Year: 2010

Belgium offers solutions to new tax legislation

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These problems appeared in the midst of the well documented worldwide financial crisis, where debt ratios exploded and evidence of many state’s incapacity to handle social security and manage public finances and expenditure became more obvious every day.

Recent forecasts predict a decrease in domestic demand and eventually a drop in exports, despite the rise of public consumption and investments; fortunately, a recovery is expected some time this year.

When a Member State needs money and cannot count on economic development, especially in times of crisis, there aren’t many solutions: heavier taxation, or increase of the taxable basis, especially by driving out new taxpayers or undeclared funds.

Moreover, the signature of an important number of information exchange agreements and treaties, as well as compliance, as of January 1, 2010 with the EU savings’ related regulation and thus, the participation to the automatic exchange information system of the Savings Guideline, led to a more important restriction of bank secrecy.

This was inevitable: in Belgium, as elsewhere, the expanse of taxpayer liberty has been reduced a little bit more… once more.

So, the question remains: what can one still do to maintain those privileges and, if possible, improve its situation?

Belgian law firm Afschrift offers perspective on the changing face of European liberty.

Creativity and innovation
Create has always been the cornerstone of the team, a tax law firm created in 1994 as a partnership of lawyers specialising in tax issues.

Afschrift is a niche tax boutique, as tax issues are among those that can be dealt with most easily through a medium sized structure, because, given the speed of changes in tax law, in order to be really effective, a lawyer must be acutely exclusive.

The firm, headquartered in Brussels, the home of the European Commission and the Council of Ministers, has also strategically located offices throughout Europe, in Luxembourg, Geneva, Madrid and
Tel Aviv.

Notwithstanding its size, Afschrift, already a member of the 2009 World Finance 100 (www.worldfinance100.com) has been awarded as Best Belgian Tax Law Firm 2006 (Belgian Legal Awards), Corporate Tax Law Firm of the Year – Belgium 2009 (ACQ magazine), Best Law Firm in Belgium for Corporate Tax Law 2009 (Corporate International magazine), Boutique Tax Advisory Firm of the Year in Belgium 2010 (Corporate International magazine).

As for managing partner and founder Thierry Afschrift, also professor to the Free University of Brussels and deputy judge to the Court of Appeal, he has been selected as the Best Tax Lawyer-Belgium 2009 (World Finance) and is considered among the leading tax lawyers of his generation.

The secret of success of this small group of people is innovation: Afschrift’s lawyers are widely recognised for their creativity in the international tax planning field, while also concentrating on domestic tax and white collar crime law issues, as well as mergers and acquisitions, financial instruments and, especially, tax planning.

While professional excellence is permanently achieved by means of a profound and up-to-date knowledge and practice of the tax system and rules, most of the firm’s partners teach law at the university and the Brussels School of Economics and Management, of which Thierry Afschrift is the chairman of the Master on Tax Management.

All the firm’s lawyers also publish various articles in law reviews, while organising, at least twice a year, colloquiums on tax law topics.

International tax planning is the firm’s main activity. This is why Afschrift is also established in the most important market places: for example, the extremely innovative Luxembourg law can help clients with its sophisticated and advantageous structures for tax purposes while Spain is attractive, especially for operations connected with Latin America.

Afschrift’s lawyers are also active in litigation, defending clients during tax controls and before Belgian and EU courts; the firm has actually intervened in most of the important tax and white collar trials in Belgium throughout the years.

The firm’s clientele includes individuals, industrial and commercial companies, as well as several major banks and estate companies, established in Belgium, Luxembourg, Switzerland, Spain, Israel or elsewhere.

If there is a problem, there is a solution
Because of the traditionally heavy Belgian tax burden, the firm has always occupied in an important position in the nation’s business environment. Nevertheless, the firm’s target is not only to help clients navigate in the troubled waters of Belgian tax (over)regulation.

Of course, in the first place, one has to adapt his or her tax situation to the new rules and, to do so, the firm has developed a number of legal and efficient mechanisms and structures which may be used by any EU resident, individual or company.

But, on another level, Afschrift’s lawyers help individuals and corporations to plan their future operations in order to achieve tax optimisation. Confronted with such a situation, the taxpayers’ first concern is to avoid heavier taxation, thus counter-productivity and management problems.

The first solution is often the delocalisation of the people, of the business or the inheritance. From this point of view, Switzerland and Luxembourg offer the best alternatives as they have managed to contain their debt and stabilise their budget.

On a patrimonial level, acting in an environment such as the one described above, people will no longer be able to hide their inheritance but, instead, they will have to invest where the tax burden is lighter.

Asian places, Hong Kong and Singapore primarily, as well as other European places affected by the Savings Guideline, have started to put forward their master trumps. It is the same thing for Luxembourg, thanks to the extraordinary creativity of its lawmakers.

And Belgium?
One should not be mistaken, Belgium offers foreign investors several interesting possibilities.

Actually, it is important to know that Belgian law admits the “right to choose the least taxed way” principle, which essentially provides that the taxpayer has the right to choose, when setting up an operation, the most suitable route in order for his operation to generate the least taxes possible.

This principle, which concerns direct, indirect, inheritance and gift taxes, is essential in the tax optimisation activities of individuals or corporations and gives clients the opportunity to use, legally, Belgian or foreign structures in order to achieve their targets.

Beside this capital principle, a number of measures have been adopted these last few years in order to improve the country’s image abroad, as the Belgian economy has always been dependent on imports and international trade.

Thus, Belgian law has been enriched with various institutions and rules such as notional interest deduction, exemption of dividends from pre-levies, deduction of patent revenues and, of course, the OFP (Organisation for Financing of Pensions), which is a vehicle presenting important advantages and being used today by an important number of multinational companies in order to structure their pension funds.

Beside these rules, and the well known Belgian holding, Belgium has also set up special tax regimes for royalties and a “tax shelter” system for taxpayers who choose to invest in the audiovisual.

If applied as they should, these special regimes can be highly interesting for foreign investors.

Not only a job, but also a philosophy
A tax lawyer does more than optimise taxpayers’ patrimonial situation or trial tax cases.

More than all this, he takes on the tax authorities, thus the Member State. This is his/her real challenge: to make sure that authorities stop where the law specifies, and the role of the lawyer is to use the law for the benefit of those who consult him or her.

Afschrift’s lawyers are particularly attached to this idea of (tax) justice and this is a real trademark of the firm.
In conclusion, Afschrift draws upon the diversity of its attorneys and their talents while preserving an efficient structural organisation and permanently trying to provide state-of-the-art professional services and, in the same time, attend to the respect of the rights of the taxpayer.

For further information: www.afschrift.com

PVI partners with Oman investment fund

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PetroVietnam Insurance Corporation (PVI) was established in 1996 as a captive insurance company for the Vietnam Oil & Gas Corporation currently known as the Vietnam National Oil & Gas Group (PetroVietnam). PVI has positioned itself as a leader in industrial insurance in Vietnam, having become the leader in key markets. PVI currently holds nearly all of the energy insurance market share; about 30 percent of marine insurance market share and around 40 percent of property and engineering insurance market. The company has strived to become a regional prestigious Insurance and Finance Group over the past years.

Since its inception with only 20 staff and an initial chartered capital of roughly $1m, PVI has become after 14 years of development the largest capital invested insurer in the Vietnam insurance market with total equity and assets being $135m and $338m respectively as of the first quarter of 2010. PVI has successfully accomplished its mission of providing insurance services for property risks and business operations of PetroVietnam and has become the second largest insurance company in Vietnam in terms of revenue. PVI has gradually narrowed the gap between itself and Bao Viet, the existing leading non-life insurance company in Vietnam. According to Vietnam’s Ministry of Finance, by the end of Q2 2010, PVI has become the largest insurer in the non-life insurance market in terms of GWP, attaining 23.4 percent of the market share, while Bao Viet holds 22.9 percent.

