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Monday, November 17, 2008

Grameenphone's First Success in a long time

BTRC fines you
your customers desert you,
RAB robs you,
commercial banks blacklist you,
a chor now means you

Yunus jhamtis you,
CEO quits on you,
VOiP confesses on you,
Newspapers start pointing at you,
your print ads clearly aren't helping you,

$300 million ignores you,
$200 million is oblivious to you,
$150 million overlooks you,
private placement laughs at you,

SEC axes you,
IPO fails you,
Citibank doesn't know what's wrong with you,
Citi is sleeping because of you,

Mamun Rashid's worst failure is you,
SIM tax only calls you,
high rates only apply to you,
world recession ONLY hits you,
... isn't it time you stop being you?

Yet another Grameenphone article, but you knew this from my poetry skills. But now things are very puzzling. The Tk 425 crore bond issue went through without any drama. I was certainly expecting some. First there are 10 investors. One, AK Khan, who sold his stake at AKtel phone to the Japanese NTT DoMoCo decided to invest a part of his USD $400 million bonanza into a competitor he learned to hate but, as it is evident now, also secretly admires. AK Khan is said to have invested Tk 150 crore into Grameenphone. He told Financial Express that it was because banks couldn't offer the 14% interest the GP bond was offering. AK Khan is the only man in Bangladesh with such a liquid and fortuitous position.

Let me remind you that GP couldn't raise $300 million and AK Khan managed to raise more without the help of Mamun Rashid's Citibank. AK Khan will be the man to keep track of this year. I think in our upcoming award show, he would be the Man of the Year. Now back to Grameenphone. The bond issue does have some interesting aspects. Let's start with the positive ones first.
  • Inflation is going to rise further. 14% lock in means Grameenphone is thinking early and setting a debt cap on some of its loans
  • Market is already in a cash (more like hysteria) crunch. A 14% bond now may be a smart move now if the situation becomes worse
  • Banks are becoming increasingly suspicious of the market and GP. Citibank NA sinking means even a local bank thinks twice before investing. Most are overly cautious these days about their investments. Even in New York, LC's and international trades are looked into very deeply in case the corresponding bank collapses. GP may have managed to avoid this paranoia.
And now the negatives
  • A company of GP's size and status should be able to lock in a loan at 12% instead of a 14% bond. There is no need to issue bonds. It only makes the IPO more risky.
  • A bond issue is highly suspicious. The Daily Star pointed out in 'quotes' that this bond is 'unsecured and unconvertible'. Meaning like bonds of many large and well-known companies they become junk because the companies won't honor the payments. A bank has some guarantee of a GP asset when it issues it a loan, but in this case AK Khan and banks can claim nothing.
  • Fixed Deposit Rates may as well reach 14% with the inflation. Why do they need GP for anyway?
  • GP has a new CEO, and like Anders Jensen, may claim he too had no knowledge about a bond being issued or where the excess cash came from. Thereby they are excused of the liabilities and will have an internal inquiry as to who is responsible for these nefarious activities.
At this point, I am not sure which way it is leaning. But then again I would like to give GP the benefit of the doubt. But from what has happened last year its better to sit on the fence.

As a side note, what was predicted here, is now getting national coverage. Commodity trade isn't what it used to be


the_skywalker said...

He he he, this writing is hilarious and full of ridiculous logic. Corporate bond is just another form of financing for companies in which companies can raise financing without requirement to show big collaterals. In Bangladesh this form of financing has been almost absent. In Bangladesh financial market participants are still not comfortable with such financial instruments even though this is one of the basic one. So, at least GP is to be given applause for pioneering the way. GP business model is hybrid one- that has got blend of tangible and in tangible assets. In this type of business it’s often tough to raise collaterised debts especially when business at its mature stage and requires huge financing. But Bangladeshi Bankers are still in primitive stage of granting loans looking into assets in the balance sheet. This is again debatable because assets in balance sheet are of no value to bankers if there is no buyer of those assets in the real market. And for your information, knowledgeable writer, bond holders are not totally wiped out when a business is into bankruptcy because bond holders are paid after senior debts etc. What is the risk for here for A K Khan is only if GP goes into bankruptcy which I see is far off case. Unconvertible bond is something else.

Ahmed Ali said...

Its ridiculous because even a lot of Fortune 500 companies don't pay the interest on their bonds and are classified as 'junk' bonds. Fortune 500 companies use fancy words as how it is a instrument in lowering this and raising that ratio, only they end up not paying the interest on the bond.

GP may end up doing the same because there is no legal obligation. If Fortune 500 companies don't care, then they are also encouraged not to care.

Yes you are right that bond holders are not wiped out. That is if you think about it theoretically. In reality if the company is in such a critical stage, bank loans, penalties and interest charges are enough for banks to claim 4 times what the company has. And even then it is not enough.

And after this is sorted out then only bond holders can lay a claim 'theoretically'. But there is nothing left.

Yes Bangladeshi banks are very primitive. Because from the bank I work at in NY and 99.9% of the other banks around the world it is legally required to look into assets , the balance sheet and tons of other financials before granting a commercial loan. Extremely primitive I know.

