
However, this in itself was part of a
larger process of liberalization that
had started almost 30 years before
the crisis, when governments started
retreating from Bretton Woods.
Before and After Bretton Woods
After the Second World War, the
governments of the US, Canada,
Western Europe, Australia and Japan
negotiated a monetary order that
obliged each country to adopt a
monetary policy that maintained the
exchanged rates by tying its currency
to gold, and enabled the IMF to cover
imbalance of payments. This would
come to be known as the Bretton
Woods system.
This system was in place until the
1970s, after which a much broader
liberalisation process set in.
The 2007/2008 subprime mortgage
crisis was not the only financial crisis
to emerge the post-Bretton Woods
era: during the period between 1970
until 2007 the IMF counts a total of 42
systemic banking crises, both locally
and internationally.
But it was not until the aftermath of
the credit crunch that the leaders of
the largest economies in the world
arrived to the conclusion that the
only way to prevent futures crises
was to stop this liberalisation process
and bring back tight regulations and
government controls.
This also carried important political
implications; the general public,
enraged by bankers, was not going to
stand and watch those they believed to
be responsible for the crisis continue
to go unsupervised; their trust in the
financial sector was lost.
In a speech in Dublin this year Sabine
Lautenschlger, Member of the Executive
Board of the ECB and Vice-Chair of the
Supervisory Board of the ECB, explained
why tight regulatory standards were still
needed ten years on.
After all, bankers are people. Like
the rest of us, they sometimes tend
to overestimate potential profits and
underestimate risks. Markets can get
carried away, as Alan Greenspan said,
by irrational exuberance. Expecting
eternal growth, banks might make
huge investments. But at some point,
reality hits, and it might hit hard. If it
does, those who took on too much
risk might fail. And the crisis taught us
that the failure of a single bank can
damage the entire financial system and
the economy. In a nutshell, thats why
banks need rules.

JULY / AUGUST 2017 7

 The New World Order
Today banks are heavily regulated,
following the introduction of The Dodd-
Frank Act, the Volcker rule, and the
Foreign Account Tax Compliance Act
(Fatca) in the U.S., and the Mifid II, Emir,
Mifir, and Basel III accords in the EU.
Compared to earlier regulations, the
Senior Managers Regime, Certification
Regime, and Conduct Rules are also
increasing the individual liability of
senior bank managers.
According to Jonathan Weinberger,
Managing Director of Debt Capital
Markets at Societe Generale, the
regulatory community has completely
rethought financial regulations since
2009. In 2010, we saw the first pan-
European stress tests and Basel III, both
of which were significantly different to
prior practice and regulation. Banks
globally have considerably increased
the quantity and quality of their
capital as well as their liquidity buffers,
have built significant loss-absorbing
buffers in the context of recovery and
resolution frameworks, and have been
compelled to rethink their risk appetite
and therefore their business models
as a consequence.
Darrell Duffie a financial economist,
explained in his report The Financial
Regulatory Reform After the Crisis
that while they share a common
purpose, European and US authorities
have taken different approaches when
it comes to regulation.
The US Dodd-Frank competition
rules are narrowly aimed at the swap
market. Europes Markets in Financial
Instruments Directive (MiFID II)
and proposed MIFIR implementing
regulations are more ambitious
in scope than the US reforms but
are moving much more slowly, the
economist wrote.
Today, under the Basel III rules, a
banks equity Tier 1 capital ratio is
set at minimum 4.5% with a Tier 1
capital ratio defined at 6% and a
minimum total capital ratio of 8%.
To that, lenders will need to add a
conservation buffer of 2.5% which will
be need to set in place by 2019 as well
as countercyclical up to 2.5%, while the
8 www.BondsLoans.com
Post-Crisis Deleveraging in Perspective
StanChart HSBC
40
35
30
Leverage Ratio
25
20
15
10
2008 2009 2010 2011
Source: Bank balance sheets
leverage ratio is now set at 4% and the
supplementary leverage ratio of 3%.
And this seems to have paid off. Last
month the Federal Reserve conducted
their annual stress test on banks,
which produced very positive results
on the US banking system. The test
showed that the 34 institutions under
assessment had enough capital to
endure the two scenarios posed
by regulators one related to the
financial crisis and another entailing a
shallower downturn.
Under the simulation, the banks tested
"would experience substantial losses."
However, in total, the institutions
"could continue lending to businesses
and households, thanks to the capital
built up by the sector following the
financial crisis," the report noted.
The Federal Reserve also affirmed that
the aggregate ratio of common equity
capital to risk-weighted assets doubled
from 5.5% in Q1 2009 up to 12.5% in
Q4 2016 in the US.
The results on the European banking
system will be released in December
this year, the European Banking
Authority announced.
The tests marked the third straight
year the banks have all met the Fed's
standards for health, which means as
Mohamed A. El-Erian, Chief Economic
Adviser at Allianz, wrote in an article
published in the Guardian, ongoing
measures to buttress the global
financial system have undoubtedly
Lloyds Barclays Royal BOS
2012 2013 2014 2015 2016
paid off, especially when it comes to
strengthening capital cushions and
cleaning up balance sheets in important
parts of the banking system.
The Regulatory Problem
The positive results of the bank stress
tests might for some people, including
US president Donald Trump enforce
the idea that time for excessive
regulations has now passed.
Even if the regulations have forced
banks to boost their liquidity and keep
leverage margins in check, some fear
that too much regulation is killing the
business, and question whether the
current regulatory framework will
indeed prevent another systemic crisis.
For Edward James, Director at RCQ
Associates the new regulations
have put pressure on profits, mostly
because it hiked the cost of business
for banks, which, in turn, could pose
a threat to the stability of the financial
institutions in general.
Meanwhile, Andrew Breach, Global
Financial Services Practice at Hoggett
Bowers, believes that excessive
regulations might prevent banks from
doing the job that they need to do.
In 2013 (even before the full set of
new regulations was in place) the six
largest US banks spent an estimated
US$70.2bn on regulatory compliance,
doubling the US$34.7bn they spent in
2007, according to data compiled by
Duffie in his report.
For Weinberger, whether or not the It is important to understand, especially financial institutions, there are also
regulatory frameworks currently now, as the debate shifts to whether meaningful differences between
applied today are effective is a topic or not the current regulations are still regions, notably in terms of the
of evergreen discussion. needed, that the current framework in availability of alternatives to bank
place might not be enough to prevent financing: in the US for instance,
As one financial actors costs change another crisis. low-risk assets are financed to a far
for example, because of regulatory higher degree by capital markets and
pressures the market typically Weinberger maintains the argument non-bank actors than is the case in
responds by shifting the useful activity that, while another crisis can always Europe or Asia, the banker explained
to another person or place. The occur, it will vary from institution to
shorthand is shadow banking,' but Ten years on from 2007, and with
what is lost in that static phrase is that the global economy and financial
the actors performing the economically institutions stable, the public debate
useful activities change over time. has shifted to whether or not these
Whether the result is the best mix of regulations should be replaced
Another crisis can
risk reduction, consumer choice, and marking a return to a more liberal
fostering economic growth, it has
always happen approach.
to be constantly re-evaluated as the again, but the new
economy evolves. rules can make it But while it is true that rules need
less systematic. to be reviewed and adapted to meet
What I find heartening is that we now the requirements and conditions
have a concrete example of the SRB of the time we live in, it would be
resolving a failing bank, and a significant dangerous and short-sighted to
one at that, with minimal market institution from region to region, simply discard or dispose of the
disruption. We note that on both sides depending on the type of internal risk current frameworks.
of the Atlantic there has been a desire models used by each organization.
to have a fresh look at the post-crisis The considerations arising from
reform measures to assess whether The institutions most impacted will regulation tend to be strategic as I
they have appropriately achieved be those whose businesses are highly said before, regulation is a key driver
their purpose and ensure that they exposed to assets with modelled of whether businesses are viable
are not creating unnecessary hurdles risk weights, quite different from the and as such is hugely important,
to financing economic growth and job standard-approach risk weights. In Weinberger concluded.
creation, Weinberger explained. addition to the difference between

JULY / AUGUST 2017 9

 For Emerging Market
Investors, Gaining
Deep Insight into ESG
Still a Huge Challenge
As investors continue to flock to the nascent but growing green bond market, many still struggle
to gain deep insight into the greenness of different instruments, one of the key obstacles holding
the market back.
G
lobal listed green bond issuance topped US$82bn
in 2016, around 92% the volume of issuance
seen in 2015, according to the Climate Bonds
Initiative and the market has shown no signs of slowing.
Moodys estimates global green bond issuance including
instruments linked to energy efficiency, carbon capture,
and other grey areas in the broader spectrum of green
bonds could top US$200bn by the end of 2017.
European issuers, mainly financial institutions and
corporates, took an early lead in carving out the asset
class for investors, but emerging markets led by China
specifically have made great strides over the past year
and a half: Poland (the sovereigns 750mn 2022s) , Costa
Rica (Banco Nacional de Costa Ricas US$500mn 2021s),
Philippines (AP Renewables PHP10.7bn 2026s), Morocco
(MASEN, BMCE Bank), Colombia (Bancolombia), Latvia
(Latvenergo), Brazil (Suzano, Fibria), Mexico (Mexico City
Airport Trust, Mexico City, Nacional Financiera, Rotoplas),
India (Axis Bank, Greenko, Hero Future Energy, NTPC, PNB
Housing Finance, IREDA, ReNew Power) and China, where a
wide range of financial institutions, energy companies and
real estate developers have tapped the market.
During that period, an increasing number of investors and
asset managers have launched dedicated green bond funds
covering both emerging and developed market assets
Swedens AP2 pension fund, NN Investment Partners,
Natixis Mirova Fund, BlackRock, VanEck, and Amundi to
name a few.
A Tale of Two Funds
French asset manager Amundi made history earlier this year
after it launched the worlds first broad emerging market
green bond fund alongside the IFC, the private sector arm
of the World Bank. The US$2bn Green Cornerstone Bond
Fund in which the IFC is investing about US$325mn is
aimed at attracting private investment into the climate-
aligned bonds and developing the sustainable finance asset
class in emerging markets globally.
Private investors frequently have both the capacity and
appetite to invest in climate-smart projects in emerging
10 www.BondsLoans.com
markets, yet they lack the proper tools to make investments
happen, the IFC stated upon the launch of the fund in April.
The global market for green bonds has expanded rapidly
in recent yearstotalling more than US$100bn in 2016.
But few banks in developing countries have issued such
bonds. IFC and Amundi expect the new fund to encourage
more local financial institutions to issue green bonds, by
increasing global demand and building local markets.
The IFC is a veteran in emerging markets and has invested
some US$15bn in renewable energy, energy efficiency, and
climate-friendly real estate projects across a range of EM
countries, but the recently launched bond fund targets
financial institutions in particular, with many that have so far
issued green bonds clustered in China, India, and Mexico.
There are three main components to the Green Cornerstone
Bond Funds investment process. The first centres on
traditional credit assessment techniques not unlike those
deployed on any emerging market debt fund.
The second focuses on a deep analysis of the credit entity
from an environmental, sustainability and governance
(ESG) point of view. The Funds managers which in
Amundis case includes, among other stakeholders,
classic emerging market debt investors, credit analysts,
ESG specialists focus on continuously evaluating and
allocating ESG scores to each entity based on their asset
portfolios and activities, in part leveraging the analytical
models developed by the IFC among other multilateral
development institutions (which, generally, lead in
this space).
The final component of the investment process involves
green bond selection and management, which is influenced
by a range of factors.
This classic type of ESG investing involves the exclusion of
poorly rated names. If the name is downgraded to below
a certain level in terms of its ESG score, side then we will
divest, explains Sergei Strigo, Head of Emerging Market
Debt at Amundi Asset Management, one of the stakeholders
managing the Green Cornerstone Bond Fund.
We are ensuring that the bonds we are buying for this fund
adheres to the highest possible standards in terms of ESG,
which today is the Green Bond Principles. We are constantly
trying to gain visibility on specific uses of proceeds to ensure
we can avoid any controversy through annual impact
monitoring and securing secondary opinion by recognised
independent third parties.
BlackRocks approach to the market is fairly similar. Though
it doesnt explicitly focus on emerging markets, or financial
institutions, it does consolidate the expertise of a wide range
of stakeholders outside the traditional credit analysis space.
BlackRock has a Climate Solutions team led by Ashley
Schulten, who sits within the Portfolio Solutions Group,
which will provide analysis and opinion on issuances.
Each green bond programme introduced to the market
is evaluated both by its conformity to the Green Bond
Principles as well as the degree of environmental benefit
that can be gleaned from the information provided.
This evaluation is then provided to a group of fixed income
portfolio managers that are active in the green bond market
as they consider the other characteristics that drives the
asset managers investments namely credit risk and
pricing. Eligible green bonds are then tagged on an internal
risk management platform as investible assets.
Going Deeper is a Problem
A big driver of funds bid to gain deep insight into the use
of proceeds is that end investors life insurers, pension
funds, wealthy philanthropists are increasingly asking
for this . This might be less of an issue for many funds
with a broad mandate, both existing or prospective,
which in many cases seem satisfied when they see a
green stamp of approval from a third-party provider.
But for those taking these kinds of investments
seriously, digging deeper is a must, and in emerging
markets, that can be quite problematic because many
issuers simply arent geared up to collect that kind of
data. Historically, there hasnt been the need to but
that is slowly changing, often due to some combination
of regulatory and reputational reasons.
Thats where were trying to work with issuers, and show
them that improving their ESG rating has a direct impact
on their medium to long-term prospects.
Part of the challenge, for investors and the wider
industry, is the lack of standards around impact
assessment. Mathematical models to determine the
impact of a solar farm on carbon emissions are much
more robust and straightforward than, say, determining
how a new wastewater treatment plant will impact
rural pollution, or how new technology deployed in
an agribusiness setting (where yields are variable) will
influence air pollution. The further away use of proceeds
stray from energy, the harder it is to qualify, quantify,
and distinguish between ESG benefits. For investors,
being able to take a nuanced view on ESG impact will
become increasingly crucial as investors, and regulators,
become more demanding.
[Approaching the market using our technique] has
enabled us to provide portfolio impact reporting on some
of our green bond investment funds, Schulten says.
As a market standard develops for impact reporting,
we hope to be able to differentiate the greenness of
different green bond programmes.
Green Bonds on the Rise
Green bond market (US$b)
Issued Outstanding
120 300
100 250
80 200
60 150
40 100
20 50
06 07 08 09 10 11 12 13 14 15 16 17
Year-to-date Forecast
SCMP
Source: Credit Agricole

Gauging the impact of these investments, on carbon Issuers by type (%)

emissions or other sustainability objectives, is even more
difficult for asset managers, which has a knock-on effect Commercial bank Corporate Supranational and agency Sovereign

in terms of the insights they can deliver to their investors.