Bao Viet has been the largest dominant in the market for nearly 50 years since its establishment in 1965. Taking over the number one from Bao Viet given the competitive and crowded local market with 28 non-life insurance companies, should therefore be considered a turning point for not only PVI but also the whole insurance market of Vietnam.

Maintaining and developing its core business of industrial insurance, PVI has established itself as the leading industrial insurance company in Vietnam for a number of years. PVI’s customers include large industrial and service sector  groups in Vietnam such as the Posts and Telecommunications Group, Vietnam Electricity Group, Vietnam Shipbuilding Industry Group to name a few, as well as leading international institutions and companies such as Gazprom, Conoco Phillips, Chevron, Nippon Oil, Petronas, Talisman, KNOC etc. Quoting Mr. Nguyen Anh Tuan, PVI’s Chairman, “PVI is proud to be an insurance company being able to sustain sustainable growth among leading local insurers while maintaining a strong competitive capability. Our aspiration is to bring about the best benefits to our customers and shareholders. I firmly believe PVI’s brand slogan the “Flame of Trust” will continue to shine splendidly not only in the domestic market but also internationally.”

PVI’s performance has been indeed very impressive. PVI has been maintaining the highest growth rate of gross written premiums for the last few years. From 2006 to 2009, PVI’s average growth rate has been 34 percent meanwhile other key players such as Bao Viet, Bao Minh and PJICO were only able to sustain growth rate of 18 percent, 10 percent and 22 percent respectively (Vietnam Insurance Association, 2009). Meanwhile, PVI has consistently enjoyed loss ratios significantly lower than the average ratio of the market. This further evidences PVI’s risks management capability and professionalism of its sales force. It should also be noted that PVI was one of the first non-life insurance enterprises in Vietnam to successfully develop and apply comprehensive business management software.

Being established initially as a captive insurance company for PetroVietnam, PVI had been given the responsibility to provide insurance coverage for PetroVietnam’s assets, construction works and projects and for PetroVietnam’s projects abroad. Since its foundation, PVI has had the ambition to become one of the leading insurers in Vietnam market and furthermore to develop itself into a leading Insurance – Finance Institution in the region. And for the past 14 years, PVI has kept itself on track to realize these goals. Not only having been locally recognised as the second largest non-life insurer in Vietnam, PVI has been a vanguard of the Vietnam insurance industry while forging a path to integrate itself into the international market. PVI remains a very important partner to giant international reinsurers in Vietnam market regarding reinsurance placement capacity and frequency. This is evidenced in both Facultative and Treaty placement activities. PVI has placed two remarkable international treaties being an Offshore Facility with the Lloyd’s market and an Onshore Facility with leading international reinsurers having limits of liability of $450m and $1.54bn respectively.

PVI is the first and as Q1 2010 the only company in Vietnam rated by A.M. Best and that is financial strength rating is B+ (Good). This provides a platform for PVI to integrate into international finance-insurance market. At present, PVI is the only local insurer to accept foreign risks including risks in Singapore, Malaysia, Japan and Russia and even in fresh markets such as North Africa, Middle America.

Aiming to become an insurance company with the largest market capitalisation in Vietnam, PVI has recently conducted a capital raising effort through which PVI has selected Oman Investment Fund (OIF) as a strategic shareholder with the OIF having acquired a 12.6 percent stake of the enlarged share capital of PVI. Raising capital and selecting an international financial institution as strategic partner are among strategies to develop PVI into a combined finance-insurance institution. OIF will be involved in investment projects taking part in management and control processes of those projects. PVI expects to learn from its strategic partner’s management experience, skills, and high technologies knowledge. As an international experienced investment fund with a worldwide business network, it is hoped that OIF will bring benefits to PVI’s business development. Quoting Mr. Bui Van Thuan, PVI’s CEO regarding this event, “Engaging in strategic partnership with OIF helps facilitate PVI business operations abroad by providing insurance service to Petrovietnam Group’s oil and gas exploration and development activities in Oman as well as enabling further accesses to potential Middle East markets being the world’s capital of natural oil. The successful transaction with OIF reaffirms PVI’s brand-name and helps to bring the Vietnam brand-name in general to the international market”.

PVI will continue its plan of organisational restructuring in accordance with international standards, enhancing competitive capability and strive to be an internationally recognised finance-insurance institution. With the great achievements earned over the last years, PVI is indeed a role model for Vietnam insurance companies.

As seen at the World Cup and Expo 2010

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Not many countries with two million people and an area of 20, 0000 sq. km have played in the 2010 World Cup, and are attracting thousands of visitors to the Slovenian pavilion in Shanghai designed around the fact that its capital Ljubljana is also this year’s UNESCO World Book Capital.

Companies that want to relocate or set up subsidiaries in a country with good growth prospects where starting a business is easy, investor protection is high, both labour and taxation are value for money and life is great, will find Slovenia to be a location of choice.

Gradual economic recovery is on track after experiencing the flipside of Slovenia’s economy relying too much on exports and investment in infrastructure projects. The Slovenian government has scaled back new infrastructure projects and new loans by state-controlled banks on the one hand and on the other its measures for overcoming the credit crunch and revive corporate investment and household consumption have been successful. The action plan for reducing red tape in order to facilitate foreign direct investment, as well as entrepreneurship and competitiveness, is bearing fruit. According to the Doing Business 2010 data, Slovenia is 53rd out of 183 economies and knowing that it is still “work-in-progress”, investors can look forward to a VIP treatment.

A wealth of experience
Slovenia’s pro-enterprise and innovative environment makes it a high-value location and a production platform strategically placed to serve customers in the distant markets with the ease enjoyed when serving customers in the regional markets. In addition to Slovenia’s   strategic location and its position between the most developed countries and the emerging economies, the country’s overall cost structure is highly competitive: infrastructure, utilities, labour, tax … Corporate income tax rate in Slovenia is 20 percent in 2010 (10 percent for companies that operate in special economic zones) and there is no payroll tax. As regards Slovenia’s workforce, there is a pool of talented people with technical expertise, knowledge of foreign languages and minds that fear no challenge.

Investors will appreciate local availability of supply network and industry clusters, and availability of raw materials: wood, metals, agricultural products. The steadily improving fiscal and incentive regimes spell out success for those looking for the “regional approach” – an opportunity for foreign investors to serve the markets of the Western Balkans but also of East Europe. A host of innovative small companies often born as a result of the structural reforms of the Slovenian economy famous for large manufactures in a wide range of both light and heavy industries, illustrate the flexibility of the country and its people. A long industrial tradition in the country equally proud of its artisans and artists has made Slovenian products highly praised objects in households, on the road, at sea and in the air.

Whether investors come up with a greenfield or a brownfield project that requires development or redevelopment, Slovenia has to offer the facilities, knowledge and experience to handle every aspect of investors’ requirements.

Investors will benefit from a professional and competitive approach and a host of free-of-charge complementary services provided by the highly trained staff of JAPTI, Public Agency of the Republic of Slovenia for Entrepreneurship and Foreign Investments. A bespoke service for foreign investors and entrepreneurs, JAPTI puts specialised experts at investor service to work with them to help plan and launch investment projects. Slovenia may not be able to quote a couple of thousand of well-known international corporations with operations on its soil, but there is a couple of hundred of foreign-owned companies and they are here to stay.

