Weekly banking insight: a week of spicy deals, election speculation and more

Greetings and welcome back to this weekly global investment banking update where we talk about the top transactions, themes, and narratives in the investment banking world.

This week, even though I am eager to start the article with “Dearest Gentle Readers…” (Ref: Bridgerton for those who don’t know) because the last couple of weeks have been as spicy as the the latest episodes of Bridgerton!

While I was away studying for my professional exam, a lot has moved on the global geopolitical side. With a narrow win for Modi in India and UK elections closing in, there’s an array of updates to chase in this article.

Geopolitical highlights

Election in India this year looked quite in favour of Modi globally but he only got a thin win jolting the stock markets a little who were banking on Modi’s easy win. On the other side, Emanuel Macron in France declared an election but it doesn’t seem to work very well in his favour with the opposition gaining momentum. In the UK, Labour is taking lead but Sunak is unwilling to alter his campaign.

On interest rates, US seems to become hawkish once again after anticipating 2-3 cuts in 2024 earlier in the year. ECB seems more optimistic. But the story is still complex and unpredictable since data on inflation, jobs, etc seems to be comparatively grim to what was anticipated.

In other part of the world, Russia is offering ceasefire if Ukraine gives control only four areas but that doesn’t seem what Kyiv were expecting. Gaza problems don’t seem diminishing soon. G7 is not happy with China supporting Russia in any way and UN believes the rich developing nations in G7 should contribute funds for climate change (will we ever get any sensible, sustainable solution on climate change?!).

Deal summary

Saudi’s strengthening their foot in the UK

Saudi Arabia’s Public Investment Fund (PIF) and French private equity firm Ardian will jointly own 37.6% of London Heathrow Airport following a £3.26bn ($4.26 bn) deal. This agreement, addressing “tag along rights,” allows other shareholders to sell their holdings. Ferrovial SE, Heathrow’s largest shareholder, will retain a 5.25% stake. Concerns about foreign ownership of UK infrastructure have been raised, as the UK has previously ceded ownership of key ports. This deal aligns with Crown Prince Mohammed bin Salman’s efforts to diversify Saudi Arabia’s economy. Qatar Investment Authority, with a 20% stake, remains a significant shareholder.

Football star Ronaldo invests in a Porcelain maker

Cristiano Ronaldo is set to acquire a 10% stake in Portuguese porcelain manufacturer Vista Alegre Atlantis SGPS from Grupo Visabeira. Additionally, Ronaldo’s company CR7 SA plans to purchase 30% of Vista Alegre Spain. Both parties will also establish a 50-50 joint venture in the Middle East and Asia to promote Vista Alegre and Bordallo Pinheiro. This partnership aims to accelerate global brand expansion in the luxury segment. Ronaldo, who joined Al Nassr in 2022 with a $200m annual salary, continues to diversify his investments, including a notable €75m hotel venture with Grupo Pestana. Vista Alegre did not disclose the investment’s value.

LBC, a petrochemical storage company, set to sell

LBC Tank Terminals’ owners, APG Asset Management, Ardian, and PGGM, are contemplating a sale that could value the bulk liquid storage company at over €1.5bn ($1.6 bn). The owners are collaborating with an adviser on this potential divestment, expected to start later this year. LBC operates storage facilities for petrochemicals, petroleum products, and base oils in Europe and the US, with a capacity of 2.9 million cubic meters. Deliberations are early, and the owners may retain their stakes.

Paytm selling its movie and event ticketing business

Paytm is in advanced talks with Zomato Ltd. to sell its movie and events ticketing business as part of a strategy to revive its performance amid declining sales. Other potential buyers are also interested. The sale would help Paytm, led by CEO Vijay Shekhar Sharma, refocus on core areas such as travel, deals, and cashbacks. This move follows regulatory actions affecting Paytm Payments Bank Ltd., leading to job cuts and new lender partnerships. The deal would enable Zomato to expand into a new growth area, complementing its previous acquisition of Uber’s India food unit.

Vodafone is selling its stake in Indus Towers Ltd

Vodafone Group Plc plans to sell its entire 21% stake in India’s Indus Towers Ltd. via block trades, potentially raising over $2bn. The offering’s final size is undecided, with a partial sale also possible. Vodafone, which formed Indus Towers with Bharti Airtel Ltd. and Idea Cellular in 2007, aims to streamline its operations under CEO Margherita Della Valle. The company is working with Bank of America, BNP Paribas, and Morgan Stanley on the sale. This move follows Vodafone’s broader strategy of divesting underperforming markets.