37 32
It is often the case that the data third party providers
2016 year-to-date
get from potential issuers in terms of reporting on
31
use of proceeds is superficial at best, which makes it
challenging for them and as a result for us to gain any
real insight into where the funds are going, Strigo says.
15
31
In terms of ESG, I would say that the vast majority of 30
green bonds out there simply dont meet our standards, 24
2017 forecast

he says. Some issuers are trying to become better at

providing more robust reporting on use of proceeds
and [ESG] impact, but many have yet to see the benefit. Source: Credit Agricole

JULY / AUGUST 2017 11

 A Shariah-Compliant Default? The
Curious Case of Dana Gas Sukuk
The decision by the Abu Dhabi-based gas producer Dana Gas to declare two ostensibly shariah-
compliant sukuk worth US$700mn unlawful has created a climate of uncertainty among investors
and issuers alike, posing uncomfortable questions for the US$2tn Islamic Finance industry.
I
n June Dana Gas announced that it was ceasing payments
on 4-year sukuk that were set to mature in October this year,
after the company had argued that these instruments were
no longer Shariah-compliant.
Naturally, this did not sit well with not only with sukuk holders,
but with experts and analyst who feared that this single case
could undermine the entire Islamic finance industry and put
its credibility in question.
For Shibeer Ahmed, a Partner at Winston & Strawn LLP, though this
conflict creates concern in the Islamic finance market, the issue
raised by Dana Gas is specific to UAE law governed Mudarabah
agreements, so there should be limited repercussion once the
actual arguments being advanced by Dana Gas are made public -
which may, in any event, be rejected by the court.
A similar view is shared by Mohamed Rafe Mohamed Haneef,
the CEO of CIMB Islamic, the biggest underwriter of sukuk deals
worldwide. In an interview with Bloomberg, Rafe said that Dana
Gas attempts to nullify its own sukuk were bound to fail. He
went as far as to claim that the Dana Gas case will leave the
US$2tn global Islamic finance industry relatively unscathed.
According to him were seeing an issuer facing a liquidity crunch
trying to wriggle out using illegality or un-enforceability, which is
a bit disheartening.
This case will likely be thrown out by the courts. Im quite
confident this case will be decided in favour of the sukuk
holders, Rafe said in the interview.
12 www.BondsLoans.com
These sentiments are echoed by structured financed
specialists, who are following the deal closely. One such
commentator pointed out the companys argument that legal
experts declared the deal illegal is contentious, as only a court
can make this ruling. They went on to speculate that the real
drive behind this lawsuit is the difficult financial situation the
company finds itself in, which could have perhaps been easier
to resolve through a standard debt restructuring.
Either way, the main battle seems to be just beginning;
creditors are less than thrilled with the companys
arguments and are not giving up without a fight. Just last
week they went to UK High Court of Justice to try to overturn
an injunction that prevents them from forcing repayment of
the US$700mn sukuk.
Representatives of the sukuk holders accused Dana Gas of
taking this controversial action as a way to avoid declaring
themselves in default, as was the case during the company's
previous sukuk refinancing, when Dana Gas had to agree to
terms on its outstanding sukuk that the company now argues
are too onerous.
This claim was of course refuted by the companys CEO,
Patrick Allman-Ward, during a broadcast phone call with
investors where he cited compliance issues as the reasons
for this unprecedented step.
Compliance issues with regard to the current sukuk
documents and instruments were identified by our legal
advisers...as part of our due diligence ahead of sukuk
restructuring discussions, he said on Thursday.
UAE or London?
The jurisdiction in which the dispute is going to be settled is
another unclear point in this murky legal battle, mostly due
to the way the sukuk is structured.
The current sukuk transaction documents are: A
Declaration of Trust, an Agency Agreement, a Purchase
Undertaking, a Sale Undertaking, a Security Agreement,
a Security Agency Agreement, Ordinary Certificates and
Exchangeable Certificates for the Sukuk all of which are
governed by English law and subject to the non-exclusive
jurisdiction of the English Courts; and a Mudarabah
Agreement, UAE Share Pledges and the UAE Mortgage
which are all governed by the laws of the UAE and subject
to the non-exclusive jurisdiction of the UAE Courts, Ahmed
explained.
According to the lawyer, Articles 693 to 709 of the Federal
Law No. (1) 1987 Concerning Civil Transactions Law of the
UAE (the Civil Code) deal with the UAE law requirements
relating to Mudarabah.
On the basis of publicly available information, I understand
that Dana Gas is relying on the provisions of the Civil Code
to argue that certain expectations, which the sukuk holders
may have in relation to their rights under the Mudarabah
Agreement, are not enforceable because they contravene
the Civil Code. Dana Gas has obtained an injunction from
the UAE Courts to prevent any enforcement action by the
Trustee (acting for the Sukuk holders) until there is a full
hearing.
On the jurisdiction issue, Allman-Ward mentioned in the
conference call that the English law in the sukuk documents
is part and parcel of the umbrella Mudarabah agreement,
implying that UAE law should prevail when determining the
legality of the security.
Global Sukuk Issuance
Total volume of Global Sukuk $ Issuance
$BILLION
50
45
40
35
30
25
20
15
10
5
0
2006 2007 2008 2009 2010
Source: Bloomberg
Not everyone believes this to be the case: Bashar Al Natoor,
Global Head of Islamic Finance for Fitch Ratings noted during
a conference in London that most of rated international sukuk
issues are governed by English law in-addition to local laws.
This is uncharted territory for both investors and issuers and
there is only one previous similar case. In 2009, when Kuwait-
based Investment Dar was undergoing a debt restructuring,
it argued a transaction with Beirut-based BLOM Bank SAL
breached the religions Shariah principles because Dar was
taking deposits at interest. However, the companys case
was quickly thrown out of a UK court, and its own Shariah
Supervisory Board prohibited them from using arguments
based on Islamic Law.
Significantly, the case of the Dana Gas sukuk stretches beyond
the company itself; Dana Gas might try to take advantage of one
of the loopholes in the Islamic financing industry in the Arab
world, where, unlike Malaysia, most countries have no centralised
Shariah boards to approve deal structures. This is why investors
are paying very close attention to this particular situation, as it
might set a legal precedent for future sukuk defaults.
As Ahmed mentioned, theres is a possibility of this sort of
situation repeating in any other similarly structured sukuk which
include a Mudarabah agreement governed by UAE law (or any
other governing law which have provisions regulating Mudarabah
contracts), which does nothing to reassured investors on the
reliability of Islamic instruments.
Al Natoor, while pointing out that Fitch has not worked on Dana
Gass case specifically, commented: Parties usually have to agree
in advance of the transaction which authorities will be assigned to
make judgments on elements of the deal whether its the legal
side, Sharia compliance or other aspects.
Whatever the outcome of the Dana Gas legal battle is, it is likely
to set a major precedent for Islamic Finance as it exposes the
loopholes and risks still ingrained in this young and developing
market.
2011 2012 2013 2014 2015 2016 2017
JULY / AUGUST 2017 13
 Exploring the Next
Frontier in the GCC
Capital Markets:
Saudi Arabia
Saudi Arabias emergence in the international
capital markets, first through the sovereigns
US$17.5bn conventional bond followed months
later by its US$9bn sukuk, has the potential
to herald one of the biggest shifts the regions
markets have seen in years.
Prompted by local liquidity constraints and encouraged by the
countrys ambitious and farsighted economic development
plans, analysts expect a range of Saudi Arabian entities to follow
the sovereign into the international capital markets to satisfy
their funding needs over the next three years. What does
this mean for the countrys nascent international issuers, the
challenges they are likely to face, or the constitution of Saudi
Arabias emerging hard currency credit pipeline?
We speak with Jean-Marc Mercier, Managing Director, Global
Co-Head of Debt Capital Markets, Global Banking, HSBC; Aziz
Ata, Managing Director, Head of Debt Financing MENA, Global
Banking and Markets, HSBC Bank Middle East; and Faisal Qadri,
Managing Director, Head of Debt Capital Markets, HSBC Saudi
Arabia about the countrys evolving participation in international
credit markets and how the countrys borrowers are gearing up
to make their debuts.
Q EM credit investors are very optimistic about the
pipeline emerging from the Kingdom of Saudi Arabia.
What kind of deal flow can we expect and what sectors
do you think will move first?
A Aziz Ata (AA): Historically, Saudi Arabian borrowers, have
highly benefited from substantial captive local liquidity for their
funding exercises in the bank and capital markets. However,
we are seeing domestic liquidity tightening across both loans
and bonds and as a result we may see a diverse set of issuers
tapping the international markets and pools of liquidity.
A Jean-Marc Mercier (JMM): It was fantastic to see the
sovereign leading the way, not just because it demonstrates
access and establishes a benchmark for the largest economy
in the GCC, but also because of how the roadshow cleared the
path for others looking to engage with global investors. The
Kingdom of Saudi Arabia was, at the end of the day, engaging
with people, and that engagement is what helps investors
become more comfortable with the countrys story and its
reform efforts, and, by proxy, a range of other entities that
form important components of that story banks, government-
related entities, and corporates. The sovereign transactions
were particularly important for corporates, many of which are
14 www.BondsLoans.com
not very well-known outside the Kingdom let alone the region
because the need to tap into international liquidity just wasnt
there; for those entities in particular, this is a game changer, and
has the potential to make their debt funding strategies much
more flexible.
A Faisal Qadri (FQ): Having set a benchmark and interacting
with those investors, the market is now open to other issuers
to move in. The first movers in my view will be those entities
that are already rated and have tapped the markets before,
taking advantage of new demand and broader familiarity with
the growth and macro stories for instance the large blue chip-
listed companies. We are also likely to see banks move into the
market, because they are already rated and have most of the
issuing infrastructure set up, followed by government-related
entities, which have strong implicit government support. Top-
tier private sector corporates many of which have strong
balance sheets but which have never tapped the market before
will take a bit longer.
Q HSBC played a crucial role in the Kingdom's
international capital markets debut. How would you
describe the strategy taken on the issuance and what
kind of questions and feedback did investors have?
A JMM: The sovereigns strategy around transforming the
country is fairly well-known, especially given the extensive
work the Kingdom has done in terms of communicating
Vision 2030, but the roadshow was an important exercise in
allowing investors the opportunity to dive into that strategy
in more depth, and to help build trust between the investor
community and the Kingdom. Questions from investors during
the first roadshow largely focused on the governments budget
and spending priorities, with some interest in the countrys
commitment to the US dollar currency peg. The roadshow
included very senior representatives from across the Saudi
Ministries, Saudi Arabian Monetary Authority (SAMA), the CMA
and the Stock Exchange (Tadawul), and adopted a two-way
Q&A structure, giving all parties the opportunity to probe quite
deeply into areas of interest. Hosting several roadshows in the
same locations also helped bolster the relationship between
the sovereign and investors and gave investors the opportunity
to understand Saudi Arabias strategy; it was also important for
cultivating investor trust in that strategy and the countrys policy
makers. At the end of the day, this was a truly global transaction,
something evident in the book; it included strong participation
from across the four major time zones, which meant that we
werent just relying on US and local accounts.
Q Many of the country's entities likely to issue in the
international markets will be first time issuers. What
kind of challenges might they encounter on their
capital markets journey? How do you expect the high
volume of new issuers to affect pricing dynamics of
Saudi credit?
A FQ: We are seeing entities in Saudi Arabia move to set up
the necessary internal infrastructure to support international
issuances: bolstering their investment relations teams;
improving transparency; introducing new processes around
disclosure; secure ratings from recognised credit rating
agencies. These initiatives dont necessarily conclude overnight,
but we are extremely encouraged by what we have seen so far.
A AA: We feel the majority of these entities will be able to go
through these processes fairly efficiently. Transitioning from
the domestic markets to the international market, while it
may require some learning process, is not necessarily a huge
challenge, and the GCC issuers have been very nimble to
changing market conditions in the past; we expect that level of
adaptability to remain consistent.
Q Saudi Arabia's energy diversification efforts are estimated
to create thousands of new jobs and dozens of new projects
over the coming decade. To what extent do you see renewable
energy driving green transactions? Are the skills or the know-
how to put these transactions together present on the ground
in Saudi Arabia?
A JMM: We absolutely see this driving green transactions
but not exclusively. We have already seen the regions first
green bond NBADs US$587mn 5-year trade earlier this year.
Repsols benchmark-sized green bond launched in May proves
that almost any company can structure and execute these
kinds of transactions. I think its also important to point out that
trades like this only form a small component of the broader
sustainable finance pipeline; we also see sustainable and social
housing driving sustainable finance in Saudi Arabia among other
regions. The Kingdom has been fairly progressive when it comes
to pushing energy efficiency and sustainability initiatives, which
form a central part of its Vision 2030 plan.
A FQ: Many of these transactions have never been done before
in Saudi Arabia and are still quite new in the broader global context.
HSBC is on the ground in Saudi Arabia sharing its expertise as
an international lender and a specialist in sustainable finance. It
takes a considerable amount of dialogue and time to understand
these kinds of transactions at every level of an organisation, but
we are privileged to be part of that process. Many issuers will
likely try to become more familiar with conventional instruments
before moving into the sustainable finance space.
JULY / AUGUST 2017 15
 Is Kenyas Economic Model Sustainable?
Kenya is a leading engine of growth in East Africa, but analysts are growing increasingly concerned about the
countrys ability to keep up the pace as a toxic combination of credit growth-stifling regulations, excessive
government borrowing and low revenue generation conspire to threaten its outlook.
T
he past year has been a particularly
challenging one for the Kenyan
economy as unseasonably
dry weather during the short rains
season led to food shortages and
rising agriculture and energy prices
which put a damper on agricultural and
industrial production, and a range of
other productive sectors.
In February this year, food prices shot
up a record 16.5%, while the number of
citizens requiring food aid jumped to 2.7
million. Headline inflation for April stood
at 11.48%, its highest level in five years,
according to official statistics, and well
above the 5-2.5% target range set by the
Central Bank of Kenya (CBK).
Coupled with a crippling slowdown
in private sector credit growth,
economists expect the country to put
in roughly 5.0% in GDP growth for
2017. Private sector credit growth has
been declining from highs of 21.0% in
August 2015 to lows of 4.0% in March
2017 according to the CBK, something
analysts at Cytonn Investments
Management, a Nairobi-based asset
manager and advisory, attribute to a
broad flight to government securities
and an increase in commercial bank
non-performing loans (NPLs).
At the same time, pressure from an
interest rate cap brought into force
last year means the countrys Tier 1
and 2 lenders have become less willing
16 www.BondsLoans.com
to lend to entities beyond government
and large blue-chip names because
they cant accurately price risk,
perpetuating the credit drought and
weighing on growth.
The recent downward revisions on the
countrys growth forecasts have already
forced Kenya to surrender the trophy for
East Africas largest economy to Ethiopia,
one of the regions largest but more
inward-looking economies a feature
that makes its consistent double-digit
growth even more impressive.
Trouble in Our Midst
Some of these pressures on the
countrys economy have begun to ease.
While headline inflation trended upward
slightly in April to 11.7%, improving
domestic crop yields brought about by
climate normalisation through the first
quarter look likely to put downward
pressure on that figure in the coming
months. Economist believe this should
also bolster consumer confidence
through the second half of the year.
Most observers see the upcoming
elections in August as the biggest near-
term risk, with what looks likely to be
a fairly narrow margin separating the
incumbent Uhuru Kenyatta of the Jubilee
Party and Raila Odinga and his newly
created National Super Alliance (Nasa).
There are rumours circulating that whoever
emerges as a victor, the government is likely
to scrap the controversial interest rate cap,
which would help restore private sector
credit growth albeit at higher average
borrowing costs.
Against this backdrop, however, trouble
is brewing seemingly unabated. Next
year, Kenya will spend more than half
of the revenue it collects from taxes to
pay down the principle and interest on
maturing debt, dwarfing sums spent on
education, health, and other critical line
items. Spending projections included in
the most recent supplementary budget
presented to Parliament show the
government will need to fork out over
KES700bn (approx. US$6.7bn) next year
to repay outstanding debt, including the
first portion of a Eurobond that falls due
next year. Thats a massive jump from the
KES446.4bn the government spent in
2016 to pay down its debt.
Although public debt remains
sustainable, margins for manoeuvre
are rapidly narrowing, the World
Bank said in its latest note on Kenya,
echoing a recent IMF reports findings.
The US$800mn syndicated loan the
country signed with four commercial
lenders in March this year brings Kenyas
total stock of debt to KES3.8tn, or close
to 53% of GDP up significantly from
38.2% of debt-to-GDP seen in 2012.
That figure looks set to rise. The
government is still mulling whether
or not to issue Islamic bonds during
the 2017/18 fiscal year, and it already
has a number of commercial and
concessional loans earmarked for the
forthcoming fiscal year including a
KES148bn loan from China Exim Bank
for the Nairobi-Naivasha leg of the
Standard Gauge Railway, a flagship
multibillion dollar infrastructure
project largely financed through debt,
and KES100bn in loans from the World
Bank to finance new road construction.
The Standard Gauge Railway, the largest
project in the countrys post-colonial history
connecting the Indian Ocean port city of
Mombasa and the capital, Nairobi, Naivasha,
Kisumu and finally Malaba, is being financed
through a 15% equity contribution from
the government and KES390bn through a
mix of concessional and commercial loans
from China and Chinese lenders. Analysts
also suspect the government will have to
put at least a further KES1.5bn aside to help
subsidise the project over the next five years.
Debt to GDP is worrying, but not nearly as
much as debt servicing costs to revenue,
explained Johnson Nderi, Head, Corporate
Finance Advisory at ABC Capital.
Analysts have also grown more concerned
about a recurring and widening fiscal deficit.
The budget deficit for the 2016/17 fiscal
year is projected to hit 9.6% of GDP, up
significantly from 4.5% in 2011. The Treasury
which has also voiced concerns about the
countrys debt sustainability is targeting
a deficit of 5.2% of GDP for the 2018/19
fiscal year, and 4% in the medium term,
targets one economist who spoke with
Bonds & Loans characterised as hopelessly
unrealistic without any significant shift in the
tax regime or reduction in future spending
commitments.
Part of the problem is that tax collection
in the country is notoriously substandard,
purse to finance expensive infrastructure.
Much of the equity historically used for
development spending was sourced from
the governments own balance sheet in
combination with concessional loans. But
some economists have argued that the
percentage of actual equity placed into
these projects has diminished over the
past 7 years as the government boosted
borrowing, only to be replaced with debt.
At the same time, commercial loans
have actually increased as a percentage
of the governments total borrowing, a
trend that is broadly consistent across
East Africa according to Jibran Qureishi, a
Nairobi-based economist at Stanbic. As
the regions governments eschew cheaper
concessional funding, usually contingent
on the implementation of reforms, for
more expensive foreign capital, the higher
relative cost of borrowing creates an even
longer delay between the infrastructure
investment and realisation of those benefits.
If you strip out non-recurrent
government spending on infrastructure,
GPD is drastically reduced, and if
you look at debt servicing costs as a
percentage of exports, the trend is
even more concerning, Qureishi said.
Ultimately, we will need to boost dollar
receivables in order to pay for all of the
hard currency loans and bonds but
that hasnt happened yet, and if the
trend continues it wont be sustainable.
Credit Growth in Kenya
Private Sector Credit Growth (%)
20%
18%
16%
14%
12%
10%
8%
6%
4%,
2%
0%
15
The government has become so
reliant on using external capital to
finance expensive infrastructure
projects, whose multiplier effect is
still up in the air, and has not done
enough to boost domestic savings, or
form a strong exports strategy. Thats
a toxic combination. Its imperative
for economies like Kenya to ensure
that infrastructure is going to boost
employment and productivity over
the medium to long term, which
means they will need to be much
more selective about which projects
they undertake.
This, admittedly, puts Kenya in a tough
spot. New infrastructure is necessary
to ensure the country continues
transitioning into an industrialised,
middle-income country. But the
governments fiscal headroom to
finance the kind of projects that beget
productivity gains in key sectors like
agriculture and tourism is narrowing.
Without further fiscal consolidation,
unlikely to be a popular theme as
the country heads into elections later
this summer, or a functional strategy
to boost domestic savings, Kenya
will continue to struggle. Unless
something changes, one of East
Africas leading growth engines may
be headed for a breakdown.