Slovenia’s competitive strengths for FDI
– Political and economic stability.
– Membership of EU, NATO, euro zone, OECD, IMF.
– A geostrategic location at the heart of the enlarged EU.
– Well-developed general and ICT infrastructure and a deep-sea port in Koper.
– Highly- skilled and dedicated workforce: 60 percent of 25-65-year-olds have secondary education, 23 percent have higher and high education. English, German and Italian are widely spoken.
– The foreign direct investment in Slovenia has mainly targeted the financial and service sectors (20 percent), the chemical sector (16 percent) and the retail sector (14 percent).

For more information Tel: +386 (0) 1 5891 870; Email: fdi@japti.si; www.InvestSlovenia.org

Switzerland: Tour d’horizon

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Switzerland remains a solid location for financial and corporate investments. While the country officially went into recession early in 2009, the Swiss economy has again showed promising signs of recovery. Switzerland has not experienced a severe credit crunch as seen in other parts of the world. The unemployment rate early in 2010 is below four percent and is thus much lower than predicted.

Switzerland hosts, since its formation in 1930, the world’s oldest international financial organisation, the Bank for International Settlement (BIS), which acts as bank for the most important central banks. Switzerland is a member of the Basle Committee on Banking Supervision. Other international organisations such as the International Committee of the Red Cross (ICRC), the United Nations Organisation (UNO) with the largest representation office outside the New York headquarters and other UN organisations, the World Trade Organisation (WTO), the World Intellectual Property Organisation (WIPO) or the World Economic Forum (WEF) are also located in Switzerland, to name a few. On 11 June 2010, the General Assembly of the UNO elected a Swiss as President of the sixty-fifth session of the General Assembly.

Switzerland seems attractive to foreign companies and (ultra) high-net-worth individuals and employees for various reasons, such as free capital flows, open markets including labour market, legal, political and economic stability with an independent and secure currency, high legal certainty, effective protection of social and economic privacy, efficient data protection, pragmatic regulation of the financial services industry, reasonable taxation, excellent educational systems on all levels, availability of skilled employees, top infrastructure and high personal quality of life. Further, the real estate market is robust. Not only more and more finance firms such as hedge fund managers move to Switzerland, but also large industrial US firms that establish their European headquarters, operation centers, research entities or manufacturing or trading sites in Switzerland – like Phillip Morris, Hewlett Packard, Dow Chemicals, Johnson & Johnson, Transocean, Noble Corporation, Google, Sempra Energy, to name a few.

Switzerland is neither a member state of the European Union (EU) nor of the European Economic Area (EEA), but of the European Free Trade Association (EFTA) and Organisation for Economic Co-operation and Development (OECD). This renders Switzerland the autonomy to regulate its financial services industry as it deems appropriate.

Switzerland is one of the world’s leading financial centres. Market surveys show that the Swiss financial market has experienced a veritable boom, not so much due to banking and insurance but mainly due to new financial service providers such as hedge funds, private equity firms, venture-capital firms, independent asset managers, hedge funds or trust companies. There has been no private equity crisis at all in Switzerland.

There are many Swiss financial intermediaries of international weight. Most notably, UBS and Credit Suisse provide not only global asset management but also investment banking services, able to advise large international enterprises on a global scale. Zurich Financial Services and Swiss Re are very strong global (re-)insurers.

Glencore and Mercuria are amongst the world’s leading commodities traders; XStrata is one of the global leading mining enterprises. Switzerland is also a stronghold for pharmaceutical enterprises such as the global players Roche and Novartis, but also for smaller biotech niche players. The country is the home base for large nutrition companies such as Nestlé and hosts Swatch and Rolex and others active in luxury watch manufacturing.

Overall, Swiss banks are in a “comparatively strong” position, not having been badly hit by either the sub-prime crisis or the collapse of Lehman Brothers. The deposit guarantee for Swiss investors was increased from 30,000 Swiss Francs to 100,000 Swiss Francs ($90,000) in December 2008 by the Swiss parliament, which is a clear and meaningful sign to boost business confidence. The insurance comes from the banks themselves, who are required to hold assets in Switzerland that amount to 125 percent of the protected deposits. It’s maybe a typical Swiss solution that, to the extent possible, no taxpayer’s money is involved.

Mark-Oliver Baumgarten is a partner at Swiss business law firm Staiger, Schwald & Partner. He is head of the banking, finance and capital markets team. For more information tel: +41 58 387 80 00; email:
mark-oliver.baumgarten@ssplaw.ch; www.ssplaw.ch

Advising strategic acquisitions

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Muthanna Investment Company was incorporated on March 17th, 1999 as an investment company carrying on business in accordance with the Noble Islamic Sharia’a. The company’s roots extend back to 1977 when its Parent, Kuwait Finance House (KFH), was made the first Islamic financial institution in Kuwait. With the intention to be its investment arm, KFH established its wholly-owned Muthanna Investment Company to go with its business beyond the local and regional to the international markets. By such packing, in terms of know-how and experiences of its Board of Directors and Executive Management, Muthanna Investment exceeded all expectations – its own or market measures – and is now positioned as a major investment maker and developer in the region.

Since activation in 2004, one of our strengths is the diversified business activities that enable us to smoothly enter the local and international markets and expand our business, either regionally or internationally, in line with our strategic vision and objectives.

Islamic finance is considered one of the fastest-growing markets in the world to the extent it became a global phenomenon and developed far beyond rendering financial services to offer various attractive opportunities for investors. As a result, demands for Islamic products and instruments are growing significantly not only in the Middle East and Asia but also in Europe and both Americas.

Our corporate finance group can help individual and corporate customers with their unique capital needs, from raising startup capital to debt financing and feasibility evaluations, by providing customised products to reducing financing costs and increase the returns using Sharia compliant modes of finance.

The group consists of three major areas: private equity, structure finance and transaction advisory embracing professionals with sound knowledge and experience staff.

Transaction advisory services is committed to assisting clients with critical business decisions by applying our insights, providing innovations and leveraging our experience to each unique situation. We work with our clients to provide tailored financial solutions, strategic consulting and analysis specifically related to issues involved in business transactions and transitions to achieve client’s business objectives.

From evaluating business opportunities to providing corporate and financial restructuring, IPO advisory and execution, business valuations, advising on mergers & acquisitions, private placements and underwriting. Transaction advisory strives to help clients with their financial needs.

During the years, transaction advisory services engaged on numerous transactions and deals that placed Muthanna Investment Company on top chart of the Islamic Investment companies.  Our independent and perceptive view on all business deals and transactions, presented us with an unshakable confidence among our clients.

Working across a wide range of sectors has embedded in us the flexibility to adapt and understand the business dynamics as well as providing a widespread and comprehensive conception of the industry. Our diverse experience in industries includes Real Estate, logistics, aviations, insurance, foodstuff and we continue to add more to our industry capabilities.

Transaction advisory track record
Al-Masaken International Real Estate Company K.S.C.C.
The Company’s primary focus of operation is the development of residential projects in Kuwait with expansion plans on the anvil to cover wider GCC markets. Muthanna Investment Company acted as Placement Manager & Co-Advisor for Al-Masaken’s capital increase in a deal of $44,600,000.

ALAFCO
ALAFCO Aviation Lease and Finance Company KSCC is an emergent provider of innovative Sharia-based commercial aircraft leasing products. Muthanna Investment Company acted as Lead Manager and Listing Advisor for ALAFCO in the pre-listing placement phase in a transaction amounting to $84,630,000.

Al Rai Logistica Company K.S.C.C.
Al-Rai Logistica is a company specialising in operating and providing third party logistics services. Muthanna Investment Company acted as Lead Placement Manager to increase the capital to $103,000,000 in a deal of $50,000,000.
 
