Is a voluntary debt restructuring really voluntary?

Four years ago, in March 2007, three months before the start of the credit crisis, I tried to make my voice heard regarding the potential impending crisis in the credit derivatives world. I have written extensively about this in earlier entries, see Who listens to academics?, and my message from that blog can be summarized with the passage:

…..I am just not convinced that the typical credit derivative is either (i) traded in a satisfactorily liquid market, (ii) well defined, or (iii) understood by all participants……

Most of you know that the first and last points have come true (clearing houses to replace OTC trading in CDSs and investors such as the commune of Narvik in Norway deafulting on their CDOs) but the second point has not been raised very much in media. The point was raised in my attempted newspaper article however:

…..Moreover, there is evidence of the legal/operational interpretation of the contract-details occasionally being open for discussion. For instance, the exact definition of what should count as a credit event is sometimes debated, and in some cases the CDS owners have even seen their contract suddenly become worthless due to an unexpected total debt-repayment by the underlying firm!…..

Let us fast forward to May 2011! Now, the kind of problem discussed above, exactly, is potentially faced by the CDS owners that have bought protection against a Greek default. In fact, the so-called voluntary debt restructuring that EU-officials talk about might not trigger an actual default in the CDS-contract! At least that is a risk that is dicussed in the CDS community. And that would mean a zero pay-out to the insurance buyer and a disqualification of the entire sovereign CDS market! Ecco, all my three pre-crisis predictions have come true!

I find the whole thing slightly worrying though and I wonder how the CDS traders treat this “problem”. At the moment the Greek sovereign 5Y CDS spread is 13% and one asks oneself how high the spread would be without the risk of a non-payment? I must also question the logic behind the term “voluntary restructuring” and the extent to which such an event is really “voluntary”. I mean, if this was voluntary, why would not bond holders in general gladly extend the maturities of their bonds without any compensation as soon as they have the possibility to do so (such a maturity-extension is most likely what such a restructuring would mean)? To me, such an event is not voluntary at all and simply equal to a credit event!

Government to increase electricity tariff? And, RON95 price? (24 May 2011)

Before Government making the decision on two of the most important necessity of Rakyat, let us make a guess first. I know this would be a hot debate on whether Government should increase the electricity tariff and RON95 petrol price. Actually, both are linked closely with crude oil - the black GOLD.

Electricity Tariff

For TNB, the revise is crucial for its sustainably of the company to continue electrified Malaysia's economy. In fact, this is a long overdue issue, delay and postpone until now. But, why now? I believes that Government, initially wanted to review the tariff once the much anticipated general election. But, the Sarawak state election result could have derailed the early election plan. If we don't review now, TNB may facing financial difficulties which may impact the cash flow and credit ratings of its debts. High natural gas price is affecting the bottom line of the company.

Petrol RON95 price

Comparing to its brother (RON97), we should be more than happy to still pumping at current price. The last review is on December 2010, and the 6 months grace period will end by June 2011. In other words, next month (June 2011) would be schedule to revise the price again. Actually, this is not a surprise move given that the Government had already gradually cutting subsidies since last year. And, he did mentioned that petrol price will be subsidy-free by 2013.

Conclusion by Finance Malaysia

Confidently, we predicts that Government will revise both electricity tariff and RON95 price UPWARDS. Inflation will shot up to 4% this year. BNM will continue its OPR hiking. Believe it? You can watch TV news and advertisements these few days. Government is "previewing" the increase, letting Rakyat to welcome it mentally. Not enough? That's why we saw news from economists saying that "Malaysia will Bankrupt, if Government do not cut subsidies". BNM governor is embracing the increase, saying "We can ride out high costs".

New IPO: UOA Development Berhad

Being one of the most established developer in Klang Valley, UOAD is going to be a darling property stocks for investors once listed. The strong "UOA" brand name as a developer of high end residential and commercial properties, makes it stands out from its competitors.

What's so interesting about UOAD?

Based on the IPO price of RM2.90 per share, the company is listing with a market capitalization of RM3.5bn, which eventually will place UOAD to be the 4th largest property company in Bursa Malaysia. The top 3 are UEMLand, SP Setia and IJMLand.

Don't forget about UOA REIT, which is the real estate investment trust of UOA Group in Malaysia. In other words, whatever properties that was construct by UOAD may inject into REIT one day. With UOAD being granted a "Right of First Refusal" to inject its completed commercial buildings into UOA REIT, it definitely provides UOAD the opportunity to redeploy its capital where the proceeds from asset injections will be re-utilized for future development projects. This would act like a "ready-exit" strategy for UOAD's asset. Not good enough?