15

Fe 6
M 6

Ap 6
M 6

Ju 6
16

Au 6

Se 6

O 6
N 6

D 6
16

Fe 7
17
1

1
1
r1

l1

1
1

1
ov

ec

b
ar

ay

p
ct
ov

ec

n
b

with the treasury having regularly recorded

Ju
Ja

Ja
D
N

shortfalls over the past three years. To

Source: Central Bank of Kenya
counter this, the government is looking to
broaden its tax base, including a planned
doubling of non-pay-as-you-earn (non- Public Sector Credit Growth (%)
PAYE) tax payers through the 2017/18 Central Government County Governments and Parastatals
fiscal year, from 1.6 million to 4 million. 35%
30%
25%
20%
Kenyas Economic Model is 15%
10%
Not Sustainable 5%
-
A big part of the problem hits at the -5%
heart of Kenyas economic model, Oct-16 Nov-16 Dec-16 Jan-17 Feb-17

which relies heavily on the government Source: Central Bank of Kenya

JULY / AUGUST 2017 17

 Dufil Prima Foods COO: Nigerias
Regulators Need to Streamline Bond
Compliance Process
Nigerian regulators have made progress on managing the countrys challenging FX situation and
narrowing the gap between official and black-market currency exchange rates, giving a much-needed
boost to investor confidence. Madhukar Khetan, COO, of Dufil Prima Foods, which is lining up its debut
bond issuance after nearly a year of planning, says the government now needs to tackle the regulatory
compliance process associated with issuing if it is to have any hope of jolting the countrys capital
markets back to life.

Q Can you give us a sense of Dufil Prima Foods main

strategic objectives this year? Where is the company looking
to expand its footprint?

A At the beginning of this year we set two primary

objectives for ourselves. The first objective was to bring our
market share in the noodle business to more than 80%, and
the second objective set at the beginning of the year was
to maintain the supply chain. At the beginning of the year
the economy and businesses like ours were significantly
impacted by the FX challenges in Nigeria, which had a huge
impact on companies ability to source certain raw materials.
Within that context, simply maintaining our supply chain was
a particular challenge. We are on target with both of these
objectives, and we have already secured the required raw
materials either in stock or transit so that we maintain our
required raw materials throughout the year. About 60% of
our raw materials are imported from sources outside Nigeria. That said, one of the key challenges has been to secure new
funding at competitive pricing from banks, in part due to the
We are currently exploring the possibility of expanding into availability but also due to liquidity. One of the things weve
Ghana, and we are also exploring expansion into Western Africa had to do in order to get in front of this, given our CAPEX
more broadly. At the same time, because of the FX situation, we expansion, supply chain and market share goals, was to take
have started looking further afield for commodity export markets, out a term loan before the funding was really needed so we
particularly in far East Asia, which will ensure we can also secure could lock in comparatively lower interest rates and secure
foreign currencies that we can also use to support our imports our supply chain. But theres a cost attributed to taking on
strategy. additional debt earlier than needed, of course.

Q That said, how have some of the challenges seen in
the Nigerian economy affected Dufils funding strategy
and outlook? To what extent has the countrys challenges
and the particular challenges faced by importers
influenced investor sentiment towards Dufil?
Given our longstanding presence in the market, I wouldnt
say that investor sentiment has changed that much, nor has
the tone of our dialogue with investors. We grew more than
20% last year in despite the challenges seen in the market,
and we are anticipating growth of between 40-50% this year.