Finzels Reach
Finzels Reach consists of a prominent mixed-use development site in the city centre of Bristol, England. The site has extensive river frontage as well as excellent road links within the city centre and to the Bristol ring road. The immediate vicinity has a mix of both new and historic residential, office and retail accommodations. Muthanna Investment Company acted as an Underwriter for the project, as well as a Joint Venture sponsor with a project size of approximately $430m.

Muthanna Financial Brokerage Company
Muthanna Investment Company owns a 99.9 percent of Muthanna Financial Brokerage Company’s capital (previously: International Markets Brokerage Company) after an acquisition deal at a value of $50,000,000. The Company is licensed by Kuwait Stock Exchange to provide financial brokerage services; its vision is to become the largest financial brokerage network in the GCC for local and international markets leveraging the latest technology.

Muthanna Takaful Insurance Company K.S.C.C.
Muthanna Investment Company established a takaful insurance company with a stake of 50 percent, namely, Muthanna Takaful Insurance Company with a capital of $17,000,000 to provide Sharia compliant insurance services including property and general accident, marine, motor and re-insurance products.

Abyaar Real Estate Development Co. K.S.C.C.
Muthanna Investment Company acted as the financial advisor for Abyaar Real Estate Development Co. and several other institutions to provide comprehensive financial and debt restructuring plus granting advisory on designing the best structure on selecting suitable financing that match the company’s requirements. Muthanna Investment Company had successfully restructured $69,000,000 worth of debts for Abyaar Real Estate Development Co.

During the recession many institutions and investors wonder when the economy will start heading in the right direction. However, Muthanna Investment Company looked at the current financial situation as an opportunity to make strategic acquisitions, offer financial and debt restructuring.

We persist on protecting and growing our clients and shareholder’s interests and wealth as we aim to be the leading full-fledge Islamic Investment Company in the region.

Securing the future

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Founded in 1996, Seguros BBVA Bancomer is one of Mexico’s leading insurance companies. Operating mainly as a bank assurance company, it offers 29 products within the fields of health, car, life and damage insurance. Its products are sold through a network of 1800 retail bank branches, in conjunction with call centres and on line services and in 2009 its turnover was $1180m. Its return on sales over the past three years averages 27 percent and return on equity over the same period was sixty percent.

Seguros BBVA Bancomer changed the face of the Mexican insurance market when it was founded. When the Mexican banking sector was denationalised in the early 90s, the business was sold to  VAMSA, a firm that had been long on the banking scene. This company, upon acquiring the bank, realised that there was a huge opportunity for selling insurance products through the bank’s branches. Until then, policies in Mexico had been sold almost exclusively through brokers to people who were earning above average income, as they were the only ones who could afford to pay premiums up-front annually.  VAMSA established Seguros BBVA Bancomer in order to service the middle-income sector, providing a direct debit-style monthly premium payment service to overcome the hurdle of annual payments. In 2000, the firm was sold to the Spanish banking group Grupo Financiero BBVA and has continued to grow. The company has two fully owned subsidiaries; health insurance firm Preventis and car, life and damage insurance claims business Multiasistencia. In addition to these, Seguros Bancomer is also a majority shareholder in Vitamedica, a health insurance claims company. These claims services are fully integrated into the company, with each one reporting directly to the CEO of Seguros BBVA Bancomer, Mr Jose Antonio Palacios.

This fully vertically integrated structure is what makes Seguros BBVA Bancomer unique, as Eduardo Viñolo explains, “we are the only company in the market that is in this position, which puts us at an advantage. We are able to design our own products, sell them through our own bank branches and provide our own claims service.”

The firm also completely overhauled its business model in 2003 to enable it to better respond to the demands of customers. Whereas the original plan was based on simple standardised products sold only through the branch network, the new model has enabled it to diversify and grow, “by 2002, our business strategy was at the point of becoming exhausted, with an expected increase in competition coming from other credit products,” explains Mr Viñolo, “so in 2003 we carried out a product differentiation, looking at market segmentation and distribution channels.” The company has already begun reaping the benefits of this transformation; As of December 2009, of 65 insurance companies in Mexico Seguros BBVA Bancomer is the fifth largest company in Premiums issued, with 6.9 percent total market share. In the bank assurance market, it is the largest player, controlling 41 percent of the market share.

Conversely to what might be expected, the recession has not only left the company’s profits undamaged, it has in fact helped it to grow, “as was the case with the last recession in Mexico, which ended in the early part of the last decade, credit products have been hit hard. With fewer credit cards and loans on offer, we face less competition when selling products through our branches. Managers are seeking to make up for lost earnings in the credit sector by selling more in the way of insurance. Thus in-branch representatives are able to give more time to promoting what we have on offer to their clients.” In addition to this, the call centres used by the firm are handling fewer credit products requests, freeing up capacity to sell insurance. In short, the company has continued to grow and has benefitted from greater public exposure created through a reduction in competition from other banking products.

Outside of the business arena, Seguros BBVA Bancomer has been officially recognised as a socially responsible company by CEMEFI, the Mexican Centre for Philanthropy. There are three areas in which the company has been involved that have led to it receiving this accolade. Firstly, it has an ongoing environmental preservation campaign, which both seeks to raise general awareness and to reduce energy and water consumption in its offices.

Secondly, the firm is helping to create a future-conscious community, using its insurance products to encourage people to think and plan ahead. Thirdly, it works with its own staff to ensure that there is equality amongst employees, encouraging higher levels of integration amongst them through annual tournaments involving whole families. There is also a communication forum where concerns can be raised and discussed on all levels. Finally, the company works with Bancomer’s foundation to promote education, especially amongst the families of Mexican emigrants where the children have been left behind with  relatives.

So what does Mr Viñolo think is the key secret of  Seguros BBVA Bancomer’s success and what are its plans for the future? The sector as a whole offers great scope for expansion, insurance premium contributions only account for 1.9 percent of Mexico’s GDP – when compared to other Latin American countries such as Chile (4 percent), Brazil (3 percent) and Argentina (2.5) it is clear that this is a growth market, “there are some cultural issues that we need to overcome, but really, this is just a matter of  financial education and awareness” says Mr  Viñolo. “As for the key to our success, I would say that as a company, you need to be attuned to the changing market. You need to listen to what your customers say they want and adapt your business model and portfolio accordingly. That is at the heart of our success and the way we will pursue success in the future.”

Project finance recovers

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Listed on the Euronext Lisbon Stock Exchange, Banif Financial Group is the fourth largest private Portuguese financial institution and one of the most internationally established, being present in 17 countries whilst having a strategic focus on the Iberian and Latin American. BANIF Investment Bank embodies the investment banking and asset management divisions of Banif Financial Group.

The bank’s strategy is embedded in the global reach and local approach concept, built upon a global product-market matrix structure, which is adapted and customised to each local market where the bank operates.

Moreover, it enables the development of opportunities and synergies across the various markets in which it operates.

The success of its clients, shareholders and employees is the driver of the success of BANIF Investment Bank and reflects the values embraced by the Group: confidence, humanism, effectiveness, innovation, ambition.

Structured finance
The structured finance team provides financial advisory services and bank financing to various segments of renewable energy and infrastructure including transport, healthcare, environment and social infrastructures.

Advisory services offered to the public sector (central and regional governments, municipalities, local authorities, etc) include funding strategy definition, analysis of feasibility and structuring long term infrastructure concessions, including public private partnerships and the public sector comparator.

Also, BANIF Investment Bank offers financial advisory services and debt financing to private sector entities (sponsors, bidding consortia, concessionaires or SPVs) including structuring, arranging and underwriting project finance debt associated with infrastructure projects and PPP concessions.