Source: OSK Research

By managing its construction works in-house, this gave UOA a very competitive cost advantage, resulting in gross development margins of 50%, which is way above the industry average. They got their own team of architects, planning experts, M&E and civil engineers and quantity surveyor, hence, giving UOAD the edge to respond wisely and promptly to any unforeseen changes.

At last but not least, of course, is UOAD's flagship integrated property development project - Bangsar South. RM8bn, 60-acre located near Federal Highway and Mid Valley. According to HL Research, the land was acquired in 2005 for RM46psf, and its Horizon project has commanded pricing of RM600psf despite its leasehold status. In short, strategic location with huge value enhancement potential.

Fair Value?

OSK gave RM3.57
RHB gave RM3.45

HLIB gave RM2.57

Source: HLIB Research

How to get involved in disruptive finance: The Finance Innovation Lab

Trading floors and paneled offices in Canary Wharf look profoundly hi-tech, and yet they are built on blueprints inherited from the past, in some cases the very distant past. Modern financial institutions like to use the language of innovation, and yet they endorse only a narrow conception of innovation, focused on product innovation. There’s very little tinkering with the base level assumptions from which they are created.

To challenge the deep-level normative status quo requires one to move out of the mainstream salons, and into the fringe coffee shops and covert speakeasies. Close to Moorgate station is one such safehouse, down a small alley, behind an austere wooden door. Enter the Finance Innovation Lab.

The Finance Lab initially started as a joint project by the WWF and ICAEW, asking the question “What does a financial system that serves people and planet look like?” It’s now a forum for an assortment of financial heretics, some outrightly so, others more subtly so. The community is partially centered on an online platform hosted by the Ning social networking architecture, and partly on monthly meetings where ideas are presented and workshopped.

On Friday, I attended the monthly brainstorm. The setting is old English, in a meeting room with gilded portraits, but the content was anything but traditional. The session focused on work by David Braid, showcasing his graphic design visualisations of the financial sector as a tool for altering the way people perceive the sector. Ben Curtis was also there to discuss the PositiveMoney campaign that seeks radical monetary reform. The atmosphere is part collaborative, for people to throw around wacky ideas, and part critical reflection, to bring attention to shortcomings in proposed innovations. Friday’s session saw both impulses in action. For my part, I wanted to see David’s financial maps interpreted by graffiti artists on the walls of the urban downtown, and I wanted to see a more robust proposal by the PositiveMoney guys.

In the end, the sessions are not designed to be prescriptive. Presentations are used to set up loose themes as a backdrop for open-ended explorations. Key topics that have developed over the months include complementary currencies, social finance innovations, methods for dealing with complexity in finance, building resilience and dealing with risk, grassroots finance and mutual credit systems, social enterprise and community investment, behaviourial economics, environmental economics and the art of dealing with externalities, crowd financing, religion and philosophical aspects of finance, alternative conceptions of value, alternative metrics of economic wellbeing, and alternative goals for economic systems.

In part, the specifics of what is discussed doesn’t necessarily matter. More important is the fact that you’re able to do it, and to meet others who are doing it. Ideas have a way of fertilising other ideas and creating mutations. It’s the Silicon Valley effect. You hang out with people like Bertrand, Eli, Tav, Nick, Mary, Timothy, Max, Deeti, Giles, Rachel, Jen and loads of others who are doing similar things, and your own ideas get sharpened and informed in light of theirs. 

There’s also no single objective. Some have a particular agendas. Some frame their goals in utopian or moral terms, whilst others are more hard-edged or pragmatic. There's a general sense of trying to make the financial system better. For me though, the objective is disruption, change for change’s sake. I think the true value of these forums is to workshop ideas that can cause shit, for better or for worse, and see if the resultant disruptions, outcomes not strictly known, could potentially lead somewhere worthwhile. I like the idea of a creative dialectic to keep the system on its toes.

Over the next few months I’ll profile some of the movements I've encountered at the Finance Lab in this blog, some of the fascinating thinkers and some of the shit-stirrers. Keep tuned, and sign up.

New Fund: OSK-UOB Multi-Asset Recovery Strategy Fund

With the ongoing global economic recovery and the various opportunities created from the vast stimulus packages put forth by governments around the world, we are currently witnessing differing levels of economic expansion across all economies. And different asset classes such as equities, bonds, commodities, currencies and cash perform differently under different stages of economic expansion.