You think you have it bad in Bangladesh because banks are actually willing to give you a loan? Here we have stopped this primitive task completely for the last 4 months or so.

the_skywalker said...
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the_skywalker said...
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the_skywalker said...

First of all, let me tell you what junk bond is. I am sure that you know what it is as you said that you work in a bank in NY. But still I can’t control the temptation to mention it again. Junk Bonds are high yield bond that are below investment grades. Holder of any debt bears different types of risks. Credit risk is one of the major ones in which case the debtor defaults or files for bankruptcy. There are many rating agency which determines this credit rating. In USA these are Fitch , Moody, Standard and Poor, A M Best … Bonds rated BBB or above are investment grades bond and bonds below BBB are high yield or junk bonds. Junk bonds have got features of debt and equity though legally it is debt. Junk Bond will always be associated with defunct investment bank Lambert and junk bond king Milken. Junk Bonds are used by mid sized companies that have got limited access to financing. But of course some big names also used junk bonds especially for LBOs. But that is a history of greed and manipulation in 1980’s.Junk bonds has got its entire stigma because of the arcane and illegal activities of Milken. And remember that investors who buy such junk bonds are well aware of associated risks and they buy those because of higher return. Higher return is always associated with higher risk. I guess working in Bank you know this basic funda , isn’t it?

So, it is highly unlikely that any fortune 500 company would like to issue such bond and impact its credit rating which will increase its other financing cost and depress stock price etc. But it does not mean that investment grade bonds may not ever become “ Fallen Angel”. For example, in 2005 Ford and GM both fell into junk bonds status. But that is related to few other issues such as market condition or business model of the particular company. And even after that in west junk bonds are considered as a good diversification tool for asset portfolio diversifications and for fixed income investing. Why so? It’s covered in FIN 101 and 102 lessons.

To my knowledge Junk Bond default rate even in USA today is around 2.8% and it was only 1.4% just one year ago. Yes Junk bonds are quite similar to stock market performance and with recession there can be higher defaults. But in last 10 years the default has been not more than 2%. But in recession even GE or Goldman Sachs paying warren buffet 10%. Whatever it is making a statement that fortune 500 companies are defaulting on corporate bonds every now and then, is kind of misleading and outrageous.

You also should remember that default on such bonds will be seen by market in a very negative way and stock price of that particular company will go down significantly. I guess if you work in financial market you know very well about CDS (Credit Default Swap). In my b-school finance class, an iconoclast finance professor used to call CDS as herald of doom. So, company with high default risk will be having high CDS. With high CDS there will be higher shorting of those stock prices and other things start to work. And basically your stock price goes down, your debt/equity ratio goes up and many other things start to happen as snow ball effects. This is what was happening to CITI and today happening to many others though this is not the only culprit. Unfortunately I am also with a company whose CDS has gone up 900% and I am working with others to reduce this spread. So, a fortune 500 company will only take the risk of not paying bond holders if it wants to fuck up the whole business and its management members would like to go into jail. I guess people are not so stupid to take such a self destruction approach in a fortune 500 company. Now, you may ask that what has happened to Lehman or Enron. Yes, there is history of such companies that went into self destruction mode. If you are interested we can start a separate debate on that. It will require detailed analysis of human psychology, market mechanism/structures and other issues.

Now while issuing loans, it is pristine duty of bankers to look into the balance sheet and all the financials. But what Bankers often make mistake about how to price the assets or how define and quantify the underlying risks associated with the business models. This is the reason why the whole crisis of today has started. Yes in Bangladesh banks are willing to give me loan if I have political clout even though they know that I will anyway default. I have been a partner of US$ small business (US$10M revenue per annum) in Bangladesh though I am based in Europe. I have raised financing from some sophisticated bankers (Some top Multinational Banks) of Bangladesh and I know it very well how it works in Bangladesh. I also know little bit how it works in developed world also as I have been involved in corporate financing to some extent here in Europe. Despite having a very low asset base we have been able to raise financing of about US$ 3M. Do you know why banks gave us the loan? It’s not that we have got assets that could be collaterized. It’s because we could convince the bankers about our business model and cash flow. And yes, we also had a few other tricks and of course those are not those tricks commonly used by Bangladeshi investors.

Why Banks in Europe are not giving loans? That is separate debate. As I told you earlier it would require deep understanding of psychology and market structure and history of economic development. This cannot be seen just from the other side of the glass.

Anonymous said...

You were wrong when u mentioned AK Khan raising alot more then GP by selling their stake and did not need the help of Mamun Rashid to do it. In case u didnt know it was Citi that brokered the deal for AK Khan.

Good Day!

the_skywalker said...

Anonymous thanks for pointing the mis presentation. At times I wonder why dont some blog writers do little bit of more research rather than making shallow or plain observation. It is true that philosophy of this blog is freedom of speech. But that does not mean that we can just write anything and everything without knowing/verifying the real causes or reasons.

NAIM said...

Telenor (GP'S Parent company) is one of the smallest company of the world. No other country in the world they don't get the leadership in the market, even in their home scandinavia (Telia sonera is market leader there). So all the foolist bangladeshi guys think GP (Telenor) is the best. But its wrong. Grow up guys.