Other key highlights:

1. The merger of Netomnia and Brsk, UK’s broadband providers indicates consolidation in the sector to compete with giants such as Virgin Media O2
2. UK pub sector seems to be recovering despite continued tensions in the market
3. Voodoo has acquired BeReal, photo sharing app, for €500m
4. Mercer to buy Cardano for £50bn growing Mercer’s presence in the UK workplace pension market

Education series: Understanding junk bonds

The video below briefly explains what are junk bonds, how do they make money and the position of junk bonds in the markets today. For those who do not wish to watch a video, the text is ready for you right below the video.

What are Junk Bonds?

Junk bonds, also known as high-yield bonds, are bonds that carry a higher risk of default compared to investment-grade bonds. These bonds are rated below investment grade by rating agencies like Moody’s, S&P, and Fitch. The lower ratings indicate that the issuing company has a higher probability of failing to meet its debt obligations, hence the term “junk.” However, these bonds offer higher yields to compensate for the increased risk, attracting investors seeking higher returns.

How Do Junk Bonds Make Money?

Junk bonds make money primarily through interest payments, known as coupon payments, and potential capital appreciation. The higher yields (interest rates) on junk bonds provide investors with regular income. If the issuing company improves its financial health and credit rating, the bond’s price can increase, leading to capital gains for the investor. Conversely, if the company’s situation worsens, the bond price might drop, reflecting the higher risk.

Risks of Investing in Junk Bonds

The primary risk associated with junk bonds is default risk, where the issuing company fails to make interest or principal payments. Other risks include:

1. Credit Risk: The risk that the bond’s credit rating will be downgraded, leading to a decrease in bond price.
2. Market Risk: Junk bonds can be highly sensitive to economic conditions and market sentiment. Economic downturns can increase default rates.
3. Liquidity Risk: These bonds may be harder to sell without significant price concessions during times of market stress.
4. Interest Rate Risk: Rising interest rates can make existing bonds with lower yields less attractive, reducing their market value.

Asian Junk Dollar Bonds

Recently, Asian junk dollar bonds have gained significant attention due to their impressive performance in 2023. According to Bloomberg indexes, these bonds have returned 9.8% year-to-date, compared to about 3% for global speculative peers and losses in much of high-grade debt. This outperformance is largely driven by a rebound in Chinese junk debt, as Beijing implements measures to support the struggling property market.

T. Rowe Price Group Inc. and other money managers believe these bonds still have room to grow. Factors contributing to this optimism include attractive yields, shorter duration profiles, and a stabilizing growth outlook in major economies like China and India. Notably, Chinese junk bonds now contain less property debt, a sector that previously dominated and saw record defaults.

Key performers include Vedanta Resources, whose dollar bonds surged about 50% due to favorable commodity prices and extended maturities agreements with creditors. Similarly, several Pakistani sovereign bonds climbed over 30% this year as confidence in the government’s debt repayment improved.

However, risks remain. Analysts emphasize that Chinese authorities must address the housing market’s supply-demand imbalance to ensure sustained economic recovery. Pakistan’s economic challenges, including the need to secure a new IMF loan, also pose significant risks.

Despite these risks, investors like Julio Callegari of JPMorgan Asset Management see opportunities in Asian high-yield bonds, even excluding Chinese property debt. These bonds offer a “decent pick-up” of about 150 basis points over developed-market high-yield bonds, providing a compelling option for earning income in a higher-for-longer interest rate environment.

Parting thoughts

While the global economy watches the interest rate story and political events unfold, I am intrigued to observe how this impacts global markets and investor strategies that will steer the wheel of investment banking strategies worldwide.

Stay tuned for the summary next week to stay upbeat in this fast-paced sector!

Sources: Bloomberg, Financial Times, Desktop Research

Disclaimer: This weekly global investment banking update provides insights into recent transactions and market trends for informational purposes only. It does not constitute financial advice, and readers are encouraged to verify information independently before making investment decisions. The content reflects the views of the respective sources mentioned, and while efforts are made to ensure accuracy, completeness, and reliability, we do not guarantee it. Investing involves risks, and past performance is not indicative of future results. The mention of specific companies or transactions does not imply endorsement. Stay informed about regulatory changes and market conditions, and consider seeking advice from qualified financial professionals for personalized guidance.