A After seeing how the economy was fairing in 2016, we
had already made a number of adjustments to our funding
strategy in order to get ahead of some of the challenges
we anticipated would evolve. We are currently very bullish
about the Nigerian economy despite some of the very
real challenges that are still present and we anticipate a
turnaround sometime in early 2018; with this in mind we are
actually anticipating a CAPEX expansion in order to ensure
we can continue expanding our manufacturing operations in
a number of locations.
Q Earlier this year the Nigerian Central Bank eased
FX controls to the delight of many importers, but many
would argue the Bank has not eased nearly enough.
Where do you stand on this? Has this easing of FX
controls had a positive influence on Dufils business?
A I think the regulators along with the Central Bank
are actually doing a tremendous job in containing the FX
situation and ensuring it doesnt spiral out of control, and
they are making progress on narrowing the gap between

18 www.BondsLoans.com
the official and black-market exchange rates. Coupled
with the governments ambitious reform plans, we feel
like investor confidence in Nigeria has increased in recent
months as a result, which has in turn increased business
confidence. Certain parts of our supply chain do rely on
foreign currencies, particularly US dollars, and with the
new FX windows established by the Central Bank we still
have access to most of the foreign currencies we need
to continue operating as usual. What we have noticed,
however, is that the supply of currencies made available
in these windows has decreased and as a result of this,
it takes longer to secure the necessary currencies, which
could influence our business and the wider economy for
importers going forward.
Q The company recently acquired Dangotes noodle-
manufacturing assets, further cementing Dufils lead
in the segment. What were some of the main drivers
behind the move and how was the transaction financed?
A This was largely driven by our core strategy of
increasing market share, and given this area is our core
competency we have been investing in this market for
over three decades we wanted to ensure that we can
continue to deliver high quality products in the market.
The move was in line with our strategy to increase our
market share in the noodle segment to more than 80%.
The transaction was financed exclusively by a term loan
provided by a commercial lender, so entirely debt-funded.
Q Dufil Prima Foods recently announced its intention
to issue up to NGN40bn in the local capital markets, a
transaction that, as I understand it, is coming after over a
year of preparation. What were some of the main challenges
in bringing this transaction to market? How did the company
and deal stakeholders overcome those challenges?
A We have raised NGN2bn through the issuance of short-term
commercial paper in the past, and have secured approvals from
the Securities and Exchange Commission for another NGN2bn,
but the NGN40bn deal is the first bond transaction being
undertaken by the company. We originally began preparing for this
issuance in September 2016, which is when we began preparing
the necessary documentation and began engaging regulators.
Regulatory approval took a very long time, more time than we had
anticipated, in part because it took regulators a very long time to
assess all of the documentation from the various parties involved
with the transaction. In our view, this needs to be streamlined
much better in order to allow the market to develop further. The
process needs to be simplified for issuers and borrowers, and
more guidance on compliance throughout the documentation
process needs to be provided by regulators. We also feel that it
would be better to create and ensure the conditions of compliance
apply to multiple issuances in order to make the process more
flexible for potential borrowers for instance, to draw on our own
example, by creating a process that would allow us to secure pre-
approval for forthcoming issuances through certifying compliance
on our commercial paper programme. It would make borrowers
more agile when tapping the market.
JULY / AUGUST 2017 19
 Olam Africa, Middle
East CFO: Challenging
Times, Huge Growth
Opportunities in
Agribusiness
A number of African economies this year were
hit with turbulent commodity prices and severe
drought, weighing on the outlook for the regions
agricultural industry. In a region that focuses so
strongly on food security, never has there been
more impetus on delivering new efficiencies to
the agribusiness sector. Bikash Prasad, Olam
Internationals CFO for Africa and the Middle East,
talks about how the company is looking to do just
that, tailoring its funding strategy and bringing in
new talent and technologies to create a regional
agribusiness powerhouse.
Q Can you give us a sense of the outlook for
agribusiness in Africa and the Middle East in 2017?
What are the most influential factors in play currently?
A The Sub-Saharan Africa (SSA) region contains around
1 billion people, which is approximately 13% of the global
population. Despite drastic changes to economies in this region,
agriculture remains a crucial sector providing livelihoods for
millions of people. Agricultural makes up a significant portion of
most Sub-Saharan countries GDP, ranging anywhere from 30%
to 60%. We feel that while the outlook for agriculture in Sub-
Saharan Africa is broadly positive, it could be much improved
by improvements in government policies across the region,
through increases in strategic public and private investments,
especially in infrastructure, and by suitably adapted research
and extension. Such investments could improve access to
markets, reduce post-harvest losses, and make much needed
inputs more widely available.
There are some major innovations that would need to take
place in order for Africa to compete on a global scale. With
almost 60% of the arable land in Africa, it is imperative that the
regions governments and market players upgrade value chains,
improve yields, reduce food wastage and invest in technology
and education. These improvements will enable Africa to deliver
food to tables across the globe.
Our outlook for Africa and Middle East in 2017 is stable with
the price of commodities showing recovery this year, however,
they are not expected to return to previous highs seen a
few years ago. This will likely affect the growth of many of the
countries in the region as governments struggle to rein in public
20 www.BondsLoans.com
spending, current account deficits and provide basic services
to the population. Some key commodities, however, have
experienced a huge drop in prices. Price crashes in cocoa will
affect the West African producing countries. With Ivory Coast
poised to become one of the fastest growing economies in
Africa in 2017, an impact on their largest export product will
have weigh on their growth.
Many of the SSA economies have recently faced the worst
drought in years, which hindered production and has led to food
shortages. Ethiopia received US$141.8mn in food aid in 2017
alone to ensure that 7.8 million people did not go without food.
The IMF has warned that while the effect of the 2016 drought
that hit most southern African countries is fading, a new bout of
drought is now affecting parts of eastern Africa (Ethiopia, Kenya,
South Sudan, and Tanzania) as the erratic weather patterns of
La Nia hit these countries. Pest and armyworm infestations
in some southern African countries (Democratic Republic of
Congo, Malawi, Namibia, South Africa, Zambia, and Zimbabwe)
have also wreaked havoc on the regions economies. As a result,
about half of SSA countries have reported food insecurity
situations that could potentially impact 60 million more people
in the region this year. Worse still, famine has been declared in
South Sudan and is looming in north eastern Nigeria as a result
of past and ongoing conflicts.
We have also seen a shift in economies that have been reliant
on hard commodities like oil and copper, whose prices fell
sharply in the last few years. Economies like Nigeria and Zambia
have increased their focus on agriculture in an effort to diversify
their economies and reliance on oil and copper, respectively, as
it has resulted in huge decreases in growth. Nigerias growth in
2016 was only 0.6% while Angola, also an oil producer, recorded
GDP growth of 1.5%.
Q What are some of Olams key strategic initiatives in
the regions you cover this year, both for the company
and the finance team?
A Africa continues to be strong pillar for Olams business, with
invested capital of over US$3bn as we started our journey from
Africa in 1989. Being an agri-player and devoting ourselves to
becoming a large part of ensuring food security solutions to
governments in Africa, we are heavily invested in upstream,
midstream & downstream opportunities in Africa. We have various
investments in Africa like farming (Coffee, Rice, Palm, Rubber),
flour milling, sugar milling, edible oil refineries, forestry concessions,
cotton ginning, cashew processing, cocoa processing, coffee
processing, sesame hulling, tomato paste processing, biscuits
and candies factories, logistics and storage assets, rice and dairy
products, and packaged foods business. We believe Africa is poised
to become the food producer for the world. Having the lowest
yield compared to other producers globally (only 25% of total
potential yield on average as compared to 90% in East Asia), there
is an opportunity to maximize yields and production through up
skilling agronomics, improved fertilizers application, technological
innovation, financing, infrastructure, and PPPs in Africa.
During the last year or so for the region, Olam continued
expansion of our operational footprint further growing our
upstream plantation investments in coffee, palm and rubber
and rice farming. We also made a significant commitment to
enter the animal feeds business in Africa. We successfully
integrated transformational and strategic acquisitions such
as the erstwhile ADM Cocoa business and the wheat milling
and pasta assets from the BUA Group in Nigeria during
the course of the year. We also prioritise and treat Africa
as a separate vertical with a special focus, given our Africa
footprint and operating capability.
All of this creates significant responsibilities, challenges, as well
as offers opportunities for the finance team. We are focused
on capital-raising and its management to support our current
and future investments; optimising capital allocation amongst
various geographies and business units after considering
the associated risks and returns; and directing Olam Africas
financial goals and budgets; increasing oversight of existing
investments and optimizing our balance-sheet to improve
shareholder returns.
We want to become a growth champion for Africa and lead
mergers and acquisitions, joint ventures, and PPPs to meet our
growth plans.
As a company leading and directing a diverse, multicultural and
multilingual finance team of over 250 members, the challenge
will be to drive localization, develop a pipeline of talents and
create cutting edge capabilities within the team to handle our
integrated value-chain operations
We also want to focus more on protecting and creating value
through managing risks proactively in ever volatile economic
environments in the emerging markets, be it commodity
prices, currency or credits. Bolstering our understanding
of global and African macro- economic indicators would be
key to manage these risks effectively.
Finally, we want to continue creating standardized systems
and scalable processes across Africa to enhance controls
and support the business requirements. We believe these
systems, which are linked to our business intelligence
platforms, will contribute significantly to the quality of
our data and analysis, which will allow us to constantly
maximize on our efficiency and add value to the company
and its decisions. This goes hand in hand with improving
governance and transparency, as well as investigating how
new digital technologies can fundamentally transform the
way we farm, live, work and consume.
Q Localisation seems to be a prominent theme within
Olams corporate ethos. To what extent does Olam
International rely on local capital markets and local
financial institutions for its funding needs? How does
the company choose its relationship banks?
A We believe in building strong banking relationships in
every country and region we are present in. The partnership
with these banks are important and strategic for our growth
and managing the funding challenges amidst volatile currency
environment in Africa. Local and regional funding lines have
helped us to protect and create value during the ever-turbulent
times Africa has witnessed. The choice of our banking partner
depends on the size, history and reputation of the local/regional
banks, their ability to partner with us on our various value-chain
operations and geographical presence, FX and trade structures,
and of course, pricing competitiveness.
Q Africa and the Middle East have quite different
economic fundamentals. How do you adjust your
funding strategy to cater to the regions unique
characteristics?
A With the current drop and continued comparative lows in
oil and gas prices, both Africa and Middle East economies have
been highly effected. With the political tensions, war between
countries in the ME region, there has been a lot of economic
instability that is building there. Continuous fall in property
prices and job cuts in the region have reduced the flow in of
cash into the region even further. Some of the International
Banks have already discontinued their business in Middle east
while others have either stopped or reduced their exposure.
Given the premise, the overall cost of funds in foreign currency
for the Middle East banks is higher as compared to other
regions. On the other hand, economic under-performance
in Africa is also leading to sharp increase in local currency
funding cost.
In these regions, first we make a choice between using a local
currency or foreign currency lines. Local currency lines can only
be sourced and used in-country. For foreign currency lines, we
do look at overall cost competitiveness, structures availability,
choice of the funding partners depending upon the projects.
JULY / AUGUST 2017 21
 Corruption Woes Still Weigh Heavily on
South Africas Business Climate
As yet another corruption scandal adds to the mounting wave of controversy surrounding Jacob Zumas
administration, leading to a sixth motion of non-confidence being tabled against the embattled ANC leader,
investors are left wondering about the stability of Africas most industrialized economy.
I
n June, an investigation carried out by attorney Geoff
Budlender, found that Trillian, a company linked to the
Gupta family, business associates of president Jacob Zuma,
had been paid ZAR495mn (US$39mn) by state-owned utility
firm Eskom, despite not having carried out any work.
The ties of the Gupta family, a wealthy family of Indian origins,
to Zuma are well known in South Africa both his wife and son
worked for them- and the influence the three brothers have
in South African politics has long been questioned not only by
the media, but by political opponents of the current president.
Many companies with links to the Guptas- who have
interest in media, telecoms and mining, among others
- have been awarded lucrative contracts by government-
run enterprises, and they have been known to be unofficial
advisers to Zuma and other members of his cabinet.
Eskom is just one of the long list of opaque deals surrounding
Zuma and the Guptas, and even though any allegations of
wrongdoing have been vehemently denied by both parties,
this time it might not be enough to calm the storm brewing
on South Africas political scene.
While the companys CFO Anoj Singh was placed on a
special leave after the news broke that he had taken trips
to Dubai on the Guptas tab, the real surprise came from
South Africas Finance Minister Malusi Gigaba, a close ally of
22 www.BondsLoans.com
Zuma. In a declaration to the local media, Gigaba expressed
his concerns about the ongoing investigations.
The issues being raised in the audit findings are serious
and very grave. They are grave for the government. They
are grave for how the investor community especially the
lenders, ratings agencies and the public view the governance
of our state-owned entities, the minister told a Cape Town
based radio station.
Other members of ruling party ANC have called for Zumas
immediate resignation and for public enquiry to be
conducted on the payments.
And the South African leader ought to be concerned: the
repercussion of this case might extend beyond the realm of
politics and make its way down to South Africas economy if
it is not dealt with in an adequate manner; foreign investors
increasingly raise doubts about the governments ability to
clean its own backyard.
According to Arno Lawrenz, Head of Fixed Income Portfolio
Management at Ashburton Investments, the story around
the Gupta family and perceived corrupt activities involving
high-profile government officials is the key political issue
of the day in South Africa, especially in the run-up to
December 2017, which is when the ruling ANC elects a new
party leader.
This story will play a significant part in the way in which Foreign Purchases of SA Bonds by Maturity
political power is exercised in South Africa. As such, for
investors, this is a very significant development, bringing 0.5
questions about future economic policy to the fore. So, for a
capital holder looking to invest in South African corporates, 0.0
uncertainty around tax policy will certainly play a major role

Rbn
-0.5
in their analysis. In the mining industry, also currently subject
to questions around the Gupta family, there is enormous -1.0
uncertainty around future policy, causing investors to take
an extremely dim view of such corporates, he commented. -1.5
1-3yr 3-7yr 7-12yr 12+yr
Lawrenz believes that the idea that economic policy is being 07-Aug-17 5d avg
influenced with malign intent can only have one possible
outcome, which is for investors to be reluctant to commit to
Source: Standard Bank Research,Bloomberg
the country long-term.