Hence, OSK-UOB now offer investors a fund that will capitalize on the potential opportunities arising from the different market conditions resulting from this economic expansion phase by dynamically investing in multi-asset classes that are expected to do well in specific market conditions.

The OSK-UOB Multi-Asset Recovery Strategy Fund is a fund-of-funds which aims to achieve long term capital appreciation by investing in a portfolio of exchange traded funds (ETFs).

The fund aims to achieve its objective through a portfolio of ETFs chosen from 5 major asset classes, i.e equities, bonds, commodities, foreign exchange (currencies) and money market instruments selected from the global markets. The fund's name reflects the fund's strategy that capitalize on the recovery of the global economy by dynamically investing in multi-asset classes through a portfolio of ETFs.

How much return?

This fund is benchmark against an average annual return of 8.00% over the long term. This is the targets of the fund.

Investor Profile?

This fund is suitable for investors who:

• want to capitalize on the recovery of the global economy with an investment that invests dynamically in multi-asset classes through a portfolio of ETFs
• seek capital appreciation
• have a medium risk tolerance
• have a long term investment horizon

Source: OSK-UOB Unit Trust Management Bhd

Click here to download prospectus

New Fund: Am-Mateen Asia Pacific Equity Fund

Launched on 5th May 2011, AmIslamic Funds Management Sdn Bhd presented to investors an opportunity to participate in the growing Asia Pacific region and also investing according to Shariah principles.

The Fund is a Shariah compliant equity fund that seeks to grow the value of investments over the medium to long term by investing in listed equities, equity related investments and other approved instruments across Asia Pacific (ex-Japan) that conforms to the Shariah investment guidelines.

Strategy

The investment style is active and focuses on strategic structuring of the portfolio. Meanwhile, the investment strategy is to select a core portfolio of low volatility and high dividend stocks with a 3 year time horizon coupled with a value approach to identify undervalued companies due to economic cycles which have been ignored relative to historical patterns.

However, the Manager may adopt temporary defensive strategy by maintaining 100% of the fund's NAV in liquid assets/cash weightings that may be inconsistent with the Fund's principal investment and asset allocation strategy.

The countries in which the Fund will be investing includes but are not limited to Malaysia, Hong Kong (including H-shares which refer to companies incorporated in mainland China that are traded on the Hong Kong Stock Exchange), Korea, Pakistan, Philippines, Singapore, Taiwan, Thailand, Australia, Indonesia and New Zealand.

Asset Allocation

• 70% - 95% in equity and equity related instruments
• 5% - 30% in liquid assets

The fund is suitable for investors who:

• want investment exposure to Asia Pacifc (ex-Japan)
• seek steady growth-potential capital appreciation with lower volatility
• have medium to long term (3-5 years) investment horizon goals

Interestingly, the base currency of this fund is USD. As such, the initial offering price is USD 0.2000.

Source: Am-Mateen Asia Pacifc Equity fund prospectus

Click here to download the prospectus.

3 Hints given by BNM (16 May 2011)

Bank Negara Malaysia (BNM) hiked the OPR by 25bps to 3% on 5 May as what some analysts said "Surprising". The OPR hike was a pre-emptive strike on inflation pressures as the output gap closes. Many analysts are expecting hikes to resume only in July as inflation remains largely supply side driven. However, BNM seems to act before demand pull pressures dominate and before the output gap turns positive. In our view, the OPR and SRR hike is indicating two things here.

Hints #1

Inflation is going to threaten the Malaysian economy in the near-term (at least). Recent increase in prices of petrol and sugar will further accelerate the numbers. With ongoing efforts by Government to reduce the subsidies, inflation numbers for sure will gone up.

Citi Research: Regional Policy Rates as at 10th May 2011

Hints #2

Related to inflation also, BNM is trying to reduce the increasing food and resources prices. If we can reduce the import price, by having a stronger currency, this would be a wise move. So, BNM is trying hard to cramp down our money spent on these import items. Not by reducing the quantity of imports, Malaysia are buying at a cheaper price. How to that? Of course, by raising the OPR rates, which will lead to a stronger currency RM.

Citi: Regional Currency Performances as at 10th May 2011

Hints #3

Maybe, BNM foresees that Malaysia economy is going to face some real challenges (Asian financial crisis?). If the situation really turns bad in a year or two, how are we going to reduce the rate to spur economy given the current low rates? We must have room for BNM to decrease the rate by that time. That's why BNM so pro-active now?