The bank also provides structuring, arranging and underwriting of senior debt facilities in the context of M&A transactions financed through acquisition finance structures, participating either as sole MLA or within a syndicate of banks or club deal in MBO, LBO and MBI transactions.

The structured finance department operates in Lisbon, São Paulo and Barcelona, with local execution teams, which include specialists with vast experience both locally and internationally, and work closely with other areas of the bank such as corporate finance, capital markets and private equity, in order to provide a fully integrated service to the bank’s clients.

BANIF Investment Bank keeps up with the pace of its clients in what comes to being flexible, rapid and innovative in order to successfully “make transactions happen”.

The global financial and banking crisis has had a significant impact on project and acquisition finance lending in the past 24 months. From H1 2008 the market has suffered with restricted access to credit and increased margins resulting in a severe decrease in transactions closed and a thinner pipeline of deals. Project finance deal volumes in 2009, according to Infrastructure Journal, were similar to those in 2005. Transaction volumes in Western Europe have decreased 48 percent in 2009 from 2008, but this region continues to be the most important. Spain led with 89 transactions, Portugal had the largest renewables deal in 2009 and Brazil saw a record year with the largest transactions in the power, oil and gas and transport sectors in Latin America.

Notwithstanding the difficult market conditions, Iberia and Brazil have proved its importance in terms of number and relevance of transactions, as well as presence of internationally renowned sponsors.

In Q1 2010, there was a sense that the crisis had reached its bottom in what concerned limited-recourse lending, with a number of transactions moving through the pipeline or slowly returning to the market. The market was apparently stabilizing after 2009 market disruption. However, the sovereign crisis, starting with Greece being unable to refinance part of its public debt and a number of large European economies posting scaring 2009 budget deficit and public debt numbers, has impacted the market and caused renewed uncertainty in liquidity, availability of credit and cost of funds. Currently, the markets witness a fragile response to severe European-wide political measures to reduce budget deficits and public debt levels in a desperate effort to calm the markets and its investors’ confidence in large European economies credit ratings, namely Greece, Spain, Portugal and Ireland.

With less commercial debt available, and at a higher cost, public sponsors and private sector bidders are finding it difficult to finance infrastructure projects and companies wanting to grow from acquisitions are getting “no” answers from previously active banks in the acquisition finance market. Additionally, a number of high profile international banks withdrew completely from limited-recourse lending and faced critical liquidity situations, which frequently involved government support or “bail-outs”.

In this difficult market context, Banif Investment Bank has benefited from the sound financial solvability and capitalisation of the Banif Financial Group to increase its presence and awareness in the structured finance market, focusing in financial advisory, but also structuring and participating in club deals for  renewable and infrastructure projects.

BANIF Investment Bank holds a relevant track record in advising, arranging and underwriting long term funding for renewable energy production projects, namely solar photovoltaic, wind power, biomass and solar thermal.

In particular, BANIF Investment Bank has lead the Portuguese market in the solar photovoltaic technology in 2009 when the Bank closed three important deals with the main renewable players in Portugal in a total of over 24MW. Indeed, BANIF Investment Bank is now recognized by its expertise and experience in structuring and taking successfully to financial close transactions in this sector. The solar photovoltaic market and technology know-how is an important asset to the Bank as it has constantly been approach by the market’s leading players, both in Portugal and in Spain to structure new transactions.

BANIF Investment Bank is also participating in one of the largest thermal solar projects in Spain, together with a club of leading Iberian banks, and a group of leading Portuguese and Spanish sponsors. This new technology is a major growth area in Iberia in the solar sub-sector of renewables and BANIF Investment Bank is looking forward to enhancing its participation in similar deals.

Furthermore, the bank is analysing a long list of rooftop photovoltaic projects in Iberia with leading financial and strategic sponsors. The number of solar rooftop projects currently being promoted is significant in Iberia, as the market starts moving from a centralized production approach to a mass production and user-producer approach, supported by central and local governments and legislation favoring its feed-in tariff vis-à-vis centralised ground structures which are starting to suffer the pressure of tariff revision given the amount of installed MW, particularly in Spain.

In what comes to wind energy projects, BANIF Investment Bank has participated in the largest renewable transaction in 2009, a Portuguese wind projects portfolio refinancing, and is continuing to invest resources and lend long term to wind energy projects in Iberia and Brazil. The bank has successfully advised a leading Portuguese sponsor in the auction of wind projects promoted by Brazilian regulator ENEEL, achieving a total of over 218 MW of wind power capacity awarded in Brazil.  This experience is to be repeated as new wind power projects are being tendered by the government in Brazil and the bank is advising a number of clients. In 2010 the bank aims to extend its presence in the wind sector and is already analyzing a number of relevant transactions in Portugal, Spain and Brazil with leading sponsors.

Besides renewable, adverse market conditions have not been an obstacle for BANIF Investment Bank in providing financing for infrastructure projects, namely hospital PPPs and road concessions.

BANIF Investment Bank aims at become a reference  player in Iberia and Brazil in structured finance transactions, involving structuring and underwriting debt for renewable energy projects, infrastructure concessions and providing acquisition finance to M&A transactions either cross border or local, in Portugal, Spain and Brazil.

Sectors where Banif operates:
Healthcare: from 2009 the Bank has been involved in three hospital PPP concession projects and in different roles: as adviser to a bidding consortium, as Lead Arranger and as MLA;

Road concessions: BANIF Investment Bank has advised two concessionaires in restructuring the concession and financing agreements, has advised a potential bidding party in a feasibility study of a road concession, has advised a regional Government in the preparation and negotiation of a new road concession and has been a Lead Arranger in the largest road concession transaction recently closed in Portugal;

Other infrastructure: the bank has been active in providing financial advice to a consortium of leading sponsors in a public tender for a new port logistics platform concession, advising a municipal entity in the structuring and preparation of a tender process for a waste management concession, and was an MLA in the most relevant infrastructure asset acquisition in Spain in 2009.

Vasco Pinto Ferreira is an Executive Board Member, BANIF Investment Bank

Continuous growth for market leader

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The bank has remained the most profitable in Bolivia for the fourth year in a row. In order to achieve these profits, the bank cut costs significantly, therefore being able to counteract the significant decrease in interest rates that affected the financial system. The bank continued its growth strategy both in deposits, loans and investments. The bank opted to reinforce the sale of products and services that aim to retain customers, and sell them complementary products, therefore making the relationships more profitable and advantageous for both the bank and the customers.

The liquidity indicators were improved considerably during the past year. The bank decided to keep more liquid investments outside the country in order to diversify its risk, but also to seek larger returns.

Among the most important actions done in the past year are:

1 The bank continued its commercial strategy, and its growth continued, especially in the retail banking division, therefore diversifying its risk and owning a less concentrated loan portfolio.

2 The bank branch network reached 69 offices, the largest for any bank in Bolivia. The bank opened four offices in the past twelve months in two different cities. The expansion aims to have our customers spend less time in our offices, and keep serving non customers of the bank in all sort of services.

3 The bank purchased and installed its own ATM switch, therefore the bank has been able to obtain a higher and better control of its network, and has released new and innovative services that are unique in the country in this channel, such as the payment of loans, and credit cards, transfer to third party accounts, and providing a consolidated position of the customer. The bank currently has 215 ATMs, remaining as the largest network in the country, and is going to install 36 more until August.

4 The bank’s home page (www.bmsc.com.bo) was rereleased during the past year. This new design aimed at making the page more accessible to our clients, release an image more according to the image released in 2008, but most importantly it includes a new version of digital certification by Verisign, therefore being the only bank in Bolivia to have a visual authentication feature for its home page and it also has a new application firewall to prevent hacker attacks.