With a substantial current account deficit that is funded

by foreign investor inflows, if South Africa wants to avoid a Exchange Rates Have Not Been Favourable
currency slide, it will have to be careful in how it positions Aug
itself to foreign investors. In order to attract long-term 11 13 15 19 21 23 25 27 29 31 1 3 5 7

capital, rather than just portfolio flows, there needs to

be a higher degree of certainty around macroeconomic 13.4000

policy. The risk is that with all the attention given to the 13.2000
political shenanigans, economic policy (and hence growth)
stagnates, he added. 13.0000

For Abri Du Plessis Portfolio Manager, Economist & CEO
Gryphon Asset Management, this case will receive even
more attention due to the fact that Eskom was one the most
highly regarded public companies. Credit rating agencies
warned since last year that they are concerned about the
wellbeing of SOEs (State Owned Enterprises) in SA. Eskom
was one of the only few that remained fairly well managed;
this is now not the case anymore, the investor explained.
More Regulation Is Not Always the Answer
Unlike many other countries in the emerging world, South
Africa does not necessarily require more regulations to fix
its corruption problem, a point both investors agree on.
For Du Plessis, what the country needs is just a change of
guard, not additional laws or regulations. While Lawrenz
explains that in the corporate context, South Africa already
operates at a very high level of transparency: for example,
it is rated the first in the world when it comes to the
strength of auditing and reporting standards, as well as the
protection of minority shareholders interests. And it is third
in the worldwide rating of efficacy of corporate boards.
But when it comes to public policies, investors are getting
anxious about what they see.
When an investor makes a decision about investing into SA
corporates, there is a high degree of confidence that can be
attached to the available financial information. However, it is the
operating environment (namely, future macroeconomic policy
direction) that is increasingly uncertain, the investor added.
As Brazils case proves, corruption scandals in emerging
markets can become an economic and financial impediment
12.8000
Source: Bloomberg
very quickly, and it might take years for a sovereign to
recover the markets trust.
For the time being however, global investors might be
willing to overlook South Africas corruption scandal, as the
lack of growth and low rates in the developed world puts a
dent in their portfolios.
The significance of the corruption scandal is, to a certain
degree, being overlooked in favour of the global search
for growth and yield. Should global growth rates recover,
or, should other emerging markets, on a relative basis,
be better positioned than South Africa, then it is highly
probable that South Africa would struggle to attract such
foreign investors.
In addition to this, international rating agencies have
already over the past few years been downgrading South
Africas sovereign credit ratings on the back of the lack of
growth, the uncertainty around future economic policy,
and the perceived increase in perceived corruption. This
dynamic itself potentially causes investors to hesitate
when it comes to investing here, and can potentially cause
a downward spiral in foreign investment in SA, Du Plessis
concluded.
In a year when South Africa lost its investment grade, the
government must focus on cleaning house and showing
foreign investors that the country is open for business
and, most importantly, for legitimate business.

JULY / AUGUST 2017 23

 Signal Versus Noise: The Case of Brazil
Brazil offers a good example which illustrates the difference between signal and noise in investing.
A complete mess from a journalistic perspective, Brazil has been one of the best investments
in global fixed income markets and continues to offer an attractive investment proposition. We
examine why countries with so much bad news can be such excellent investments.
Jan Dehn, Head of Research, Ashmore Group

T
here is nothing quite like
an Emerging Markets (EM)
country in crisis to illustrate the
difference between signal and
noise. Brazil is a good case in point.
Headlines suggest that the country
is a complete mess! Brazil is mired
in the worst economic downturn in
its modern history and almost the
entire political class has been exposed
as utterly corrupt by Judge Sergio
Moro, whose relentless campaign to
uproot corruption has already seen
one president impeached, another
sentenced to 9.5 years in jail for
corruption and a third teetering on the
precipice of political demise.
Yet, from an investment perspective
Brazil has been one of the most
attractive opportunities in global fixed
income and the country arguably
continues to offer a compelling
investment case. For example, in 2016,
Brazilian local currency government
bonds returned 58% in USD terms
and year to date they are up 12%. If
the year ends as it started, investors
can expect to make about 25% in USD
terms in Brazilian fixed income in 2017.
For simple government bonds with a
modest 3 years of duration that is hard
to beat.
But how can returns be so stellar
when the news is so bad? The answer
is that investment returns depend on
key signals about the likely evolution
of deeper economic and political
parameters, whereas news headlines
often focus on events, which, though
colourful, often have a bearing on the key
parameters, which impact investment
returns. In other words, a lot of news
is quite simply noise, at least from the
narrow perspective of the investor.
The reason for this distinction is that
the act of investing is about making
forward-looking calls on what is about
to happen to the key underlying risk
parameters, such as growth, inflation,
reforms, policy interest rates and
the ability and willingness to pay.
The investor then compares these
parameters with the current level
of asset prices in order to assess if
they are consistent with each other.
Investing is a forward-looking exercise
in signal extraction, which is obviously
a very different exercise from noise
reporting, which is not only imprecise
(from a narrow investment perspective)
but also mostly backward-looking in
nature.
So, what were the Brazilian investment
signals in late 2015 ahead of the
monster rally of the last eighteen
months? First, the central bank policy
rate in Brazil was 14.25%, while
inflation was showing signs of peaking
around 10.7%. This meant that the
policy rate was a positive 355bps,
which is extremely high. At the same
time, GDP was contracting sharply.
Hence, it seemed very likely that this
combination of high real rates and very
weak growth would usher in a period of
falling inflation.
Second, the real exchange rate was
beginning to get seriously cheap by
late 2015 following a 41% decline

24 www.BondsLoans.com
over the previous four years. The very
competitive real exchange rate was
already beginning to improve Brazils
trade balance, which in turn could be
expected to begin to stabilise economic
growth, though with no serious risk of
inflation since the enormous slack in
the Brazilian economy meant it would
probably take years before wage costs
would threaten to push up inflation. In
short, Brazil looked very likely to enter
what some people call a goldilocks
scenario, that is, coincident positive
growth and declining inflation. In Brazils
case, of course, the story was even
more compelling because in addition
to rising growth and falling inflation,
investors could also expect reasonable
currency appreciation and a central
bank poised to cut rates aggressively (a
quadruple fixed income tailwind known
as super goldilocks).
Thirdly, the political crisis in Brazil was
doing wonders for the willingness to
reform. The PSDB and PMDB political
parties recognised early that the
collapse of the PT party presented
an opportunity to implement tough
reforms, since voters would, for some
time at least, attribute blame for the
associated pain on Lula and Dilmas
administrations. PSDB in particular is
supportive of reforms, because the
idea that the most challenging reforms
could be undertaken before the 2018
elections seems very appealing. A team
of highly credible technocrats led by
Ilan Goldfajn at the central bank and
Henrique Meirelles at the Finance
Ministry was therefore put in place
to assist the Temer Administration in
designing and executing deep reforms.
Anchored in an amendment to Brazils
constitution, which freezes public
spending in real terms for the next
20 years, the draconian commitment
to fiscal probity immediately broke
inflation expectations and enabled the
central bank to start cutting rates as
inflation tumbled.
Looking forward, the economic case for
Brazilian fixed income remains solid.
Inflation is still falling rapidly. Only last
week the inflation rate declined to just
3.0% yoy for the month of June from
3.6% yoy in May and 8.84% a year
ago. However, the central banks policy
rate is still very high in both nominal
(10.25%) and real terms (7.25%) see
the chart below. Finally, positioning
remains light as foreigners hold only
13.4% of Brazilian bonds compared to
more than 20% in 2014.
What about the political outlook?
Actually, the political front continues
to deliver positive news despite
the vulnerability of the Temer
Administration. Importantly, the
political logic underpinning reforms still
holds sway. This was illustrated clearly
last week, when the Senate approved
important changes to Brazils labour
code aimed at making the labour
market far more flexible. The reform
will make Brazil more productive,
allow the economy to return to full
employment quicker and place the
country on a faster non-inflationary
trend growth rate once the recovery
is complete. In another positive piece
of political news Judge Moro last week
gave former president Lula a 9.5 year
prison sentence for corruption, which
deals a serious blow to Lulas hopes
of returning to frontline politics in the
2018, thus reducing an important
potential downside risk to the medium
political outlook. Lula has the right to
appeal, but nevertheless this is a clear
setback for his political ambitions.
In the next 18 months, the economy is
likely to contribute most of the positive
news, while the main source of volatility
will still come from politics. Temer may
yet be forced from office, but with Lulas
return now less likely the downside risks
associated with Temers removal from
office are much reduced. The reform of
Brazil policy rate and ination
16 Selic, % (LHS)
IPCA % change, yoy (LHS)
14 Real Selic rate, % (RHS)
12
10
%8
6
4
2 1
0 0
08 09 10 11 12 13 14
Source: Ashmore Investment Management
the pension system, still outstanding,
is not overly time sensitive and can be
postponed to early in the first term
of a future PSDB Administration, that
is, early 2019. There is still a chance
that the pension reform is passed
before next years election if Temer is
replaced by a technocrat appointed by
parliament. Hence, Temer leaving is not
necessarily bad news.
The lesson from Brazil, when it comes
to investing, is that crises can be
tremendous investment opportunities.
This is because the price action during
crises tends to be extreme as many
investors confuse noise and signal. The
headlines are almost always bad, but it
is often precisely during such times that
the underlying economic and political
dynamics begin change in a favourable
direction. This insight generalises across
EM. The vast majority of EM country-
specific crises have turned out to be
buying opportunities. Even so, it should
never be assumed that crises give way to
recoveries. Investment managers must
make judgements in each specific case as
to whether the crisis in question will end
well or not. Serious and well-informed
journalistic insight into local political
and economic dynamics can clearly be
extremely valuable in this context, but
frantic overly headline-driven journalistic
over-reactions aimed at exploiting
investor fears can be directly counter-
productive to making sound investment
decisions. Investors who focus too much
on the noise risk missing important
investment signals. The signals can only be
extracted from the noise through forward-
looking and rational analysis of the deeper
economic and political dynamics.
9
8
7
6
5
%
4
3
2
15 16 17
JULY / AUGUST 2017 25
 Paraguays
New Finance
Minister on
Developing the
Local Capital
Markets and
Green Bonds
Paraguays nascent capital markets sprang to life this year off the back of the countrys first cross-
border bond sale in four years, part of the governments strategy to develop the local market. The
countrys industrial base and infrastructure ambitions also positions Paraguay very well for the green
bond market, potentially opening the South American country up to vast new pools of liquidity.
Bonds & Loans speaks with Lea Gimnez, the countrys recently appointed Minister of Finance, on
this and more.

Q Can you give us a sense of the economic outlook for
Paraguay in over the next 6-12 months? What are some of
the most influential factors in play?
A Growth prospects for this year are auspicious and the
economy is expected to continue growing at around 4.2%. The
levels of foreign trade have recovered, domestic demand has
been turn around driven by consumption and investment. The
numbers for the first quarter of the year confirm this dynamism,
GDP grew by 6.6% year-on-year, private consumption rose by
2.7% and gross capital formation increased by 26.4%. On the
supply side, trade, manufacturing and construction were the
most dynamic sectors.
Q Brazil is one of Paraguays leading trading partners.
To what extent is the protracted political volatility and
economic stagnation in the country having an impact on
Paraguays economy?
A It should be noted that in recent years there has been a
clear decoupling of Paraguay's growth rates from the economic
performance of its trading partners, this is reflected in the fact
that Paraguay has grown more than Brazil and the region
on average in the period 2013-2016, the exports to Brazil of
originating products continue to grow and markets are more
diversified. Maquila companies that are mostly located at
border frontiers come to replace border trading and generate
formal jobs. The commitment of foreign investors in Paraguay
is the result of our relationship maturity and economic stability,
incentives for investment and the challenging situation facing
our main trading partners.
However, some of the most significant impacts were the
negative effects on border trade, stagnancy of bilateral
negotiations and the paralysis of the regional cooperation
system (MERCOSUR).
Q What are some of the Ministrys medium-term financing
objectives? To what extent is the country looking to raise
fresh funding and diversify its funding base?
A Paraguay's financing needs continue to be a determining
factor in the economy and in recent years investment levels
have shown a significant jump in indicators, especially in the
infrastructure sector. Still there are sectors that must be
addressed by the requirements of the sources of financing
and their appropriate implementation to cover the areas.
The design of a debt strategy allows us to count a viable plan
to obtain resources that meet the financing needs of the
Republic, in the most favourable medium-term cost conditions
and framed in controllable risks under a sustainable path.
One of the strategies for government is to diversify sources
of credit to guarantee the government access to resources.
This is intended to be achieved through continued issuance of
bonds in international markets and continue with the issuance
of bonds in the local market, denominated in Guarani, helping
to keep the functioning of the primary market active. Among
the efforts to develop the local financial market, the IDB

26 www.BondsLoans.com
announced that it would issue bonds in Guarani and the Social
Security Institute (IPS) is beginning to channel pension funds
into productive and AAA-guaranteed investment of the IDB.
Also, the restructuring of the expenditure allows financing the
investment with current income.
Q Paraguay last tapped the cross-border bond market earlier
this year. Can you give us some insight into the execution and
marketing strategy on the transaction? How did expectations
shift during the issuance process, and what were some of the
main questions you received from investors?
A Paraguay has been active steadily in the international bond
market since 2013, mostly to finance infrastructure. Earlier this
year, Paraguay obtained the lowest spread of all the emissions we
have made to date, which reflects the confidence that investors
have in our economy and in our economic fundamentals. Access
to those markets is part of our debt financing strategy, along
with other sources of funds available to us, both domestic and
international. The issue in the bond placement earlier this year
was a Paraguay legal question about our authority to issue debt
separate or in conjunction with the national budget. Once we
obtained a favourable opinion from our Supreme Court, the bonds
were placed quickly and at attractive rates and terms. They were
over-subscribed, in fact. We plan to keep all of our options open
on debt financing, and to protect access to the capital markets
through judicious use of debt and careful risk management.
Q Sustainable finance seems to be a growing theme
across Latin America, particularly given the high volume of
infrastructure projects that could qualify for green bonds or
green loans. To what extent is the government looking to tap
into these instruments for its own fundraising purposes?
A We approve in principle the concept of green bonds
for infrastructure or environmental remediation projects
within the country. In this we are also assisted by the
IADB which has championed such green bonds in its
annual regional meetings since 2015 and earlier. So far
Paraguay has used mostly standard credit products such
as developmental loans through multilateral or bilateral
agencies, international bonds and the local bond market.
At the right time and with the right projects we will look at
such instruments carefully.
Q How is the government working to develop the local
capital markets? What are some of the main barriers or
challenges that come along with this?
A Our pool of domestic capital is relatively small,
but growing. We view nurturing the development of
the local market as an important long term strategic
objective of Hacienda on the path to sustainability. We
also know that buyers of national debt mostly banks
and insurance companies need a regular schedule
of offerings that they can plan on, which means the
Hacienda sticking to the announced auction schedules,
and ensuring an efficient clearing mechanism for
competitive price discovery. From the Hacienda's point
of view, forecasting our borrowing needs a year or more
in advance is essential, too. We are working on all of
the above, including recently surveying some of the key
local market players for their feedback. There may be
a few small challenges to law or regulation that would
benefit the price discovery mechanism in particular, but
on the whole, we are pleased at the way this market is
developing.
JULY / AUGUST 2017 27
 Top Dealmaker:
Yamur Munoz,
HSBC
The Director of Debt Capital Markets for
HSBC Mexico speaks to Bonds & Loans
about progress Mexico has made in
developing its sustainable finance market
and HSBCs role in promoting issuances of
green bonds in the region.
Q What is the outlook for the green bond market in
Mexico this year? What are some of the major drivers
pushing that market forward?
A As this still a nascent market, in terms of number of
issuers, we believe one or two more companies could tap
the green market in the following months. This year, in
contrast to the previous year, we are seeing more demand
and more investors interested in green/sustainable/social
bonds; as a result of greater demand, issuers can benefit
in lower issuance spreads.
Q In your view, where do borrowers tend to struggle
throughout the green bond issuing process planning,
marketing, execution and follow-up? What are some
of the ways youve seen other issuers overcome those
challenges?
A We believe that even issuers that do have green related
portfolios, plans or pipeline for green project, most of the
time, dont know which of their portfolios can compute
as green, or how to segregate it to achieve the green
certification. Also, the lack of information on this asset class
is a factor as not all companies are aware of green bonds.
As time goes by and more issuances come to market this
will change but the single most important factor is education
and good advice from a regarded and experienced green
structuring agent. On that regard HSBC has been crucial
on advising its clients in order to achieve the second party
opinion green certification in a proper and timely manner.
Q Is the lack of high-quality data on the impact
of these instruments a concern? What role is HSBC
playing in helping borrowers in this regard many of
which have not historically had the need to collect the
kind of data green bond investors are looking for?
A More than lack of high quality data is the dissemination
of this information. HSBC has produced good information
28 www.BondsLoans.com
on this front and has provided it to the potential issuers,
but it will take time for more likely issuers to know the
green bond market. Additional to information, also
issuance size is important as not all green/sustainable/
social institutions have the size and structure that the
market requires. Additionally, an issuers credit rating is
still the most important factor on the investors decision.
In terms of HSBCs role, we are the liaison between the
second party opinion provider and the issuers. We help
them identify the projects that could qualify for a green
bond certification and collaborate with the second party
opinion provider to structure the documentation that will
ultimately accomplish the green bond certification.
Q Is there a price benefit associated with issuing
green bonds?
A Is hard to say with precision if there is a price
benefit as of now. We have seen marginal benefits
in the international market in primary issuances but
benefit is typically found in the secondary market. In
Mexico, we have seen some benefits in the primary
market, but it is hard to pinpoint exactly how significant
these are as there are still only very few green bonds in
the MXN market.
Q Is there much scope for borrowers not looking to
finance new infrastructure to issue green bonds? What
is the limit in terms of how proceeds can be used and
are there tradeoffs or big challenges associated with
widening that scope?
A Even though it depends on the issuer, the company
can refinance backward debt for up to five years prior
to issuance. Additionally, companies can also use the
proceeds to finance a green project directly. Most of the
issuers do a mix of new project and refinancing and having
this flexibility is key for the future of the market.
Will Argentinas Unions Stand in the
Way of Macris Reforms?
Argentinian labour unions are among the most powerful in the region; old allies of the Peronist
Party, they are well known for their ability to influence the wider public against acting presidents. As
President Mauricio Macri tries to implement market-friendly policies, will the unions stand in his way?
I
t is said that since Argentina returned to democratic rule in
1983, not a single president that has not belonged to the
Peronist Party has been able to finish his term. It happened
to Ricardo Alfonsin in 1989 and to Fernando de la Rua in 2001.
They were both forced to resign in a climate of social turmoil
and a great economic crisis.
Over a decade apart, one of the lynchpins tying these two resignations
together were the countrys largest labour unions, which are known
to react to economic reforms with large scale strikes and protests
that have left the country virtually paralyzed in the past.
To this day, unions have an enormous influence in Argentina.
Their prominence today stems from their alliance with former
president Juan Domingo Peron (1946-1955, 1973, 1974).
Peron relied heavily on labour unions is his quest to consolidate
power, and it is widely thought that during the 1940s and 1950
the unions were heavily involved in the decision-making process
of the state. As claimed by Peron himself, the unions were the
backbone on which the Peronist movement was built.
Mauricio Macri, the centre-right leader who won the presidency
in 2015 on the promise of economic reform, created a kind of
administration that the unions tend to oppose. Being familiar with
the fate of his non-Peronist predecessors, among the first things
Macri did was to strike a deal with the main union's leaders, in which
they pledged to abstain from actions against the government in
return for better salaries and monetary compensation.
This honeymoon period lasted exactly 15 months. In March
2017, after a series of failed negotiation attempts, and with
little indication that the economy was growing at the expected
rate, the unions finally called for a 24-hour strike, accompanied
by a massive protest in front of the Congress. Much to the
satisfaction of the government, this strike was not universally
followed by all labour groups, even as it did result in severe
disruption to public service delivery.
Strikes a Political Tool
Strikes in Argentina are not usually limited to the revindication
of labour rights, but are used as tools of political influence, so
the recent strikes against Mauricio Macri economic agenda
are mostly political strikes, explained Pablo Kummetz, and
Argentinian economist.
The big unions are divided along political lines: there is a faction
still aligned with Kirchnerism, which completely opposes Macri;
theres a bigger group, however, which so far has proven to be
willing to negotiate. This has made it more difficult for them
to coordinate and carry out nationwide strikes, giving the
government more room to negotiate, the economist explained.
This doesnt mean that unions could not impede Macris efforts
to reform the economy.
So far, however, Macris government has been able to negotiate
with the big unions' leaders - he even settled, with public
funds, an outstanding debt the unions had with the former
government. This, however, might change if the economy
doesnt improve, Kummetz warned.
Still, unions were directly affected by the termination of populist
policies carried out by the Kirchner administration, and by the opening
of the economy, which heralded the end of protectionist policymaking.
The Kirchners governments distributed money, mostly through
subsidies, among the most vulnerable sectors of the population,
but they did it without any collateral; they printed money without
control, which resulted in uncontrollable levels of inflation. On the
other hand, the protectionist policies carried out by the former
administration only served to scare off foreign investors. Add to
this the self-inflicted financial isolation they submitted on Argentina
when they refused to settle the debts with the holdout funds,
despite the fact that the New York courts ruled in favour of the
bondholders on several occasions, the economist commented.
Macri is still betting on negotiating with the unions and has so
far succeeded in avoiding direct confrontations, even conceding
certain benefits to them in his year and a half in power.
However, in specific cases, like the episode with the teachers
unions, he has remained firm in his position. A combination of
negotiation and strength has proven to be effective, for now.
In the long-run, it will all depend on whether or not the Argentinian
economy finally takes off.
Argentina is expected to grow 2.5% in 2017 and 2.6% in 2018, so if
these targets are met, this will be the most powerful argument for
the government at the bargaining table.
For Macri to continue to implement his comprehensive economic
reforms, he needs to attract foreign investors, but to do this, he
needs to show the international community that Argentina is
able to change its way, conveying a strong commitment to fiscal
responsibility, efficiency and social stability. To achieve this, he
ought to keep the unions in check and form a consensus with all
sectors of Argentinian society.
JULY / AUGUST 2017 29
 Kazakh Megamerger Brings Relief as
Concerns over CIS Banks Linger
Kazakhstan's largest banks US$560mn takeover of its biggest rival is expected to bring more
stability to the countrys fragile banking system and leave a positive footprint on CIS economies.

H
alyk Bank announced on Wednesday
it had paid KZT185bn (US$560mn)
for 96.8% of the shares in
Kazkommertsbank (KKB), the countrys
second-largest lender. The news is
particularly encouraging amid the
ongoing debt restructuring of defaulted
state-owned lender International Bank
of Azerbaijan and growing concerns
about the banking sectors health across
the region.

The new combined banks total assets

will be equal to US$30bn, which,
according to ING, puts it in 7th place
among CIS bank ranked by assets, and
to 3rd among privately-owned banks in
CIS. The new entity will control nearly
38% of Kazakhs banking sector assets,
29.1% of the sectors customer loans,
37.7% of retail deposits and 34% of
corporate deposits. The closing of the
transaction is currently expected to take
place in 3Q17.
The general outlook on Kazakhstans
economy remains positive. The
European Bank for Reconstruction and
Development (EBRD) has forecast the
countrys economy to grow 2.4% in 2017,
a significant improvement from the
modest 1% growth recorded last year.
But its troubled financial system could
prove to be a hindrance on the countrys
positive economic momentum.
The deal is also expected to boost the
countrys debt markets. ING analyst
Dmitry Polevoy wrote in a brief that
the announced merger will bring
fundamental reasons for improving
the credit quality of KKB and its
outstanding Eurobonds.
We think that the spread between
KKB 5 1/2 12/21/22 and HSBKKZ 7
1/4 01/28/21 will decline to around
50bp, as was in the case with Bank
of Moscow and VTB. The current
spread at 175bp looks attractive, the
analyst noted.
Bad Loans Rising
Kazakh banks have been struggling
since the 2008 financial crisis, mostly
due to weak balance sheets and
surging non-performing loans, coupled
with years of low oil prices, the countrys
main export. The situation has become
so delicate that policymakers fear
the collapse of the countrys largest
financial institutions could trigger a
chain reaction that could precipitate a
full-blown financial crisis.
According to official data, around 12%
of the US$80bn assets held by Kazakh
banks are non-performing loans, while
Moodys research suggests up to one-
third of the loans on banks balance
sheets are distressed.
KKB has suffered in recent years after
overextending its balance sheet to
troubled corporates and other financial
institutions including BTA, a former
bank turned distressed asset manager,
where half of the lender's assets are
tied up approximately US$15.7bn.
Today, around 50% of KKBs loan
portfolio is made up of toxic loans.
A possible failure at KKB could cause
havoc in the countrys financial
system, which the government seems
determined to avoid.
Under the terms of the deal, a state-
linked Fund of Problem Loans will back
repayments of the loan by BTA Bank to
Kazkommertsbank at an amount of up
to KZT2.4tn, while a stabilisation loan
provided by the National Bank of the
Republic of Kazakhstan to KKB will be
partly repaid due to proceeds.
Furthermore, Halyk Bank will recapitalise
Kazkommertsbank by KZT185bn using
own sources, and NPL coverage ratio of
KKB will be increased to adequate levels,
with the banks CET1 ratio planned
to exceed 19.9% as at the end of
May 2017.
Earlier the Kazakh government
announced it will allocate more than
KZT500bn (US$1.52bn) to support the
nation's banking system.
For Clemente Capello, Chief Investment
Officer at Sturgeon Capital, this deal
should not be mistaken for a full-blown
bailout.
State money has played a role as a
backer rather than as an actor, which is
probably for the best, Capello said.
The marriage of KKB and Halyk may be
the most significant deal yet, but there
may be more in the pipeline. A merger