5 The bank launched for the second year its campaign for its Super Makro Cuenta product. This saving account offers $5,000 prizes every week, and on May 2009 it offered a large prize of $142,000. The campaign was successful once again, and the product continues to position itself as the most important savings account product in the country. In order to expand this benefit to our base of customers the bank decided that all savings account opened through an agreement to pay salaries for companies, will now be part of this product.

6 The bank continued its release of insurance products. The Debit Card Insurance released in 2008 achieved a high success and now almost 30 percent of retail division debit cards have the insurance. Among the new insurances released are one to protect the contents of customers homes, and perhaps the most innovative service in the financial market, is the Purse Insurance, which protects female customers against purse snatching.

7 At the end of 2009 the bank improved its internal loan  process and was able to launch a campaign to approve its vehicle and personal loans in 24 hours. Beginning in February 2010 the bank has included its mortgages products in its 24 hour approval process.

8 Banco Mercantil Santa Cruz also worked to improve the quality of its service, and automatised its most important business processes, including work flows for the loan process, for the pricing processes and others. The bank changed, in the past year, significantly 65 processes that will relieve the front office personnel work load, and aims at having a higher quality of service in our branches.

9 The bank released its new fidelity programme, “Puntos por Todo”, which rewards customers with points for every type of transaction that they execute in certain channels or with certain products. For example the bank rewards internet transactions, credit and debit card purchases, the timely payment of loan charges, the increase of deposits, among others.

The loan portfolio increased significantly in the retail division, and the corporate division deposits grew at a very large rate and the bank has as of March 31st 2010 was still the largest bank in terms of loans and deposits.

The bank has a loan portfolio of approximately $796,000,000 and deposits for almost $1,638,000,000. Those figures account for a 19.5 percent of the loans market share and 23.5 percent of the deposits market share, and although keeping both shares is quite difficult in any country or market, the bank aims every year at maintaining its market position.

However, the bank is not the leader only because of its size or its origins and tradition, but also because of its solvency, growth, and specially commitment with all of its stakeholders. The bank has consistently grown in its profits, grown in assets and deposits; this sustainable growth reflects a serious strategy and the help of the human resources available at the bank. The reputation and the conservative and solvency image that customers have of the bank is also a very important intangible, which no other bank in Bolivia has.

Family banker to familiar entrepreneur

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Founded in 1926, Banca March is the foremost family-owned Spanish bank. Soundness, prudence and a close-knit relationship with its clients are the cornerstone values of a bank that has been around for nearly a century. Banca March also has the best solvency ratio among Spanish banks and one of the highest in European banking (19.7 percent Core Capital and Tier 1 as at December 2009). Its non-performing loan ratio is one of the lowest in the Spanish financial system (2.82 percent in 2009), namely due to the excellent quality of its investment portfolio, and it has a high allowance coverage ratio for insolvencies (97.20 percent), in accordance with the standards comprised in the bank’s philosophy. Banca March maintains its A2 Moody’s rating for long-term deposits, and P1 – the highest level – for short-term deposits. As Bank President Carlos March points out, “as part of our banking and family enterprise business philosophy, which has been in place for nearly one hundred years, one of the constants in our corporate values has been to allocate the majority of our profit to strengthening the balance sheet as a symbolic sign of our prudence.”

 During the past three fiscal years Banca March has taken important steps to develop a new strategic focus: as regional bank on the Balearic Islands – where it was founded and has its headquarters – and as the bank of reference for the mid-to-high and high client segments for Private Banking, Wealth Management and Business Banking (particularly family-owned businesses and entrepreneurial families). The bank continues to place emphasis on these strategic areas, all the while markedly reinforcing its teams.

“We are a family bank, with the fourth generation currently filling the highest levels of the Board. We are focused on meeting our clients’ needs and managing their equity in all its different facets: entrepreneurial, financial and diversification. Our success is based on having a very clearly defined strategy. Our objective is to reinforce long-term relationships with our clients, with the hope of continuing these into the coming generations. Offering family-owned businesses added value is one of our corporate values, and one of which we are very proud,” says Banca March CEO Francisco Verdú.

The wealth management team is made up of 50 professionals spread across six regional locations: Madrid, Balearic Islands, Canary Islands, Catalonia, Levante and Aragon, the latter three having opened in 2009 and 2010.

Most impressive has been the growth in wealth management in the regions of Catalonia and Levante, where the volume of assets under management has doubled. The private banking segment, which is aimed mainly at mid-sized patrimonies, has also been strengthened as a result of streamlining and organisational changes, and the incorporation of specialised teams in the most important offices within the network.

“At a time of crisis within the private banking industry, we have known how to value our offer and have obtained excellent results in spite of the situation,” says Rafael Gascó, Managing Director of wealth management for Banca March. “The crisis in private banking is due to clients losing confidence in their money managers, basically for two reasons: because sales were given priority over service and because the products being sold were incomprehensible not only to the clients, but to the bankers themselves.”

“One of the most crucial parts of our value proposition is estate planning. As a result of continuing regulatory and fiscal changes, we must constantly revise our clients’ estate planning needs,” adds Gascó. “Due to changing sentiments emerging within this sector and clients’ increased aversion to risk, it is essential that we be able to offer them products with value added which generate foreseeable cash flows, and are also transparent and simple to understand. This is something we appreciate at Banca March.”

One of the aspects that differentiates Banca March is the joint investment contract. Clients have the possibility of investing in different businesses in which the March Group brings management capabilities and know-how, and takes a stake in the projects it launches. Through Deyá Capital, a venture capital firm created in 2008 and held principally by Corporación Financiera Alba (Banca March’s Group), the bank offers the possibility to jointly acquire significant stakes in companies not listed on the Iberian market. Up to now, investments have been made in Ros Roca and Ocibar, and new opportunities are at an advanced stage. In line with this philosophy of providing offers with a high degree of value added, Banca March offered its clients the chance to invest in the so-called “Proyecto Arbol” (sale and lease back of BBVA real estate) and it is currently studying other similar projects.  

During the last two years, Banca March’s wealth management/private banking business has recorded more than double-digit sustained growth, making it one of the companies with the most assets under management in this segment, while already being one of the companies with a major presence on the national market place. “We are proud to say that we are a respected brand not only by our clients, but also by our competitors and by professionals working in this segment,” highlights the head of wealth management. 

Profile
The Banca March Group encompasses a variety of activities: banking, conducted directly by the parent company, Banca March; investment and pension fund management, handled by March Gestión; and insurance activities, through Banca March as the associated banking-insurance operator, and March-Unipsa as insurance brokers. March Unipsa is one of the top five Spanish brokers in the insurance business and the first one composed entirely of Spanish capital.

Through its business banking unit and corporate finance department, the bank provides the strategic consulting services necessary to implement companies’ expansion plans, helping them obtain credit as well as assisting them in finding partners in this growth process.

March Gestión, Banca March’s investment arm, combines creating long-term value with safeguarding equity in the belief that active management is an important source of value added for the profitability of any investment portfolio. March Group’s experience in investing in business projects, in the tactical allocation of assets and in the selection of medium and long-term investments are the characteristics which predominate the work of the management professionals.

A prime example of this investment philosophy are the SICAVs (Investment Company with Variable Capital) managed by March Gestión de Fondos. Torrenova, one of the group’s banner portfolios, has accumulated a return well above the Euribor 3M, IBEX 35 or MSCI World in the last decade. These returns have been achieved through sustained growth in contrast to the considerable fluctuations recorded in the key indicators.

At the end of 2009 March Gestión launched Vini Catena F.I., the first global equity fund investing in a selection of some of the finest companies involved in the wine value chain, a very attractive sector in terms of yield/risk to diversify any investment portfolio. Since its launch in December 2009, and despite the overall drop in stock exchanges, this equity fund yielded a nine percent return.

In 2009 March Gestión recorded double-digit growth in assets under management and added 23 new SICAVs. More than 80 percent of its funds and SICAVs exceeded benchmark rates.

Through the group’s majority shareholding in the listed firm Corporación Financiera Alba, Banca March owns significant stakes in some of Europe’s most important companies for infrastructure, construction and services, energy, information technology and defence, and health, etc. It is major shareholder in ACS and Acerinox, and a main shareholder in companies such as Prosegur and Indra. Moreover, through its venture capital fund Deyá Capital, held in large part by Alba, the bank holds significant stakes in companies such as Ros Roca and Ocibar.

In addition, through its Fundación Juan March, established in 1955, it is involved in fostering culture and the arts. It is a family-run, patrimonial and operative institution dedicating its resources and activities to the fields of the humanities and science. The Fundación Juan March organises art exhibits, concerts as well as series of conferences and seminars. It administers a music and theatre library in its Madrid headquarters and directs the Museo de Arte Abstracto Español in Cuenca and the Museu Juan March in Palma de Mallorca. Moreover, it is active in the field of research through its Centre for Advanced Studies.

Banca March is a driving force behind the Asociación de Empresa Familiar (Association of Family Businesses) and sponsors the Banca March Chair of Family Business at the University of the Balearic Islands.

For more information tel: +34 914 364 323;  www.bancamarch.es

EU votes on credit directive

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The European Parliament’s Internal Market Committee (IMC) has recently proposed changes to the EU’s directive on late payments which are designed to give more protection to businesses – especially small to medium sized enterprises (SMEs).

The IMC wants to introduce a mandatory maximum payment term of 30 days for all transactions, whether between the public sector and private companies or business to business (B2B).

The recommendations allow some leeway for extension. In B2B transactions, the extended period must be stipulated in the contract and could be further extended if it doesn’t cause unjustified financial harm to either party.

For public sector bodies, the rules are stricter: there must be an exceptional reason to delay payment beyond 30 days, while 60 days is the absolute limit.

There are recommendations too for interest payments and compensation for late payment.

The directive and its proposed amendments are no doubt well intentioned.  But the question is ‘Will they help cash strapped SMEs – or, for that matter, larger companies?’

The concept of maximum payment terms definitely has merit, particularly when it comes to public bodies. The latest Atradius Payment Practices Barometer (downloadable from www.atradius.com) shows that, in several European countries – notably the Netherlands – public sector bodies were judged the worst payers.

Looking further, there are other potential benefits:
– Increased incentives for cross border trade
– Fewer misunderstandings about international payment terms
– Better payment predictability that can increase supply chain management and maximise manufacturing run efficiency
– More disciplined purchasing
– More efficient procedures for collecting overdue payments
– Room for flexibility in setting terms of payment

However, legislating a maximum credit period of any number of days doesn’t necessarily guarantee timely payment, which still needs to be effectively managed by the supplier. Bear in mind that the party struggling to maintain its cash flow is just as likely to be the buyer as the supplier, so the possibility of a late payment still exists, no matter what the payment term.

The length of the credit period does not itself determine healthy cash flow: if the agreement does not put financial stress on either party and the supplier is confident of receiving payment on time, cash flow can be managed through intelligent credit management and by maintaining a portfolio of trusted customers.

A recent Atradius white paper, The future of trade credit, (www.atradius.com) actually found, by surveying businesses operating across Europe, the USA, Australia and New Zealand, that the majority of respondents expected credit periods to extend in the next 12 months to allow customers more time to pay. As the world recovers from the economic downturn, bank finance – especially to SMEs – is still hard to come by, and the credit period allows customers time to raise the wherewithal to pay for their goods and services.

As one of the contributors to the white paper, US based credit consultant Abe WalkingBear Sanchez, put it: “While the supply of money is limited by how much of it governments print, credit is unlimited; in fact, the more of it that is extended the greater is the demand created for products and services. Credit, properly understood and managed, allows the expanded movement of products and services and for economic growth and prosperity.  Credit is a lubricant of commerce and greases the wheels of business.”

And, whether it is the supplier’s or the buyer’s cash flow that the EU directive seeks to protect, a short credit period may in some circumstances exacerbate the situation.  In his article ‘The recession conundrum’, also quoted in the Atradius white paper, Rob Sherman expresses the following piece of absolute common sense: “Even the most meticulous accounts receivables efforts are ineffective if your customer simply does not have the financial means to repay their debt.  So rather than fight a fruitless war, progressive finance departments are instead offering innovative solutions to their customers.”

What needs to be understood is that late payment and the agreed credit period are two separate issues, and the parties to the sale must decide on the best way to achieve a mutually successful transaction.

In his article, Sherman hits upon the salient point that perhaps lies ‘between the lines’ of the directive: that trade credit isn’t simply a term of payment – it’s an expression of trust and a means of fostering successful long term business relationships. And, in a competitive market, retaining good customers should be every business’s top priority.

Simon Groves is a senior manager of corporate communications and marketing at Atradius Credit Insurance NV

China tries to soothe fears about local debt

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China has played down the risks in a wave of borrowing by local governments, saying that officials were getting to grips with a debt problem that economists warn could yet destabilise the financial system.

A statement issued by the Ministry of Finance and the China Banking Regulatory Commission (CBRC) gave a largely clean bill of health to the pile of debt racked up in a surge of stimulus spending during the global financial crisis last year.

The majority of loans would be repayable from cash flow generated by the investments they are financing, and banks had set aside more than enough provisions to cover any defaults.

“There are indeed some risks in loans to financing vehicles, but currently the overall risk is manageable and will not cause systemic risk,” they said.

The announcement helped push China’s benchmark stock index up 0.8 percent to a three-month closing high.

Investors have been worried that local government borrowing, the bulk of which has funded infrastructure projects, could sow a new crop of bad debt in the banking system.

Dong Tao, an economist with Credit Suisse in Hong Kong, said China was not out of the woods yet.

“While I do respect the conclusions that they have given, I would remain quite cautious in the sense that a large part of the bank lending that went out in 2009 will not generate cash flow in the near future,” he said.

Clearing the brush
Local authorities are barred by law from borrowing directly. To get around the ban, they have established some 8,000 special purpose funding vehicles that, by the end of June, had borrowed an estimated 7.7 trillion yuan ($1.1trn).

Although that accounts for only about 20 percent of China’s GDP, economists have warned that the increase in indebtedness could shake the financial system if left unchecked.

“Most of these loans can generate steady and sufficient cash flow, which can cover both the principal and the interest,” the finance ministry and banking regulator said.

To keep the problem from growing any further, they said Beijing was working to develop a mechanism to standardise fund-raising and debt management by local governments.

Xu Jian, an analyst with China International Capital Corp in Beijing, said that a new framework would make borrowing by local financing vehicles more transparent and thus help rev up a crucial engine for the economy.

“The government has made the policy clear and banks can resume extending loans to such vehicles, as long as this is done in line with the new rules,” he said.

“Local projects are mainly financed by bank lending, so this is an important contribution to the economy, especially after growth moderated in the second quarter,” he said.

Three-front battle
For months, Chinese regulators have been trying to piece together how much local governments owe and to devise a blueprint for reining in the debt.

They have also been working to shore up confidence on two other fronts: telling banks to bring loans funnelled through trust firms back onto their balance sheets and ordering stress tests to gauge the potential impact of a collapse in property prices.