30 www.BondsLoans.com
between Tsesnabank and BankCenterCredit, said to be in the
works, would create the countrys second-largest lender after
Halyk-Kazkommertsbank. Capital Bank and Tengri Bank, two
smaller banks, also signed a memorandum of intention to
merge, with a deal likely to be finalised next year.
A Long-term Solution?
The government, following the advice of the IMF, believes
that solidifying the countrys financial system is the best
way to avert a possible crisis, although some analysts warn
that more government involvement may be needed to
maintain stability in the banking system.
We consider the announced transaction as a crucial step
for the rehabilitation of Kazakhstans banking sector, which
is mitigated by the too-big-to-fail risk of Kazkommertsbank
and it removes a huge system risk in Kazakhs banking
sector, wrote Polevoy.
But another analyst, Egor Fedorov, earlier warned that the
longer-term outlook is still unclear.
The mergers will help stabilize the economy, for now,
however in the long run, it will depend on different factors,
Fedorov explained.
The government will need to accompany these mergers with
new regulatory measures aimed at deepening monitoring
of the financial system and improving the health of banks
capital, if it is to succeed in stabilizing the financial system
in the long run.
Still, the ING note further indicated that Kazakhstans state
support makes an important statement to international
investors amid growing concerns over other major banks
in the region, namely the International Bank of Azerbaijan
(IBA), which announced debt restructuring in May.
Kazakhstan Central Bank Balance Sheet
Jul 2016 Oct 2016
Source: Trading Economics
The IBA intends to write down the principal on some senior
notes by 20% and swap debt for sovereign bonds following
a painful currency crisis. Creditors holding more than 87%
of the Azeri state-lenders debt affected by the proposal
have voted in favour of a restructuring, a day before the
deadline, in what Baku would consider a major win.
Another neighbour, Uzbekistan, recently received a boost
from Fitch ratings agency, which reaffirmed the IDRs of
four of the countrys major banks, including of Uzbek
Industrial and Construction Bank Joint-Stock Commercial
Bank (Uzpromstroybank), Asaka Bank, OJSC Agrobank
and Microcreditbank's at 'B+', with a stable outlook. The
agency praised the state's currently solid ability to provide
support, due to the moderate size of the banking sector
relative to the Uzbek economy.
But Fitch also warned that banking sector remains
concentrated and support-dependent and pointed to the
economy's structural weaknesses, as Uzbek exports are
commodities-driven and concentrated on a few countries,
and external finances are heavily supported by remittances.
These anxieties to a greater or lesser extent can be
applied to other CIS states, bound by strong economic
and financial ties with each other and with Russia, which is
carrying out its own banking sector consolidation, and has
seen a number of major lenders, including the recent case
of Yugra Bank, go into administration.
Until deeper, more structural reforms of the banking
sector are carried out across the region to secure a long-
term solution for the financial system, the industry will
continue to rely on state support and as such remain
vulnerable to spikes in volatility traditionally impacting
these economies, such as swings in commodity prices and
political uncertainty.
6600000
6400000
6200000
KZT Million
6000000
5800000
5600000
5400000
Jan 2017 Apr 2017
JULY / AUGUST 2017 31
 Transneft vs Sberbank Ruling Threatens
to Derail Russias Derivatives Market
The courts decision to award the oil pipeline monopoly RUB67bn in compensation for an options
trade originating in 2014 could take a trillion-rouble toll on the countrys secondary markets.
A
Russian court ruling in an ongoing derivatives trade
lawsuit brought by Transneft against one of the
countrys biggest lenders, Sberbank, could set a
dangerous precedent and send shockwaves through the
countrys financial markets.
In its complaint, Transneft, an oil pipe producer, was trying to
challenge the loss of more than RUB75bn on options contracts
dating from 2014. On 11 January, according to Bloomberg,
Transneft filed a lawsuit in the Moscow Arbitration Court against
Sberbank to recognize the transaction as null and void, allegedly
claiming that the bank did not fully reveal details and potential
consequences of the trade to the company.
According to an IFRS 2014 report, Transneft entered into a
US$2.727bn put and call options deal in order to reduce risks
of a dollar devaluation and to temporarily free additional FX
funds. However, after the rouble collapsed following the drop
in oil prices, from ~35 per US dollar in 2014 to the minimum
of 81 per USD dollar in January 2016, Transneft saw losses of
RUB75.3bn from the trade.
In its defence, Transneft insisted that the purpose of the
transaction was not currency hedging, but rather for
refinancing its debt obligations.
Sberbank pitched the options deal to us at the start of 2013,
they initiated the talks, said Transneft vice-president Mikhail
Grishanin in an interview with Russias RBC Channel. It was
pitched as a way of reducing the cost of debt servicing, it was
never intended to be a hedging instrument.
Typically, exporters hedge their expenses by buying currency
options. What we are talking about here is a completely
different type of product. Calling it a currency hedging
instrument is like looking at Paris from a satellite and calling it
a suburb of Moscow.
In the lawsuit filed against Sberbank, the company claimed
that its representatives were misled by the bank about the
possible consequences of the options trade and that it was
not made aware of the risks associated with it.
In response, Sberbank argued that Transneft was fully aware
of the potential losses from the transaction, as it confirmed in
the agreement signed with Sberbank ahead of the deal, which
included a declaration of risks.
In late June, the Moscow court ruled in favour of the plaintiff,
ordering Sberbank to compensate the company for RUB67bn
it lost through the trade a decision that Sberbank claims could
32 www.BondsLoans.com
cost the Russian banking sector as much RUB600-1,000bn. The
lender has already launched an appeal against the decision.
If the court rules in favour of Transneft, it will create a
dangerous precedent that could lead to an avalanche of
similar lawsuits from other companies, Sberbank global
markets head Andrey Shemetov said, quoted by RBC.
He noted that the derivatives market is currently worth around
US$200bn, but this decision could completely halt trading, as
investors wont be able to hedge themselves against currency
volatility or other types of risks.
The Central Bank of Russia (CBR) also expressed concern at
the ruling.
"The Bank of Russia is concerned with the legal precedent on
the financial derivatives market, which threatens almost all
deals of Russian banks with non-financial organisations," the
regulator told Reuters on June 23.
Sergey Dergachev, Senior Portfolio Manager and Lead
Manager for Union Investment Privatfonds, likewise sees cause
for concern for Sberbank and Russias derivatives market if
the ruling stands. According to the portfolio manager, such
contracts are never riskless and professional investors and
companies like Transneft, which operate internationally and in
volatile commodity markets, have to be knowledgeable about
the risks in using derivatives.
Derivatives markets are hugely popular globally, and are
several times bigger than physical financial markets, so
there is substantial risk that this precedent can in the worst-
case lead to a contagion to other regions and a re-thinking
of derivatives contracts, Dergachev said.
While the analyst conceded that the case is unlikely to lead
to such far ranging repercussions, he did warn that the
lawsuit poses many questions regarding the rationale and
what are key details behind the deal that triggered such a
harsh reaction.
In a note published on JDSupra online journal, legal experts
from Morrison & Foerster LLP concluded that while for now
it is unclear how this decision will impact the derivatives
market in Russia, "there will certainly be even more focus
on any communications with counterparties prior to
entering into any derivative contracts and on thorough
risk disclosure and disclaimer statements coupled with
robust representations and acknowledgements from
the counterparties."
EuroChem Group
CFO on Finding
the Right Window
to Optimise Cost
of Debt
Russian fertilizer company EuroChem Group,
which recently issued a very successful 4-year
Eurobond, has aggressively expanded its
operations in recent years, breaking into seven
different markets on three continents. Bonds
& Loans speaks with Group CFO Andrey Ilyin
about the companys funding strategy, investor
diversification, and managing a tricky combination
of high capex and declining output prices.
Q EuroChem closed a benchmark 4-year bond
transaction earlier this summer. Can you walk us through
that deal in more depth? What were some of the main
objectives with this deal and the strategy taken on the
transaction? How did your expectations on pricing and
allocations shift during the issuance process?
A Re-visiting the Eurobond market so quickly after our
October 2016 issue, which we did to finance a partial
tender for our existing bond, was not in our initial plans.
Yet by May 2017 the market appeared too hot to ignore,
and we mobilized in record-time for a new issue.
However, we saw two headwinds relevant to us as an issuer
with Russian exposure conjuring shortly after initiating our
marketing roadshow on 15 June a falling oil price and talks of
expanding US anti-Russia sanctions. As well, Russias surprise
announcement of new sovereign debt issue on the same day
we were to announce pricing also had us revisit our game plan.
We opted to delay pricing in expectation of a more favorable
window. With oil prices recovering and sanctions talk dimming,
we saw an appropriate window emerge and made our move.
We were able to price our 4-year at below 4%, which was our
objective from the start, in part thanks to the support from
several Russia-based anchor investors.
In hindsight, we probably could have achieved better pricing a
couple of months earlier, but in light of the market backdrop,
the execution on this deal was not far off as good as it gets.
Q What is EuroChems funding strategy for the
upcoming year? Are you looking to tap the markets
again? What blend between local and hard currencies
are you looking for? And to what extent do you rely on
local lenders in the countries in which you operate?
A Our funding mix today is roughly 50% debt markets
and 50% banks mostly large international institutions.
We are not seeking to grow our covenant debt, but rather
to refinance upcoming maturities, preferably with longer
and less expensive alternatives. We will borrow in local
currencies only if we see an arbitrage opportunity in the
local/USD swap: we tend to keep borrowings in US dollars
as all of our revenue is economically skewed to the US
dollar even where customers settle in other currencies,
as fertilizers are dollar-denominated commodities.
Q What is your traditional investor base and to what
extent are you looking to diversify? What would be the
primary drivers to do so?
A Our traditional investor base in the DCM markets are
UK and US institutions, private banking clients of Swiss
banks and Russian institutional investors and banks. We
would be keen to diversify and tap Asian and Gulf investors,
but building our profile there takes time, and our feeling is
that a non-investment grade borrower from outside these
regions might be too exotic of a product for local investors.
Q Your company has assets in Russia, Lithuania,
Kazakhstan, Belgium, China, the US, and Brazil. Which
of these markets presents the biggest challenges and
where do you see better opportunities? Why?
A Simply by virtue of their size and potential, we see
Russia, Brazil and China as representing both the most
promising opportunities and biggest challenges for
EuroChem. Every market has its pros and cons Russia
offers competitive natural resources for production, but
today it is a relatively modest agricultural market size-wise,
albeit with vast growth potential. Brazil is a big and growing
JULY / AUGUST 2017 33
 market in terms of demand, but local logistics can be
challenging. China will be one of the largest markets for
our future potash exports from Russia and represents
massive potential for enhanced efficiency fertilizers as
local authorities push for a progressive environmental
agenda and seek to enhance efficiency in agriculture -
but you must have a strong and reliable local partner.

Q What are the next steps for Eurochem regarding

investment opportunities? Where is the company
looking to grow?

A First and foremost, EuroChem is focused on

successfully completing and commissioning its three
major ongoing investment projects two potash
mines and an ammonia production plant. As for new
growth areas, we will seek to continue growing our
global distribution platform as a matter of priority. Our
investments in distribution are not capital intensive, but
important for our future sales of potash. Another growth
area is premium fertilizers. Our ability to tailor products to
specific crops and soils is cost-effective for our customers
and encourages sustainable agriculture practices by
providing optimal nutrition with minimal application. Q What in your view are the biggest challenges the
We are further expanding EuroChems product portfolio company might face in the upcoming year?
with innovative and environmentally friendly solutions to
enhance the efficiency of nutrient application and uptake, A The biggest challenge is to manage a combination of
all the while gradually de-commoditizing EuroChems heavy capital expenditure, which will start to decline only
product portfolio. EuroChem also looks at opportunities in 2019, and the pressure from low fertilizer prices on the
in core fertilizer and agrochemical commodities where Groups operating cash flow. Another challenge will be
we see unique competitive advantage and the belief that to bring all our three transformational capital projects to
this may be sustained operating phase over the next 15 months.

34 www.BondsLoans.com
Can Bond Connect Hong Kong and
Mainland China Markets?
The long awaited Bond Connect program linking the Hong Kong and mainland Chinese markets
has finally launched. Even though it was initially received with warm welcome by investors, some
experts believe that on its own it wont be enough to make global players give the local Chinese
markets the desired recognition.
A
t the end of June, China launched
the long awaited Bond Connect
programme with the purpose of
linking the Hong Kong and mainland
China markets for the first time.
This was a significant effort by Chinese
authorities to lure foreign capital into
both debt and equity markets, which,
despite being the second largest in the
world, hold only 2% of foreign capital.
And there is certainly reason to feel a
degree of optimism about China this
year. Economic growth data shows
acceleration in for the first time in almost
seven years, with GDP rising 6.5% in the
first quarter of 2017 from a year before.
This economic expansion has been led by
the real estate sector, in turn buoyed by the
government policy of making it easy for families
to borrow money to purchase homes.
Furthermore, investment, retail sales
and industrial output have all reported
strong figures. Industrial production
rose 7.6% in June from a year earlier,
faster than Mays 6.5% while year-on-
year growth in retail sales accelerated
to 11% in June from 10.7%, according
to official data.
However, some analyst believes that
regardless of the improved numbers
and the government efforts to attract
foreign capital into its bond markets,
China still has a long way to go before
achieving its goal.
Bond Connect Not Enough
The day the program was launched,
trading volumes hit over RMB7bn,
which reflected a keen interest from
investors, though, according to a
report by Capital Economics, there
is no guarantee that such levels of
interest will be sustained. After all,
the HK-Shanghai stock connects also
had a strong first day, only for trading
activity to subsequently fizzle out, the
report warned.
There are good reasons to think that
foreign demand for Chinese bonds will
remain tepid for the foreseeable future.
For a start, there is little evidence
that market access has been a binding
constraint on foreign investment. Most
large institutional investors have long had
access to the interbank bond market via
the QFII scheme. And since that access
was expanded to a wider pool of foreign
investors early last year, foreign ownership
of onshore bonds has only edged up
marginally, the report noted.
Misplaced credit risk remains a major
concern for investors as Chinas onshore
market is dominated by state-owned
companies, with high levels of debt and
questionable financial health.
According to data presented in the Capital
Economics reports, onshore yields have
been higher than offshore yields, due to
the fact that onshore liquidity conditions
are much tighter than those offshore;
3m Shibor is now at 4.5% versus 0.8%
for 3m Hibor. However, traditionally,
overseas yields have exceeded onshore
yields despite borrowing costs being lower
offshore. This suggests that offshore
investors demand a higher risk premium
than their onshore counterparts, the
report explained.
For Chang Liu, a China Economist at
Capital Economics, the main concerns
for investors include: "exchange rate
risk, worries about capital controls and
mispriced credit risk in Chinas onshore
bond market. None of these can be
easily addressed. Officials have taken
some steps to improve market access
and allow more corporate defaults in
recent years. And more market-based
reforms would be positive for the
economy in the long-term.
But policymakers have shown little
appetite for more aggressive action on
this front due to concerns about short-
term economic stability. As a result, we
think progress is likely to remain slow,
Liu added
Even though worries about the Chinese
markets continue to emerge, some
analyst believes that their capital market
is well on its way to becoming the
largest in the world, and investors will
have little choice but to increases their
exposure to Chinese assets as they start
to be included in traditional benchmark
indexes. However, the actions taken by
the Chinese government will be closely
watched and will be critical to how the
local markets perform going forward.
JULY / AUGUST 2017 35
 CDL Breaks New
Ground with
Singapores First
Green Bond
City Developments Limited (CDL), the Singapore-
listed real estate giant with a global presence
spanning 97 locations in 26 countries, has been
praised for its sustainability efforts, which place
it top among Singapore corporates in the Global
100 Most Sustainable Corporations in the World
2017 rankings. We speak to the companys Chief
Sustainability Officer Esther An about challenges
associated with issuing green instruments in the
region and CDLs strategy going forward.
Q CDL became the first company in Singapore to issue
a green bond. What were some of the main drivers
behind the transaction? How did the green bond fit
within the companys broader funding strategy?
A In April this year, CDL, through the wholly-owned
subsidiary CDL Properties Ltd (CDLP), launched its
inaugural green bond a first by a Singapore-listed
property developer. Green finance offers CDL an alternative
financing stream. There is an increased interest in socially
responsible investments and a growing demand for
relevant products. CDLs green bond links our sustainability
initiatives with the capital markets and enables us to tap on
investors who are supportive of the commitment that CDL
has made over the past two decades towards sustainability
best practices.
Our green bond issuance also complements the Singapore
governments target of greening at least 80% of the
countrys building stock by 2030, which could potentially
be the lynchpin of Singapores climate pledge to reduce its
Greenhouse Gas (GHG) emissions. It is clear that for the
next 13 years, real estate companies have a large role to
play in mitigating climate change and contributing towards
Singapores greening and GHG emissions reduction goals.
We would certainly be keen to explore more green bond
issuances in the future.
Q Can you give us a sense of the strategy taken on the
S$100mn transaction? To what extent did the marketing
strategy on this issuance differ from what you have
encountered on roadshows for conventional issuances?
What kinds of questions did you get from investors?
A For more than two decades, sustainability has been
integrated into CDLs business and operations. Founded
on our ethos of Conserving as we Construct established
36 www.BondsLoans.com
in 1995, CDL has been committed to future-proofing our
business through a three-pronged strategy as a developer,
an asset owner and a corporate citizen. We develop green
buildings, manage them in an energy- and resource-
efficient way, and engage stakeholders on sustainable
development. Our unique Environmental, Social and
Governance (ESG) integration model has created tangible
and long-lasting value for our brand, business operations,
stakeholders, customers, investors and the community.
The investors of our green bond comprise mainly financial
institutions and fund managers who have been familiar
with CDLs strong ESG performance and track record.
The successful launch of our green bond reflects their
confidence in and support of the commitment that CDL
has made over the past two decades towards sustainability
best practices and Republic Plazas green upgrading and
retrofit initiatives.
Q From planning to execution, what would you say
was the biggest challenge involved with the green bond
transaction?
A As it was the first green bond by a Singapore company,
extensive fact finding and learning of the process was
needed. We met up with the relevant authorities and
international consultants for advice and inputs. Meetings
were also conducted with selected bankers, lawyers
and consultants to draw up a broad framework and kick
start the stringent requirements of data compilation,
assessment, validation and documentation. Moreover, the
issuance requires a second opinion provider, third party
certifier and final certification, which entails extensive
data compilation and verification. It helped that our green
bond only involved one building, which made it possible to
expedite the process and complete the entire assessment,
auditing and certification work within three months.
Q Where will the proceeds from the green bond be
deployed? How is the company managing reporting
and auditing of the ESG impact of the instrument?
Are the standards for measuring the ESG impact of an
investment mature enough?
A The two-year senior secured bond raised S$100
million at 1.98% fixed rate. Proceeds of CDLs first green
bond will be allocated to the repayment of a S$100 million
loan extended by CDL to CDLP which owns Republic Plaza.
Completed in 1996, Republic Plaza, one of Singapores tallest
skyscrapers, is a premium Grade A office building at Raffles
Place, in the heart of Singapores Central Business District.
Since its completion, Republic Plaza has continuously been
upgraded, including the major retrofitting of chiller plants
and installation of energy efficient lightings with motion
sensors, to improve the buildings energy efficiency. In
2012, Republic Plaza was awarded by Singapores Building
and Construction Authority (BCA) with the highest Green
Mark Platinum rating.
As a result of continuous efforts to enhance energy and
water efficiency, Republic Plaza saves more than six million
kilowatt-hours of energy annually, equivalent to the annual
energy consumption of about 1,200 three-bedroom
apartment units of around 100 square metres each. It
also saves approximately 10,255 cubic metres of water,
equivalent to approximately four Olympic-sized swimming
pools. In total, this translates into more than S$1.2 million
of savings from annual energy and water consumption.
CDLs green bond is issued under the CDLP S$700
million secured Medium Term Note (MTN) Programme
first established in 2001. DBS Bank Ltd. (DBS) is the
sole bookrunner on this transaction. It was prepared in
alignment with the Green Bond Principles, a set of voluntary
guidelines encouraging transparency and disclosure of a
bonds use of proceeds; project evaluation and selection
criteria; management of proceeds; and ongoing impact
reporting commitments.
Sustainalytics, a leading global provider of ESG and
corporate governance ratings and research, provided
a second party opinion on the robustness of the green
bond framework and its environmental credentials. The
firm states in its assessment that CDL has a strong overall
environmental commitment and is well positioned to issue
green bonds. Given the alignment of the bond with the
ICMA Green Bond Principles 2015, Sustainalytics considers
the CDL green bond to be robust and credible. In addition,
Sustainalytics has independently rated CDL as an industry
leader in ESG performance.
Climate Bonds Certification of this green issuance was
verified by KPMG using the Climate Bonds Standard
developed by the Climate Bonds Initiative (CBI). CBI is the
only organisation in the world working solely to mobilise
the largest capital market the US$100tn bond market -
for climate change solutions.
Annually, CDL also has a robust tracking and reporting
system in place for all our assets, including Republic
Plaza. We report all sustainability performance data and
trending in our annual integrated sustainability report.
For our Integrated Sustainability Report 2017, CDL is the
first private-sector developer in Singapore to adopt the
latest 2016 Global Reporting Initiative (GRI) Standards
for sustainability reporting. The enhanced standards
promote a higher level of disclosure and greater
accountability along CDLs supply chain to address
stakeholders concerns. To track the performance of
Republic Plaza from the green building perspective,
the BCA Green Mark certification provides stringent
assessment that is aligned with global standards.
Q Should there be a black-and-white approach to
qualifying what is considered green and what isnt?
A To market and grow relatively new investment
instruments such as green bonds, formal validation and
certification of sustainability data help to provide assurance
and give investors greater confidence. They also enable
issuers to closely monitor and keep track of performance to
ensure that the instrument delivers on its promises. In turn,
this will enhance the reputation of sustainable investment
products on the whole and further spur their growth.
Q The MAS took an interesting step with the recently
announced green bond grant scheme, which helps
subsidise the cost of second-party auditing. Are
the measures enough to stimulate the market for
sustainable finance in your view?
A The demand for green bonds is fuelled by the Paris
Climate Change Agreement, which took effect on 4
November 2016. Singapore has since ratified the Paris
Agreement, and pledged to reduce its carbon emissions
intensity by 36% from 2005 levels by 2030 as well as
stabilise its emissions with the aim of peaking around
2030. More investors are also seeking to fund low-
carbon and climate-resilient projects that are aligned
with the goal of limiting global warming to below two
degrees Celsius.
Increasingly, the Singapore government is taking steps
to match the demand for sustainable investments and to
nurture green finance. Green bonds are among a wider
range of sustainability-oriented benchmarks, funds
and products that the Monetary Authority of Singapore
(MAS) is seeking to promote locally. Recognising that
green bond issuers may have to bear additional costs as
they engage external reviewers to ascertain their green
bond status, MAS has announced a Green Bond Grant
scheme to incentivise the issuance of green bonds. This
is a very encouraging step forward and we hope that
the success of CDLs inaugural green bond issuance will
also help to pave the way for other Singapore firms to
tap into the fast-growing green bond market to finance
green building projects and sustainability initiatives.
JULY / AUGUST 2017 37
 Case Study: Indias Rural
Electrification Corporation Debuts
with US$450mn Green Bond
The state-owned company, which finances and promotes power sector projects in India, successfully
launched its inaugural green bond, becoming the first Indian public sector corporate to issue USD-
denominated green debt and supporting the central governments sustainability drive.

Background
Deal At A Glance
Rural Electrification Corporation is keen to provide affordable and
accessible power to most rural parts of the country by 2020 via Deal Type: Green Bond
projects that include solar, wind and biomass assets, as well as
sustainable water and waste management projects. In summer Deal Structure: Reg S only, off EMTN
2017 the company was looking to unlock new pools of liquidity and Programme; Fixed Rate, Senior, Unsecured
make inroads into sustainable financing with only its second USD-
Issuer: Rural Electrification Corporation
denominated bond, achieving the tightest credit spread to date for
Limited (REC)
an Indian corporate 10-year transaction in the last decade.
Deal Size: US$450mn
Transaction Breakdown
On 29 June, REC, a majority government-owned infrastructure Issue Date: 29 June 2017
finance company with the aim of financing and promoting
Tenor: 10-year
power sector projects in India, successfully issued a US$450mn
10-year green bond, with MUFG acting as a Joint Bookrunner. Coupon: 3.875%

Prior to the issue, a 3-day roadshow was conducted covering Hong Price: 99.263%
Kong, Singapore and London with a series of 1-on-1 meetings and
group luncheons. With strong indication of interest from investors Yield: 3.965%
and stable market backdrop, REC decided to announce the Spread vs Treasuries: T10+167.5
transaction early morning with initial guidance of T10+200 area.
Issuer Rating: Baa3 (pos) / BBB- (sta)
With strong demand from Asian accounts, the orderbook reached New York
US$3.3bn in late afternoon, following which the price guidance was
revised to T10+170 ( 2.5bp), the tight end of range, and issue size Location: India
settling at USD450mn.
Listing: ISM (London Stock Exchange) / SGX
The deal was 3.9x oversubscribed with over 150 investors taking MLAs/ Joint Lead Managers: NZ, Barclays
part, and the final coupon of 3.875% marking the tightest spread Bank, BNP Paribas, Mizuho Securities, MUFG
to date for an Indian corporate 10-year note. Securities, and HSBC

55% of the notes were placed with fund managers, with another
32% going to sovereign, insurance and pension funds and a final
13% to banks and private banks.
The issue saw significant interest from Asian investors (68%
of allocation), with the remaining 32% placed with accounts
in EMEA.
Notably, the green bonds have been certificated by the
Climate Bond Initiative (CBI), while the Green Bond
Framework formulated by REC has been verified by KPMG.
Legal Adviser to JLMs / Bookrunners:
Confidential
Legal Adviser to Issuer: Confidential
Use of Proceeds: On-lending to renewable
energy projects, primarily covering projects
in the area of solar, wind, bio-mass &
hydropower energy

This was only the third green bond by an Indian issuer to

list on London Stock Exchange, following in the footsteps of
Axis Bank and NTPC, which in 2016 raised the equivalent of
US$500mn and US$300mn respectively.

38 www.BondsLoans.com
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When we are planning to execute any big transactions, we use Bonds
& Loans as a reference for what is happening in the market. Its an
extremely useful resource for me personally, and the whole team.

Marcelo Habibe, Head of Treasury, Fibria