“Property is the mother of all crises,” Dong from Credit Suisse said. “If the property market goes down, local government lending will face a much bigger problem than what the government currently claims.”

The CBRC fears that some 23 percent of loans to local financing vehicles could go sour, but the agency and the ministry said in their statement that broader risks were not that grave.

For those loans that may not be repayable, debt can be restructured and collateral increased, they said.

And with provisioning ratios set at a minimum of 150 percent, banks are sufficiently prepared to absorb defaults, they said.

They added that the scale of the problem was already on the wane. As a proportion of total bank lending, new loans to local financing vehicles had dropped by a third in the first half of this year compared with 2009.

Commercial bankers have also expressed confidence about the knock-on effects of a tumble in property prices. The real estate market has soared over the past year, fuelling concerns that some parts of the country were experiencing a bubble.

Asked by regulators to test for the impact of a 50 percent fall in property prices, Bank of Communications, China’s fifth-biggest lender, said recently that the ratio of bad loans in its mortgage business would rise by only 1.2 percentage points.

Insurer FP banks on Mideast employee benefits

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Life insurer Friends Provident, now part of the British group Resolution, sees a rise in employee benefits in the Middle East as a springboard to growth in the region’s nascent insurance industry, an executive said.

“The main focus is on the United Arab Emirates and we are currently speaking to another territory about getting a license there,” said Matt Waterfield, general manager for Friends Provident in the Middle East and Africa.

“Friends Provident have clearly identified certain regions around the world, the Middle East is one, for expansion and so we’re receiving investment in terms of being able to apply for this license,” he added, declining to name the country.

The Middle Eastern life insurance industry is tiny compared to more developed markets. Its penetration rate is less than one percent of GDP, compared to between nine and 11 percent in Western Europe or the Americas.

The main reasons behind the discrepancy is that in the Middle East there are no legal requirements or tax benefits related to life insurance.

“Unlike Europe where there is a tax benefit or a legal need to have insurance, here there is nothing,” Waterfield said.

Friends Provident’s strategy in the Middle East revolves around three major areas: life insurance and savings, bancassurance and employment benefits.

The insurer reported an annual premium equivalent (APE) – a measure of new business it is writing – of £23m ($35.8m) in the first half of 2010, the second-largest contribution to the group after its Asian business and a 10 percent increase from the previous year.

Even though Waterfield wouldn’t name the new countries where it applied for a license, he mentioned Saudi Arabia, Egypt, Jordan and Qatar as markets holding great potential.

The insurer foresees growth to come from the employment benefits segment. After the boom years companies are expected to try wooing international employees to work in the region with perks such as pension benefits and life insurance.

“That’s the real exciting area for the Middle East, which is where group employee benefits will start to snowball because employers have to be competitive in the market,” Waterfield said.

“Previously employers would differentiate and attract talent purely by paying salary – who could pay the most?. If that top talent is coming from Europe or America there is now the expectation there should be employee benefits attached to it.”

Peru’s finance minister to leave this week

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Peru’s Finance Minister Mercedes Araoz will be replaced in a cabinet shuffle this week, three sources in the ruling party and close to the government have unveiled.

One of the sources said Ismael Benavides, who once led one of Peru’s largest banks, will be the new finance minister and that a swearing in ceremony was slated for Thursday.

“It’s going to be Thursday at 3 p.m. (2000 GMT),” the source said.

“We know that Mercedes Araoz will leave no matter what,” said another source.

Benavides, who also previously served as agriculture minister under President Alan Garcia, declined to comment.

A cabinet shuffle is widely expected so that some ministers, including Prime Minister Javier Velasquez, can step down to run in regional elections in October.

Araoz has downplayed talk of her own departure and one of her aides denied on Tuesday that she would leave.

But leaders of Garcia’s APRA party have mentioned her as desirable candidate to have run on their ticket. Though she is not currently affiliated with any party, she is seen as having political ambitions.

Peru’s economy is one of the most dynamic in the world at the moment and should expand about seven percent this year. The economy grew 11.92 percent in June from the same month a year ago, official data shows.

Despite the swift growth, Araoz and the central bank’s monetary policy director were recently ensnared in a policy rift over the pace of spending by her ministry and whether it was contributing to inflation.

Mazda recalls 215,000 vehicles in US for steering

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Mazda Motor Corp will recall 215,000 Mazda 3 and Mazda 5 vehicles sold in the US because of the risk that they could lose power steering without warning.

The Mazda recall of vehicles from the 2007 through 2009 model years was announced in a filing with the US National Highway Traffic Safety Administration.

Mazda said the vehicles under recall could experience a “sudden loss” of power steering, increasing the risk of a crash. The notification did not detail any incidents.

The defect occurs because rust could break lose from a high-pressure pipe, straining the power steering pump and causing the system to shut down, the Japanese automaker said.

Mazda also said it was facing a shortage of parts to repair recalled vehicles at its dealerships.

The automaker said it would begin to notify affected owners of the recall in September and send notices to all owners by February.

The Mazda recall stems from a customer complaint in the Japanese market in March 2008, NHTSA records show.

Mazda had told dealers to monitor vehicles for the problem in the US but had not issued a safety recall because it judged that the problem remained relatively rare.

Earlier this year, Mazda said it realised that more US owners were experiencing the loss of power steering.

In June, NHTSA opened a preliminary investigation of the problem.

The Mazda recall comes as the automaker’s larger rival Toyota Motor Corp faces continuing scrutiny of its handling of safety recalls. It was fined a record $16.4m by NHTSA, the maximum then allowed, for moving too slowly to recall vehicles with defective accelerator pedals.

Australian central bank faces makeover after election

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The winner of Australia’s election on Saturday will have the rare opportunity to re-shape the leadership of the central bank, with almost the entire board coming up for reappointment in the next three years.

The terms of eight of the nine Reserve Bank of Australia (RBA) board members, including the governor, expire between December and late 2013, leading to talk that the next government could be tempted to pick ideological allies for the posts.

Neither side of politics have commented on such a sensitive topic, but the make-up of the next RBA board is arguably more important to the economy than the make-up of the next cabinet and different governments can make different appointments.

“The governor is the job that really matters and it’s not too hard to think that the choice might be different, depending on what political stripe the government was,” said Rory Robertson, an interest rate strategist at Macquarie Bank.

The centre-left Labor government is locked in a tough electoral struggle with the conservative opposition, with opinion polls pointing toward a cliff-hanger result at the weekend.

In practice, the central bank’s independence is now so firmly entrenched amongst the public and so prized by investors, that only the most foolhardy Treasurer would risk the markets’ ire with an appointment that was considered blatantly “political”.

“There would be an uproar if there was even the slightest suggestion of political bias in the choices,” said Rob Henderson, head of markets economics at National Australia Bank.

“The government’s economic credibility would be called into doubt, and both parties value that very highly.”

Joe Hockey, the treasury spokesman for the conservative opposition, recently said he had spoken to RBA Governor Glenn Stevens to assure him they supported the central bank’s target of keeping inflation within a two to three percent band over the medium term.

Stevens’ first term ends in September 2013, just within the life of the next three-year parliament.

Henderson felt Stevens would be certain to be re-appointed for a second seven-year term, assuming he wanted it.

The career central banker has been credited with helping Australia avoid recession during the global financial crisis, cutting interest rates by a massive four percentage points between September 2008 and April 2009.

The RBA is also assumed to be grooming successors in-house, notably the head of its economics unit, Philip Lowe, and the head of the markets division, Guy Debelle.

“It would be a kick in the guts for the RBA if they offered such well-qualified candidates and the government turned them down for their own pick,” said Henderson.